[Title 12 CFR ]
[Code of Federal Regulations (annual edition) - January 1, 2017 Edition]
[From the U.S. Government Publishing Office]



[[Page i]]

          

          Title 12

Banks and Banking


________________________

Parts 600 to 899

                         Revised as of January 1, 2017

          Containing a codification of documents of general 
          applicability and future effect

          As of January 1, 2017
                    Published by the Office of the Federal Register 
                    National Archives and Records Administration as a 
                    Special Edition of the Federal Register

[[Page ii]]

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                            Table of Contents



                                                                    Page
  Explanation.................................................       v

  Title 12:
          Chapter VI--Farm Credit Administration                     3
          Chapter VII--National Credit Union Administration        441
          Chapter VIII--Federal Financing Bank                    1237
  Finding Aids:
      Table of CFR Titles and Chapters........................    1247
      Alphabetical List of Agencies Appearing in the CFR......    1267
      List of CFR Sections Affected...........................    1277

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                     ----------------------------

                     Cite this Code:  CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus, 12 CFR 600.1 refers 
                       to title 12, part 600, 
                       section 1.

                     ----------------------------

[[Page v]]



                               EXPLANATION

    The Code of Federal Regulations is a codification of the general and 
permanent rules published in the Federal Register by the Executive 
departments and agencies of the Federal Government. The Code is divided 
into 50 titles which represent broad areas subject to Federal 
regulation. Each title is divided into chapters which usually bear the 
name of the issuing agency. Each chapter is further subdivided into 
parts covering specific regulatory areas.
    Each volume of the Code is revised at least once each calendar year 
and issued on a quarterly basis approximately as follows:

Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1

    The appropriate revision date is printed on the cover of each 
volume.

LEGAL STATUS

    The contents of the Federal Register are required to be judicially 
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
evidence of the text of the original documents (44 U.S.C. 1510).

HOW TO USE THE CODE OF FEDERAL REGULATIONS

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    To determine whether a Code volume has been amended since its 
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EFFECTIVE AND EXPIRATION DATES

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OMB CONTROL NUMBERS

    The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires 
Federal agencies to display an OMB control number with their information 
collection request.

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
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PAST PROVISIONS OF THE CODE

    Provisions of the Code that are no longer in force and effect as of 
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``[RESERVED]'' TERMINOLOGY

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INCORPORATION BY REFERENCE

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This material, like any other properly issued regulation, has the force 
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    What is a proper incorporation by reference? The Director of the 
Federal Register will approve an incorporation by reference only when 
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    (a) The incorporation will substantially reduce the volume of 
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    (b) The matter incorporated is in fact available to the extent 
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    (c) The incorporating document is drafted and submitted for 
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CFR INDEXES AND TABULAR GUIDES

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this volume.

[[Page vii]]

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    Oliver A. Potts,
    Director,
    Office of the Federal Register.
    January 1, 2017.

                                
                                      
                            

  

[[Page ix]]



                               THIS TITLE

    Title 12--Banks and Banking is composed of ten volumes. The parts in 
these volumes are arranged in the following order: Parts 1-199, 200-219, 
220-229, 230-299, 300-499, 500-599, 600-899, 900-1025, 1026-1099, and 
1100-end. The contents of these volumes represent all current 
regulations codified under this title of the CFR as of January 1, 2017.

    For this volume, Ann Worley was Chief Editor. The Code of Federal 
Regulations publication program is under the direction of John Hyrum 
Martinez, assisted by Stephen J. Frattini.

[[Page 1]]



                       TITLE 12--BANKS AND BANKING




                  (This book contains parts 600 to 899)

  --------------------------------------------------------------------
                                                                    Part

chapter vi--Farm Credit Administration......................         600

chapter vii--National Credit Union Administration...........         700

chapter viii--Federal Financing Bank........................         810

[[Page 3]]



                 CHAPTER VI--FARM CREDIT ADMINISTRATION




  --------------------------------------------------------------------

                 SUBCHAPTER A--ADMINISTRATIVE PROVISIONS
Part                                                                Page
600             Organization and functions..................           5
601             Employee responsibilities and conduct.......           7
602             Releasing information.......................           7
603             Privacy Act regulations.....................          15
604             Farm Credit Administration Board meetings...          19
605             Information.................................          22
606             Enforcement of nondiscrimination on the 
                    basis of handicap in programs or 
                    activities conducted by the Farm Credit 
                    Administration..........................          24
607             Assessment and apportionment of 
                    administrative expenses.................          30
608             Collection of claims owed the United States.          35
                    SUBCHAPTER B--FARM CREDIT SYSTEM
609             Electronic commerce.........................          48
610             Registration of mortgage loan originators...          51
611             Organization................................          51
612             Standards of conduct and referral of known 
                    or suspected criminal violations........          98
613             Eligibility and scope of financing..........         107
614             Loan policies and operations................         114
615             Funding and fiscal affairs, loan policies 
                    and operations, and funding operations..         161
616             Leasing.....................................         202
617             Borrower rights.............................         204
618             General provisions..........................         218
619             Definitions.................................         228
620             Disclosure to shareholders..................         231
621             Accounting and reporting requirements.......         251
622             Rules of practice and procedure.............         260
623             Practice before the Farm Credit 
                    Administration..........................         274
624             Margin and capital requirements for covered 
                    swap entities...........................         277
625             Application for award of fees and other 
                    expenses under the Equal Access to 
                    Justice Act.............................         299
626             Nondiscrimination in lending................         304

[[Page 4]]

627             Title IV conservators, receivers, and 
                    voluntary liquidations..................         307
628             Capital adequacy of system institutions.....         318
630             Disclosure to investors in systemwide and 
                    consolidated bank debt obligations of 
                    the Farm Credit System..................         380
650             Federal Agricultural Mortgage Corporation 
                    general provisions......................         395
651             Federal Agricultural Mortgage Corporation 
                    governance..............................         402
652             Federal Agricultural Mortgage Corporation 
                    funding and fiscal affairs..............         405
653             Federal Agricultural Mortgage Corporation 
                    risk management.........................         437
654             [Reserved]

655             Federal Agricultural Mortgage Corporation 
                    disclosure and reporting requirements...         438
656-699         [Reserved]

[[Page 5]]



                 SUBCHAPTER A_ADMINISTRATIVE PROVISIONS





PART 600_ORGANIZATION AND FUNCTIONS--Table of Contents



                  Subpart A_Farm Credit Administration

Sec.
600.1  The Farm Credit Act.
600.2  Farm Credit Administration.
600.3  Farm Credit Administration Board.
600.4  Organization of the Farm Credit Administration.

    Subpart B_Rules and Procedures for Service Upon the Farm Credit 
                             Administration

600.10  Service of Process.

    Authority: Secs. 5.7, 5.8, 5.9, 5.10, 5.11, 5.17, 8.11 of the Farm 
Credit Act (12 U.S.C. 2241, 2242, 2243, 2244, 2245, 2252, 2279aa-11).

    Source: 53 FR 16693, May 11, 1988, unless otherwise noted.



                  Subpart A_Farm Credit Administration

    Source: 70 FR 69645, Nov. 17, 2005, unless otherwise noted.



Sec. 600.1  The Farm Credit Act.

    The Farm Credit Act of 1971, Public Law 92-181 recodified and 
replaced the prior laws under which the Farm Credit Administration (FCA) 
and the institutions of the Farm Credit System (System or FCS) were 
organized and operated. The prior laws, which were repealed and 
superseded by the Act, are identified in section 5.40(a) of the Act. 
Subsequent amendments to the Act and enactment dates are as follows: 
Public Law 94-184, December 31, 1975; Public Law 95-443, October 10, 
1978; Public Law 96-592, December 24, 1980; Public Law 99-190, December 
19, 1985; Public Law 99-198, December 23, 1985; Public Law 99-205, 
December 23, 1985; Public Law 99-509, October 21, 1986; Public Law 100-
233, January 6, 1988; Public Law 100-399, August 17, 1988; Public Law 
100-460, October 1, 1988; Public Law 101-73, August 9, 1989; Public Law 
101-220, December 12, 1989; Public Law 101-624, November 28, 1990; 
Public Law 102-237, December 13, 1991; Public Law 102-552, October 28, 
1992; Public Law 103-376, October 19, 1994; Public Law 104-105, February 
10, 1996; Public Law 104-316, October 19, 1996; Public Law 107-171, May 
13, 2002; Public Law 110-246, June 18, 2008. The law is codified at 12 
U.S.C. 2000, et seq.

[80 FR 68428, Nov. 5, 2015]



Sec. 600.2  Farm Credit Administration.

    (a) Background. The Farm Credit Administration is an independent, 
non-appropriated fund agency in the executive branch of the Federal 
Government. The FCA Board and employees carry out the FCA's functions, 
powers, and duties.
    (b) Locations. FCA's headquarters address is 1501 Farm Credit Drive, 
McLean, Virginia 22102-5090. The FCA has the following field offices:

1501 Farm Credit Drive, McLean, VA 22102-5090
7900 International Drive, Suite 200, Bloomington, MN 55425-2563
500 East John Carpenter Freeway, Suite 400, Irving, TX 75062-3906
8101 East Prentice Avenue, Suite 1200, Greenwood Village, CO 80111-2939
2180 Harvard Street, Suite 300, Sacramento, CA 95815-3323.

[70 FR 69645, Nov. 17, 2005, as amended at 80 FR 40897, July 14, 2015; 
81 FR 47691, July 22, 2016]



Sec. 600.3  Farm Credit Administration Board.

    (a) FCA Board. The President appoints the three full-time Board 
members with the advice and consent of the Senate. The Board manages, 
administers, and establishes policies for FCA. The Board promulgates the 
rules and regulations implementing the Farm Credit Act of 1971, as 
amended, and provides for the examination of Farm Credit System 
institutions.
    (b) Chairman of the FCA Board. The Chairman of the Board is FCA's 
Chief Executive Officer. The Chairman directs the implementation of the 
policies and regulations adopted by the Board and, after consulting the 
Board, the execution of the administrative functions and duties of FCA. 
In carrying out the Board's policies, the Chairman acts as the 
spokesperson for the Board and represents the Board and

[[Page 6]]

FCA in their official relations within the Federal Government.



Sec. 600.4  Organization of the Farm Credit Administration.

    (a) Offices and functions. The primary offices of the FCA are:
    (1) Office of Inspector General. The Office of Inspector General 
conducts independent audits, inspections, and investigations of Agency 
programs and operations and reviews proposed legislation and 
regulations.
    (2) Secretary to the Board. The Secretary to the Board serves as the 
parliamentarian for the Board and keeps permanent and complete records 
and minutes of the acts and proceedings of the Board.
    (3) Equal Employment and Inclusion Director. The Office of Equal 
Employment and Inclusion manages and directs the Agency-wide Diversity, 
Inclusion, and Equal Employment Opportunity Program for FCA and FCSIC. 
The office serves as the chief liaison with the Equal Employment 
Opportunity Commission and the Office of Personnel Management on all 
EEO, diversity, and inclusion issues. The office provides counsel and 
leadership to Agency management to carry out its continuing policy and 
program of nondiscrimination, affirmative action, and diversity.
    (4) Designated Agency Ethics Official. The Designated Agency Ethics 
Official is designated by the FCA Chairman to administer the provisions 
of title I of the Ethics in Government Act of 1978, as amended, to 
coordinate and manage FCA's ethics program and to provide liaison to the 
Office of Government Ethics with regard to all aspects of FCA's ethics 
program.
    (5) Office of Congressional and Public Affairs. The Office of 
Congressional and Public Affairs performs Congressional liaison duties 
and coordinates and disseminates Agency communications.
    (6) Office of Secondary Market Oversight. The Office of Secondary 
Market Oversight regulates and examines the Federal Agricultural 
Mortgage Corporation for safety and soundness and compliance with law 
and regulations.
    (7) Office of the Chief Operating Officer. The Chief Operating 
Officer has broad responsibility for planning, directing, and 
controlling the operations of the Offices of Management Services, 
Examination, Regulatory Policy, and General Counsel in accordance with 
the operating philosophy and policies of the FCA Board.
    (8) Office of Agency Services. The Office of Agency Services manages 
human capital and administrative services for the Agency. This includes 
providing the following services to the Agency: Staffing and placement, 
job evaluation, compensation and benefits, payroll administration, 
performance management and awards, employee relations, employee training 
and development, contracting, acquisitions, records and property 
management, supply services, agency purchase cards, design, publication, 
and mail service.
    (9) Office of the Chief Financial Officer. The Office of the Chief 
Financial Officer manages and delivers timely, accurate, and reliable 
financial services to the Agency. The office establishes financial 
policies and procedures and oversees the formulation and execution of 
the Agency's budget. The office reports periodically on the status of 
the Agency's financial position, results of operations, and budgetary 
resources. It also oversees the Agency's travel management, internal 
controls, and personnel security programs.
    (10) Office of Regulatory Policy. The Office of Regulatory Policy 
develops policies and regulations for the FCA Board's consideration; 
evaluates regulatory and statutory prior approvals; manages the Agency's 
chartering activities; and analyzes policy and strategic risks to the 
System.
    (11) Office of Examination. The Office of Examination evaluates the 
safety and soundness of FCS institutions and their compliance with law 
and regulations and manages FCA's enforcement and supervision functions.
    (12) Office of Information Technology. The Office of Information 
Technology manages and delivers the Agency's information technology, 
data analysis infrastructure, and the security supporting Agency 
technology resources.
    (13) Office of General Counsel. The Office of General Counsel 
provides legal advice and services to the FCA Chairman, the FCA Board, 
and Agency staff.

[[Page 7]]

    (b) Additional information. You may obtain more information on the 
FCA's organization by visiting our Web site at http://www.fca.gov. You 
may also contact the Office of Congressional and Public Affairs:
    (1) In writing at FCA, 1501 Farm Credit Drive, McLean, Virginia 
22102-5090;
    (2) By email at [email protected]; or
    (3) By telephone at (703) 883-4056.

[81 FR 47691, July 22, 2016]



    Subpart B_Rules and Procedures for Service Upon the Farm Credit 
                             Administration



Sec. 600.10  Service of Process.

    (a) Except as otherwise provided in the Farm Credit Administration 
regulations, the Federal Rules of Civil Procedure or by order of a court 
with jurisdiction over the Farm Credit Administration, any legal process 
upon the Farm Credit Administration shall be duly issued and served upon 
the Secretary to the Farm Credit Administration Board, 1501 Farm Credit 
Drive, McLean, Virginia 22102-5090.
    (b) Service of process upon the Secretary to the Farm Credit 
Administration Board may be effected by personally delivering a copy of 
the documents to the Secretary or by sending a copy of the documents to 
the Secretary by registered or certified mail.
    (c) The Secretary shall promptly forward a copy of all documents to 
the General Counsel and to any Farm Credit Administration personnel 
named in the caption of the documents.

[54 FR 50736, Dec. 11, 1989, as amended at 59 FR 21642, Apr. 26, 1994]



PART 601_EMPLOYEE RESPONSIBILITIES AND CONDUCT--Table of Contents



    Authority: 5 U.S.C. 7301; 12 U.S.C. 2243, 2252.



Sec. 601.100  Cross-references to employee ethical conduct standards
and financial disclosure regulations.

    Board members, officers, and other employees of the Farm Credit 
Administration are subject to the Standards of Ethical Conduct for 
Employees of the Executive Branch at 5 CFR part 2635, the Farm Credit 
Administration regulation at 5 CFR part 4101, which supplements the 
Executive Branch-wide Standards, and the executive branch-wide financial 
disclosure regulations at 5 CFR part 2634.

[60 FR 30782, June 12, 1995]



PART 602_RELEASING INFORMATION--Table of Contents



               Subpart A_Information and Records Generally

Sec.
602.1  Purpose and scope.
602.2  Disclosing reports of examination and other non-public 
          information.

   Subpart B_Availability of Records of the Farm Credit Administration

602.3  Definitions.
602.4  How to make a request.
602.5  FCA response to requests for records.
602.6  FOIA exemptions.
602.7  Confidential business information.
602.8  Appeals.
602.9  Current FOIA index.

                           Subpart C_FOIA Fees

602.10  Definitions.
602.11  Fees by type of requester.
602.12  Fees.
602.13  Fee waiver.
602.14  Advance payments--notice.
602.15  Interest on unpaid fees.
602.16  Combining requests.

Subpart D_Testimony and Production of Documents in Legal Proceedings in 
                     Which FCA is Not a Named Party

602.17  Policy.
602.18  Definitions.
602.19  Request for testimony or production of documents.
602.20  Testimony of FCA employees.
602.21  Production of FCA documents.
602.22  Fees.
602.23  Responses to demands served on FCA employees.
602.24  Responses to demands served on non-FCA employees or entities.

         Subpart E_Release of Records in Public Rulemaking Files

602.25  General.

    Authority: Secs. 5.9, 5.17, 5.59 of the Farm Credit Act (12 U.S.C. 
2243, 2252, 2277a-8); 5 U.S.C 301, 552; 12 U.S.C. 1821(t); 52 FR 10012; 
E.O. 12600; 52 FR 23781, 3 CFR 1987, p. 235.

[[Page 8]]


    Source: 64 FR 41770, Aug. 2, 1999, unless otherwise noted.



               Subpart A_Information and Records Generally



Sec. 602.1  Purpose and scope.

    This part contains FCA's rules for disclosing our records or 
information; processing requests for records under the Freedom of 
Information Act (5 U.S.C. 552, as amended)(FOIA); FOIA fees; disclosing 
otherwise exempt information in litigation when FCA is not a party; and 
getting documents in public rulemaking files. Part 603 of this chapter 
tells you how to get records about yourself under the Privacy Act of 
1974, 5 U.S.C. 552a.



Sec. 602.2  Disclosing reports of examination and other non-public
information.

    (a) Disclosure by FCA. Reports of examination are FCA property. We 
prepare them for our confidential use and the use of the institution 
examined. We do not give reports of examination to the public. Except as 
provided in this section, only the Chairman or the Chairman's designee 
may consent to disclosing reports of examination of Farm Credit System 
institutions and other institutions subject to our examination. You may 
send a written request to our General Counsel that explains why we 
should give permission.
    (b) Disclosure by Farm Credit System institutions. An institution 
that we have examined may disclose its report of examination to its 
officers, directors, and agents, such as its attorney or accountant, if 
they agree to keep the report confidential. In addition, banks may 
disclose their reports of examination to their affiliated associations, 
associations may disclose their reports to their supervisory bank, and 
service corporations may disclose their reports of examination to the 
institutions that own them. An institution may not disclose these 
institutions' reports of examination to any other person without our 
written permission.
    (c) Disclosure to the Farm Credit System Insurance Corporation. 
Without waiving any privilege or limiting any of the requirements of 
section 5.59 of the Farm Credit Act of 1971, as amended, we may disclose 
reports of examination and other examination and non-public information, 
including data from reports of System accounts and exposures received 
pursuant to Sec. 621.15 of this chapter, to the Farm Credit System 
Insurance Corporation pursuant to confidentiality and data security 
agreements executed between the agencies.
    (d) Disclosure to governmental entities. Without waiving any 
privilege, we will disclose reports of examination to other Federal 
government entities:
    (1) In response to a Federal court order;
    (2) In response to a request of either House or a Committee or 
Subcommittee of Congress; or
    (3) When requested for confidential use in an official investigation 
by authorized representatives of other Federal agencies.

[64 FR 41770, Aug. 2, 1999, as amended at 78 FR 77561, Dec. 24, 2013]



   Subpart B_Availability of Records of the Farm Credit Administration



Sec. 602.3  Definitions.

    Appeal means a request under the FOIA asking for the reversal of a 
decision.
    Business information means trade secrets or other commercial or 
financial information that is privileged or confidential.
    Business submitter means any person or entity that gives business 
information to the Government.
    FOIA request means a written request for FCA records, made by any 
person or entity that either directly or indirectly invokes the FOIA or 
this part.
    Record means all documentary materials, such as books, papers, maps, 
photographs, and machine-readable materials, regardless of physical form 
or characteristics (for example, electronic format) in our possession 
and control when we receive your FOIA request.



Sec. 602.4  How to make a request.

    (a) How to make and address a request. Your request for records must 
be in writing and addressed to the FOIA Officer, Farm Credit 
Administration. You may send it:

[[Page 9]]

    (1) By mail to 1501 Farm Credit Drive, McLean, Virginia 22102-5090;
    (2) By facsimile to (703) 790-0052; or
    (3) By E-mail to [email protected].
    (b) Description of requested records. You must describe the 
requested records in enough detail to let us find them with a reasonable 
effort. If the description is inadequate, we will ask you to provide 
more information and the 20-day response period under Sec. 602.5(a) will 
not begin until we receive your reply.
    (c) Faster response. You may ask for a faster response to your FOIA 
request by giving us a statement, certified to be true, that you have a 
``compelling need.'' The FOIA Officer will tell you within 10 calendar 
days after receiving the request whether we will respond to it faster. 
If so, we will respond to your request as soon as we can. A compelling 
need means:
    (1) Someone's life or physical safety may be in danger if we do not 
respond to the request faster; or
    (2) You urgently need to tell the public about Federal government 
activity as a representative of the news media.
    (d) Request for personal information. If you or your representative 
requests your personal information, we may require you to give us a 
notarized request, identify yourself under penalty of perjury, or 
provide other proof of your identity.
    (e) Fees. When making a request, you must tell us the most you are 
willing to pay. Our charges are in the fee tables in Secs. 602.11 and 
602.12. You may also want to tell us the purpose of your request so we 
can classify your request for fee purposes.
    (f) Other requests. To ensure the public has timely information 
about our activities, the Office of Congressional and Public Affairs 
will make available copies of public documents, such as the FCA annual 
report and media advisories.



Sec. 602.5  FCA response to requests for records.

    (a) Response time. Within 20 business days of receiving your 
request, the FOIA Officer will tell you whether we have granted or 
denied it. If you send your request to the wrong address, the 20-day 
response time will not begin until the FOIA Officer receives your 
request.
    (b) Extension of response time. In ``unusual circumstances,'' the 
FOIA Officer may extend the 20-day response time for up to 10 more 
business days by telling you in writing why we need more time and the 
date we will mail you our response. As used in this subpart, ``unusual 
circumstances'' means our need to:
    (1) Search for and get the requested records from field offices or 
other locations;
    (2) Search for, get, and review many records identified in a single 
request;
    (3) Consult with another Federal agency having a substantial 
interest in the request; or
    (4) Consult with two or more FCA offices having a substantial 
interest in the request.
    (c) Referrals. If you ask for records we have that another Federal 
agency originated, we will refer the request to the originating agency 
and tell you about the referral. If you should have sent your request to 
another Federal agency, we will refer the request to that agency and so 
advise you.



Sec. 602.6  FOIA exemptions.

    The FOIA allows agencies to withhold documents in certain 
categories. For instance, we do not have to give you documents that 
relate to our examination of institutions or that would violate the 
personal privacy of an individual. If we do not give you a document 
because the FOIA does not require us to, we will tell you which FOIA 
exemption applies to our decision.



Sec. 602.7  Confidential business information.

    (a) FCA disclosure. FCA may disclose business information from a 
business submitter only under this section. This section will not apply 
if:
    (1) We decide the business submitter has no valid basis to object to 
disclosure;
    (2) The information has been published lawfully or made available to 
the public; or
    (3) Law (other than the FOIA) requires disclosure of the 
information.

[[Page 10]]

    (b) Notice by FCA. When we receive a request for confidential 
business information, the FOIA Officer will promptly tell the requester 
and the business submitter in writing that the responsive records may be 
free from disclosure under the FOIA. We will give the business submitter 
a reasonable time to object to the proposed disclosure of the responsive 
records and tell the requester whenever:
    (1) The business submitter has in good faith labeled the information 
a trade secret or commercial or financial information that is privileged 
or confidential. We will provide such notice for 10 years after 
receiving the information unless the business submitter justifies the 
need for a longer period; or
    (2) We believe that disclosing the information may result in 
commercial or financial injury to the business submitter.
    (c) Objection to release. A business submitter who objects to our 
releasing the requested information should tell us in writing why the 
information is a trade secret or commercial or financial information 
that is privileged or confidential.
    (d) FCA response. (1) We will consider carefully a business 
submitter's objections. If we decide to disclose business information 
over the submitter's objection, the FOIA Officer will explain to the 
submitter in writing why we disagreed with the submitter's objection and 
describe the business information to be disclosed.
    (2) We will tell the requester and the submitter the proposed 
disclosure date at the same time.
    (3) If a submitter sues to prevent release, we will promptly tell 
the requester and will not disclose the business information until after 
the court's decision.
    (4) If a requester sues to compel disclosure, we will promptly tell 
the business submitter.



Sec. 602.8  Appeals.

    (a) How to appeal. You may appeal a total or partial denial of your 
FOIA request within 90 calendar days of the date of the denial letter. 
Your appeal must be in writing and addressed to the Director, Office of 
Agency Services (OAS), Farm Credit Administration. You may send it:
    (1) By mail to 1501 Farm Credit Drive, McLean, Virginia 22102-5090;
    (2) By facsimile to (703) 893-2608; or
    (3) By Email to [email protected]. You also have the right to seek 
dispute resolution services from FCA's FOIA Public Liaison and the 
Office of Government Information Services.
    (b) FCA action on appeal. Within 20 business days of receiving your 
appeal, the OAS Director will tell you, in writing, whether we have 
granted or denied it. If you send your appeal to the wrong address, the 
20-day response time will not begin until the OAS Director receives your 
appeal.
    (c) Unusual circumstances. In unusual circumstances, the OAS 
Director may extend the 20-day response time by telling you in writing 
why we need more time and the date we will mail you our response. All 
extensions, including any extension of the response time for the first 
request, may not total more than 10 business days.
    (d) How to seek dispute resolution services. Requesters may seek 
dispute resolution services from:
    (1) FCA's FOIA Public Liaison;
    (i) By mail addressed to FOIA Public Liaison, 1501 Farm Credit 
Drive, McLean, Virginia 22101-5090;
    (ii) By facsimile at 703-790-3260; or
    (iii) By Email at [email protected].
    (2) Office of Government Information Services;
    (i) By mail to Office of Government Information Services, National 
Archives and Records Administration, 8601 Adelphi Road--OGIS, College 
Park, Maryland, 20740-6001;
    (ii) By facsimile at (202) 741-5769; or
    (iii) By Email at [email protected].

[64 FR 41770, Aug. 2, 1999, as amended at 70 FR 69645, Nov. 17, 2005; 81 
FR 47692, July 22, 2016; 81 FR 63366, Sept. 15, 2016]



Sec. 602.9  Current FOIA index.

    FCA will make a current index available for public inspection and 
copying, as required by the FOIA. We will give you an index for the cost 
of copying it. Because we rarely receive requests for an index, we have 
not published one in the Federal Register.

[[Page 11]]



                           Subpart C_FOIA Fees



Sec. 602.10  Definitions.

    Commercial use request means an information request by an individual 
or entity seeking information for a use or purpose that furthers the 
commercial, trade, or profit interests of that individual or entity.
    Direct costs means the costs FCA incurs in searching for and 
reproducing documents to respond to a FOIA request. For a commercial use 
request, it also means the costs we incur in reviewing documents to 
respond to the request. Direct costs include the pro rated cost of the 
salary of the employee performing the work (based on the basic rate of 
pay plus 16 percent to cover benefits) and the cost of operating 
reproduction equipment. They do not include overhead expenses.
    Educational institution means a preschool, a public or private 
elementary or secondary school, an institution of undergraduate or 
graduate higher education, an institution of professional education, or 
an institution of vocational education that runs a program of scholarly 
research.
    Noncommercial scientific institution means a nonprofit institution 
that conducts scientific research that is not intended to promote any 
particular product or industry.
    Pages mean 8-1/2  x  11 inch or 11  x  14 inch paper copies.
    Representative of the news media means any person actively gathering 
news for an entity that publishes or broadcasts news to the public. News 
means information about current events or of current interest to the 
public.
    Reproduce (or reproduction) means copying a record.
    Review means looking at documents found in response to a FOIA 
request to decide whether any portion should be withheld. It does not 
include the time spent resolving legal or policy issues.
    Search means all time spent looking for material responsive to a 
FOIA request, including page-by-page or line-by-line identification of 
material within documents.



Sec. 602.11  Fees by type of requester.

    Depending on your identity and the purpose of your request, the FCA 
may charge you the direct costs of searching for responsive records, 
reviewing the records, and reproducing them. If necessary, we will seek 
clarification before classifying the request.
    (a) Educational institutions and noncommercial scientific 
institutions. We charge fees for reproduction costs only. The first 100 
pages are free. You must show that the request is sanctioned by an 
educational or noncommercial scientific institution and that you seek 
the records for scholarly or scientific research, not for a commercial 
use.
    (b) Representatives of the news media. We charge fees for 
reproduction costs only. The first 100 pages are free. You must be a 
representative of the news media, and the request must not be made for a 
commercial use. A request for records supporting news distribution is 
not a request for a commercial use.
    (c) Commercial use. We charge the direct cost for search, review, 
and reproduction. Commercial use requesters are not entitled to free 
search time or free reproduction. We will charge you even if we do not 
disclose any records.
    (d) All others. The first 2 hours of search time and the first 100 
pages of reproduction are free. After that, we will charge you for 
search and reproduction costs. We will charge you for a search even if 
we do not disclose any records.
    (e) Fee table. The fee information in paragraphs (a) through (d) of 
this section is presented in the table to this paragraph. You may apply 
for a waiver if your request is not mostly in your commercial interest 
and the disclosure is in the public interest. See Sec. 602.13.

[[Page 12]]



                                                    Fee Table
----------------------------------------------------------------------------------------------------------------
                                                         Charges for
          Type of requester          ---------------------------------------------------       Reproduction
                                             Search time              Review time
----------------------------------------------------------------------------------------------------------------
 Educational................  No Charge...............  No charge..............  First 100 pages free, $
 Noncommercial scientific                                                         0.15 a page after
 users.                                                                                   that.
 News media.................
Commercial Users \1\................  All direct costs........  All direct costs.......  $0.15 a page.
All others \1\......................  First 2 hours free, all   No charge..............  First 100 pages free,
                                       direct costs after that.                           $0.15 a page after
                                                                                          that.
----------------------------------------------------------------------------------------------------------------
\1\ You are responsible for fees even if we do not disclose any records.


[64 FR 41770, Aug. 2, 1999; 64 FR 45589, Aug. 20, 1999]



Sec. 602.12  Fees.

    (a) FCA may charge:
    (1) For manual searches for records and for review, the pro rated 
cost of the salary of the employee doing the work.
    (2) For computer searches for records, the direct costs of computer 
search time and supply or material costs.
    (3) For each page made by photocopy or similar method, fifteen cents 
a page, and for other forms of copying, the direct costs.
    (4) The direct costs of elective services, such as certifying 
records as true copies or sending records by special methods.
    (b) We will not charge fees when total assessed fees are less than 
$15.00.
    (c) You must pay by personal check, bank draft drawn on a United 
States bank, or postal money order made payable to the Treasury of the 
United States.
    (d) We treat a request about yourself under Privacy Act fee rules.
    (e) The information in paragraphs (a) and (b) of this section is 
presented in the table to this paragraph. Direct costs means the costs 
FCA incurs in searching for, reviewing, and reproducing documents to 
respond to a request. Direct costs include pro rated salary and 
reproduction costs. We will not charge fees when they total less than 
$15.00.

                            Fee Amounts Table
------------------------------------------------------------------------
               Type of fee                         Amount of fee
------------------------------------------------------------------------
Manual Search and Review.................  Pro rated Salary Costs.
Computer Search..........................  Direct Costs.
Photocopy................................  $0.15 a page.
Other Reproduction Costs.................  Direct Costs.
Elective Services........................  Direct Costs.
------------------------------------------------------------------------

    (f) We will not assess fees if we fail to comply with any time limit 
under the FOIA or these regulations, and have not timely notified the 
requester, in writing, that an unusual circumstance exists. If an 
unusual circumstance exists, and timely, written notice is given to the 
requester, we may be excused an additional 10 working days before fees 
are automatically waived under this paragraph.
    (g) If we determine that unusual circumstances apply and more than 
5,000 pages are necessary to respond to a request, we may charge fees if 
we provided a timely, written notice to the requester and discussed with 
the requester via mail, Email, or telephone (or made at least three 
good-faith attempts to do so) how the requester could effectively limit 
the scope of the request.
    (h) If a court has determined that exceptional circumstances exist, 
a failure to comply with time limits imposed by these regulations or 
FOIA shall be excused for the length of time provided by court order.

[64 FR 41770, Aug. 2, 1999, as amended at 81 FR 63366, Sept. 15, 2016]



Sec. 602.13  Fee waiver.

    We may waive or reduce fees if disclosure is not mostly in your 
commercial interest but, instead, is in the public interest because it 
will advance public understanding of the Federal government's operations 
or activities.

[[Page 13]]



Sec. 602.14  Advance payments--notice.

    (a) If fees will be more than $25.00 and you have not told us in 
advance that you will pay estimated fees, we will tell you the estimated 
amount and ask that you agree to pay it. Except as noted in this 
section, we will begin processing the FOIA request when we receive your 
agreement to pay.
    (b) If estimated fees exceed $250.00 and you have a history of 
promptly paying fees charged for information requests, we may respond to 
your request based on your agreement to pay.
    (c) If estimated fees exceed $250.00 and you have no history of 
paying fees, we may require you to pay in advance.
    (d) If you have previously failed to pay fees for information 
requests or paid them late, you must pay any fees still owed, plus 
interest calculated under Sec. 602.15, and the estimated fees before we 
will respond to a new or a pending request.
    (e) If we require advance payment or an advance agreement to pay, we 
will not consider your request to be received and will not respond to it 
until you meet the requirement.



Sec. 602.15  Interest on unpaid fees.

    If you fail to pay fees on time, FCA may charge you interest 
starting on the 31st calendar day following the date we bill you. We 
will charge you interest at the rate allowed by law (31 U.S.C. 3717) on 
the billing date.



Sec. 602.16  Combining requests.

    You may not avoid paying fees by filing multiple requests at the 
same time. When FCA reasonably believes that you, alone or with others, 
are breaking down one request into a series of requests to avoid fees, 
we will combine the requests and charge accordingly.

[81 FR 63366, Sept. 15, 2016]



Subpart D_Testimony and Production of Documents in Legal Proceedings in 
                     Which FCA is Not a Named Party



Sec. 602.17  Policy.

    (a) The rules in this subpart preserve the confidentiality of FCA's 
documents and information, conserve employees' time for official duties, 
uphold fairness in litigation, and help the Chairman decide when to 
allow testimony and to produce documents. This subpart does not affect 
access to documents under the FOIA or the Privacy Act. See subpart B of 
this part and part 603 of this chapter.
    (b) Generally, we will not produce documents voluntarily and 
employees will not appear as witnesses voluntarily in any legal 
proceeding. However, in limited circumstances, the Chairman may allow 
the production of documents or testimony when the Chairman decides it 
would be in the best interest of FCA or the public. All privileged 
documents produced under this subpart remain our property. Any employee 
having information or privileged documents may disclose them only as 
allowed by the Chairman.



Sec. 602.18  Definitions.

    Court means any entity conducting a legal proceeding.
    Demand means any order, subpoena, or other legal process for 
testimony or documents.
    Direct costs means FCA's costs to search for, review, and reproduce 
documents to respond to a request. Direct costs include the pro rated 
cost of the salary of the employee performing the work (based on the 
basic rate of pay plus 16 percent to cover benefits) and the cost of 
operating reproduction equipment.
    Document means any record or other documentary materials, such as 
books, papers, maps, photographs, and machine-readable materials, 
regardless of physical form or characteristics (for example, electronic 
format) in our possession and control when we receive the request.
    Employee means any present or former FCA employee, any present or 
former FCA Board member, any former Federal Farm Credit Board member, 
any present or former FCA-appointed receiver or conservator, and any 
present or former agent or contractor.
    FCA Counsel means the General Counsel, a Department of Justice 
attorney, or counsel authorized by FCA to act for the FCA or an 
employee.
    General Counsel means the FCA's General Counsel or designee.

[[Page 14]]

    Legal proceeding means any administrative, civil, or criminal 
proceeding, including a discovery proceeding, before a court when FCA is 
not a named party and has not instituted the legal proceeding.



Sec. 602.19  Request for testimony or production of documents.

    (a) How to make and address a request. Your request for an 
employee's testimony about official matters or the production of 
documents must be in writing and addressed to the General Counsel, 1501 
Farm Credit Drive, McLean, Virginia 22102-5090.
    (b) Your request must contain the following:
    (1) Title of the case;
    (2) Forum;
    (3) Your interest in the case;
    (4) Summary of the litigation issues;
    (5) Reasons for the request;
    (6) Why the confidential information is important; and
    (7) An explanation of why the testimony or document you want is not 
reasonably available from another source. If you want testimony, you 
must also state how you intend to use the testimony, provide a subject 
matter summary of the requested testimony, and explain why a document 
could not be used instead.
    (c) The General Counsel may ask you to limit your request to make it 
less burdensome or to give us information to help us decide if providing 
documents or testimony is in the public interest.



Sec. 602.20  Testimony of FCA employees.

    (a) An employee may testify only as the Chairman approves in 
writing. Generally, an employee may testify only by deposition or 
written interrogatory. An employee may give only factual testimony and 
may not give opinion testimony.
    (b) If, in response to your request, the Chairman decides that an 
employee may testify, you must serve the employee with a subpoena under 
applicable Federal or State rules of procedure and at the same time send 
a copy of the subpoena by registered mail to the General Counsel.
    (c) Normally, depositions will be taken at the employee's office, at 
a time convenient to the employee and the FCA. FCA counsel may represent 
FCA's interests at the deposition.
    (d) If you request the deposition, you must give the General Counsel 
a copy of the deposition transcript at no charge.



Sec. 602.21  Production of FCA documents.

    (a) An FCA employee may produce documents only as the Chairman 
allows.
    (b) Before we will release any documents, the requesting party must 
get an acceptable protective order from the court before which the 
action is pending that will preserve the confidentiality of the 
documents to be released.
    (c) On request, we may provide certified or authenticated copies of 
documents.



Sec. 602.22  Fees.

    (a) For documents released under this subpart, FCA will charge:
    (1) The direct costs of searching for responsive records, including 
the use of a computer, reviewing the records, and reproducing them. We 
also will charge for the direct costs of any other services and 
materials that we provide at your request.
    (2) Fifteen cents a copy for each page made by photocopy or similar 
process.
    (3) The direct costs for each certification or authentication of 
documents.
    (b) You must pay by personal check, bank draft drawn on a United 
States bank, or postal money order made payable to FCA. We will waive 
fees of $15.00 or less. We will send the documents after we receive your 
payment.



Sec. 602.23  Responses to demands served on FCA employees.

    (a) An employee served with a demand or a subpoena in a legal 
proceeding must immediately tell the General Counsel of such service, 
the testimony or documents described in the demand, and all relevant 
facts.
    (b) When the Chairman does not allow testimony or production of 
documents, FCA Counsel will provide the regulations in this subpart to 
the party

[[Page 15]]

or court issuing the demand and explain that the employee may not 
testify or produce documents without the Chairman's prior approval.
    (c) If the court rules the employee must comply with the demand 
regardless of the Chairman's instructions not to do so, the employee 
must respectfully refuse to comply.
    (d) FCA's decision under this subpart to comply or not to comply 
with any demand is not a waiver, an assertion of privilege, or an 
objection based on relevance, technical deficiency, or any other ground. 
We may oppose any demand on any legal ground.



Sec. 602.24  Responses to demands served on non-FCA employees 
or entities.

    If you are not an employee and are served with a demand or a 
subpoena in a legal proceeding directing you to produce or testify about 
an FCA report of examination, other document created or adopted by FCA, 
or any related document, you must object and immediately tell the 
General Counsel of such service, the testimony or documents described in 
the demand, and all relevant facts. You also must object to the 
production of any documents on the basis that they are FCA's property 
and cannot be released without FCA's consent. You should tell the 
requester the production of documents or testimony must follow the 
procedures in this part.



         Subpart E_Release of Records in Public Rulemaking Files



Sec. 602.25  General.

    FCA has a public rulemaking file for each regulation. You may get 
copies of documents in the public rulemaking file by sending a written 
request to the Director, Office of Regulatory Policy, Farm Credit 
Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-5090. We 
will charge fifteen cents a copy for each page. We will waive fees of 
$15.00 or less.

[64 FR 41770, Aug. 2, 1999, as amended at 81 FR 47692, July 22, 2016]



PART 603_PRIVACY ACT REGULATIONS--Table of Contents



Sec.
603.300  Purpose and scope.
603.305  Definitions.
603.310  Procedures for requests pertaining to individual records in a 
          record system.
603.315  Times, places, and requirements for identification of 
          individuals making requests.
603.320  Disclosure of requested information to individuals.
603.325  Special procedures for medical records.
603.330  Request for amendment to record.
603.335  Agency review of request for amendment of record.
603.340  Appeal of an initial adverse determination of a request to 
          amend a record.
603.345  Fees for providing copies of records.
603.350  Criminal penalties.
603.355  Exemptions.

    Authority: Secs. 5.9, 5.17 of the Farm Credit Act (12 U.S.C. 2243, 
2252); 5 U.S.C. app. 3, 5 U.S.C. 552a (j)(2) and (k)(2).

    Source: 40 FR 40454, Sept. 2, 1975, unless otherwise noted.



Sec. 603.300  Purpose and scope.

    (a) This part is published by the Farm Credit Administration 
pursuant to the Privacy Act of 1974 (Pub. L. 93-579, 5 U.S.C. 552a) 
which requires each Federal agency to promulgate rules to establish 
procedures for notification and disclosure to an individual of agency 
records pertaining to that person, and for review of such records.
    (b) The records covered by this part include:
    (1) Personnel and employment records maintained by the Farm Credit 
Administration which are not covered by Secs. 293.101 through 293.108 of 
the regulations of the Office of Personnel Management (5 CFR 293.101 
through 293.108), and
    (2) Other records contained in record systems maintained by the Farm 
Credit Administration.

[40 FR 40454, Sept. 2, 1975, as amended at 51 FR 41941, Nov. 20, 1986]



Sec. 603.305  Definitions.

    For the purposes of this part:
    (a) Agency means the Farm Credit Administration.

[[Page 16]]

    (b) Individual means a citizen of the United States or an alien 
lawfully admitted for permanent residence;
    (c) Maintain includes maintain, collect, use, or disseminate;
    (d) Record means any item, collection, or grouping of information 
about an individual that is maintained by an agency including, but not 
limited to, that person's education, financial transactions, medical 
history, and criminal or employment history, and that contains that 
person's name, or the identifying number, symbol, or other identifying 
particular assigned to the individual, such as a finger or voice print 
or photograph;
    (e) Routine use means, with respect to the disclosure of a record, 
the use of such record for a purpose that is compatible with the purpose 
for which it was collected;
    (f) Statistical record means a record in a system of records 
maintained for statistical research or reporting purposes only and not 
used in whole or in part in making any determination about an 
identifiable individual, except as provided by 13 U.S.C. 8;
    (g) System of records means a group of any records under the control 
of any agency from which information is retrieved by the name of an 
individual or by some identifying number, symbol, or other identifying 
particular assigned to the individual.

[51 FR 41941, Nov. 20, 1986]



Sec. 603.310  Procedures for requests pertaining to individual records
in a record system.

    (a) Any present or former employee of the Farm Credit Administration 
seeking access to that person's official civil service records 
maintained by the Farm Credit Administration shall submit a request in 
such manner as is prescribed by the Office of Personnel Management.
    (b) Individuals shall submit their requests in writing to the 
Privacy Act Officer, Office of General Counsel, Farm Credit 
Administration, McLean, Virginia 22102-5090, when seeking to obtain from 
the Farm Credit Administration:
    (1) Notification of whether the agency maintains a record pertaining 
to that person in a system of records;
    (2) Notification of whether the agency has disclosed a record for 
which an accounting of disclosure is required to be maintained and made 
available to that person;
    (3) A copy of a record pertaining to that person or the accounting 
of its disclosure;
    (4) The review of a record pertaining to that person or the 
accounting of its disclosure. The request shall state the full name and 
address of the individual, and identify the system or systems of records 
believed to contain the information or record sought.

[51 FR 41941, Nov. 20, 1986, as amended at 61 FR 67185, Dec. 20, 1996]



Sec. 603.315  Times, places, and requirements for identification of
individuals making requests.

    The individual making written requests for information or records 
ordinarily will not be required to verify that person's identity. The 
signature upon such requests shall be deemed to be a certification by 
the requester that he or she is the individual to whom the record 
pertains, or the parent of a minor, or the duly appointed legal guardian 
of the individual to whom the record pertains. The Privacy Act Officer, 
however, may require such additional verification of identity in any 
instance in which the Privacy Act Officer deems it advisable.

[51 FR 41941, Nov. 20, 1986]



Sec. 603.320  Disclosure of requested information to individuals.

    (a) The Privacy Act Officer shall, within a reasonable period of 
time after the date of receipt of a request for information of records:
    (1) Determine whether or not such request shall be granted,
    (2) Notify the requester of the determination and, if the request is 
denied, of the reasons therefor, and
    (3) Notify the requester that fees for reproducing copies of records 
may be charged as provided in Sec. 603.345 of this part.
    (b) If access to a record is denied because the information therein 
has been compiled by the Farm Credit Administration in reasonable 
anticipation of a civil or criminal action proceeding, the

[[Page 17]]

Privacy Act Officer shall notify the requester of that person's right to 
judicial appeal under 5 U.S.C. 552a(g).
    (c)(1) If access to a record is granted, the requester shall notify 
the Officer whether the requested record is to be copied and mailed to 
the requester or whether the record is to be made available for personal 
inspection.
    (2) A requester who is an individual may be accompanied by an 
individual selected by the requester when the record is disclosed, in 
which case the requester may be required to furnish a written statement 
authorizing the discussion of the record in the presence of the 
accompanying person.
    (d) If the record is to be made available for personal inspection, 
the requester shall arrange with the Privacy Act Officer a mutually 
agreeable time in the offices of the Farm Credit Administration for 
inspection of the record.

[40 FR 40454, Sept. 2, 1975, as amended at 51 FR 41941, Nov. 20, 1986]



Sec. 603.325  Special procedures for medical records.

    Medical records in the custody of the Farm Credit Administration 
which are not subject to Office of Personnel Management regulations 
shall be disclosed either to the individual to whom they pertain or that 
person's authorized or legal representative or to a licensed physician 
named by the individual.

[51 FR 41942, Nov. 20, 1986]



Sec. 603.330  Request for amendment to record.

    (a) If, after disclosure of the requested information, an individual 
believes that the record is not accurate, relevant, timely, or complete, 
that person may request in writing that the record be amended. Such a 
request shall be submitted to the Privacy Act Officer and shall contain 
identification of the system of records and the record or information 
therein, a brief description of the material requested to be changed, 
the requested change or changes, and the reason for such change or 
changes.
    (b) The Privacy Act Officer shall acknowledge receipt of the request 
within 10 days (excluding Saturdays, Sundays, and legal holidays) and, 
if a determination has not been made, advise the individual when that 
person may expect to be advised of action taken on the request. The 
acknowledgment may contain a request for additional information needed 
to make a determination.

[51 FR 41942, Nov. 20, 1986]



Sec. 603.335  Agency review of request for amendment of record.

    Upon receipt of a request for amendment of a record, the Privacy Act 
Officer shall:
    (a) Correct any portion of a record which the individual making the 
request believes is not accurate, relevant, timely, or complete and 
thereafter inform the individual in writing of such correction, or
    (b) Inform the individual in writing of refusal to amend the record 
and of the reasons therefor, and advise that the individual may appeal 
such determination as provided in Sec. 603.340 of this part.

[40 FR 40454, Sept. 2, 1975, as amended at 51 FR 41942, Nov. 20, 1986]



Sec. 603.340  Appeal of an initial adverse determination of a request
to amend a record.

    (a) Not more than 10 days (excluding Saturdays, Sundays, and legal 
holidays) after receipt by an individual of an adverse determination on 
the individual's request to amend a record or otherwise, the individual 
may appeal to the Director, Office of Agency Services.
    (b) The appeal shall be by letter, mailed or delivered to the 
Director, Office of Agency Services, Farm Credit Administration, McLean, 
Virginia 22102-5090. The letter shall identify the records involved in 
the same manner they were identified to the Privacy Act Officer, shall 
specify the dates of the request and adverse determination, and shall 
indicate the expressed basis for that determination. Also, the letter 
shall state briefly and succinctly the reasons why the adverse 
determination should be reversed.
    (c) The review shall be completed and a final determination made by 
the Director not later than 30 days (excluding

[[Page 18]]

Saturdays, Sundays, and legal holidays) from receipt of the request for 
such review, unless the Director extends such 30-day period for good 
cause. If the 30-day period is extended, the individual shall be 
notified of the reasons therefor.
    (d) If the Director refuses to amend the record in accordance with 
the request, the individual shall be notified of the right to file a 
concise statement setting forth that person's disagreement with the 
final determination and that person's right under 5 U.S.C. 552a(g)(1)(A) 
to a judicial review of the final determination.
    (e) If an amendment of a record as requested upon review is refused, 
there shall be included in the disputed portion of the record a copy of 
the concise statement filed by the individual together with a concise 
statement of the reasons for not amending the record as requested. Such 
statements will be included when disclosure of the disputed record is 
made to persons and agencies as authorized under 5 U.S.C. 552a.

[40 FR 40454, Sept. 2, 1975, as amended at 51 FR 41942, Nov. 20, 1986; 
56 FR 2673, Jan. 24, 1991; 70 FR 69645, Nov. 17, 2005; 81 FR 47692, July 
22, 2016]



Sec. 603.345  Fees for providing copies of records.

    Fees for providing copies of records shall be charged in accordance 
with Secs. 602.11 and 602.12 of this chapter.

[40 FR 40454, Sept. 2, 1975, as amended at 56 FR 28479, June 21, 1991; 
71 FR 54900, Sept. 20, 2006]



Sec. 603.350  Criminal penalties.

    Section 552a (i)(3) of the Privacy Act (5 U.S.C. 552a(i)(3)) makes 
it a misdemeanor, subject to a maximum fine of $5,000, to knowingly and 
willfully request or obtain any record concerning any individual from an 
agency under false pretenses. Sections 552a (i) (1) and (2) of the Act 
(5 U.S.C. 552a (i) (1), (2)) provide penalties for violation by agency 
employees of the Act or regulations established thereunder.

[40 FR 40454, Sept. 2, 1975, as amended at 71 FR 54900, Sept. 20, 2006]



Sec. 603.355  Exemptions.

    (a) Specific. Pursuant to 5 U.S.C. 552a(k)(2), the investigatory 
material compiled for law enforcement purposes in the following systems 
of records is exempt from subsections (c)(3), (d), (e)(1), (e)(4) (G), 
(H), and (I) and (f) of 5 U.S.C. 552a and from the provisions of this 
part:

Farm Credit Bank loans--FCA.
Production Credit Association loans--FCA.
Agricultural Credit Association loans--FCA.
Federal Land Credit Association loans--FCA.
Agricultural Credit Bank loans--FCA.
Office of Inspector General Investigative Files--FCA.

    (b) General. (1) In addition, pursuant to 5 U.S.C. 552a (j)(2), 
investigatory materials compiled for criminal law enforcement in the 
system of records described in (b)(2) are exempt from all subsections of 
5 U.S.C. 552a, except (b), (c) (1) and (2), (e)(4) (A) through (F), (e) 
(6), (7), (9), (10), and (11), and (i). Exemptions from the particular 
subsections are justified for the following reasons:
    (i) From subsection (c)(3) because making available to a record 
subject the accounting of disclosures from records concerning him/her 
would reveal investigative interest on the part of the OIG. This would 
enable record subjects to impede the investigation by, for example, 
destroying evidence, intimidating potential witnesses, or fleeing the 
area to avoid inquiries or apprehension by law enforcement personnel.
    (ii) From subsection (c)(4) because this system is exempt from the 
access provisions of subsection (d) pursuant to subsection (j)(2) of the 
Privacy Act.
    (iii) From subsection (d) because the records contained in this 
system relate to official Federal investigations. Individual access to 
those records might compromise ongoing investigations, reveal 
confidential informants or constitute unwarranted invasions of the 
personal privacy of third parties who are involved in a certain 
investigation. Amendment of the records would interfere with ongoing 
criminal law enforcement proceedings and impose an impossible 
administrative burden by requiring criminal investigations to be 
continuously reinvestigated.

[[Page 19]]

    (iv) From subsections (e) (1) and (5) because in the course of law 
enforcement investigations, information may occasionally be obtained or 
introduced the accuracy of which is unclear or which is not strictly 
relevant or necessary to a specific investigation. In the interests of 
effective law enforcement, it is appropriate to retain all information 
that may aid in establishing patterns of criminal activity. Moreover, it 
would impede the specific investigative process if it were necessary to 
assure the relevance, accuracy, timeliness and completeness of all 
information obtained.
    (v) From subsection (e)(2) because in a law enforcement 
investigation the requirement that information be collected to the 
greatest extent possible from the subject individual would present a 
serious impediment to law enforcement in that the subject of the 
investigation would be informed of the existence of the investigation 
and would therefore be able to avoid detection, apprehension, or legal 
obligations or duties.
    (vi) From subsection (e)(3) because to comply with the requirements 
of this subsection during the course of an investigation could impede 
the information gathering process, thus hampering the investigation.
    (vii) From subsections (e)(4) (G), and (H), and (I), (e)(8), (f), 
(g) and (h) because this system is exempt from the access provisions of 
subsection (d) pursuant to subsection (j) of the Privacy Act.
    (2) Office of Inspector General Investigative Files--FCA.

[56 FR 2673, Jan. 24, 1991, as amended at 57 FR 32421, July 22, 1992]



PART 604_FARM CREDIT ADMINISTRATION BOARD MEETINGS--Table of Contents



Sec.
604.400  Definitions.
604.405  Notice of public observation.
604.410  Scope of application.
604.415  Open meetings.
604.420  Exemptive provisions.
604.425  Announcement of meetings.
604.430  Closure of meetings.
604.435  Record of closed meetings or closed portion of a meeting.
604.440  Requests for information.

    Authority: Secs. 5.9, 5.17 of the Farm Credit Act; 12 U.S.C. 2243, 
2252.



Sec. 604.400  Definitions.

    For purposes of this part:
    (a) Agency means the Farm Credit Administration.
    (b) Board means the Farm Credit Administration Board.
    (c) Exempt meeting and exempt portion of a meeting mean, 
respectively, a meeting or that part of a meeting designated as provided 
in Sec. 604.430 of this part as closed to the public by reason of one or 
more of the exemptive provisions listed in Sec. 604.420 of this part.
    (d) Meeting means the deliberations of at least two (quorum) members 
of the Board where such deliberations determine or result in joint 
conduct or disposition of official Farm Credit Administration business.
    (e) Member means any one of the members of the Board.
    (f) Open meeting means a meeting or portion of a meeting which is 
not an exempt meeting or an exempt portion of a meeting.
    (g) Public observation means the right of any member of the public 
to attend and observe, but not participate or interfere in any way in, 
an open meeting of the Board, within the limits of reasonable and 
comfortable accommodations made available for such purpose by the Farm 
Credit Administration.

[51 FR 41942, Nov. 20, 1986]



Sec. 604.405  Notice of public observation.

    (a) A member of the public is not required to give advance notice to 
the Farm Credit Administration of an intention to exercise the right of 
public observation of an open meeting of the Board. However, in order to 
permit the Farm Credit Administration to determine the amount of space 
and number of seats which must be made available to accommodate 
individuals who desire to exercise the right of public observation, such 
individuals are requested to give notice to the Farm Credit 
Administration at least two business days before the start of the open 
meeting of the intention to exercise such right.
    (b) Notice of intention to exercise the right of public observation 
may be

[[Page 20]]

given in writing, in person, or by telephone to the official designated 
in Sec. 604.440 of this part.
    (c) Individuals who have not given advance notice of intention to 
exercise the right of public observation will not be permitted to attend 
and observe the open meeting of the Board if the available space and 
seating are necessary to accommodate individuals who gave advance notice 
of such intention to the Farm Credit Administration.

[42 FR 12161, Mar. 3, 1977. Redesignated and amended at 51 FR 41942, 
Nov. 20, 1986]



Sec. 604.410  Scope of application.

    The provisions of this part apply to meetings of the Board, and do 
not apply to conferences or other gatherings of employees of the Farm 
Credit Administration who meet or join with others, except at meetings 
of the Board, to deliberate official agency business.

[51 FR 41942, Nov. 20, 1986]



Sec. 604.415  Open meetings.

    Every meeting and portion of a meeting of the Board shall be open to 
public observation unless the Board determines that such meeting or 
portion of a meeting will involve the discussion of matters which are 
within one or more of the exemptive provisions listed in Sec. 604.420 of 
this part, and that the public interest is not served by the discussion 
of such matters in an open meeting.

[51 FR 41943, Nov. 20, 1986]



Sec. 604.420  Exemptive provisions.

    Except in a case where the Board determines that the public interest 
requires otherwise, a meeting or portion of a meeting may be closed to 
public observation where the Board determines that the meeting or 
portion of the meeting is likely to:
    (a) Disclose matters that are:
    (1) Specifically authorized under criteria established by an 
Executive order to be kept secret in the interests of national defense 
or foreign policy, and
    (2) In fact properly classified pursuant to such Executive order;
    (b) Relate solely to the internal personnel rules and practices of 
the Farm Credit Administration;
    (c) Disclose matters specifically exempted from disclosure by 
statute (other than 5 U.S.C. 552): Provided, That such statute:
    (1) Requires that the matters be withheld from the public in such a 
manner as to leave no discretion on the issue, or
    (2) Establishes particular types of matters to be withheld;
    (d) Disclose trade secrets and privileged or confidential commercial 
or financial information obtained from a person;
    (e) Involve accusing any person of a crime, or formally censuring 
any person;
    (f) Disclose information of a personal nature where disclosure would 
constitute a clearly unwarranted invasion of personal privacy;
    (g) Disclose investigator records compiled for law enforcement 
purposes, or information which if written would be contained in such 
records, but only to the extent that the production of such records or 
information would:
    (1) Interfere with enforcement proceedings;
    (2) Deprive a person of a right to a fair trial or an impartial 
adjudication;
    (3) Constitute an unwarranted invasion of personal privacy;
    (4) Disclose the identity of a confidential source and, in the case 
of a record compiled by a criminal law enforcement authority in the 
course of a criminal investigation, or by an agency conducting a lawful 
national security intelligence investigation, confidential information 
furnished only by the confidential source;
    (5) Disclose investigative techniques and procedures; or
    (6) Endanger the life or physical safety of law enforcement 
personnel;
    (h) Disclose information contained in or related to examination, 
supervision, operating, or condition reports prepared by, on behalf of, 
or for the use of the Farm Credit Administration;
    (i) Disclose information the premature disclosure of which would:
    (1) Significantly endanger the stability of any Farm Credit System 
institution, including banks, associations, service corporations 
chartered under the Act, or the Funding Corporation; or

[[Page 21]]

    (2) Be likely to significantly frustrate implementation of a 
proposed action of the Farm Credit Administration: Provided, said 
Administration has not already disclosed to the public the content or 
nature of its proposed action, or is not required by law to make such 
disclosure on its own initiative prior to taking final action on such 
proposal; or
    (j) Specifically concern participation by the Farm Credit 
Administration in a civil action or proceeding otherwise involving a 
determination on the record before an opportunity for a hearing.

[51 FR 41943, Nov. 20, 1986, as amended at 56 FR 2673, Jan. 24, 1991; 75 
FR 35967, June 24, 2010; 78 FR 31831, May 28, 2013]



Sec. 604.425  Announcement of meetings.

    (a) The Board meets in the offices of the Farm Credit 
Administration, McLean, Virginia 22102-5090, on the second Thursday of 
each month, unless the Board fixes a different time and/or place for a 
meeting and follows the requirements of paragraph (b) of this section.
    (b)(1) The Farm Credit Administration shall make available for 
public inspection the time, place, and subject matter of the meeting, 
and whether it is to be open or closed, by posting notice on its public 
notice board or on its public Web site except to the extent that such 
information is exempt from disclosure under the provisions of 
Sec. 604.420 of this part. The public announcement must be made at least 
1 week before the meeting, unless a majority of the FCA Board determines 
by a recorded vote that agency business requires that a meeting be 
called on lesser notice, in which case the announcement shall be made at 
the earliest practicable time.
    (2) Once a meeting has been announced, the time, place, and subject 
matter of the meeting and whether it is open or closed to the public may 
be changed following the requirements of the Government in the Sunshine 
Act, 5 U.S.C. 552b.

[74 FR 44727, Aug. 31, 2009]



Sec. 604.430  Closure of meetings.

    (a) A majority of the meetings or portions of a majority of the 
meetings of the board are exempt by reason of Sec. 604.420 (d), (h), 
(i)(1), or (j) of this part. An exempt meeting or an exempt portion of a 
meeting shall be closed to the public when at least two members of the 
Board vote by a recorded vote of the Board at the beginning of the 
exempt meeting or exempt portion of a meeting to close such meeting or 
such exempt portion, and the General Counsel, Farm Credit 
Administration, publicly certifies that, in his or her opinion, the 
meeting or portion of the meeting may be closed to the public stating 
each relevant exemptive provision listed in Sec. 604.420 of this part.
    (b) A copy of the vote of the Board to close a meeting or an exempt 
portion thereof reflecting the vote of each member on the question, and 
a copy of the certification of General Counsel, shall be made available 
for public inspection in the offices of the Farm Credit Administration, 
or pursuant to telephonic or written requests.
    (c) A copy of the certification of the General Counsel, together 
with a statement from the presiding officer of the meeting setting forth 
the time and place of an exempt meeting or an exempt portion of a 
meeting which was closed and the persons present, shall be retained by 
the Farm Credit Administration for a period of at least 2 years after 
the date of such closed meeting or closed portion of a meeting.

[42 FR 12161, Mar. 3, 1977. Redesignated and amended at 51 FR 41943, 
Nov. 20, 1986]



Sec. 604.435  Record of closed meetings or closed portion 
of a meeting.

    (a) The Farm Credit Administration shall maintain a complete 
transcript or electronic recording adequate to record fully the 
proceedings of each closed meeting or closed portion of a meeting, 
except that in the case of a meeting or portion of a meeting closed to 
the public pursuant to Sec. 604.420 (d), (h), (i)(1), or (j) of this 
part, the Farm Credit Administration shall maintain either such 
transcript, recording, or a set of minutes.
    (b) Any minutes so maintained shall fully and clearly describe all 
matters

[[Page 22]]

discussed and shall provide a full and accurate summary of any actions 
taken, and the reasons therefor, including a description of each of the 
views expressed on any item and the record of any roll call vote. All 
documents considered in connection with any action shall be identified 
in the minutes.
    (c) The Farm Credit Administration shall promptly make available to 
the public, in its offices, the transcript, electronic recording, or 
minutes, of the discussion of any item on the agenda of a closed 
meeting, or closed portion of a meeting, except for such item or items 
of discussion which the Farm Credit Administration determines to contain 
information which may be withheld under Sec. 604.420 of this part. 
Copies of such transcript or minutes, or a transcription of such 
recording disclosing the identity of each speaker, shall be furnished to 
any person at the actual cost of duplication or transcription.
    (d) The Farm Credit Administration shall maintain a complete 
verbatim copy of the transcript, a complete copy of the minutes, or a 
complete electronic recording of each closed meeting or closed portion 
of a meeting for a period of 2 years after the date of such closed 
meeting or closed portion of a meeting.
    (e) All actions required or permitted by this section to be 
undertaken by the Farm Credit Administration shall be by or under the 
authority of the Secretary to the Board.

[42 FR 12161, Mar. 3, 1977. Redesignated and amended at 51 FR 41943, 
Nov. 20, 1986; 56 FR 2673, Jan. 24, 1991; 70 FR 69645, Nov. 17, 2005]



Sec. 604.440  Requests for information.

    Requests to the Farm Credit Administration for information about the 
time, place, and subject matter of a meeting, whether it or any portion 
thereof is closed to the public, and any requests for copies of the 
transcript or minutes, or of a transcript of an electronic recording of 
a closed meeting, or closed portion of a meeting, to the extent not 
exempt from disclosure by the provisions of Sec. 604.420 of this part, 
shall be addressed to the Secretary to the Board, Farm Credit 
Administration, McLean, Virginia 22102-5090.

[51 FR 41944, Nov. 20, 1986, as amended at 59 FR 21642, Apr. 26, 1994]



PART 605_INFORMATION--Table of Contents



Sec.
605.500  Policy.
605.501  Information Security Officer.
605.502  Program and procedures.

    Authority: Secs. 5.9, 5.12, 5.17 of the Farm Credit Act; 12 U.S.C. 
2243, 2246, 2252.



Sec. 605.500  Policy.

    It is the policy of the Farm Credit Administration to act in matters 
relating to national security information in accordance with Executive 
Order 13292 and directives issued thereunder by the Information Security 
Oversight Office (ISOO).

[49 FR 9859, Mar. 16, 1984, as amended at 71 FR 54900, Sept. 20, 2006]



Sec. 605.501  Information Security Officer.

    (a) The Information Security Officer of the Farm Credit 
Administration shall be responsible for implementation and oversight of 
the information security program and procedures adopted by the Agency 
pursuant to the Executive order. This officer shall be the recipient of 
questions, suggestions, and complaints regarding all elements of this 
program and shall be solely responsible for changes to it and for the 
assurance that it is at all times consistent with the Executive order 
and ISOO directive.
    (b) The Information Security Officer shall be the Farm Credit 
Administration's official contact for requests for declassification of 
materials submitted under the Executive order, regardless of the point 
of origin of such requests, and shall assure that such requests for 
records in the Farm Credit Administration's possession that were 
originated by another agency shall be forwarded to the originating 
agency. The Farm Credit Administration shall include a copy of the 
records requested together with its recommendation for action. Upon 
receipt, the originating agency shall process the request in accordance 
with 32 CFR 2001.33(a)(2)(i). Upon request, the originating agency shall 
communicate its declassification determination to the Farm Credit 
Administration. The Farm Credit Administration shall inform the 
requester of the determination within 1 year from the

[[Page 23]]

date of receipt, except in unusual circumstances. If an appeal is made 
on a denial of a mandatory declassification review request, the 
originating agency's appellate authority shall normally make a 
determination within 30 working days following the receipt of an appeal. 
If additional time is required to make a determination, the originating 
appellate authority shall notify the requester of the additional time 
needed and provide the requester with the reason for extension. The 
originating agency's appellate authority shall notify the requester in 
writing of the final determination and of the reasons for any denial. 
Such officer shall also assure that requests for declassification 
submitted under the Freedom of Information Act are handled in accordance 
with that Act.

[49 FR 9859, Mar. 16, 1984, as amended at 71 FR 54900, Sept. 20, 2006]



Sec. 605.502  Program and procedures.

    (a) The Farm Credit Administration has no authority for the original 
classification of information for national security purposes. Only those 
agencies described in the Executive order may so classify information.
    (b) Derivative classification. ``Derivative classification'' means 
the incorporating, paraphrasing, restating or generating in new form 
information that is already classified, and marking the newly developed 
material consistent with the classification markings that apply to the 
source information. Derivative classification includes the 
classification of information based on classification guidance. The 
duplication or reproduction of existing classified information is not 
derivative classification.
    (c) Mandatory declassification review. ``Mandatory declassification 
review'' means the review for declassification of classified information 
in response to a request for declassification that meets the 
requirements under section 3.5 of the Executive order. All requests for 
review for declassification under the mandatory review provisions of the 
Executive order shall be handled by the Information Security Officer or 
his/her designee.
    (d) Handling of classified documents. All documents bearing the 
terms ``Top Secret,'' ``Secret,'' and ``Confidential'' shall be 
delivered to the Information Security Officer or his/her designee 
immediately upon receipt. All potential recipients of such documents 
shall be advised of the names of such designees. In the event that the 
Information Security Officer or his/her designee is not available to 
receive such documents, they shall be sent to the FCA mailroom and 
stored in the combination safe and secured unopened until the 
Information Security Officer is available. Under no cirumstances shall 
classified materials that cannot be delivered be stored other than in 
the designated safe. All materials not immediately deliverable or able 
to be secured in the designated safe shall be returned to the sender, 
under appropriate cover, for redelivery to the FCA at the next earliest 
opportunity.
    (e) Reproduction. Reproduction of classified materials shall take 
place only in accordance with section 4.2(g) of the Executive order and 
any limitations imposed by the originator. Should copies be made, they 
shall be subject to the same controls as the original document. Records 
showing the number and distribution of copies shall be maintained by the 
Information Security Officer or his/her designee, and the log stored 
with the original documents. These measures shall not restrict 
reproduction for the purposes of Mandatory Review.
    (f) Storage. In accordance with 32 CFR 2001.43, all classified 
documents shall be stored in combination safes located at the primary 
headquarters and/or a Field Office, Office of Examination, Farm Credit 
Administration. The combinations shall be changed as required by 
directives issued by ISOO. The combinations shall be known only to the 
Information Security Officer and his/her designees who have appropriate 
security clearances.
    (g) Employee education. All employees who have been granted a 
security clearance and who have occasion to handle classified materials 
shall be advised of handling, reproduction, and storage procedures and 
shall be required to review the Executive order and appropriate ISOO 
directives.
    (h) Agency terminology. No official of the Farm Credit 
Administration shall

[[Page 24]]

use the terms ``Top Secret'', ``Secret'', or ``Confidential'' except in 
relation to materials classified for national security purposes. As a 
Federal regulatory agency, the Farm Credit Administration maintains 
certain internal documents that relate to its examination and 
supervision of the institutions of the Farm Credit System. Such 
documents are limited in use and distribution. Material that is of a 
sensitive nature to the Farm Credit Administration may be designated 
``Executive Document.''
    (i) Nondisclosure agreement. In accordance with 32 CFR 2003.20, the 
Farm Credit Administration requires that any person whose position 
requires access to classified information must execute a nondisclosure 
agreement on Standard Form 312--Classified Information Nondisclosure 
Agreement. Persons not executing such nondisclosure agreements are 
subject to sanctions of Executive Order 13292. It is the policy of the 
Farm Credit Administration that any employee authorized access to 
classified information holds a personal responsibility for safeguarding 
against unlawful disclosures, and such employees are prohibited from 
disclosure without consent of the FCA Information Security Officer. Any 
such unauthorized disclosure will be reported to the Information 
Security Oversight Office, the Department of Justice, the Department of 
State, the Federal Emergency Management Agency, and to any other Federal 
agency for which the Farm Credit Administration has access to classified 
information, as such reportings are subject to interpretation as 
required by statute and Executive order. Any employee who knowingly 
disclosed classified information or who refuses to cooperate with an 
investigation may be subject to mandatory administrative sanctions, 
including as a minimum, denial of further access to classified 
information. Further sanctions could include demotion or dismissal 
depending on the circumstances of a particular case.
    (j) Freedom of Information request. All inquiries regarding requests 
for classified information under the Freedom of Information Act (5 
U.S.C. 552), including those from the news media, shall be referred to 
the FCA FOI Officer, Office of Congressional and Public Affairs, Farm 
Credit Administration, and shall be handled in accordance with 
provisions of that statute and applicable regulations.

[49 FR 9859, Mar. 16, 1984, as amended at 52 FR 18200, May 14, 1987; 59 
FR 21643, Apr. 26, 1994; 71 FR 54900, Sept. 20, 2006]



PART 606_ENFORCEMENT OF NONDISCRIMINATION ON THE BASIS OF HANDICAP 
IN PROGRAMS OR ACTIVITIES CONDUCTED BY THE FARM CREDIT ADMINISTRATION
--Table of Contents



Sec.
606.601  Purpose.
606.602  Application.
606.603  Definitions.
606.604-606.609  [Reserved]
606.610  Self-evaluation.
606.611  Notice.
606.612-606.629  [Reserved]
606.630  General prohibitions against discrimination.
606.631-606.639  [Reserved]
606.640  Employment.
606.641-606.648  [Reserved]
606.649  Program accessibility: Discrimination prohibited.
606.650  Program accessibility: Existing facilities.
606.651  Program accessibility: New construction and alterations.
606.652-606.659  [Reserved]
606.660  Communications.
606.661-606.669  [Reserved]
606.670  Compliance procedures.
606.671-606.999  [Reserved]

    Authority: 29 U.S.C. 794.

    Source: 53 FR 19889, June 1, 1988, unless otherwise noted.



Sec. 606.601  Purpose.

    The purpose of this part is to effectuate section 119 of the 
Rehabilitation Comprehensive Services, and Developmental Disabilities 
Amendments of 1978, which amended section 504 of the Rehabilitation Act 
of 1973 to prohibit discrimination on the basis of handicap in programs 
or activities conducted by Executive agencies or the United States 
Postal Service.



Sec. 606.602  Application.

    (a) This part applies to all programs or activities conducted by the 
agency. For example, members of the public

[[Page 25]]

may participate in the following ``programs and activities'' of the FCA:
    (1) Attending open meetings of the Farm Credit Board.
    (2) Making inquiries or filing complaints.
    (3) Using the FCA library in McLean, Virginia.
    (4) Seeking employment with FCA.
    (5) Attending any meeting, conference, seminar, or other program 
open to the public.


This list is illustrative only and failure to include an activity does 
not necessarily mean that it is not covered by this regulation.
    (b) This regulation does not apply to the institutions that are 
regulated or examined by the FCA. However, this regulation governs the 
conduct of FCA personnel, in their interaction with employees of such 
institutions and employees of other Federal agencies, while discharging 
their official FCA duties.



Sec. 606.603  Definitions.

    For purposes of this part, the term:
    (a) Agency means the Farm Credit Administration.
    (b) Assistant Attorney General means the Assistant Attorney General, 
Civil Rights Division, United States Department of Justice.
    (c) Auxiliary aids means services or devices that enable persons 
with impaired sensory, manual, or speaking skills to have an equal 
opportunity to participate in, and enjoy the benefits of, programs or 
activities conducted by the agency. For example, auxiliary aids useful 
for persons with impaired vision include readers, Brailled materials, 
audio recordings, and other similar services and devices. Auxiliary aids 
useful for persons with impaired hearing include telephone handset 
amplifiers, telephones compatible with hearing aids, telecommunication 
devices for deaf persons (TDDs), interpreters, note-takers, written 
materials, and other similar services and devices.
    (d) Complete complaint means a written statement that contains the 
complainant's name and address and describes the agency's alleged 
discriminatory action in sufficient detail to inform the agency of the 
nature and date of the alleged violation of section 504. It shall be 
signed by the complainant or by someone authorized to do so on his or 
her behalf. Complaints filed on behalf of classes or third parties shall 
describe or identify (by name, if possible) the alleged victims of 
discrimination.
    (e) Facility means all or any portion of buildings, structures, 
equipment, roads, walks, parking lots, rolling stock or other 
conveyances, or other real or personal property.
    (f) Individual with handicaps means any person who has a physical or 
mental impairment that substantially limits one or more major life 
activities, has a record of such an impairment, or is regarded as having 
such an impairment. As used in this definition, the phrase:
    (1) Physical or mental impairment includes:
    (i) Any physiological disorder or condition, cosmetic disfigurement, 
or anatomical loss affecting one or more of the following body systems: 
Neurological; musculoskeletal; special sense organs; respiratory, 
including speech organs; cardiovascular; reproductive; digestive; 
genitourinary; hemic and lymphatic; skin; and endocrine; or
    (ii) Any mental or psychological disorder, such as mental 
retardation, organic brain syndrome, emotional or mental illness, and 
specific learning disabilities. The term physical or mental impairment 
includes, but is not limited to, such diseases and conditions as 
orthopedic, visual, speech, and hearing impairments, cerebral palsy, 
epilepsy, muscular dystrophy, multiple sclerosis, cancer, heart disease, 
diabetes, mental retardation, emotional illness, and drug addiction and 
alcoholism.
    (2) Major life activities includes functions such as caring for 
oneself, performing manual tasks, walking, seeing, hearing, speaking, 
breathing, learning, and working.
    (3) Has a record of such an impairment means has a history of, or 
has been misclassified as having, a mental or physical impairment that 
substantially limits one more major life activities.
    (4) Is regarded as having an impairment means:
    (i) Has a physical or mental impairment that does not substantially 
limit major life activities but is treated by

[[Page 26]]

the agency as constituting such a limitation;
    (ii) Has a physical or mental impairment that substantially limits 
major life activities only as a result of the attitudes of others toward 
such impairment; or
    (iii) Has none of the impairments defined in paragraph (f)(1) of 
this definition but is treated by the agency as having such an 
impairment.
    (g) Qualified individual with handicaps means an individual with 
handicaps who meets the essential eligibility requirements for 
participation in the program or activity conducted by the agency. With 
respect to employment, a qualified individual with handicaps is one who 
meets the definition of qualified handicapped person set forth in 29 CFR 
1613.702(f), which is made applicable to this part by Sec. 606.640 of 
this rule.
    (h) Section 504 means section 504 of the Rehabilitation Act of 1973 
(Pub. L. 93-112, 87 Stat. 394 (29 U.S.C. 794)), as amended by the 
Rehabilitation Act Amendments of 1974 (Pub. L. 93-516, 88 Stat. 1617); 
the Rehabilitation, Comprehensive Services, and Developmental 
Disabilities Amendments of 1978 (Pub. L. 95-602, 92 Stat. 2955); and the 
Rehabilitation Act Amendments of 1986 (Pub. L. 99-506, 100 Stat. 1810).



Secs. 606.604-606.609  [Reserved]



Sec. 606.610  Self-evaluation.

    (a) The agency shall, within one year of the effective date of this 
part, evaluate its current policies and practices, and the effects 
thereof, that do not or may not meet the requirements of this part, and, 
to the extent modification of any such policies and practices is 
required, the agency shall proceed to make the necessary modifications.
    (b) The agency shall provide an opportunity to interested persons, 
including individuals with handicaps or organizations representing 
individuals with handicaps, to participate in the self-evaluation 
process by submitting comments (both oral and written).
    (c) The agency shall, for at least three years following completion 
of the evaluation required under paragraph (a) of this section, maintain 
on file and make available for public inspection:
    (1) A list of the interested persons who commented, with copies of 
comments received;
    (2) A description of areas examined and any problems identified; and
    (3) A description of any modifications made.



Sec. 606.611  Notice.

    The agency shall make available to employees, applicants, 
participants, beneficiaries, and other interested persons such 
information regarding the provisions of this part and its applicability 
to the programs or activities conducted by the agency, and make such 
information available to them in such manner as the agency head finds 
necessary to apprise such persons of the protections against 
discrimination assured them by section 504 and this regulation.



Secs. 606.612-606.629  [Reserved]



Sec. 606.630  General prohibitions against discrimination.

    (a) No qualified individual with handicaps, on the basis of 
handicap, shall be excluded from participation in, be denied the 
benefits of, or otherwise be subjected to discrimination under any 
program or activity of the agency.
    (b)(1) The agency, in providing any aid, benefit, or service, may 
not, directly or through contractual or other arrangements, on the basis 
of handicap:
    (i) Deny a qualified individual with handicaps the oportunity to 
participate in or benefit from the activity, aid, benefit, or service;
    (ii) Afford a qualified individual with handicaps an opportunity to 
participate in or benefit from the aid, benefit, or service that is not 
equal to that afforded others;
    (iii) Provide a qualified individual with handicaps with an aid, 
benefit, or service that is not as effective in affording equal 
opportunity to obtain the same result, to gain the same benefit, or to 
reach the same level of achievement as that provided to others;
    (iv) Provide different or separate aid, benefits, or services to 
individuals with handicaps or to any class of individuals with handicaps 
than is provided to others unless such action is necessary to

[[Page 27]]

provide qualified individuals with handicaps with aid, benefits, or 
services that are as effective as those provided to others;
    (v) Deny a qualified individual with handicaps the opportunity to 
participate as a member of planning or advisory boards;
    (vi) Otherwise limit a qualified individual with handicaps in the 
enjoyment of any right, privilege, advantage, or opportunity enjoyed by 
others receiving the aid, benefit, or service.
    (2) The agency may not deny a qualified individual with handicaps 
the opportunity to participate in programs or activities that are not 
separate or different, despite the existence of permissibly separate or 
different programs or activities.
    (3) The agency may not, directly or through contractual or other 
arrangements, utilize criteria or methods of administration the purpose 
or effect of which would:
    (i) Subject qualified individuals with handicaps to discrimination 
on the basis of handicap; or
    (ii) Defeat or substantially impair accomplishment of the objectives 
of a program or activity with respect to individuals with handicaps.
    (4) The agency may not, in determining the site or location of a 
facility, make selections the purpose or effect of which would:
    (i) Exclude individuals with handicaps from, deny them the benefits 
of, or otherwise subject them to discrimination under any program or 
activity conducted by the agency; or
    (ii) Defeat or substantially impair the accomplishment of the 
objectives of a program or activity with respect to individuals with 
handicaps.
    (5) The agency, in the selection of procurement contractors, may not 
use criteria that subject qualified individuals with handicaps to 
discrimination on the basis of handicap.
    (c) The exclusion of nonhandicapped persons from the benefits of a 
program limited by Federal statute or Executive order to individuals 
with handicaps or the exclusion of a specific class of individuals with 
handicaps from a program limited by Federal statute or Executive order 
to a different class of individuals with handicaps is not prohibited by 
this part.
    (d) The agency shall administer programs and activities in the most 
integrated setting appropriate to the needs of qualified individuals 
with handicaps.



Secs. 606.631-606.639  [Reserved]



Sec. 606.640  Employment.

    No qualified individual with handicaps shall, on the basis of 
handicap, be subjected to discrimination in employment under any program 
or activity conducted by the agency. The definitions, requirements, and 
procedures of section 501 of the Rehabilitation Act of 1973 (29 U.S.C. 
791), as established by the Equal Employment Opportunity Commission in 
29 CFR part 1613, shall apply to employment in the agency.



Secs. 606.641-606.648  [Reserved]



Sec. 606.649  Program accessibility: Discrimination prohibited.

    Except as otherwise provided in Sec. 606.650, no qualified 
individual with handicaps shall, because the agency's facilities are 
inaccessible to or unusable by individuals with handicaps, be denied the 
benefits of, be excluded from participation in, or otherwise be 
subjected to discrimination under any program or activity conducted by 
the agency.



Sec. 606.650  Program accessibility: Existing facilities.

    (a) General. The agency shall operate each program or activity so 
that the program or activity, when viewed in its entirety, is readily 
accessible to and usable by individuals with handicaps. This paragraph 
does not:
    (1) Necessarily require the agency to make each of its existing 
facilities accessible to and usable by individuals with handicaps;
    (2) Require the agency to take any action that it can demonstrate 
would result in a fundamental alteration in the nature of a program or 
activity or in undue financial and administrative burdens. In those 
circumstances where agency personnel believe that the proposed action 
would fundamentally alter the program or activity or would result in 
undue financial and administrative burdens, the agency has the

[[Page 28]]

burden of proving that compliance with paragraph (a) of this section 
would result in such alteration or burdens. The decision that compliance 
would result in such alteration or burdens must be made by the agency 
head or his or her designee after considering all agency resources 
available for use in the funding and operation of the conducted program 
or activity, and must be accompanied by a written statement of the 
reasons for reaching that conclusion. In preparing the report, the 
agency shall make reasonable efforts to ensure that the person(s) to be 
accommodated has an opportunity to provide relevant information. If an 
action would result in such an alteration or such burdens, the agency 
shall take any other action that would not result in such an alteration 
or such burdens but would nevertheless ensure that individuals with 
handicaps receive the benefits and services of the program or activity.
    (b) Methods. The agency may comply with the requirements of this 
section through such means as redesign of equipment, reassignment of 
services to accessible buildings, assignment of aides to beneficiaries, 
home visits, delivery of services at alternate accessible sites, 
alteration of existing facilities and construction of new facilities, or 
any other methods that result in making its programs or activities 
readily accessible to and usable by individuals with handicaps. The 
agency is not required to make structural changes in existing facilities 
where other methods are effective in achieving compliance with this 
section. The agency, in making alterations to existing buildings, shall 
meet accessibility requirements to the extent compelled by the 
Architectural Barriers Act of 1968, as amended (42 U.S.C. 4151 through 
4157), and any regulations implementing it. In choosing among available 
methods for meeting the requirements of this section, the agency shall 
give priority to those methods that offer programs and activities to 
qualified individuals with handicaps in the most integrated setting 
appropriate.
    (c) Time period for compliance. The agency shall comply with the 
obligations established under this section within sixty days of the 
effective date of this part except that where structural changes in 
facilities are undertaken, such changes shall be made within three years 
of the effective date of this part, but in any event as expeditiously as 
possible.
    (d) Transition plan. In the event that structural changes to 
facilities will be undertaken to achieve accessibility, the agency shall 
develop, within six months of the effective date of this part, a 
transition plan setting forth the steps necessary to complete such 
changes. The agency shall provide an opportunity to interested persons, 
including individuals with handicaps or organizations representing 
individuals with handicaps, to participate in the development of the 
transition plan by submitting comments (both oral and written). A copy 
of the transition plan shall be made available for public inspection. 
The plan shall, at a minimum:
    (1) Identify physical obstacles in the agency's facilities that 
limit the accessibility of its programs or activities to individuals 
with handicaps;
    (2) Describe in detail the methods that will be used to make the 
facilities accessible;
    (3) Specify the schedule for taking the steps necessary to achieve 
compliance with this section, and if the time period of the transition 
plan is longer than one year, identify steps that will be taken during 
each year of the transition period;
    (4) Indicate the official responsible for implementation of the 
plan; and
    (5) Identify the persons or groups who commented on the plan.



Sec. 606.651  Program accessibility: New construction and alterations.

    Each building or part of a building that is constructed or altered 
by, on behalf of, or for the use of the agency shall be designed, 
constructed, or altered so as to be readily accessible to and usable by 
individuals with handicaps. The definitions, requirements, and standards 
of the Architectural Barriers Act (42 U.S.C. 4151 through 4157), as 
established in 41 CFR 101-19.600 to 101-19.607, apply to buildings 
covered by this section.

[[Page 29]]



Secs. 606.652-606.659  [Reserved]



Sec. 606.660  Communications.

    (a) The agency shall take appropriate steps to ensure effective 
communication with applicants, participants, personnel of other Federal 
entities, and members of the public.
    (1) The agency shall furnish appropriate auxiliary aids where 
necessary to afford an individual with handicaps an equal opportunity to 
participate in and enjoy the benefits of a program or activity conducted 
by the agency.
    (i) In determining what type of auxiliary aid is necessary, the 
agency shall give primary consideration to the requests of the 
individual with handicaps.
    (ii) The agency need not provide individually prescribed devices, 
readers for personal use or study, or other devices of a personal 
nature.
    (2) Where the agency communicates with applicants and beneficiaries 
by telephone, telecommunication devices for deaf persons (TDDs) or 
equally effective telecommunication systems shall be used.
    (b) The agency shall ensure that interested persons, including 
persons with impaired vision or hearing, can obtain information as to 
the existence and location of accessible services, activities, and 
facilities.
    (c) The agency shall provide signage at a primary entrance to each 
of its inaccessible facilities directing users to a location at which 
they can obtain information about accessible facilities. The 
international symbol for accessibility shall be used at each primary 
entrance of an accessible facility.
    (d) This section does not require the agency to take any action that 
it can demonstrate would result in a fundamental alteration in the 
nature of a program or activity or in undue financial and administrative 
burdens. In those circumstances where agency personnel believe that the 
proposed action would fundamentally alter the program or activity or 
would result in undue financial and administrative burdens, the agency 
has the burden of proving that compliance with this section would result 
in such alteration or burdens. The decision that compliance would result 
in such alteration or burdens must be made by the agency head or his or 
her designee after considering all agency resources available for use in 
the funding and operation of the conducted program or activity, and must 
be accompanied by a written statement of the reasons for reaching that 
conclusion. In preparing the report, the agency shall make reasonable 
efforts to ensure that the person(s) to be accommodated has an 
opportunity to provide relevant information. If an action required to 
comply with this section would result in such an alteration or such 
burdens, the agency shall take any other action that would not result in 
such an alteration or such burdens but would nevertheless ensure that, 
to the maximum extent possible, individuals with handicaps receive the 
benefits and services of the program or activity.



Secs. 606.661-606.669  [Reserved]



Sec. 606.670  Compliance procedures.

    (a) Except as provided in paragraph (b) of this section, this 
section applies to all allegations of discrimination on the basis of 
handicap in programs and activities conducted by the agency.
    (b) The agency shall process complaints alleging violations of 
section 504 with respect to employment according to the procedures 
established by the Equal Employment Opportunity Commission in 29 CFR 
part 1613 pursuant to section 501 of the Rehabilitation Act of 1973 (29 
U.S.C. 791).
    (c) Responsibility for implementation and operation of this section 
shall be vested in the Director, Office of Agency Services, Farm Credit 
Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090.
    (d) The agency shall accept and investigate all complete complaints 
for which it has jurisdiction. All complete complaints must be filed 
within 180 days of the alleged act of discrimination. The agency may 
extend this time period for good cause.
    (e) If the agency receives a complaint over which it does not have 
jurisdiction, it shall promptly notify the complainant and shall make 
reasonable efforts to refer the complaint to the appropriate Government 
entity.

[[Page 30]]

    (f) The agency shall notify the Architectural and Transportation 
Barriers Compliance Board upon receipt of any complaint alleging that a 
building or facility that is subject to the Architectural Barriers Act 
of 1968, as amended (42 U.S.C. 4151 through 4157), is not readily 
accessible to and usable by individuals with handicaps.
    (g) Within 180 days of the receipt of a complete complaint for which 
it has jurisdiction, the agency shall notify the complainant of the 
results of the investigation in a letter containing:
    (1) Findings of fact and conclusions of law;
    (2) A description of a remedy for each violation found; and
    (3) A notice of the right to appeal.
    (h) Appeals of the findings of fact and conclusions of law or 
remedies must be filed by the complainant within 90 days of receipt from 
the agency of the letter required by this paragraph. The agency may 
extend this time for good cause.
    (i) Timely appeals shall be accepted and processed by the Equal 
Employment Opportunity and Inclusion Director, or his/her designee, Farm 
Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090.
    (j) The head of the agency shall notify the complainant of the 
results of the appeal within 60 days of the receipt of the request. If 
the head of the agency determines that additional information is needed 
from the complainant, he or she shall have 60 days from the date of 
receipt of the additional information to make his or her determination 
on the appeal.
    (k) The time limits cited in paragraphs (g) and (j) of this section 
may be extended with the permission of the Assistant Attorney General.
    (l) The agency may delegate its authority for conducting complaint 
investigations to other Federal agencies, except that the authority for 
making the final determination may not be delegated to another agency.

[53 FR 19889, June 1, 1988, as amended at 56 FR 2674, Jan. 24, 1991; 70 
FR 69645, Nov. 17, 2005; 80 FR 68429, Nov. 5, 2015; 81 FR 47692, July 
22, 2016]



Secs. 606.671-606.999  [Reserved]



PART 607_ASSESSMENT AND APPORTIONMENT OF ADMINISTRATIVE EXPENSES--
Table of Contents



Sec.
607.1  Purpose and scope.
607.2  Definitions.
607.3  Assessment of banks, associations, and designated other System 
          entities.
607.4  Assessment of other System entities.
607.5  Notice of assessment.
607.6  Payment of assessment.
607.7  Late-payment charges on assessments.
607.8  Reimbursements for services to non-System entities.
607.9  Reimbursable billings.
607.10  Adjustments for overpayment or underpayment of assessments.
607.11  Report of assessments and expenses.

    Authority: Secs. 5.15, 5.17 of the Farm Credit Act (12 U.S.C. 2250, 
2252) and 12 U.S.C. 3025.

    Source: 58 FR 10942, Feb. 23, 1993, unless otherwise noted.



Sec. 607.1  Purpose and scope.

    The regulations in part 607 implement the provisions of section 5.15 
of the Farm Credit Act of 1971, 12 U.S.C. 2001 et seq. (Act) relating to 
Farm Credit Administration (FCA) assessments. The regulations prescribe 
the procedures for the equitable apportionment of FCA annual 
administrative expenses and necessary reserves among Farm Credit System 
(System) institutions. Pursuant to section 5.15(a) of the Act, the 
regulations also provide for the separate assessment of the FCA's costs 
of supervising and examining the Federal Agricultural Mortgage 
Corporation (FAMC). The regulations further provide for the 
reimbursement of expenses incurred in performing statutorily required 
examinations of non-System entities.



Sec. 607.2  Definitions.

    For the purpose of this part, the following definitions shall apply:
    (a) Assessment means the annual amount to be paid by each System 
institution to the Farm Credit Administration in accordance with section 
5.15 of the Act.
    (b) Average risk-adjusted asset base means the average of the risk-
adjusted asset base (as defined in Sec. 615.5201 of

[[Page 31]]

this chapter) of banks, associations, and designated other System 
entities, calculated as follows:
    (1) For banks, associations, and designated other System entities 
with four quarters of risk-adjusted assets as of June 30 of each year, 
the sum of the average daily risk-adjusted assets as of the last day of 
the quarter as reported on each quarterly Call Report Schedule RC-G to 
the FCA for the most recent four quarters immediately preceding each 
September 15, divided by four;
    (2) Except as provided in paragraphs (b)(3) and (b)(4) of this 
section, for banks, associations, and designated other System entities 
with less than four quarters of risk-adjusted assets as of June 30 of 
each year, the sum of the average daily risk-adjusted assets as of the 
last day of the quarter reported on each quarterly Call Report Schedule 
RC-G to the FCA for the quarters in which it was in existence 
immediately preceding September 15, divided by the number of quarters 
for which the Call Report Schedule RC-G was received;
    (3) For banks, associations, and designated other System entities 
that were formed through mergers, consolidations, or transfers of direct 
lending authority, and have less than four quarters of risk-adjusted 
assets as of June 30, the sum of the average daily risk-adjusted assets 
as of the last day of the quarter for the most recent four quarters 
immediately preceding September 15 as reported on each quarterly Call 
Report Schedule RC-G filed by the newly chartered institution and the 
institutions that were merged or consolidated or that received direct 
lending authority, divided by four;
    (4) For banks, associations, and designated other System entities 
chartered during the period July 1 through September 30 of each year 
that were not formed by the merger or consolidation of existing System 
institutions or the transfer of direct lending authority from another 
System institution, the total of the average daily risk-adjusted assets 
as of the last day of the quarter as reported on Call Report Schedule 
RC-G for the quarter ending September 30.
    (c) Composite Financial Institution Rating System (FIRS) rating 
means the composite numerical assessment of the financial condition of 
an institution assigned to the institution by the FCA based on its most 
recent examination of the institution. The FIRS factors are generally 
considered to be important indicators of an institution's financial 
health. Institutions are rated on each of the factors during an 
examination. The composite FIRS rating ranges from 1 to 5, with a lower 
number indicating a better financial condition than a higher number.
    (d) Delinquent amount means an amount owed to the FCA that has not 
been paid by the date specified in the FCA's Notice of Assessment or 
billing.
    (e) Designated other System entities means other System entities 
designated by the FCA in Sec. 607.3(c) to be assessed on the same basis 
as banks and associations under Sec. 607.3.
    (f) Direct expenses means the expenses of the FCA attributable to 
the performance of examinations.
    (g) Indirect expenses means all FCA expenses that are not 
attributable to the performance of examinations.
    (h) Non-System entities means the National Consumer Cooperative 
Bank, the National Cooperative Bank Development Corporation, and any 
other entity that is required to be examined, supervised, or otherwise 
regulated by the FCA that is not a System institution.
    (i) Notice of Assessment means a written notice to each System 
institution showing the total amount assessed and owing, the fiscal year 
covered by the assessment, the amounts of installment payments, and the 
due dates for such payments. For banks, associations, and designated 
other System entities, the Notice of Assessment shall also include an 
individualized assessment table showing the assessment under 
Sec. 607.3(b)(2), where applicable.
    (j) Other System entities means any service corporation chartered 
under section 4.25 of the Act, the FAMC, the Federal Farm Credit Banks 
Funding Corporation, the Farm Credit Finance Corporation of Puerto Rico, 
and any other entity statutorily designated as a System institution that 
is not a bank or association.

[[Page 32]]

    (k) System institutions means banks, associations, and other System 
entities.

[58 FR 10942, Feb. 23, 1993, as amended at 59 FR 37403, July 22, 1994; 
63 FR 34268, June 24, 1998; 70 FR 35348, June 17, 2005; 75 FR 35968, 
June 24, 2010; 81 FR 49772, July 28, 2016]



Sec. 607.3  Assessment of banks, associations, and designated other
System entities.

    (a) Banks, associations, and other System entities designated in 
paragraph (c) of this section will be assessed annually pursuant to this 
section for funds to cover a portion of the FCA's administrative 
expenses and for such funds as may be required to maintain a necessary 
reserve. The total amount of the annual assessment of banks, 
associations, and designated other System entities shall be based on the 
FCA budget for each fiscal year plus such amount as may be required to 
maintain a necessary reserve, excluding amounts to be assessed against 
other System entities and reimbursements received from non-System 
entities.
    (b) The assessment shall be apportioned among the banks, 
associations, and designated other System entities as follows:
    (1) Thirty (30) percent of the assessment under this section shall 
be apportioned to each bank, association, and designated other System 
entity on the basis of each institution's pro rata share of the total 
average risk-adjusted asset base.
    (2) Seventy (70) percent of the assessment under this section shall 
be apportioned to each bank, association, and designated other System 
entity based upon the amounts of the institution's average risk-adjusted 
assets that fall within the graduated risk-adjusted asset tiers 
contained in the following table. An institution's total assessment 
under this paragraph is the sum of the amounts assessed for risk-
adjusted assets falling into each applicable tier, subject to adjustment 
for its FIRS rating as required in paragraphs (b)(2)(i) and (b)(2)(ii) 
of this section. The same assessment rate (designated as X1 
or a declining percentage of X1 in the following table) will 
be applied to each dollar value of risk-adjusted assets falling within 
each tier, increased where applicable, by the amounts prescribed in 
paragraphs (b)(2)(i) and (b)(2)(ii) of this section. The actual 
assessment rate under this paragraph shall be determined annually based 
on relative average risk-adjusted asset bases, the FIRS ratings of 
individual institutions, and the FCA budget as adjusted pursuant to 
paragraph (a) of this section, but the relationship between the rates 
applied to each tier shall remain constant as set forth in the following 
table.

------------------------------------------------------------------------
    Average risk-adjusted asset size range (in
                    millions)
--------------------------------------------------    Assessment rate
                Over                       To
------------------------------------------------------------------------
$0..................................          $25  X1
25..................................           50  .85X1
50..................................          100  .75X1
100.................................          500  .60X1
500.................................        1,000  .50X1
1,000...............................        7,000  .35X1
7,000...............................       10,000  .20X1
10,000..............................  ...........  .10X1
------------------------------------------------------------------------

    Example: XYZ association has a FIRS rating of 2 and average risk-
adjusted assets of $500.4 million. The value of X1 has been 
determined to be .000917, based on an FCA budget of $40.29 million.

X1= .000917 therefore $25,000,000  x  .0917%..............   =   $22,925
.85X1= .000780 therefore $25,000,000  x  .0780%...........   =    19,500
.75X1= .000688 therefore $50,000,000  x  .0688%...........   =    34,400
.60X1= .000550 therefore $400,000,000  x  .0550%..........   =   220,000
.50X1= .000458 therefore $400,000  x  .0458%..............   =       183
                                                               ---------
    Total Assessment under Sec. 607.3(b)(2)..............   =   297,008
 

    (i) If the FCA assigns a bank, association, or designated other 
System entity a composite FIRS rating of 3 following its most recent 
examination of the institution prior to the date of assessment, the 
assessment provided for in paragraph (b)(2) of this section shall be 
increased by 20 percent.
    (ii) If the FCA assigns a bank, association, or designated other 
System entity a composite FIRS rating of 4 or 5 following its most 
recent examination of the institution prior to the date of assessment, 
the assessment provided for in paragraph (b)(2) of this section shall be 
increased by 40 percent.

[[Page 33]]

    (iii) Banks, associations, and designated other System entities that 
were formed through mergers or consolidations and have not been examined 
before their initial assessment under this section shall be deemed to 
have a composite FIRS rating equivalent to the best composite FIRS 
rating assigned to the merged or consolidated institutions in the FCA's 
most recent examination of the individual institutions prior to the date 
of merger or consolidation. Newly chartered institutions not formed 
through mergers or consolidations that have not been examined before 
their initial assessment under this section shall be deemed to have a 
composite FIRS rating of 2.
    (3) Each bank, association, and designated other System entity shall 
pay a minimum assessment of $20,000 regardless of the result of the 
application of the assessment formula established by paragraphs (b)(1) 
and (b)(2) of this section. If such a minimum assessment is apportioned 
to an institution, that institution's average risk-adjusted asset base 
shall be deducted from the total average risk-adjusted asset base, and 
$20,000 shall be deducted from the total assessment amount for purposes 
of determining the assessments of banks, associations, and designated 
other System entities paying more than the $20,000 minimum assessment.
    (c) Other System entities designated to be assessed in accordance 
with this section are:
    The Farm Credit Services Leasing Corporation.
    (d) Assessments may be adjusted periodically to reflect:
    (1) Changes in the FCA budget and necessary reserve; and
    (2) Any overpayment or underpayment by a bank, association, or 
designated other System entity in the prior fiscal year.

[58 FR 10942, Feb. 23, 1993, as amended at 63 FR 34268, June 24, 1998]



Sec. 607.4  Assessment of other System entities.

    (a)(1) Unless otherwise designated to be assessed under Sec. 607.3, 
and with the exception of FAMC as provided in paragraph (b) of this 
section, other System entities will be assessed for estimated direct 
expenses plus an allocated portion of FCA indirect expenses and such 
amount as may be required to maintain a necessary reserve. The estimate 
for direct expenses shall take into account the direct expenses incurred 
in the most recent examination of the entity preceding each September 15 
and expected increases or decreases in examination work for the next 
fiscal year. A proportional amount of FCA indirect expenses will be 
allocated to each entity based on the estimated direct expenses related 
to the particular entity as a percentage of the total budgeted direct 
expenses of the agency (excluding direct expenses under paragraph (b) of 
this section) for the fiscal year covered by the assessment.
    (2) Assessments of other System entities under paragraph (a)(1) of 
this section may be adjusted periodically to reflect:
    (i) Changes in the FCA budget and necessary reserve; and
    (ii) Any overpayment or underpayment by such other System entity in 
the prior fiscal year.
    (b) Assessment of Federal Agricultural Mortgage Corporation. The FCA 
shall assess FAMC for the estimated cost of FCA's regulation, 
supervision, and examination of FAMC, including reasonably related 
administrative and overhead expenses. FAMC's assessment may be adjusted 
periodically to reflect changes in the FCA budget and to reconcile 
differences between FAMC's assessment and FCA's actual expenditures for 
regulation of FAMC in the prior fiscal year.



Sec. 607.5  Notice of assessment.

    (a) Except as provided in paragraph (b) of this section, prior to 
September 15 of each year, the FCA shall determine the amount of 
assessment to be collected from each System institution for the next 
fiscal year under Secs. 607.3 and 607.4 and shall provide each System 
institution with a Notice of Assessment. The total amount assessed each 
System institution in the Notice of Assessment shall be an obligation of 
each institution on October 1 of each fiscal year. The total amount 
assessed each System institution shall be payable not less often than 
quarterly in equal installments during each fiscal year,

[[Page 34]]

subject to adjustment pursuant to Secs. 607.3(d), 607.4(a)(2), 607.4(b), 
and 607.10.
    (b) For banks, associations and designated other System entities 
chartered during the period July 1 through September 30 of each year, 
the FCA shall, prior to December 15, determine the amount of assessment 
to be collected from each such institution for the remainder of the 
fiscal year and provide the institution with a Notice of Assessment. The 
total amount of the assessment becomes an obligation of the institution 
on January 1 and shall be payable in equal installments, subject to 
adjustment pursuant to Secs. 607.3(d) and 607.10, not less often than 
quarterly for the remainder of the fiscal year. The first installment 
shall be due on January 1. This paragraph shall not apply to banks, 
associations, and designated other System entities formed by merger, 
consolidation, or transfer of direct lending authority.
    (c) In the event of the proposed cancellation of the charter of a 
System institution, the unpaid installments of the total amount of the 
institution's assessment shall be provided for prior to the cancellation 
of the charter.



Sec. 607.6  Payment of assessment.

    (a) System institutions shall pay the amounts due as scheduled in 
the FCA Notice of Assessment. Payment shall be made by electronic funds 
transfer (EFT) for credit to the FCA's account in the Department of the 
Treasury, by check to the FCA for deposit, or by such other means as the 
FCA may authorize.
    (b) Payments made by EFT that are not received by the close of 
business on the due date shall be considered delinquent in accordance 
with Sec. 607.7.
    (c) Payments made by check that are not received by the FCA before 
the close of business on the third workday preceding the due date shall 
be considered delinquent in accordance with Sec. 607.7.



Sec. 607.7  Late-payment charges on assessments.

    (a) If any portion of a scheduled installment of a System 
institution's total assessment or the reimbursement billed to a non-
System entity is not paid by the due date, the overdue amount shall be 
considered delinquent.
    (b) Delinquent amounts shall be charged late-payment interest at the 
United States Treasury Department's current value of funds rate 
published in the Federal Register. Late payment interest shall be 
expressed as an annual rate of interest and shall accrue on a daily 
basis starting on the due date of the delinquent amount and continuing 
through the date payment is received by the FCA.
    (c) The FCA shall waive the collection of interest on the delinquent 
amounts if such amounts are paid within 30 days of the date interest 
begins to accrue. The FCA may waive interest due on delinquent amounts 
upon finding no fault with the performance of the remitter.
    (d) The FCA shall charge an amount necessary to cover the 
administrative costs incurred as a result of collection of any 
delinquent amount.
    (e) The FCA shall charge a penalty of 6 percent per annum on any 
portion of a delinquent amount that is more than 90 days past due. Such 
penalty shall accrue from the date the amount became delinquent.



Sec. 607.8  Reimbursements for services to non-System entities.

    Non-System entities shall be assessed for direct expenses plus an 
amount for FCA indirect expenses reasonably related to the services 
rendered to the non-System entity. Such related indirect expenses shall 
be calculated as a percentage of the FCA's overall indirect expenses 
based on the extent of FCA activities with respect to the non-System 
entity during the period since the entity's most recent assessment.



Sec. 607.9  Reimbursable billings.

    The FCA shall bill the amounts due for services to non-System 
entities each year subsequent to the issuance of their respective 
Reports of Examination. Amounts billed are due in full within 30 days 
from the date billed. If the billed amount or any portion thereof 
remains unpaid at close of business on the due date, such amount or 
portion shall be considered delinquent in accordance with Sec. 607.7.

[[Page 35]]



Sec. 607.10  Adjustments for overpayment or underpayment of
assessments.

    Where adjustments for overpayment or underpayment of assessments are 
made pursuant to Secs. 607.3(d), 607.4(a)(2), and 607.4(b), credits for 
overpayments or charges for underpayments shall be based on FCA 
administrative operating expenses incurred in the applicable fiscal year 
and on funds required to be maintained pursuant to section 5.15 of the 
Act. Such credits or charges shall be applied to the next applicable 
assessment payment due during the current or subsequent fiscal year. 
Where such adjustments are made, the FCA shall provide the institution 
with a statement of adjustment at least 15 days prior to the date when 
the institution's next assessment payment is due. Adjustments in 
assessments shall be made in principal amount only. Overdue amounts 
under Sec. 607.7 are not underpayments for assessment adjustment 
purposes.



Sec. 607.11  Report of assessments and expenses.

    By January 15 of each calendar year, the FCA shall provide each 
assessed System institution with a report of assessments and expenses 
for the preceding fiscal year showing total assessments and other income 
received as applied to expenses incurred by major budget category and 
amounts set aside for a necessary reserve.



PART 608_COLLECTION OF CLAIMS OWED THE UNITED STATES--
Table of Contents



              Subpart A_Administrative Collection of Claims

Sec.
608.801  Authority.
608.802  Applicability.
608.803  Definitions.
608.804  Delegation of authority.
608.805  Responsibility for collection.
608.806  Demand for payment.
608.807  Right to inspect and copy records.
608.808  Right to offer to repay claim.
608.809  Right to agency review.
608.810  Review procedures.
608.811  Special review.
608.812  Charges for interest, administrative costs, and penalties.
608.813  Contracting for collection services.
608.814  Reporting of credit information.
608.815  Credit report.

                     Subpart B_Administrative Offset

608.820  Applicability.
608.821  Collection by offset.
608.822  Notice requirements before offset.
608.823  Right to review of claim.
608.824  Waiver of procedural requirements.
608.825  Coordinating offset with other Federal agencies.
608.826  Stay of offset.
608.827  Offset against amounts payable from Civil Service Retirement 
          and Disability Fund.

                     Subpart C_Offset Against Salary

608.835  Purpose.
608.836  Applicability of regulations.
608.837  Definitions.
608.838  Waiver requests and claims to the General Accounting Office.
608.839  Procedures for salary offset.
608.840  Refunds.
608.841  Requesting current paying agency to offset salary.
608.842  Responsibility of the FCA as the paying agency.
608.843  Nonwaiver of rights by payments.

    Authority: Sec. 5.17 of the Farm Credit Act; 12 U.S.C. 2252; 31 
U.S.C. 3701-3719; 5 U.S.C. 5514; 4 CFR parts 101-105; 5 CFR part 550.

    Source: 59 FR 13187, Mar. 21, 1994, unless otherwise noted.



              Subpart A_Administrative Collection of Claims



Sec. 608.801  Authority.

    The regulations of this part are issued under the Federal Claims 
Collection Act of 1966, as amended by the Debt Collection Act of 1982, 
31 U.S.C. 3701-3719 and 5 U.S.C. 5514, and in conformity with the joint 
regulations issued under that Act by the General Accounting Office and 
the Department of Justice (joint regulations) prescribing standards for 
administrative collection, compromise, suspension, and termination of 
agency collection actions, and referral to the General Accounting Office 
and to the Department of Justice for litigation of civil claims for 
money or property owed to the United States (4 CFR parts 101-105).



Sec. 608.802  Applicability.

    This part applies to all claims of indebtedness due and owing to the 
United States and collectible under procedures

[[Page 36]]

authorized by the Federal Claims Collection Act of 1966, as amended by 
the Debt Collection Act of 1982. The joint regulations and this part do 
not apply to conduct in violation of antitrust laws, tax claims, claims 
between Federal agencies, or to any claim which appears to involve 
fraud, presentation of a false claim, or misrepresentation on the part 
of the debtor or any other party having an interest in the claim, unless 
the Justice Department authorizes the Farm Credit Administration, 
pursuant to 4 CFR 101.3, to handle the claim in accordance with the 
provisions of 4 CFR parts 101-105. Additionally, this part does not 
apply to Farm Credit Administration assessments under part 607 of this 
chapter.



Sec. 608.803  Definitions.

    In this part (except where the term is defined elsewhere in this 
part), the following definitions shall apply:
    (a) Administrative offset or offset, as defined in 31 U.S.C. 
3701(a)(1), means withholding money payable by the United States 
Government to, or held by the Government for, a person to satisfy a debt 
the person owes the Government.
    (b) Agency means a department, agency, or instrumentality in the 
executive or legislative branch of the Government.
    (c) Claim or debt means money or property owed by a person or entity 
to an agency of the Federal Government. A ``claim'' or ``debt'' includes 
amounts due the Government from loans insured by or guaranteed by the 
United States and all other amounts due from fees, leases, rents, 
royalties, services, sales of real or personal property, overpayment, 
penalties, damages, interest, and fines.
    (d) Claim certification means a creditor agency's written request to 
a paying agency to effect an administrative offset.
    (e) Creditor agency means an agency to which a claim or debt is 
owed.
    (f) Debtor means the person or entity owing money to the Federal 
Government.
    (g) FCA means the Farm Credit Administration.
    (h) Hearing official means an individual who is responsible for 
reviewing a claim under Sec. 608.810 of this part.
    (i) Paying agency means an agency of the Federal Government owing 
money to a debtor against which an administrative or salary offset can 
be effected.
    (j) Salary offset means an administrative offset to collect a debt 
under 5 U.S.C. 5514 by deductions at one or more officially established 
pay intervals from the current pay account of a debtor.



Sec. 608.804  Delegation of authority.

    The FCA official(s) designated by the Chairman of the Farm Credit 
Administration are authorized to perform all duties which the Chairman 
is authorized to perform under these regulations, the Federal Claims 
Collection Act of 1966, as amended, and the joint regulations issued 
under that Act.



Sec. 608.805  Responsibility for collection.

    (a) The collection of claims shall be aggressively pursued in 
accordance with the provisions of the Federal Claims Collection Act of 
1966, as amended, the joint regulations issued under that Act, and these 
regulations. Debts owed to the United States, together with charges for 
interest, penalties, and administrative costs, should be collected in 
one lump sum unless otherwise provided by law. If a debtor requests 
installment payments, the debtor, as requested by the FCA, shall provide 
sufficient information to demonstrate that the debtor is unable to pay 
the debt in one lump sum. When appropriate, the FCA shall arrange an 
installment payment schedule. Claims which cannot be collected directly 
or by administrative offset shall be either written off as 
administratively uncollectible or referred to the General Counsel for 
further consideration.
    (b) The Chairman, or designee of the Chairman, may compromise claims 
for money or property arising out of the activities of the FCA, where 
the claim (exclusive of charges for interest, penalties, and 
administrative costs) does not exceed $100,000. When the claim exceeds 
$100,000 (exclusive of charges for interest, penalties, and 
administrative

[[Page 37]]

costs), the authority to accept a compromise rests solely with the 
Department of Justice. The standards governing the compromise of claims 
are set forth in 4 CFR part 103.
    (c) The Chairman, or designee of the Chairman, may suspend or 
terminate the collection of claims which do not exceed $100,000 
(exclusive of charges for interest, penalties, and administrative costs) 
after deducting the amount of any partial payments or collections. If, 
after deducting the amount of any partial payments or collections, a 
claim exceeds $100,000 (exclusive of charges for interest, penalties, 
and administrative costs), the authority to suspend or terminate rests 
solely with the Department of Justice. The standards governing the 
suspension or termination of claim collections are set forth in 4 CFR 
part 104.
    (d) The FCA shall refer claims to the Department of Justice for 
litigation or to the General Accounting Office (GAO) for claims arising 
from audit exceptions taken by the GAO to payments made by the FCA in 
accordance with 4 CFR part 105.



Sec. 608.806  Demand for payment.

    (a) A total of three progressively stronger written demands at not 
more than 30-day intervals should normally be made upon a debtor, unless 
a response or other information indicates that additional written 
demands would either be unnecessary or futile. When necessary to protect 
the Government's interest, written demands may be preceded by other 
appropriate actions under Federal law, including immediate referral for 
litigation and/or administrative offset.
    (b) The initial demand for payment shall be in writing and shall 
inform the debtor of the following:
    (1) The amount of the debt, the date it was incurred, and the facts 
upon which the determination of indebtedness was made;
    (2) The payment due date, which shall be 30 calendar days from the 
date of mailing or hand delivery of the initial demand for payment;
    (3) The right of the debtor to inspect and copy the records of the 
agency related to the claim or to receive copies if personal inspection 
is impractical. The debtor shall be informed that the debtor may be 
assessed for the cost of copying the documents in accordance with 
Sec. 608.807;
    (4) The right of the debtor to obtain a review of the FCA's 
determination of indebtedness;
    (5) The right of the debtor to offer to enter into a written 
agreement with the agency to repay the amount of the claim. The debtor 
shall be informed that the acceptance of such an agreement is 
discretionary with the agency;
    (6) That charges for interest, penalties, and administrative costs 
will be assessed against the debtor, in accordance with 31 U.S.C. 3717, 
if payment is not received by the payment due date;
    (7) That if the debtor has not entered into an agreement with the 
FCA to pay the debt, has not requested the FCA to review the debt, or 
has not paid the debt by the payment due date, the FCA intends to 
collect the debt by all legally available means, which may include 
initiating legal action against the debtor, referring the debt to a 
collection agency for collection, collecting the debt by offset, or 
asking other Federal agencies for assistance in collecting the debt by 
offset;
    (8) The name and address of the FCA official to whom the debtor 
shall send all correspondence relating to the debt; and
    (9) Other information, as may be appropriate.
    (c) If, prior to, during, or after completion of the demand cycle, 
the FCA determines to collect the debt by either administrative or 
salary offset, the FCA shall follow, as applicable, the requirements for 
a Notice of Intent to Collect by Administrative Offset or a Notice of 
Intent to Collect by Salary Offset set forth in Sec. 608.822.
    (d) If no response to the initial demand for payment is received by 
the payment due date, the FCA shall take further action under this part, 
under the Federal Claims Collection Act of 1966, as amended, under the 
joint regulations (4 CFR parts 101-105), or under any other applicable 
State or Federal law. These actions may include reports to credit 
bureaus, referrals to collection agencies, termination of contracts, 
debarment, and salary or administrative offset.

[[Page 38]]



Sec. 608.807  Right to inspect and copy records.

    The debtor may inspect and copy the FCA records related to the 
claim. The debtor shall give the FCA reasonable advance notice that it 
intends to inspect and copy the records involved. The debtor shall pay 
copying costs unless they are waived by the FCA. Copying costs shall be 
assessed pursuant to Secs. 602.11 and 602.12 of this chapter.

[59 FR 13187, Mar. 21, 1994, as amended at 71 FR 54900, Sept. 20, 2006]



Sec. 608.808  Right to offer to repay claim.

    (a) The debtor may offer to enter into a written agreement with the 
FCA to repay the amount of the claim. The acceptance of such an offer 
and the decision to enter into such a written agreement is at the 
discretion of the FCA.
    (b) If the debtor requests a repayment arrangement because payment 
of the amount due would create a financial hardship, the FCA shall 
analyze the debtor's financial condition. The FCA may enter into a 
written agreement with the debtor permitting the debtor to repay the 
debt in installments if the FCA determines, in its sole discretion, that 
payment of the amount due would create an undue financial hardship for 
the debtor. The written agreement shall set forth the amount and 
frequency of installment payments and shall, in accordance with 
Sec. 608.812, provide for the imposition of charges for interest, 
penalties, and administrative costs unless waived by the FCA.
    (c) The written agreement may require the debtor to execute a 
confess-judgment note when the total amount of the deferred installments 
will exceed $750. The FCA shall provide the debtor with a written 
explanation of the consequences of signing a confess-judgment note. The 
debtor shall sign a statement acknowledging receipt of the written 
explanation. The statement shall recite that the written explanation was 
read and understood before execution of the note and that the debtor 
signed the note knowingly and voluntarily. Documentation of these 
procedures will be maintained in the FCA's file on the debtor.



Sec. 608.809  Right to agency review.

    (a) If the debtor disputes the claim, the debtor may request a 
review of the FCA's determination of the existence of the debt or of the 
amount of the debt. If only part of the claim is disputed, the 
undisputed portion should be paid by the payment due date.
    (b) To obtain a review, the debtor shall submit a written request 
for review to the FCA official named in the initial demand letter, 
within 15 calendar days after receipt of the letter. The debtor's 
request for review shall state the basis on which the claim is disputed.
    (c) The FCA shall promptly notify the debtor, in writing, that the 
FCA has received the request for review. The FCA shall conduct its 
review of the claim in accordance with Sec. 608.810.
    (d) Upon completion of its review of the claim, the FCA shall notify 
the debtor whether the FCA's determination of the existence or amount of 
the debt has been sustained, amended, or canceled. The notification 
shall include a copy of the written decision issued by the hearing 
official pursuant to Sec. 608.810(e). If the FCA's determination is 
sustained, this notification shall contain a provision which states that 
the FCA intends to collect the debt by all legally available means, 
which may include initiating legal action against the debtor, referring 
the debt to a collection agency for collection, collecting the debt by 
offset, or asking other Federal agencies for assistance in collecting 
the debt by offset.



Sec. 608.810  Review procedures.

    (a) Unless an oral hearing is required by Sec. 608.823(d), the FCA's 
review shall be a review of the written record of the claim.
    (b) If an oral hearing is required under Sec. 608.823(d), the FCA 
shall provide the debtor with a reasonable opportunity for such a 
hearing. The oral hearing, however, shall not be an adversarial 
adjudication and need not take the form of a formal evidentiary hearing. 
All significant matters discussed at the hearing, however, will be 
carefully documented.
    (c) Any review required by this part, whether a review of the 
written record or an oral hearing, shall be conducted

[[Page 39]]

by a hearing official. In the case of a salary offset, the hearing 
official shall not be under the supervision or control of the Chairman 
of the Farm Credit Administration.
    (d) The FCA may be represented by legal counsel. The debtor may 
represent himself or herself or may be represented by an individual of 
the debtor's choice and at the debtor's expense.
    (e) The hearing official shall issue a final written decision based 
on documentary evidence and, if applicable, information developed at an 
oral hearing. The written decision shall be issued as soon as 
practicable after the review but not later than 60 days after the date 
on which the request for review was received by the FCA, unless the 
debtor requests a delay in the proceedings. A delay in the proceedings 
shall be granted if the hearing official determines, in his or her sole 
discretion, that there is good cause to grant the delay. If a delay is 
granted, the 60-day decision period shall be extended by the number of 
days by which the review was postponed.
    (f) Upon issuance of the written opinion, the FCA shall promptly 
notify the debtor of the hearing official's decision. Said notification 
shall include a copy of the written decision issued by the hearing 
official pursuant to paragraph (e) of this section.



Sec. 608.811  Special review.

    (a) An employee subject to salary offset, under subpart C of this 
part, or a voluntary repayment agreement, may, at any time, request a 
special review by the FCA of the amount of the salary offset or 
voluntary repayment, based on materially changed circumstances such as, 
but not limited to, catastrophic illness, divorce, death, or disability.
    (b) To determine whether an offset would prevent the employee from 
meeting essential subsistence expenses (costs incurred for food, 
housing, clothing, transportation, and medical care), the employee shall 
submit a detailed statement and supporting documents for the employee, 
his or her spouse, and dependents indicating:
    (1) Income from all sources;
    (2) Assets;
    (3) Liabilities;
    (4) Number of dependents;
    (5) Expenses for food, housing, clothing, and transportation;
    (6) Medical expenses; and
    (7) Exceptional expenses, if any.
    (c) If the employee requests a special review under this section, 
the employee shall file an alternative proposed offset or payment 
schedule and a statement, with supporting documents, showing why the 
current salary offset or payments result in an extreme financial 
hardship to the employee.
    (d) The FCA shall evaluate the statement and supporting documents, 
and determine whether the original offset or repayment schedule imposes 
an undue financial hardship on the employee. The FCA shall notify the 
employee in writing of such determination, including, if appropriate, a 
revised offset or payment schedule.



Sec. 608.812  Charges for interest, administrative costs, and penalties.

    (a) Except as provided in paragraph (d) of this section, the FCA 
shall:
    (1) Assess interest on unpaid claims;
    (2) Assess administrative costs incurred in processing and handling 
overdue claims; and
    (3) Assess penalty charges not to exceed 6 percent a year on any 
part of a debt more than 90 days past due. The imposition of charges for 
interest, administrative costs, and penalties shall be made in 
accordance with 31 U.S.C. 3717.
    (b)(1) Interest shall accrue from the date of mailing or hand 
delivery of the initial demand for payment or the Notice of Intent to 
Collect by either Administrative or Salary Offset if the amount of the 
claim is not paid within 30 days from the date of mailing or hand 
delivery of the initial demand or notice.
    (2) The 30-day period may be extended on a case-by-case basis if the 
FCA reasonably determines that such action is appropriate. Interest 
shall only accrue on the principal of the claim and the interest rate 
shall remain fixed for the duration of the indebtedness, except, as 
provided in paragraph (c) of this section, in cases where a debtor has 
defaulted on a repayment agreement and seeks to enter into a

[[Page 40]]

new agreement, or if the FCA reasonably determines that a higher rate is 
necessary to protect the interests of the United States.
    (c) If a debtor defaults on a repayment agreement and seeks to enter 
into a new agreement, the FCA may assess a new interest rate on the 
unpaid claim. In addition, charges for interest, administrative costs, 
and penalties which accrued but were not collected under the original 
repayment agreement shall be added to the principal of the claim to be 
paid under the new repayment agreement. Interest shall accrue on the 
entire principal balance of the claim, as adjusted to reflect any 
increase resulting from the addition of these charges.
    (d) The FCA may waive charges for interest, administrative costs, 
and/or penalties if it determines that:
    (1) The debtor is unable to pay any significant sum toward the claim 
within a reasonable period of time;
    (2) Collection of charges for interest, administrative costs, and/or 
penalties would jeopardize collection of the principal of the claim;
    (3) Collection of charges for interest, administrative costs, or 
penalties would be against equity and good conscience; or
    (4) It is otherwise in the best interest of the United States, 
including the situation where an installment payment agreement or offset 
is in effect.



Sec. 608.813  Contracting for collection services.

    The Chairman, or designee of the Chairman, may contract for 
collection services in accordance with 31 U.S.C. 3718 and 4 CFR 102.6 to 
recover debts.



Sec. 608.814  Reporting of credit information.

    The Chairman, or designee of the Chairman, may disclose to a 
consumer reporting agency information that an individual is responsible 
for a debt owed to the United States. Information will be disclosed to 
reporting agencies in accordance with the terms and conditions of 
agreements entered into between the FCA and the reporting agencies. The 
terms and conditions of such agreements shall specify that all of the 
rights and protection afforded to the debtor under 31 U.S.C. 3711(f) 
have been fulfilled. The FCA shall notify each consumer reporting 
agency, to which a claim was disclosed, when the debt has been 
satisfied.



Sec. 608.815  Credit report.

    In order to aid the FCA in making appropriate determinations 
regarding the collection and compromise of claims; the collection of 
charges for interest, administrative costs, and penalties; the use of 
administrative offset; the use of other collection methods; and the 
likelihood of collecting the claim, the FCA may institute, consistent 
with the provisions of the Fair Credit Reporting Act (15 U.S.C. 1681, et 
seq.), a credit investigation of the debtor immediately following a 
determination that the claim exists.



                     Subpart B_Administrative Offset



Sec. 608.820  Applicability.

    (a) The provisions of this subpart shall apply to the collection of 
debts by administrative [or salary] offset under 31 U.S.C. 3716, 5 
U.S.C. 5514, or other statutory or common law.
    (b) Offset shall not be used to collect a debt more than 10 years 
after the Government's right to collect the debt first accrued, unless 
facts material to the Government's right to collect the debt were not 
known and could not reasonably have been known by the official or 
officials of the Government who were charged with the responsibility of 
discovering and collecting such debt.
    (c) Offset shall not be used with respect to:
    (1) Debts owed by other agencies of the United States or by any 
State or local government;
    (2) Debts arising under or payments made under the Social Security 
Act, the Internal Revenue Code of 1986, as amended, or tariff laws of 
the United States; or
    (3) Any case in which collection by offset of the type of debt 
involved is explicitly provided for or prohibited by another statute.
    (d) Unless otherwise provided by contract or law, debts or payments 
which are not subject to offset under 31 U.S.C. 3716 or 5 U.S.C. 5514 
may be collected

[[Page 41]]

by offset if such collection is authorized under common law or other 
applicable statutory authority.



Sec. 608.821  Collection by offset.

    (a) Collection of a debt by administrative [or salary] offset shall 
be accomplished in accordance with the provisions of these regulations, 
of 4 CFR 102.3, and 5 CFR part 550, subpart K. It is not necessary for 
the debt to be reduced to judgment or to be undisputed for offset to be 
used.
    (b) The Chairman, or designee of the Chairman, may determine that it 
is feasible to collect a debt to the United States by offset against 
funds payable to the debtor.
    (c) The feasibility of collecting a debt by offset will be 
determined on a case-by-case basis. This determination shall be made by 
considering all relevant factors, including the following:
    (1) The degree to which the offset can be accomplished in accordance 
with law. This determination should take into consideration relevant 
statutory, regulatory, and contractual requirements;
    (2) The degree to which the FCA is certain that its determination of 
the existence and amount of the debt is correct;
    (3) The practicality of collecting the debt by offset. The cost, in 
time and money, of collecting the debt by offset and the amount of money 
which can reasonably be expected to be recovered through offset will be 
relevant to this determination; and
    (4) Whether the use of offset will substantially interfere with or 
defeat the purpose of a program authorizing payments against which the 
offset is contemplated. For example, under a grant program in which 
payments are made in advance of the grantee's performance, the 
imposition of offset against such a payment may be inappropriate.
    (d) The collection of a debt by offset may not be feasible when 
there are circumstances which would indicate that the likelihood of 
collection by offset is less than probable.
    (e) The offset will be effected 31 days after the debtor receives a 
Notice of Intent to Collect by Administrative Offset (or Notice of 
Intent to Collect by Salary Offset if the offset is a salary offset), or 
upon the expiration of a stay of offset, unless the FCA determines under 
Sec. 608.824 that immediate action is necessary.
    (f) If the debtor owes more than one debt, amounts recovered through 
offset may be applied to them in any order. Applicable statutes of 
limitation would be considered before applying the amounts recovered to 
any debts owed.



Sec. 608.822  Notice requirements before offset.

    (a) Except as provided in Sec. 608.824, the FCA will provide the 
debtor with 30 calendar days' written notice that unpaid debt amounts 
shall be collected by administrative [or salary] offset (Notice of 
Intent to Collect by Administrative [or Salary] Offset) before the FCA 
imposes offset against any money that is to be paid to the debtor.
    (b) The Notice of Intent to Collect by Administrative [or Salary] 
Offset shall be delivered to the debtor by hand or by mail and shall 
provide the following information:
    (1) The amount of the debt, the date it was incurred, and the facts 
upon which the determination of indebtedness was made;
    (2) In the case of an administrative offset, the payment due date, 
which shall be 30 calendar days from the date of mailing or hand 
delivery of the Notice;
    (3) In the case of a salary offset: (i) The FCA's intention to 
collect the debt by means of deduction from the employee's current 
disposable pay account until the debt and all accumulated interest is 
paid in full; and
    (ii) The amount, frequency, proposed beginning date, and duration of 
the intended deductions;
    (4) The right of the debtor to inspect and copy the records of the 
FCA related to the claim or to receive copies if personal inspection is 
impractical. The debtor shall be informed that the debtor shall be 
assessed for the cost of copying the documents in accordance with 
Sec. 608.807;
    (5) The right of the debtor to obtain a review of, and to request a 
hearing, on the FCA's determination of indebtedness, the propriety of 
collecting the

[[Page 42]]

debt by offset, and, in the case of salary offset, the propriety of the 
proposed repayment schedule (i.e., the percentage of disposable pay to 
be deducted each pay period). The debtor shall be informed that to 
obtain a review, the debtor shall deliver a written request for a review 
to the FCA official named in the Notice, within 15 calendar days after 
the debtor's receipt of the Notice. In the case of a salary offset, the 
debtor shall also be informed that the review shall be conducted by an 
official arranged for by the FCA who shall be a hearing official not 
under the control of the Chairman of the Farm Credit Administration, or 
an administrative law judge;
    (6) That the filing of a petition for hearing within 15 calendar 
days after receipt of the Notice will stay the commencement of 
collection proceedings;
    (7) That a final decision on the hearing (if one is requested) will 
be issued at the earliest practical date, but not later than 60 days 
after the filing of the written request for review unless the employee 
requests, and the hearing official grants, a delay in the proceedings;
    (8) The right of the debtor to offer to enter into a written 
agreement with the FCA to repay the amount of the claim. The debtor 
shall be informed that the acceptance of such an agreement is 
discretionary with the FCA;
    (9) That charges for interest, penalties, and administrative costs 
shall be assessed against the debtor, in accordance with 31 U.S.C. 3717, 
if payment is not received by the payment due date. The debtor shall be 
informed that such assessments must be made unless excused in accordance 
with the Federal Claims Collection Standards (4 CFR parts 103 and 104);
    (10) The amount of accrued interest and the amount of any other 
penalties or administrative costs which may have been added to the 
principal debt;
    (11) That if the debtor has not entered into an agreement with the 
FCA to pay the debt, has not requested the FCA to review the debt, or 
has not paid the debt prior to the date on which the offset is to be 
imposed, the FCA intends to collect the debt by administrative [or 
salary] offset or by requesting other Federal agencies for assistance in 
collecting the debt by offset. The debtor shall be informed that the 
offset shall be imposed against any funds that might become available to 
the debtor, until the principal debt and all accumulated interest and 
other charges are paid in full;
    (12) The date on which the offset will be imposed, which shall be 31 
calendar days from the date of mailing or hand delivery of the Notice. 
The debtor shall be informed that the FCA reserves the right to impose 
an offset prior to this date if the FCA determines that immediate action 
is necessary;
    (13) That any knowingly false or frivolous statements, 
representations, or evidence may subject the debtor to:
    (i) Penalties under the False Claims Act, sections 3729 through 3731 
of title 31, United States Code, or any other applicable statutory 
authority;
    (ii) Criminal penalties under sections 286, 287, 1001, and 1002 of 
title 18, United States Code, or any other applicable statutory 
authority; and, with regard to employees,
    (iii) Disciplinary procedures appropriate under chapter 75 of title 
5, United States Code; part 752 of title 5, Code of Federal Regulations, 
or any other applicable statute or regulation;
    (14) The name and address of the FCA official to whom the debtor 
shall send all correspondence relating to the debt or the offset;
    (15) Any other rights and remedies available to the debtor under 
statutes or regulations governing the program for which the collection 
is being made;
    (16) That unless there are applicable contractual or statutory 
provisions to the contrary, amounts paid on or deducted for the debt, 
which are later waived or found not owed to the United States, will be 
promptly refunded to the employee; and
    (17) Other information, as may be appropriate.
    (c) When the procedural requirements of this section have been 
provided to the debtor in connection with the same debt or under some 
other statutory or regulatory authority, the FCA is not required to 
duplicate those requirements before effecting offset.

[[Page 43]]



Sec. 608.823  Right to review of claim.

    (a) If the debtor disputes the claim, the debtor may request a 
review of the FCA's determination of the existence of the debt, the 
amount of the debt, the propriety of collecting the debt by offset, and 
in the case of salary offset, the propriety of the proposed repayment 
schedule. If only part of the claim is disputed, the undisputed portion 
should be paid by the payment due date.
    (b) To obtain a review, the debtor shall submit a written request 
for review to the FCA official named in the Notice of Intent to Collect 
by Administrative [or Salary] Offset within 15 calendar days after 
receipt of the notice. The debtor's written request for review shall 
state the basis on which the claim is disputed and shall specify whether 
the debtor requests an oral hearing or a review of the written record of 
the claim. If an oral hearing is requested, the debtor shall explain in 
the request why the matter cannot be resolved by a review of the 
documentary evidence alone.
    (c) The FCA shall promptly notify the debtor, in writing, that the 
FCA has received the request for review. The FCA shall conduct its 
review of the claim in accordance with Sec. 608.810.
    (d) The FCA's review of the claim, under this section, shall include 
providing the debtor with a reasonable opportunity for an oral hearing 
if:
    (1) An applicable statute authorizes or requires the FCA to consider 
waiver of the indebtedness, the debtor requests waiver of the 
indebtedness, and the waiver determination turns on an issue of 
credibility or veracity; or
    (2) The debtor requests reconsideration of the debt and the FCA 
determines that the question of the indebtedness cannot be resolved by 
reviewing the documentary evidence; for example, when the validity of 
the debt turns on an issue of credibility or veracity.
    (e) A debtor waives the right to a hearing and will have his or her 
debt offset in accordance with the proposed offset schedule if the 
debtor:
    (1) Fails to file a written request for review within the timeframe 
set forth in paragraph (b) of this section, unless the FCA determines 
that the delay was the result of circumstances beyond his or her 
control; or
    (2) Fails to appear at an oral hearing of which he or she was 
notified unless the hearing official determines that the failure to 
appear was due to circumstances beyond the employee's control.
    (f) Upon completion of its review of the claim, the FCA shall notify 
the debtor whether the FCA's determination of the existence or amount of 
the debt has been sustained, amended, or canceled. The notification 
shall include a copy of the written decision issued by the hearing 
official, pursuant to Sec. 608.810(e). If the FCA's determination is 
sustained, this notification shall contain a provision which states that 
the FCA intends to collect the debt by offset or by requesting other 
Federal agencies for assistance in collecting the debt.
    (g) When the procedural requirements of this section have been 
provided to the debtor in connection with the same debt or under some 
other statutory or regulatory authority, the FCA is not required to 
duplicate those requirements before effecting offset.



Sec. 608.824  Waiver of procedural requirements.

    (a) The FCA may impose offset against a payment to be made to a 
debtor prior to the completion of the procedures required by this part, 
if:
    (1) Failure to impose the offset would substantially prejudice the 
Government's ability to collect the debt; and
    (2) The timing of the payment against which the offset will be 
imposed does not reasonably permit the completion of those procedures.
    (b) The procedures required by this part shall be complied with 
promptly after the offset is imposed. Amounts recovered by offset, which 
are later found not to be owed to the Government, shall be promptly 
refunded to the debtor.



Sec. 608.825  Coordinating offset with other Federal agencies.

    (a)(1) Any creditor agency which requests the FCA to impose an 
offset against amounts owed to the debtor

[[Page 44]]

shall submit to the FCA a claim certification which meets the 
requirements of this paragraph. The FCA shall submit the same 
certification to any agency that the FCA requests to effect an offset.
    (2) The claim certification shall be in writing. It shall certify 
the debtor owes the debt and that all of the applicable requirements of 
31 U.S.C. 3716 and 4 CFR part 102 have been met. If the intended offset 
is to be a salary offset, a claim certification shall instead certify 
that the debtor owes the debt and that the applicable requirements of 5 
U.S.C. 5514 and 5 CFR part 550, subpart K, have been met.
    (3) A certification that the debtor owes the debt shall state the 
amount of the debt, the factual basis supporting the determination of 
indebtedness, and the date on which payment of the debt was due. A 
certification that the requirements of 31 U.S.C. 3716 and 4 CFR part 102 
have been met shall include a statement that the debtor has been sent a 
notice of Intent to Collect by Administrative Offset at least 31 
calendar days prior to the date of the intended offset or a statement 
that pursuant to 4 CFR 102.3(b)(5) said Notice was not required to be 
sent. A certification that the requirements of 5 U.S.C. 5514 and 5 CFR 
part 550, subpart K, have been met shall include a statement that the 
debtor has been sent a Notice of Intent to Collect by Salary Offset at 
least 31 calendar days prior to the date of the intended offset or a 
statement that pursuant to 4 CFR 102.3(b)(5) said Notice was not 
required to be sent.
    (b)(1) The FCA shall not effect an offset requested by another 
Federal agency without first obtaining the claim certification required 
by paragraph (a) of this section. If the FCA receives an incomplete 
claim certification, the FCA shall return the claim certification with 
notice that a claim certification which complies with the requirements 
of paragraph (a) of this section must be submitted to the FCA before the 
FCA will consider effecting an offset.
    (2) The FCA may rely on the information contained in the claim 
certification provided by a requesting creditor agency. The FCA is not 
authorized to review a creditor agency's determination of indebtedness.
    (c) Only the creditor agency may agree to enter into an agreement 
with the debtor for the repayment of the claim. Only the creditor agency 
may agree to compromise, suspend, or terminate collection of the claim.
    (d) The FCA may decline, for good cause, a request by another agency 
to effect an offset. Good cause includes that the offset might disrupt, 
directly or indirectly, essential FCA operations. The refusal and the 
reasons shall be sent in writing to the creditor agency.



Sec. 608.826  Stay of offset.

    (a)(1) When a creditor agency receives a debtor's request for 
inspection of agency records, the offset is stayed for 10 calendar days 
beyond the date set for the record inspection.
    (2) When a creditor agency receives a debtor's offer to enter into a 
repayment agreement, the offset is stayed until the debtor is notified 
as to whether the proposed agreement is acceptable.
    (3) When a review is conducted, the offset is stayed until the 
creditor agency issues a final written decision.
    (b) When offset is stayed, the amount of the debt and the amount of 
any accrued interest or other charges will be withheld from payments to 
the debtor. The withheld amounts shall not be applied against the debt 
until the stay expires. If withheld funds are later determined not to be 
subject to offset, they will be promptly refunded to the debtor.
    (c) If the FCA is the creditor agency and the offset is stayed, the 
FCA will immediately notify an offsetting agency to withhold the payment 
pending termination of the stay.



Sec. 608.827  Offset against amounts payable from Civil Service 
Retirement and Disability Fund.

    The FCA may request that monies payable to a debtor from the Civil 
Service Retirement and Disability Fund be administratively offset to 
collect debts owed to the FCA by the debtor. The FCA must certify that 
the debtor owes the debt, the amount of the debt, and that the FCA has 
complied with the requirements set forth

[[Page 45]]

in this part, 4 CFR 102.3, and the Office of Personnel Management 
regulations. The request shall be submitted to the official designated 
in the Office of Personnel Management regulations to receive the 
request.



                     Subpart C_Offset Against Salary



Sec. 608.835  Purpose.

    The purpose of this subpart is to implement section 5 of the Debt 
Collection Act of 1982 (Pub. L. 97-365)(5 U.S.C. 5514), which authorizes 
the collection of debts owed by Federal employees to the Federal 
Government by means of salary offsets. These regulations provide 
procedures for the collection of a debt owed to the Government by the 
imposition of a salary offset against amounts payable to a Federal 
employee as salary. These regulations are consistent with the 
regulations on salary offset published by the Office of Personnel 
Management, codified in 5 CFR part 550, subpart K. Since salary offset 
is a type of administrative offset, this subpart supplements subpart B.



Sec. 608.836  Applicability of regulations.

    (a) These regulations apply to the following cases:
    (1) Where the FCA is owed a debt by an individual currently employed 
by another agency;
    (2) Where the FCA is owed a debt by an individual who is currently 
employed by the FCA; or
    (3) Where the FCA currently employs an individual who owes a debt to 
another Federal agency. Upon receipt of proper certification from the 
creditor agency, the FCA will offset the debtor-employee's salary in 
accordance with these regulations.
    (b) These regulations do not apply to the following:
    (1) Debts or claims rising under the Internal Revenue Code of 1986, 
as amended (26 U.S.C. 1 et seq.); the Social Security Act (42 U.S.C. 301 
et seq.); the tariff laws of the United States; or to any case where 
collection of a debt by salary offset is explicitly provided for or 
prohibited by another statute (e.g., travel advances in 5 U.S.C. 5705 
and employee training expenses in 5 U.S.C. 4108).
    (2) Any adjustment to pay arising from an employee's election of 
coverage or a change in coverage under a Federal benefits program 
requiring periodic deductions from pay if the amount to be recovered was 
accumulated over four pay periods or less.
    (3) A claim which has been outstanding for more than 10 years after 
the creditor agency's right to collect the debt first accrued, unless 
facts material to the Government's right to collect were not known and 
could not reasonably have been known by the official or officials 
charged with the responsibility for discovery and collection of such 
debts.



Sec. 608.837  Definitions.

    In this subpart, the following definitions shall apply:
    (a) Agency means:
    (1) An executive agency as defined by 5 U.S.C. 105, including the 
United States Postal Service and the United States Postal Rate 
Commission;
    (2) A military department as defined in 5 U.S.C. 102;
    (3) An agency or court of the judicial branch, including a court as 
defined in 28 U.S.C. 610, the District Court for the Northern Mariana 
Islands, and the Judicial Panel on Multi-district Litigation;
    (4) An agency of the legislative branch, including the United States 
Senate and the United States House of Representatives; or
    (5) Other independent establishments that are entities of the 
Federal Government.
    (b) Disposable pay means, for an officially established pay 
interval, that part of current basic pay, special pay, incentive pay, 
retired pay, retainer pay, or, in the case of an employee not entitled 
to basic pay, other authorized pay, remaining after the deduction of any 
amount required by law to be withheld. The FCA shall allow the 
deductions described in 5 CFR 581.105 (b) through (f).
    (c) Employee means a current employee of the FCA or other agency, 
including a current member of the Armed Forces or Reserve of the Armed 
Forces of the United States.
    (d) Waiver means the cancellation, remission, forgiveness, or 
nonrecovery of

[[Page 46]]

a debt allegedly owed by an employee to the FCA or another agency as 
permitted or required by 5 U.S.C. 5584 or 8346(b), 10 U.S.C. 2774, 32 
U.S.C. 716, or any other law.



Sec. 608.838  Waiver requests and claims to the General Accounting
Office.

    (a) The regulations contained in this subpart do not preclude an 
employee from requesting a waiver of an overpayment under 5 U.S.C. 5584 
or 8346(b), 10 U.S.C. 2774, 32 U.S.C. 716, or in any way questioning the 
amount or validity of a debt by submitting a subsequent claim to the 
General Accounting Office in accordance with the procedures prescribed 
by the General Accounting Office.
    (b) These regulations also do not preclude an employee from 
requesting a waiver pursuant to other statutory provisions pertaining to 
the particular debts being collected.



Sec. 608.839  Procedures for salary offset.

    (a) The Chairman, or designee of the Chairman, shall determine the 
amount of an employee's disposable pay and the amount to be deducted 
from the employee's disposable pay at regular pay intervals.
    (b) Deductions shall begin within three official pay periods 
following the date of mailing or delivery of the Notice of Intent to 
Collect by Salary Offset.
    (c)(1) If the amount of the debt is equal to or is less than 15 
percent of the employee's disposable pay, such debt should be collected 
in one lump-sum deduction.
    (2) If the amount of the debt is not collected in one lump-sum 
deduction, the debt shall be collected in installment deductions over a 
period of time not greater than the anticipated period of employment. 
The size and frequency of installment deductions will bear a reasonable 
relation to the size of the debt and the employee's ability to pay. 
However, the amount deducted from any pay period will not exceed 15 
percent of the employee's disposable pay for that period, unless the 
employee has agreed in writing to the deduction of a greater amount.
    (3) A deduction exceeding the 15-percent disposable pay limitation 
may be made from any final salary payment pursuant to 31 U.S.C. 3716 in 
order to liquidate the debt, whether the employee is being separated 
voluntarily or involuntarily.
    (4) Whenever an employee subject to salary offset is separated from 
the FCA and the balance of the debt cannot be liquidated by offset of 
the final salary check pursuant to 31 U.S.C. 3716, the FCA may offset 
any later payments of any kind against the balance of the debt.
    (d) In instances where two or more creditor agencies are seeking 
salary offsets against current employees of the FCA or where two or more 
debts are owed to a single creditor agency, the FCA, at its discretion, 
may determine whether one or more debts should be offset simultaneously 
within the 15-percent limitation. Debts owed to the FCA should generally 
take precedence over debts owed to other agencies.



Sec. 608.840  Refunds.

    (a) In instances where the FCA is the creditor agency, it shall 
promptly refund any amounts deducted under the authority of 5 U.S.C. 
5514 when:
    (1) The debt is waived or otherwise found not to be owed to the 
United States (unless expressly prohibited by statute or regulations); 
or
    (2) An administrative or judicial order directs the FCA to make a 
refund.
    (b) Unless required or permitted by law or contract, refunds under 
this section shall not bear interest.



Sec. 608.841  Requesting current paying agency to offset salary.

    (a) To request a paying agency to impose a salary offset against 
amounts owed to the debtor, the FCA shall provide the paying agency with 
a claim certification which meets the requirements set forth in 
Sec. 608.825(a). The FCA shall also provide the paying agency with a 
repayment schedule determined under the provisions of Sec. 608.839 or in 
accordance with a repayment agreement entered into with the debtor.
    (b) If the employee separates from the paying agency before the debt 
is paid in full, the paying agency shall certify the total amount 
collected on the debt. A copy of this certification

[[Page 47]]

shall be sent to the employee and a copy shall be sent to the FCA. If 
the paying agency is aware that the employee is entitled to payments 
from the Civil Service Retirement and Disability Fund, or other similar 
payments, it must provide written notification to the agency responsible 
for making such payments that the debtor owes a debt (including the 
amount) and that the provisions of this section have been fully complied 
with. However, the FCA must submit a properly certified claim to the 
agency responsible for making such payments before the collection can be 
made.
    (c) When an employee transfers to another paying agency, the FCA is 
not required to repeat the due process procedures set forth in 5 U.S.C. 
5514 and this part to resume the collection. The FCA shall, however, 
review the debt upon receiving the former paying agency's notice of the 
employee's transfer to make sure the collection is resumed by the new 
paying agency.
    (d) If a special review is conducted pursuant to Sec. 608.811 and 
results in a revised offset or repayment schedule, the FCA shall provide 
a new claim certification to the paying agency.



Sec. 608.842  Responsibility of the FCA as the paying agency.

    (a) When the FCA receives a claim certification from a creditor 
agency, deductions should be scheduled to begin at the next officially 
established pay interval. The FCA shall send the debtor written notice 
which provides:
    (1) That the FCA has received a valid claim certification from the 
creditor agency;
    (2) The date on which salary offset will begin;
    (3) The amount of the debt; and
    (4) The amount of such deductions.
    (b) If, after the creditor agency has submitted the claim 
certification to the FCA, the employee transfers to a different agency 
before the debt is collected in full, the FCA must certify the total 
amount collected on the debt. The FCA shall send a copy of this 
certification to the creditor agency and a copy to the employee. If the 
FCA is aware that the employee is entitled to payments from the Civil 
Service Retirement Fund and Disability Fund, or other similar payments, 
it shall provide written notification to the agency responsible for 
making such payments that the debtor owes a debt (including the amount).



Sec. 608.843  Nonwaiver of rights by payments.

    An employee's involuntary payment of all or any portion of a debt 
being collected under this subpart shall not be construed as a waiver of 
any rights the employee may have under 5 U.S.C. 5514 or any other 
provisions of a written contract or law unless there are statutory or 
contractual provisions to the contrary.

[[Page 48]]



                     SUBCHAPTER B_FARM CREDIT SYSTEM





PART 609_ELECTRONIC COMMERCE--Table of Contents



                         Subpart A_General Rules

Sec.
609.905  Background.
609.910  Compliance with the Electronic Signatures in Global and 
          National Commerce Act (Public Law 106-229) (E-SIGN).
609.915  Compliance with Federal Reserve Board Regulations B, M, and Z.

                Subpart B_Interpretations and Definitions

609.920  Interpretations.
609.925  Definitions.

              Subpart C_Standards for Boards and Management

609.930  Policies and procedures.
609.935  Business planning.
609.940  Internal systems and controls.
609.945  Records retention.

      Subpart D_General Requirements for Electronic Communications

609.950  Electronic communications.

    Authority: Sec. 5.9 of the Farm Credit Act (12 U.S.C. 2243); 5 
U.S.C. 301; Pub. L. 106-229 (114 Stat. 464).

    Source: 67 FR 16631, Apr. 8, 2002, unless otherwise noted.



                         Subpart A_General Rules



Sec. 609.905  Background.

    The Farm Credit Administration (FCA) wants to create a flexible 
regulatory environment that facilitates electronic commerce (E-commerce) 
and allows Farm Credit System (System) institutions and their customers 
to use new technologies. System institutions may use E-commerce but must 
establish good business practices that ensure safety and soundness while 
doing so.



Sec. 609.910  Compliance with the Electronic Signatures in Global and
National Commerce Act (Public Law 106-229) (E-SIGN).

    (a) General. E-SIGN makes it easier to conduct E-commerce. With some 
exceptions, E-SIGN permits the use and establishes the legal validity of 
electronic contracts, electronic signatures, and records maintained in 
electronic rather than paper form. It governs transactions relating to 
the conduct of business, consumer, or commercial affairs between two or 
more persons. E-commerce is optional; all parties to a transaction must 
agree before it can be used.
    (b) Consumer transactions. E-SIGN contains extensive consumer 
disclosure provisions that apply whenever another consumer protection 
law, such as the Equal Credit Opportunity Act, requires the disclosure 
of information to a consumer in writing. Consumer means an individual 
who obtains, through a transaction, products or services, including 
credit, used primarily for personal, family, or household purposes. You 
must follow E-SIGN's specific procedures to make the required consumer 
disclosures electronically. E-SIGN's special disclosure rules for 
consumer transactions do not apply to business transactions. Under E-
SIGN, some System loans qualify as consumer transactions, while others 
are business transactions. You will need to distinguish between the two 
types of transactions to comply with E-SIGN.
    (c) Specific exceptions. E-SIGN does not permit electronic 
notification for notices of default, acceleration, repossession, 
foreclosure, eviction, or the right to cure, under a credit agreement 
secured by, or a rental agreement for, a person's primary residence. 
These notices require paper notification. The law also requires paper 
notification to cancel or terminate life insurance. Thus, System 
institutions cannot use electronic notification to deliver some notices 
that must be provided under part 617, subparts A, D, E, and G of this 
chapter. In addition, E-SIGN does not apply to the writing or signature 
requirements imposed under the Uniform Commercial Code, other than 
sections 1-107 and 1-206 and Articles 2 and 2A.
    (d) Promissory notes. E-SIGN establishes special technological and 
business process standards for electronic promissory notes secured by 
real estate. To treat an electronic version of

[[Page 49]]

such a promissory note as the equivalent of a paper promissory note, you 
must conform to E-SIGN's detailed requirements for transferable records. 
A transferable record is an electronic record that:
    (1) Would be a note under Article 3 of the Uniform Commercial Code 
if the electronic record were in writing;
    (2) The issuer of the electronic record has expressly agreed is a 
transferable record; and
    (3) Relates to a loan secured by real property.
    (e) Effect on State and Federal law. E-SIGN preempts most State and 
Federal statutes or regulations, including the Farm Credit Act of 1971, 
as amended (Act), and its implementing regulations, that require 
contracts or other business, consumer, or commercial records to be 
written, signed, or in non-electronic form. Under E-SIGN, an electronic 
record or signature generally satisfies any provision of the Act, or its 
implementing regulations that requires such records and signatures to be 
written, signed, or in paper form. Therefore, unless an exception 
applies or a necessary condition under E-SIGN has not been met, an 
electronic record or signature satisfies any applicable provision of the 
Act or its implementing regulations.
    (f) Document integrity and signature authentication. Each System 
institution must verify the legitimacy of an E-commerce communication, 
transaction, or access request. Document integrity ensures that the same 
document is provided to all parties. Signature authentication proves the 
identities of all parties. The parties to the transaction may determine 
how to ensure document integrity and signature authentication.
    (g) Records retention. Each System institution may maintain all 
records electronically even if originally they were paper records. The 
stored electronic record must accurately reflect the information in the 
original record. The electronic record must be accessible and capable of 
being reproduced by all persons entitled by law or regulations to review 
the original record.

[67 FR 16631, Apr. 8, 2002, as amended at 69 FR 10906, Mar. 9, 2004]



Sec. 609.915  Compliance with Federal Reserve Board Regulations B, M,
and Z.

    The regulations in this part require fair practices and meaningful 
disclosures for certain lending and leasing activities. System 
institutions must comply with Federal Reserve Board Regulations B (Equal 
Credit Opportunity), M (Consumer Leasing), and Z (Truth in Lending) (12 
CFR parts 202, 213, and 226).



                Subpart B_Interpretations and Definitions



Sec. 609.920  Interpretations.

    (a) E-SIGN preempts most statutes and regulations, including the Act 
and its implementing regulations that require paper copies and 
handwritten signatures in business, consumer, or commercial 
transactions. E-SIGN requires that statutes and regulations be 
interpreted to allow E-commerce as long as the safeguards of E-SIGN are 
met and its exceptions recognized. Generally, an electronic record or 
signature satisfies any provision of the Act or its implementing 
regulations that require such records and signatures to be written, 
signed, or in paper form.
    (b) System institutions may interpret the Act and its implementing 
regulations broadly to allow electronic transmissions, communications, 
records, and submissions, as provided by E-SIGN. This means that the 
terms address, copy, distribute, document, file, mail, notice, notify, 
record, provide, send, signature, sent, written, writing, and similar 
words generally should be interpreted to permit electronic 
transmissions, communications, records, and submissions in business, 
consumer, or commercial transactions.



Sec. 609.925  Definitions.

    We provide the following definitions that apply to the Act and its 
implementing regulations:
    (a) Electronic means relating to technology having electrical, 
digital, magnetic, wireless, optical, electromagnetic, or similar 
capabilities.
    (b) Electronic communication means a message that can be transmitted 
electronically and displayed on equipment

[[Page 50]]

as visual text. An example is a message displayed on a personal computer 
monitor screen. This does not include audio- and voice-response 
telephone systems.
    (c) Electronic business (E-business) or electronic commerce (E-
commerce) means buying, selling, producing, or working in an electronic 
medium.
    (d) Electronic mail (E-mail) means:
    (1) To send or submit information electronically; or
    (2) A communication received electronically.
    (e) Electronic signature means an electronic sound, symbol, or 
process, attached to or logically associated with a contract or other 
record and executed or adopted by a person with the intent to sign the 
record. Electronic signature describes a category of electronic 
processes that can be substituted for a handwritten signature.



              Subpart C_Standards for Boards and Management



Sec. 609.930  Policies and procedures.

    The FCA supports E-commerce and wants to facilitate it and other new 
technologies and innovations to enhance the efficient conduct of 
business and the delivery of safe and sound credit and closely related 
services. Through E-commerce, System institutions can enhance customer 
service, access information, and provide alternate communication 
systems. At the same time, E-commerce presents challenges and risks that 
your board must carefully consider in advance. Before engaging in E-
commerce, you must weigh its business risks against its benefits. You 
must also adopt E-commerce policies and procedures to ensure your 
institution's safety and soundness and compliance with law and 
regulations. Among other concerns, the policies and procedures must 
address, when applicable:
    (a) Security and integrity of System institution and borrower data;
    (b) The privacy of your customers as well as visitors to your Web 
site;
    (c) Notices to customers or visitors to your Web site when they link 
to an affiliate or third party Web site;
    (d) Capability of vendor or application providers;
    (e) Business resumption after disruption;
    (f) Fraud and money laundering;
    (g) Intrusion detection and management;
    (h) Liability insurance; and
    (i) Prompt reporting of known or suspected criminal violations 
associated with E-commerce to law enforcement authorities and FCA under 
part 612, subpart B of this chapter.

[67 FR 16631, Apr. 8, 2002; 69 FR 42853, July 19, 2004]



Sec. 609.935  Business planning.

    When engaging in E-commerce, the business plan required under part 
618 of this chapter, subpart J, must describe the E-commerce initiative, 
including intended objectives, business risks, security issues, relevant 
markets, and legal compliance.



Sec. 609.940  Internal systems and controls.

    When applicable, internal systems and controls must provide 
reasonable assurances that System institutions will:
    (a) Follow and achieve business plan objectives and policies and 
procedures requirements regarding E-commerce; and
    (b) Prevent and detect material deficiencies on a timely basis.



Sec. 609.945  Records retention.

    Records stored electronically must be accurate, accessible, and 
reproducible for later reference.



      Subpart D_General Requirements for Electronic Communications



Sec. 609.950  Electronic communications.

    (a) Agreement. In accordance with E-SIGN, System institutions may 
communicate electronically in business, consumer, or commercial 
transactions. E-commerce transactions require the agreement of all 
parties when you do business.
    (b) Communications with consumers. E-SIGN and Federal Reserve Board 
Regulations B, M, and Z (12 CFR parts 202, 213, and 226) outline 
specific disclosure requirements for communications with consumers.

[[Page 51]]

    (c) Communications with parties other than consumers. The consumer 
disclosure requirements of E-SIGN and of Federal Reserve Board 
Regulation B (12 CFR part 202) do not apply to your communications with 
parties other than consumers. (Federal Reserve Board Regulations M and Z 
(12 CFR parts 213 and 226) apply to consumers only.) Nonetheless, you 
must ensure that your communications, including those disclosures 
required under the Act and the regulations in this part, demonstrate 
good business practices in the delivery of credit and closely related 
services and in your obtaining goods and services.



PART 610_REGISTRATION OF MORTGAGE LOAN ORIGINATORS--Table of Contents



    Authority: Secs. 1.5, 1.7, 1.9, 1.10, 1.11, 1.13, 2.2, 2.4, 2.12, 
5.9, 5.17, 7.2, 7.6, 7.8 of the Farm Credit Act (12 U.S.C. 2013, 2015, 
2017, 2018, 2019, 2021, 2073, 2075, 2093, 2243, 2252, 2279a-2, 2279b, 
2279c-10); and secs. 1501 et seq. of Pub. L. 110-289, 122 Stat. 2654.

    Source: 78 FR 51048, Aug. 20, 2013, unless otherwise noted.



Sec. 610.101  Cross reference.

    The rules formerly at 12 CFR part 610 have been recodified by the 
Consumer Financial Protection Bureau at 12 CFR part 1007, ``S.A.F.E. 
Mortgage Licensing Act--Federal Registration of Residential Mortgage 
Loan Originators (Regulation G)''.



PART 611_ORGANIZATION--Table of Contents



                            Subpart A_General

Sec.
611.100  Definitions.
611.110  Meetings of stockholders.

            Subpart B_Bank and Association Board of Directors

611.210  Director qualifications and training.
611.220  Outside directors.

       Subpart C_Election of Directors and Other Voting Procedures

611.310  Eligibility for membership on bank and association boards and 
          subsequent employment.
611.320  Impartiality in the election of directors.
611.325  Bank and association nominating committees.
611.326  Floor nominations for open Farm Credit bank and association 
          director positions.
611.330  Disclosures of Farm Credit bank and association director-
          nominees.
611.340  Confidentiality and security in voting.
611.350  Application of cooperative principles to the election of 
          directors.
611.360  [Reserved]

 Subpart D_Compensation Practices of Farm Credit Banks and Associations

611.400  Compensation of bank board members.
611.410  [Reserved]

                    Subpart E_Transfer of Authorities

611.500  General.
611.501  Procedures.
611.505  Farm Credit Administration review.
611.510  Approval procedures.
611.515  Information statement.
611.520  Plan of transfer.
611.525  Stockholder reconsideration.

      Subpart F_Bank Mergers, Consolidations and Charter Amendments

611.1000  General authority.
611.1010  Farm Credit bank charter amendment procedures.
611.1020  Requirements for mergers or consolidations of Farm Credit 
          banks.
611.1030  [Reserved]
611.1040  Creation of new associations.

      Subpart G_Mergers, Consolidations, and Charter Amendments of 
                              Associations

611.1120  General authority.
611.1121  Association charter amendment procedures.
611.1122  Requirements for association mergers or consolidations.
611.1123  Association merger or consolidation agreements.
611.1124  Territorial adjustments.
611.1125  Treatment of associations not approving districtwide mergers.
611.1126  Reconsiderations of mergers and consolidations.

             Subpart H_Rules for Inter-System Fund Transfers

611.1130  Inter-System transfer of funds and equities.

                     Subpart I_Service Corporations

611.1135  Incorporation of service corporations.

[[Page 52]]

611.1136  Regulation and examination of service corporations.
611.1137  Title VIII service corporations.

               Subpart J_Unincorporated Business Entities

611.1150  Purpose and scope.
611.1151  Definitions.
611.1152  Authority over equity investments in UBEs for business 
          activity.
611.1153  General restrictions and prohibitions on the use of UBEs.
611.1154  Notice of equity investments in UBEs.
611.1155  Approval of equity investments in UBEs.
611.1156  Ongoing requirements.
611.1157  Disclosure and reporting requirements.
611.1158  Grandfather provision.

Subparts K-O [Reserved]

           Subpart P_Termination of System Institution Status

611.1200  Applicability of this subpart.
611.1205  Definitions that apply in this subpart.
611.1210  Advance notices--commencement resolution and notice to equity 
          holders.
611.1211  Special requirements.
611.1215  Communications with the public and equity holders.
611.1216  Public availability of documents related to the termination.
611.1217  Plain language requirements.
611.1218  Role of directors.
611.1219  Prohibited acts.
611.1220  Termination resolution.
611.1221  Submission to FCA of plan of termination and disclosure 
          information; other required submissions.
611.1223  Plan of termination--contents.
611.1230  FCA review and approval--plan of termination.
611.1235  Plan of termination--distribution.
611.1240  Voting record date and stockholder approval.
611.1245  Stockholder reconsideration.
611.1246  Filing of termination application and its contents.
611.1247  FCA review and approval--termination.
611.1250  Preliminary exit fee estimate.
611.1255  Exit fee calculation.
611.1260  Payment of debts and assessments--terminating association.
611.1265  Retirement of a terminating association's investment in its 
          affiliated bank.
611.1270  Repayment of obligations--terminating bank.
611.1275  Retirement of equities held by other System institutions.
611.1280  Dissenting stockholders' rights.
611.1285  Loan refinancing by borrowers.
611.1290  Continuation of borrower rights.

    Authority: Secs. 1.2, 1.3, 1.4, 1.5, 1.12, 1.13, 2.0, 2.1, 2.2, 
2.10, 2.11, 2.12, 3.0, 3.1, 3.2, 3.3, 3.7, 3.8, 3.9, 3.21, 4.3A, 4.12, 
4.12A, 4.15, 4.20, 4.21, 4.25, 4.26, 4.27, 4.28A, 5.9, 5.17, 5.25, 7.0-
7.13, 8.5(e) of the Farm Credit Act (12 U.S.C. 2002, 2011, 2012, 2013, 
2020, 2021, 2071, 2072, 2073, 2091, 2092, 2093, 2121, 2122, 2123, 2124, 
2128, 2129, 2130, 2142, 2154a, 2183, 2184, 2203, 2208, 2209, 2211, 2212, 
2213, 2214, 2243, 2252, 2261, 2279a-2279f-1, 2279aa-5(e)); secs. 411 and 
412 of Pub. L. 100-233, 101 Stat. 1568, 1638; sec. 414 of Pub. L. 100-
399, 102 Stat. 989, 1004.

    Source: 37 FR 11415, June 7, 1972, unless otherwise noted.



                            Subpart A_General

    Source: 75 FR 18740, Apr. 12, 2010, unless otherwise noted.



Sec. 611.100  Definitions.

    The following definitions apply for the purpose of this part:
    (a) Business day means a day the institution is open for business, 
excluding the legal public holidays identified in 5 U.S.C. 6103(a).
    (b) FCA means the Farm Credit Administration.
    (c) Mail ballot means a ballot cast by regular or electronic mail.
    (d) Online meeting means a meeting that is conducted over the 
Internet through the use of mediating technologies, such as online 
services, computer hardware and software, etc., where technology is used 
to generate objects and environments that are presented to users through 
a number of senses (e.g., vision and hearing). The mediating 
technologies allow people or objects at remote locations to appear 
locally present or at least allow them to be treated that way during the 
course of the meeting.
    (e) Online meeting space means an online environment where Farm 
Credit institutions can hold stockholder meetings that allow 
stockholders to communicate, collaborate, and share information. Any 
stockholder with the necessary technology requirements and access (e.g., 
password-protected meetings) must be allowed to connect to his or her 
institution's online meeting space.

[[Page 53]]

    (f) Regional election means the apportionment of a Farm Credit 
institution's territory into regions in which a director or directors 
from a region are elected only by those voting stockholders who reside 
or conduct agricultural or aquatic operations in that same region.
    (g) Stockholder-association means an association within a Farm 
Credit bank district holding voting stock in that bank.
    (h) Stockholder-elected director means a director who is elected by 
the majority vote of the voting stockholders voting to serve as a member 
of a Farm Credit institution's board of directors.
    (i) Voting record date or record date means the official date set by 
a Farm Credit institution whereby a stockholder must own voting stock in 
that institution in order to cast a vote.
    (j) Voting record date list or record date list means the list of 
names, addresses, and classes of stock held by stockholders in the Farm 
Credit institution who are eligible to vote as of a specific voting 
record date.

[75 FR 18740, Apr. 12, 2010, as amended at 77 FR 60595, Oct. 3, 2012; 79 
FR 17856, Mar. 31, 2014; 80 FR 51116, Aug. 24, 2015]



Sec. 611.110  Meetings of stockholders.

    (a) Requirement. Associations must have annual meetings of 
stockholders for the purpose of conducting annual director elections. 
Farm Credit banks are encouraged to hold annual or periodic meetings of 
stockholders. The bylaws of each Farm Credit bank and association must 
specify the quorum requirements for stockholder meetings. Associations 
must elect at least one director at each annual meeting, but the vote on 
the election of a director or directors by mail ballot may only occur in 
the period following an annual meeting. An online meeting space may be 
used in addition to a physical meeting space to conduct a stockholders' 
meeting or director election. A physical meeting space must always exist 
for association meetings involving director elections and other 
stockholders' votes.
    (b) Notice. Each association, and those Farm Credit banks holding 
annual meetings, must issue an Annual Meeting Information Statement in 
accordance with the requirements of Secs. 620.20 and 620.21 of this 
chapter.
    (c) Online meeting. Each Farm Credit bank and association using an 
online meeting space as part of a meeting or election must have policies 
and procedures in place addressing how the online meeting space will be 
accessed and used by participants. The policies and procedures must 
specifically identify any technological adaptations necessary to address 
the confidentiality and security in voting requirements of Sec. 611.340.



            Subpart B_Bank and Association Board of Directors

    Source: 71 FR 5761, Feb. 2, 2006, unless otherwise noted.



Sec. 611.210  Director qualifications and training.

    (a) Qualifications. (1) Each bank and association board of directors 
must establish and maintain a policy identifying desirable director 
qualifications. The policy must explain the type and level of knowledge 
and experience desired for board members, explaining how the desired 
qualifications were identified. The policy must be periodically updated 
and provided to the institution's nominating committee.
    (2) Each Farm Credit institution board must have a director who is a 
financial expert. Boards of directors for associations with $500 million 
or less in total assets as of January 1 of each year may satisfy this 
requirement by retaining an advisor who is a financial expert. The 
financial advisor must report to the board of directors and be free of 
any affiliation with the external auditor or institution management. A 
financial expert is one recognized as having education or experience in: 
Accounting, internal accounting controls, or preparing or reviewing 
financial statements for financial institutions or large corporations 
consistent with the breadth and complexity of accounting and financial 
reporting issues that can reasonably be expected to be raised by the 
institution's financial statements.
    (b) Training. Each bank and association board of directors must 
establish and maintain a policy for director

[[Page 54]]

training that includes appropriate implementing procedures. The policy 
must identify training areas supporting desired director qualifications. 
Each Farm Credit bank and association must require newly elected or 
appointed directors to complete director orientation training within 1 
year of assuming their position and require incumbent directors to 
attend training periodically to advance their skills.



Sec. 611.220  Outside directors.

    (a) Eligibility, number and term--(1) Eligibility. No candidate for 
an outside director position may be a director, officer, employee, 
agent, or stockholder of an institution in the Farm Credit System. Farm 
Credit banks and associations must make a reasonable effort to select 
outside directors possessing some or all of the desired director 
qualifications identified pursuant to Sec. 611.210(a) of this part.
    (2) Number. Stockholder-elected directors must constitute at least 
60 percent of the members of each institution's board.
    (i) Each Farm Credit bank must have at least two outside directors.
    (ii) Associations with total assets exceeding $500 million as of 
January 1 of each year must have no fewer than two outside directors on 
the board. However, this requirement does not apply if it causes the 
percent of stockholder-elected directors to be less than 75 percent of 
the board.
    (iii) Associations with $500 million or less in total assets as of 
January 1 of each year must have at least one outside director.
    (3) Terms of office. Banks and associations may not establish a 
different term of office for outside directors than that established for 
stockholder-elected directors.
    (b) Removal. Each institution must establish and maintain procedures 
for removal of outside directors. When the removal of an outside 
director is sought before the expiration of the outside director's term, 
the reason for removal must be documented. An institution's director 
removal procedures must allow for removal of an outside director by a 
majority vote of all voting stockholders voting, in person or by proxy, 
or by a two-thirds majority vote of the full board of directors. The 
outside director subject to the removal action is prohibited from voting 
in his or her own removal action.



       Subpart C_Election of Directors and Other Voting Procedures

    Source: 53 FR 50392, Dec. 15, 1988, unless otherwise noted.



Sec. 611.310  Eligibility for membership on bank and association
boards and subsequent employment.

    (a) No person shall be eligible for membership on a bank or 
association board who is or has been, within 1 year preceding the date 
the term of office begins, a salaried officer or employee of any bank or 
association in the System.
    (b) No bank or association director shall be eligible to continue to 
serve in that capacity and his or her office shall become vacant if 
after election as a member of the board, he or she becomes legally 
incompetent or is convicted of any criminal offense involving dishonesty 
or breach of trust or held liable in damages for fraud.
    (c) No bank director shall, within 1 year after the date when he or 
she ceases to be a member of the board, serve as a salaried officer or 
employee of such bank, or any association with which the bank has a 
discount or agent relationship.
    (d) No director of an association shall, within 1 year after he or 
she ceases to be a member of the board, serve as a salaried officer or 
employee of such association.
    (e) No person shall be eligible for membership on a Farm Credit bank 
or association board of directors in the same election cycle for which 
the Farm Credit institution's nominating committee is identifying 
candidates if that person was elected to serve on that institution's 
nominating committee and attended any meeting called by the nominating 
committee.
    (f) Out-of-territory borrowers who hold voting stock in the 
association may serve as association directors unless prohibited by the 
association's bylaws. If an association's bylaws prohibit it, that 
association must inform, in writing and at the time of

[[Page 55]]

loanmaking, each out-of-territory borrower that out-of-territory 
borrowers may not serve as directors.

[53 FR 50392, Dec. 15, 1988, as amended at 54 FR 37095, Sept. 7, 1989; 
75 FR 18740, Apr. 12, 2010]



Sec. 611.320  Impartiality in the election of directors.

    (a) Each Farm Credit institution shall adopt policies and procedures 
that are designed to assure that the elections of board members are 
conducted in an impartial manner.
    (b) No employee or agent of a Farm Credit institution shall take any 
part, directly or indirectly, in the nomination or election of members 
to the board of directors of a Farm Credit institution, or make any 
statement, either orally or in writing, which may be construed as 
intended to influence any vote in such nominations, or elections. This 
paragraph shall not prohibit employees or agents from providing 
biographical and other similar information or engaging in other 
activities pursuant to policies and procedures for nominations and 
elections. This paragraph does not affect the right of an employee or 
agent to nominate or vote for stockholder-elected directors of an 
institution in which the employee or agent is a voting member.
    (c) No property, facilities, or resources, including information 
technology and human or financial resources, of any Farm Credit 
institution shall be used by any candidate for nomination or election or 
by any other person for the benefit of any candidate for nomination or 
election, unless the same property, facilities, or resources are 
simultaneously available and made known to be available for use by all 
declared candidates, including floor nominees. For the limited purpose 
of Farm Credit bank board elections, each Farm Credit bank may allow its 
stockholder-associations to use stockholder-association property, 
facilities, or resources in support of bank director candidates. Any 
Farm Credit bank permitting this activity by its stockholder-
associations must have a policy in place approved by its board of 
directors establishing reasonable standards that stockholder-
associations must follow, and those standards must give appropriate 
consideration to the various sizes of stockholder-associations within a 
bank's district and include a maximum amount that a stockholder-
association may expend in support of a bank director candidate.
    (d) No director, employee, or agent of a Farm Credit institution 
shall, for the purpose of furthering the interests of any candidates for 
nomination or election, furnish or make use of records that are not made 
available for use by all declared candidates.
    (e) No Farm Credit institution may in any way distribute or mail, 
whether at the expense of the institution or another, any campaign 
materials for director candidates. Institutions may request biographical 
information, as well as the disclosure information required under 
Sec. 611.330, from all declared candidates who certify that they are 
eligible, restate such information in a standard format, and distribute 
or mail it with ballots or proxy ballots.
    (f) No director of a Farm Credit institution shall, in his or her 
capacity as a director, make any statement, either orally or in writing, 
which may be construed as intending to influence any vote in that 
institution's director nominations or elections. This paragraph shall 
not prohibit director candidates from engaging in campaign activities on 
their own behalf.

[53 FR 50392, Dec. 15, 1988, as amended at 71 FR 5761, Feb. 2, 2006; 75 
FR 18740, Apr. 12, 2010]



Sec. 611.325  Bank and association nominating committees.

    Each Farm Credit bank and association may have only one nominating 
committee in any one election cycle. Each Farm Credit bank and 
association's board of directors must establish and maintain policies 
and procedures on its nominating committee, describing the formation, 
composition, operation, resources, and duties of the committee, 
consistent with current laws and regulations. Each nominating committee 
must conduct itself in the impartial manner prescribed by the policies 
and procedures adopted by its institution under Sec. 611.320 and this 
section.
    (a) Composition. The voting stockholders of each bank and 
association

[[Page 56]]

must elect a nominating committee of no fewer than three members. Unless 
prohibited by association bylaws, out-of-territory borrowers who hold 
voting stock may serve as members of an association's nominating 
committee. If an association's bylaws prohibit it, that association must 
inform, in writing and at the time of loanmaking, each out-of-territory 
borrower that out-of-territory borrowers may not serve on the 
association's nominating committee.
    (b) Election. Farm Credit banks and associations may use in-person 
(including use of an online medium and proxy ballots) or mail balloting 
procedures to elect a nominating committee.
    (1) Farm Credit banks and associations must provide voting 
stockholders the opportunity to vote on the candidates for each 
nominating committee position.
    (2) Association nominating committee members may only be elected to 
a 1-year term. Farm Credit Banks must use weighted voting, with no 
cumulative voting permitted, when electing members to serve on a 
nominating committee. Farm Credit banks and associations may permit 
nominating committee members to be re-nominated and stand for re-
election to serve successive terms.
    (c) Conflicts of interest. No individual may serve on a nominating 
committee who, at the time of election to, or during service on, a 
nominating committee, is an employee, director, or agent of that bank or 
association. A nominating committee member may not be a candidate for 
election to the board in the same election for which the committee is 
identifying nominees. A nominating committee member may resign from the 
committee to run for election to the board only if the individual did 
not attend any nominating committee meeting.
    (d) Responsibilities. It is the responsibility of each nominating 
committee to identify, evaluate, and nominate candidates for stockholder 
election to a Farm Credit bank or association board of directors. A 
nominating committee's responsibilities are limited to the following:
    (1) Nominate individuals who the committee determines meet the 
eligibility requirements to run for open director positions. The 
committee must endeavor to ensure representation from all areas of the 
Farm Credit bank's or association's territory and, as nearly as 
possible, all types of agriculture practiced within the territory.
    (2) Evaluate the qualifications of the director candidates. The 
evaluation process must consider whether there are any known obstacles 
preventing a candidate from performing the duties of the position.
    (3) Nominate at least two candidates for each director position 
being voted on by stockholders. If two nominees cannot be identified, 
the nominating committee must provide written explanation to the 
existing board of the efforts to locate candidates or the reasons for 
disqualifying any other candidate that resulted in fewer than two 
nominees.
    (4) Maintain records of its meetings, including a record of 
attendance at meetings.
    (5) Identify, evaluate, and nominate eligible individuals for 
service on the next nominating committee, if permitted by the 
institution.
    (e) Resources. Each Farm Credit bank and association must provide 
its nominating committee reasonable access to administrative resources 
in order for the committee to perform its duties. Each Farm Credit bank 
and association must, at a minimum, provide its nominating committee 
with FCA regulations and guidance on nominating committees, a current 
list of stockholders, the most recent bylaws, the current director 
qualifications policy, and a copy of the policies and procedures that 
the bank or the association has adopted pursuant to Sec. 611.320(a) 
ensuring impartial elections. On the request of the nominating 
committee, the institution must also provide a summary of the current 
board self-evaluation. The bank or association may require a pledge of 
confidentiality by committee members prior to releasing evaluation 
documents.

[75 FR 18741, Apr. 12, 2010]

[[Page 57]]



Sec. 611.326  Floor nominations for open Farm Credit bank and
association director positions.

    (a) Each floor nominee must be eligible for the director position 
for which the person has been nominated.
    (b)(1) Voting stockholders of associations must be allowed to make 
floor nominations for every open stockholder-elected director position. 
Associations using only mail ballots must allow nominations from the 
floor at every session of an annual meeting. Associations permitting 
stockholders to cast votes during annual meetings may only allow 
nominations from the floor at the first session of the annual meeting.
    (2) If floor nominations are permitted by a Farm Credit bank's 
election policies and procedures, voting stockholders must be allowed to 
make floor nominations for every open stockholder-elected director 
position and a physical meeting space must exist. Before every director 
election by a Farm Credit bank, the bank must inform voting stockholders 
whether floor nominations will be accepted.
    (c) Each association's board of directors must adopt policies and 
procedures for making and accepting floor nominations of candidates to 
stand for election to its board of directors. Each Farm Credit bank's 
board of directors allowing nominations from the floor must also adopt 
policies and procedures for making and accepting floor nominations. 
Policies and procedures for floor nominations must, at a minimum, 
provide that:
    (1) Floor nominations may only be made after the nominating 
committee has provided its list of director-nominees.
    (2) No more than a second by a voting stockholder to a nomination 
from the floor is required. After receiving a floor nomination, the 
floor nominee must state if he or she accepts the nomination.
    (3) Floor nominees must make the disclosures required by 
Sec. 611.330 of this part.

[75 FR 18741, Apr. 12, 2010]



Sec. 611.330  Disclosures of Farm Credit bank and association director
-nominees.

    (a) Each Farm Credit bank and association's board of directors must 
adopt policies and procedures that ensure a disclosure statement is 
prepared by each director-nominee. At a minimum, each disclosure 
statement for each nominee must:
    (1) State the nominee's name, city and state of residence, business 
address if any, age, and business experience during the last 5 years, 
including each nominee's principal occupation and employment during the 
last 5 years.
    (2) List all business interests on whose board of directors the 
nominee serves or is otherwise employed in a position of authority and 
state the principal business in which the business interest is engaged.
    (3) Identify any family relationship of the nominee that would be 
reportable under part 612 of this chapter if elected to the 
institution's board.
    (b)(1) Floor nominees who are not incumbent directors must provide 
to the Farm Credit bank or association the information referred to in 
this section and in Sec. 620.6(e) and (f) of this chapter. The 
information must be provided in either paper or electronic form within 
the time period prescribed by the institution's bylaws or policies and 
procedures. If the institution does not have a prescribed time period, 
each floor nominee must provide this information to the institution 
within 5 business days of the nomination. If stockholders will not vote 
solely by mail ballot upon conclusion of the meeting, each floor nominee 
must provide the information at the first session at which voting is 
held.
    (2) For each nominee who is not an incumbent director or a nominee 
from the floor, the nominee must provide the information referred to in 
this section and in Sec. 620.6(e) and (f) of this chapter.
    (c) Each Farm Credit bank and association must distribute director-
nominee disclosure information to all stockholders eligible to vote in 
the election. Institutions may either restate such information in a 
standard format or provide complete copies of each nominee's disclosure 
statement.

[[Page 58]]

    (1) Disclosure information for each director-nominee must be 
provided as part of the Annual Meeting Information Statement (AMIS) 
issued for director elections in accordance with Sec. 620.21(b) of this 
chapter.
    (2) Disclosure information for each director-nominee must be 
distributed or mailed with ballots or proxy ballots. Farm Credit banks 
and associations must ensure that the disclosure information on floor 
nominees is provided to voting stockholders by delivering ballots for 
the election of directors in the same format as the comparable 
information contained in the AMIS.
    (d) No person may be a nominee for director who does not make the 
disclosures required by this section.

[75 FR 18742, Apr. 12, 2010, as amended at 77 FR 60596, Oct. 3, 2012]



Sec. 611.340  Confidentiality and security in voting.

    (a) Each Farm Credit bank and association's board of directors must 
adopt policies and procedures that:
    (1) Ensure the security of all records and materials related to a 
stockholder vote including, but not limited to, ballots, proxy ballots, 
and other related materials.
    (2) Ensure that ballots and proxy ballots are provided only to 
stockholders who are eligible to vote as of the record date set for the 
stockholder vote.
    (3) Provide for the establishment of a tellers committee or an 
independent third party who will be responsible for validating ballots 
and proxies and tabulating voting results. A tellers committee may only 
consist of voting stockholders who are not employees, directors, 
director-nominees, or members of that election cycle's nominating 
committee.
    (4) Ensure that a list of eligible voting stockholders (or identity 
codes of eligible voting stockholders) as of the voting record date is 
provided to the tellers committee or independent third party that will 
be tabulating the vote to ensure the validity of the votes cast. A small 
number of specifically authorized administrative employees of the 
institution may assist the tellers committee in such verifications, 
provided the institution implements procedures to ensure the 
confidentiality and security of the information made available to the 
employees. If an institution is using a tellers committee, verification 
of voter eligibility must be done separate and apart from the opening 
and tabulating of the actual ballots and may be done in advance of the 
vote tabulation, any time after the list of eligible voting stockholders 
has been provided to the tellers committee.
    (5) Ensure that all information and materials regarding how or 
whether an individual stockholder has voted remain confidential, 
including protecting the information from disclosure to the 
institution's directors, stockholders, or employees, or any other person 
except:
    (i) A duly appointed tellers committee;
    (ii) A small number of specifically authorized administrative 
employees assisting the tellers committee by validating stockholders' 
eligibility to vote;
    (iii) An independent third party tabulating the vote; or
    (iv) The Farm Credit Administration.
    (b) No Farm Credit bank or association may use signed ballots in 
stockholder votes. A bank or association may use balloting procedures, 
such as an identity code, that can be used to identify whether an 
individual stockholder is eligible to vote or has previously submitted a 
vote. In weighted voting, the votes must be tabulated by an independent 
third party.
    (c) An independent third party or each member of the tellers 
committee that tabulates the votes, and any administrative employees 
assisting the tellers committee in verifying stockholder eligibility to 
vote, must sign a certificate declaring that such party, member, or 
employee will not disclose to any person (including the institution, its 
directors, stockholders, or employees) any information about how or 
whether an individual stockholder has voted, except that the information 
must be disclosed to the Farm Credit Administration, if requested.
    (d) Once a Farm Credit bank or association receives a ballot, the 
vote of that stockholder is final, except that a stockholder may 
withdraw a proxy ballot before balloting begins at a stockholders' 
meeting. A Farm Credit bank or association may give a stockholder voting 
by proxy an opportunity to give

[[Page 59]]

voting discretion to the proxy of the stockholder's choice, provided 
that the proxy is also a stockholder eligible to vote.
    (e) Ballots and proxy ballots must be safeguarded before the time of 
distribution or mailing to voting stockholders and after the time of 
receipt by the bank or association until disposal. When stockholder 
meetings are held for the purpose of conducting elections or other 
votes, only proxy ballots may be accepted prior to any or all sessions 
of the stockholders' meeting and mail ballots may only be distributed 
after the conclusion of the meeting. In an election of directors, 
ballots, proxy ballots, and election records must be retained at least 
until the end of the term of office of the director. In other 
stockholder votes, ballots, proxy ballots, and records must be retained 
for at least 3 years after the vote.
    (f) An institution and its officers, directors, and employees may 
not make any public announcement of the results of a stockholder vote 
before the tellers committee or independent third party has validated 
the results of the vote.

[80 FR 30335, May 28, 2015]



Sec. 611.350  Application of cooperative principles to the election
of directors.

    In the election of directors, each Farm Credit institution shall 
comply with the following cooperative principles as well as those set 
forth in Sec. 615.5230 of this chapter, unless otherwise required by 
statute or regulation.
    (a) Each voting stockholder of an association or bank for 
cooperatives has only one vote, regardless of the number of shares owned 
or the number of loans outstanding. Each voting stockholder-association 
of a Farm Credit Bank has only one vote that is assigned a weight 
proportional to the number of that association's voting stockholders. 
Each voting stockholder of an agricultural credit bank has only one 
vote, unless another voting scheme has been approved by the Farm Credit 
Administration.
    (b) If an association apportions its territory into geographic 
regions for director nomination or election purposes, out-of-territory 
voting stockholders must be assigned to a geographic region.
    (c) All voting stockholders of a Farm Credit institution have the 
right to vote in any stockholder vote to remove any director.

[75 FR 18742, Apr. 12, 2010]



Sec. 611.360  [Reserved]



 Subpart D_Compensation Practices of Farm Credit Banks and Associations



Sec. 611.400  Compensation of bank board members.

    (a) Farm Credit banks are authorized to pay fair and reasonable 
compensation to directors for services performed in an official capacity 
at a rate not to exceed the level established in section 4.21 of the 
Farm Credit Act of 1971, as amended, unless the FCA determines that such 
a level adversely affects the safety and soundness of the institution.
    (b) The bank director compensation level established in section 4.21 
of the Act shall be adjusted to reflect changes in the Consumer Price 
Index (CPI) for all urban consumers, as published by the Bureau of Labor 
Statistics, in the following manner: Current year's maximum compensation 
= Prior year's maximum compensation adjusted by the prior year's annual 
average percent change in the CPI for all urban consumers. Adjustments 
will be made to the bank director statutory compensation limit beginning 
from October 28, 1992 (the date of enactment of the Farm Credit Banks 
and Associations Safety and Soundness Act of 1992). Additionally, each 
year the FCA will communicate the CPI adjusted bank director statutory 
compensation limit.
    (c)(1) A Farm Credit bank is authorized to pay a director up to 30 
percent more than the statutory compensation limit in exceptional 
circumstances where the director contributes extraordinary time and 
effort in the service of the bank and its shareholders.
    (2) Banks must document the exceptional circumstances justifying 
additional director compensation. The documentation must describe:
    (i) The exceptional circumstances justifying the additional director 
compensation, including the extraordinary

[[Page 60]]

time and effort the director devoted to bank business; and
    (ii) The amount and the terms and conditions of the additional 
director compensation.
    (d) Each bank board shall adopt a written policy regarding 
compensation of bank directors. The policy shall address, at a minimum, 
the following areas:
    (1) The activities or functions for which attendance is necessary 
and appropriate and may be compensated, except that a Farm Credit bank 
shall not compensate any director for rendering services on behalf of 
any other Farm Credit System institution or a cooperative of which the 
director is a member, or for performing other assignments of a non-
official nature;
    (2) The methodology for determining each director's rate of 
compensation; and
    (3) The exceptional circumstances under which the board would pay 
additional compensation for any of its directors as authorized by 
paragraph (c) of this section.
    (e) Directors may also be reimbursed for reasonable travel, 
subsistence, and other related expenses in accordance with the bank's 
policy.

[59 FR 37411, July 22, 1994, as amended at 64 FR 16618, Apr. 6, 1999; 65 
FR 8023, Feb. 17, 2000; 77 FR 60596, Oct. 3, 2012]



Sec. 611.410  [Reserved]



                    Subpart E_Transfer of Authorities

    Source: 53 FR 50393, Dec. 15, 1988, unless otherwise noted.



Sec. 611.500  General.

    Each Farm Credit Bank or Agricultural Credit Bank is authorized, in 
accordance with section 7.6 of the Act, to transfer certain authorities 
to Federal land bank associations. The regulations in this subpart set 
forth the procedures and voting and approval requirements applicable to 
such transfers.



Sec. 611.501  Procedures.

    (a) The boards of directors of a bank and an association which seek 
to transfer authorities may adopt appropriate resolutions approving such 
transfer and providing for the submission of such a proposal to their 
respective stockholders for a vote.
    (b) The resolutions accompanied by the following information shall 
be submitted to the Farm Credit Administration for review and approval:
    (1) Any proposed amendments to the charters of the institutions;
    (2) A copy of the transfer plan as required under Sec. 611.520 of 
this part;
    (3) An information statement that complies with the requirements of 
Sec. 611.515;
    (4) The proposed bylaws of the bank and the association, as 
applicable; and
    (5) Any additional information the boards of directors wish to 
submit in support of the request or that the Farm Credit Administration 
requests.



Sec. 611.505  Farm Credit Administration review.

    (a) Upon receipt of the board of directors resolution and the 
accompanying documents, the Farm Credit Administration shall review the 
request and either deny or give its preliminary approval to the request.
    (b) If the request is denied, written notice stating the reasons for 
the denial shall be transmitted to the chief executive officer of the 
bank and the association who shall promptly notify their respective 
boards of directors.
    (c) Upon approval of the proposed transfer of authorities by the 
stockholders as provided in Sec. 611.510, the secretary of the bank and 
the secretary of the association shall forward to the Farm Credit 
Administration a certified record of the results of the stockholder 
votes.
    (d) Each institution shall notify its stockholders not later than 30 
days after the stockholder vote of the final results of the vote. If no 
petition for reconsideration is filed with the Farm Credit 
Administration in accordance with Sec. 611.525, the transfer shall be 
effective on the date specified in the transfer plan, or at such later 
date as may be required by the Farm Credit Administration to grant final 
approval. Notice of final approval shall be transmitted to the 
institutions involved.
    (e) The effective date of a transfer may not be less than 35 days 
after

[[Page 61]]

mailing of the notification to stockholders of the results of the 
stockholder vote, or 15 days after the date of submission to the Farm 
Credit Administration of all required documents for the Agency's 
consideration of final approval, whichever occurs later. If a petition 
for reconsideration is filed within 35 days after the date of mailing of 
the notification of stockholder vote, the constituent institutions must 
agree on a second effective date to be used in the event the transfer is 
approved on reconsideration. The second effective date may not be less 
than 60 days after stockholder notification of the results of the first 
vote, or 15 days after the date of the reconsideration vote, whichever 
occurs later.

[53 FR 50393, Dec. 15, 1988, as amended at 63 FR 64844, Nov. 24, 1998]



Sec. 611.510  Approval procedures.

    (a) Upon receipt of approval of a resolution by the Farm Credit 
Administration, the bank and the association shall call a meeting of 
their voting stockholders. Each institution shall notify each 
stockholder that the resolution has been filed and that a meeting will 
be held in accordance with the institution's bylaws. The stockholders 
meeting of the bank and the association shall be held within 60 days of 
receipt of the approval from the Farm Credit Administration.
    (b) The notice of meeting to consider and act upon the directors' 
resolution shall be accompanied by an information statement that 
complies with the requirements of Sec. 611.515.
    (c) The proposal shall be approved if agreed to by:
    (1) A majority of the stockholders of the bank voting in person or 
by proxy, with each association entitled to cast a number of votes equal 
to the number of its voting stockholders;
    (2) A majority of the stockholders of the association voting, in 
person or by proxy;
    (3) The Farm Credit Administration.



Sec. 611.515  Information statement.

    (a) The bank and association shall prepare an information statement 
which will inform stockholders about the provisions of the proposed 
transfer of authorities and the effect of the proposal on the bank and 
the association.
    (b) The information statement for each institution involved shall 
contain the following materials as applicable to the institution:
    (1) A statement either on the first page of the materials or on the 
notice of the stockholders meeting, in capital letters and boldface 
type, that:

THE FARM CREDIT ADMINISTRATION HAS NEITHER APPROVED NOR PASSED UPON THE 
   ACCURACY OR ADEQUACY OF THE INFORMATION ACCOMPANYING THE NOTICE OF 
    MEETING OR PRESENTED AT THE MEETING AND NO REPRESENTATION TO THE 
                 CONTRARY SHALL BE MADE OR RELIED UPON.

    (2) A description of the material provisions of the plan under 
Sec. 611.520 and the effect of the transaction on the institution, its 
stockholders, and the territory to be served.
    (3) A statement enumerating the potential advantages and 
disadvantages of the proposed transfer including, but not limited to, 
changes in operating efficiencies, one-stop service, branch offices, 
local control, and financial condition.
    (4) A summary of the provisions of the charter and bylaws following 
the transfer that differ materially from the charter or bylaws currently 
existing.
    (5) A brief statement by the board of directors of the institution 
setting forth the board's opinion on the advisability of the transfer.
    (6) A presentation of the following financial data:
    (i) An audited balance sheet and income statement and notes thereto 
of the bank or the association, as applicable, for the preceding 2 
fiscal years.
    (ii) If the transfer of authority includes any material transfer of 
assets, a balance sheet and income statement of the bank and the 
association showing its financial condition before the transfer of 
authority and a pro forma balance sheet and income statement for the 
bank or association, as applicable, showing its financial condition 
after the transfer. The statements shall meet the following conditions:
    (A) Such financial statements shall be presented in columnar form, 
showing the financial condition as of the end of the most recent quarter 
of the

[[Page 62]]

institution, and operating results since the end of the last fiscal year 
through the end of the most recent quarter of the institution.
    (B) If the request is made within 90 days after the end of the 
fiscal year, the institution's financial statements shall be as of the 
most recent fiscal yearend.
    (C) If the request is made within 45 days after the end of the most 
recent quarter, the institution's financial statements shall be as of 
the end of the quarter preceding the quarter just ended.
    (D) If the request is made more than 45 days after the end of the 
most recent quarter, the institution's financial statements shall be as 
of the end of that quarter.
    (E) The financial statements must be accompanied by appropriate 
notes, describing any assets being transferred and including data 
relating to high-risk assets and other property owned, allowance for 
loan losses, and current year-to-date chargeoffs.
    (F) The amount and nature of start-up costs estimated to be 
associated with the transfer.
    (7) A description of the type and dollar amount of any financial 
assistance that has been provided to the bank or the association, as 
applicable, during the past year; the conditions on which the financial 
assistance was extended, the terms of repayment or retirement, if any; 
and, the liability for repayment of this assistance by the bank or the 
association if the transfer were approved.
    (8) A statement as to whether the bank or the association, as 
applicable, would require financial assistance during the first 3 years 
of operation, the estimated type and dollar amount of the assistance, 
and terms of repayment or retirement, if known.
    (9) A statement indicating the possible tax consequences to 
stockholders and whether any legal opinion, ruling or external auditor's 
opinion has been obtained on the matter.
    (10) A presentation of the association's interest rate and fee 
programs, interest collection policy, capitalization plan and other 
factors that would affect a borrower's cost of doing business with the 
association.
    (11) A description of any event subsequent to the date of the last 
quarterly report, but prior to the stockholder vote, that would have a 
material impact on the financial condition of the bank or the 
association.
    (12) A statement of any other material fact or circumstances that a 
stockholder would need in order to make an informed and responsible 
decision, or that would be necessary in order to provide a disclosure 
that is not misleading.
    (13) A form of written proxy, together with instructions on its 
purpose, use and authorization by the stockholder. The proxy 
instructions must ensure the secrecy of the stockholder's ballot if the 
stockholder votes by proxy.
    (14) A copy of the plan of transfer provided for in Sec. 611.520 of 
this part.
    (c) No bank or association director, officer, or employee shall make 
any untrue or misleading statement of a material fact, or fail to 
disclose any material fact necessary under the circumstances to make 
statements made not misleading, to a stockholder of the association in 
connection with a transfer under this subpart.

[53 FR 50393, Dec. 15, 1988, as amended at 58 FR 48790, Sept. 20, 1993]



Sec. 611.520  Plan of transfer.

    The transfer of authorities and assets, as appropriate, shall occur 
pursuant to a written plan which shall be agreed to by the bank and the 
association involved. The written plan shall include the following:
    (a) An explanation of the value of the equity ownership as of the 
last monthend held by stockholders of the bank and the association and 
the impact, if any, of the transfer on the value of that equity.
    (b) If the plan provides for a transfer of assets, a description of 
the terms and conditions upon which such transfer will occur, including, 
but not limited to, any warranties or representations regarding the 
value of such assets.
    (c) A description of how the association would obtain loan funds 
after the transfer.
    (d) A statement on how the expenses connected with the transfer are 
to be borne by the affected parties.

[[Page 63]]

    (e) A statement of any conditions which must be satisfied prior to 
the effective date of the transfer, including but not limited to 
approval by stockholders and approval by the Farm Credit Administration.
    (f) A statement that prior to the effective date of the transfer the 
board of directors of the bank or the association may rescind its 
resolution and void the transfer, with the concurrence of the Farm 
Credit Administration, on the basis that:
    (1) The information disclosed to stockholders contained material 
errors or omissions;
    (2) Material misrepresentations were made to stockholders regarding 
the impact of the transfer;
    (3) Fraudulent activities were used to obtain the stockholders' 
approval; or,
    (4) An event occurred between the time of the vote and the transfer 
that would have a significant adverse impact on the future viability of 
the association.
    (g) A designation of those persons who have authority to carry out 
the plan of transfer, including the authority to execute any documents 
necessary to perfect title, on behalf of the bank and the association.



Sec. 611.525  Stockholder reconsideration.

    (a) Stockholders have the right to reconsider the approval of the 
transfer provided that a petition signed by 15 percent of the 
stockholders of either institution involved in the transfer is filed 
with the Farm Credit Administration within 35 days after the date of 
mailing of the notification of the final results of the stockholder vote 
required under Sec. 611.505(d) and such petition is approved by the Farm 
Credit Administration.
    (b) A special stockholders meeting shall be called by the 
institution to vote on the reconsideration following the Farm Credit 
Administration's approval of a stockholder petition to reconsider the 
transfer. If a majority of stockholders of any institution involved in 
the transfer votes against the transfer, the transfer is not approved.



      Subpart F_Bank Mergers, Consolidations and Charter Amendments

    Source: 53 FR 50393, Dec. 15, 1988, unless otherwise noted.



Sec. 611.1000  General authority.

    (a) An amendment to a Farm Credit bank charter may relate to any 
provision that is properly the subject of a charter, including, but not 
limited to, the name of the bank, the location of its offices, or the 
territory served.
    (b) The FCA may make changes in the charter of a Farm Credit bank as 
may be requested by that bank and approved by the FCA pursuant to 
Sec. 611.1010 of this part.
    (c) The FCA may, on its own initiative, make changes in the charter 
of a Farm Credit bank, and any chartered service corporation thereof, 
where the FCA determines that the change is necessary to accomplish the 
purposes of the Act.

[80 FR 51116, Aug. 24, 2015]



Sec. 611.1010  Farm Credit bank charter amendment procedures.

    (a) A Farm Credit bank may recommend a charter amendment to 
accomplish any of the following actions:
    (1) A merger or consolidation with any other Farm Credit bank or 
banks operating under title I or III of the Act;
    (2) A transfer of territory with any other Farm Credit bank 
operating under the same title of the Act;
    (3) A change to its name or location;
    (4) Any other change that is properly the subject of a Farm Credit 
bank charter;
    (b) Upon approval of an appropriate resolution by the Farm Credit 
bank board, the certified resolution, together with supporting 
documentation, must be submitted to the FCA for preliminary or final 
approval, as the case may be.
    (c) The FCA will review the material submitted and either approve or 
disapprove the request. The FCA may require submission of any 
supplemental information and analysis it deems appropriate. If the 
request is for merger, consolidation, or transfer of territory,

[[Page 64]]

the approval of the FCA will be preliminary only, with final approval 
subject to a vote of the Farm Credit bank's stockholders.
    (d) Following receipt of the FCA's written preliminary approval, the 
proposal must be submitted for approval to the voting stockholders of 
the Farm Credit bank. A proposal will be considered approved if agreed 
to by a majority of the voting stockholders of each Farm Credit bank 
voting, in person or by proxy, at a duly authorized stockholder meeting 
with each stockholder-association entitled to cast a number of votes 
equal to the number of the association's voting shareholders, unless 
another voting scheme has been approved by the FCA.
    (e) Upon approval by the stockholders of the Farm Credit bank, the 
request for final approval and issuance of the appropriate charter or 
amendments to charter for the Farm Credit banks involved must be 
submitted to the FCA.

[80 FR 51116, Aug. 24, 2015]



Sec. 611.1020  Requirements for mergers or consolidations of Farm 
Credit banks.

    (a) As authorized under sections 7.0 and 7.12 of the Act, a Farm 
Credit bank may merge or consolidate with one or more Farm Credit banks 
operating under the same or different titles of the Act.
    (b) The plan to merge or consolidate two or more Farm Credit banks 
is subject to the requirements of Secs. 611.1122, 611.1123, and 611.1126 
of this part, unless otherwise instructed by the FCA. In interpreting 
those sections, the phrase ``Farm Credit bank(s)'' will be read for the 
word ``association(s)'' and references to ``funding bank'' are to be 
ignored.

[80 FR 51116, Aug. 24, 2015]



Sec. 611.1030  [Reserved]



Sec. 611.1040  Creation of new associations.

    Any application for the issuance of a charter to a new production 
credit association or Federal land bank association must meet the 
requirements of sections 2.0 or 2.10, respectively, of the Act. Any 
application for the issuance of a charter for an agricultural credit 
association must meet the requirements of section 2.0 of the Act.

[53 FR 50393, Dec. 15, 1988, as amended at 80 FR 51116, Aug. 24, 2015]



      Subpart G_Mergers, Consolidations, and Charter Amendments of 
                              Associations



Sec. 611.1120  General authority.

    (a) An amendment to an association charter may relate to any 
provision that is properly the subject of a charter, including, but not 
limited to, the name of the association, the location of its offices, or 
the territory served.
    (b) The FCA may make changes in the charter of an association as may 
be requested by that association and approved by the FCA pursuant to 
Sec. 611.1121 of this part.
    (c) The FCA may, on its own initiative, make changes in the charter 
of an agricultural credit association, Federal land bank association, or 
a production credit association, and any chartered service corporation 
thereof, where the FCA determines that the change is necessary to 
accomplish the purposes of the Act.

[50 FR 20400, May 16, 1985, as amended at 51 FR 41945, Nov. 20, 1986; 80 
FR 51116, Aug. 24, 2015]



Sec. 611.1121  Association charter amendment procedures.

    (a) An association that proposes to amend its charter must submit a 
request to its funding bank containing the following information:
    (1) A statement of the provision(s) of the charter that the 
association proposes to amend and the proposed amendment(s);
    (2) A statement of the reasons for the proposed amendment(s), the 
impact of the amendment(s) on the association and its stockholders, and 
the requested effective date of the amendment(s);
    (3) A certified copy of the resolution of the board of directors of 
the association approving the amendment(s);
    (4) Any additional information or documents that the association 
wishes to submit in support of the request or that may be requested by 
the funding bank.

[[Page 65]]

    (b) Upon receipt of a proposed amendment from an association, the 
funding bank must review the materials submitted and provide the 
association with its analysis of the proposal within a reasonable period 
of time. Concurrently, the funding bank must communicate its 
recommendation on the proposal to the FCA, including the reasons for the 
recommendation, and any analysis the bank believes appropriate. 
Following review by the bank, the association must transmit the proposed 
amendment with attachments to the FCA.
    (c) Upon receipt of an association's request for a charter 
amendment, the FCA will review the materials submitted and either 
approve or disapprove the request. The FCA may require submission of any 
supplemental information and analysis it deems appropriate.
    (d) The FCA will notify the association of its approval or 
disapproval of the amendment request, including a copy of the amended 
charter with the approval notification, and provide a copy of such 
communication to the funding bank.

[80 FR 51116, Aug. 24, 2015]



Sec. 611.1122  Requirements for association mergers or consolidations.

    (a) Where two or more associations plan to merge or consolidate, or 
where the funding bank board has adopted a reorganization plan for the 
associations in the district, the associations involved must jointly 
submit a request to the funding bank containing the following:
    (1) In the case of a merger, a copy of the charter of the continuing 
association reflecting any proposed amendments. In the case of 
consolidation, a copy of the proposed charter of the new association;
    (2) A statement of the reasons for the proposed merger or 
consolidation, the impact of the proposed transaction on the 
associations and their stockholders, and the planned effective date of 
the merger or consolidation;
    (3)(i) A certified copy of the resolution of the board of directors 
of each association recommending approval of the merger or 
consolidation; or
    (ii) In the case of a district reorganization plan, a certified copy 
of the resolution of the board of directors of each association 
recommending either approval or disapproval of the proposal.
    (4) A copy of the agreement of merger or consolidation;
    (5) Two signed copies of the continuing or proposed Articles of 
Association;
    (6) All of the information specified in paragraph (e) of this 
section;
    (7) Any additional information or documents each association wishes 
to submit in support of the request; and
    (8) All additional information and documentation that the funding 
bank or the FCA requests.
    (b) Upon receipt of a request for approval of an association merger 
or consolidation, the funding bank must review the materials submitted 
to determine whether they comply with the requirements of these 
regulations and must communicate with the associations concerning any 
deficiency. When the bank approves the request to merge or consolidate 
it must notify the associations. The bank must also notify the FCA of 
its approval together with the reasons for its approval and any 
supporting analysis. The associations must jointly submit the proposal 
together with required documentation to the FCA for preliminary 
approval.
    (c) Upon receipt of a complete association merger or consolidation 
request, the FCA will review the request and either deny or give its 
written preliminary approval to the request within 60 days. The FCA will 
notify the requesting associations when the 60-day preliminary approval 
review period begins. The FCA may require submission of any supplemental 
information and analysis it deems appropriate for its consideration of 
the merger or consolidation request.
    (1) When a request is denied, written notice stating the reasons for 
the denial will be transmitted to the associations and a copy provided 
to the funding bank(s).
    (2) When a request is preliminarily approved, written notice of the 
preliminary approval will be given to the associations and a copy 
provided to the funding bank(s). Preliminary approval

[[Page 66]]

by the FCA does not constitute approval of the merger or consolidation. 
Approval of a merger or consolidation is only issued pursuant to this 
subpart. In connection with granting preliminary approval, the FCA may 
impose conditions in writing.
    (d) Upon receipt of preliminary approval by the FCA of a merger or 
consolidation request, each constituent association must call a meeting 
of its voting stockholders. The FCA may also require, when considered 
appropriate to the merger or consolidation request under review, the 
associations to hold informational meetings before a stockholder vote. 
The stockholder meeting to vote on a merger or consolidation must:
    (1) Be called on written notice to each stockholder entitled to vote 
on the transaction as of the record date and be held in accordance with 
the terms of each association's bylaws.
    (2) Follow the voting procedures of Sec. 611.340, except 
associations may not use tellers committees to validate ballots and 
tabulate votes on the merger or consolidation.
    (3) Require the affirmative vote of a majority of the voting 
stockholders of each association present and voting, either in person or 
by written proxy, at a meeting at which a quorum is present to 
constitute stockholder approval of a merger or consolidation proposal.
    (e) Notice of the stockholder meeting to consider and act upon a 
proposed merger or consolidation must be accompanied by the information 
required under this paragraph. The notice and accompanying information 
must not be sent to stockholders until preliminary approval of the 
merger or consolidation has been given by the FCA.
    (1) A statement either on the first page of the materials or on the 
notice of the stockholders' meeting, in capital letters and bold face 
type, that:

THE FARM CREDIT ADMINISTRATION HAS NEITHER APPROVED NOR PASSED UPON THE 
   ACCURACY OR ADEQUACY OF THE INFORMATION ACCOMPANYING THE NOTICE OF 
    MEETING OR PRESENTED AT THE MEETING AND NO REPRESENTATION TO THE 
                 CONTRARY SHALL BE MADE OR RELIED UPON.

    (2) A description of the material provisions of the agreement of 
merger or consolidation and the effect of the proposed merger or 
consolidation on the associations, their stockholders, the new or 
continuing board of directors, and the territory to be served. In 
addition, a copy of the agreement must be furnished with the notice to 
stockholders.
    (3) A summary of the provisions of the charter and bylaws of the 
continuing or new association that differ materially from the existing 
charter or bylaw provisions of the constituent associations.
    (4) A brief statement by the boards of directors of the constituent 
associations setting forth the basis for the boards' recommendation on 
the merger or consolidation.
    (5) A description of any agreement or arrangement between a 
constituent association and any of its officers relating to employment 
or termination of employment and arising from the merger or 
consolidation.
    (6) A presentation of the following financial data:
    (i) A balance sheet and income statement for each constituent 
association for each of the 2 preceding fiscal years.
    (ii) A balance sheet for each constituent association as of a date 
within 90 days of the date the request for preliminary approval is 
forwarded to the FCA presented on a comparative basis with the 
corresponding period of the prior fiscal year.
    (iii) An income statement for the interim period between the end of 
the last fiscal year and the date of the required balance sheet 
presented on a comparative basis with the corresponding period of the 
preceding fiscal year. The balance sheet and income

[[Page 67]]

statement format must be that contained in the association's annual 
report to stockholders; must contain any significant changes in 
accounting policies that differ from those in the latest association 
annual report to stockholders; and must contain appropriate footnote 
disclosures, including data relating to high-risk assets and other 
property owned, and allowance for loan losses, including net chargeoffs 
as required in paragraph (e)(10) of this section.
    (7) The financial statements (balance sheet and income statement) 
must be in sufficient detail to show separately all significant 
categories of interest-earning assets and interest-bearing liabilities 
and the income or expense accrued thereon.
    (8) Attached to the financial statements for each constituent 
association, either:
    (i) A statement signed by the chief executive officer and each 
member of the board of directors of the association that the various 
financial statements are unaudited, but have been prepared in all 
material respects in accordance with generally accepted accounting 
principles (except as otherwise disclosed therein) and are, to the best 
of the knowledge of the board, a fair and accurate presentation of the 
financial condition of the association; or
    (ii) A signed opinion by an independent certified public accountant 
that the various financial statements have been examined in accordance 
with generally accepted auditing standards and, accordingly, included 
such tests of the accounting records and such other auditing procedures 
as were considered necessary in the circumstances, and, as of the date 
of the statements, present fairly the financial position of the 
association in conformity with generally accepted accounting principles 
applied on a consistent basis, except as otherwise noted thereon.
    (9) A presentation for each constituent association regarding its 
policy on accounting for loan performance, together with the number and 
dollar amount of loans in all performance categories, including those 
categorized as high-risk assets.
    (10) Information of each constituent association concerning the 
amount of loans charged off in each of the 2 fiscal years preceding the 
date of the balance sheet, the current year-to-date net chargeoff 
amount, and the balance in the allowance for loan losses account and a 
statement regarding whether, in the opinion of management, the allowance 
for loan losses is adequate to absorb the risk currently existing in the 
loan portfolio. This information may be appropriately included in the 
footnotes to the financial statements.
    (11) A management discussion and analysis of the financial condition 
and results of operation for the past 2 fiscal years for each 
constituent institution. This requirement can be satisfied by including 
the materials contained in the management discussion and analysis of 
each institution's most recent annual report.
    (12) A discussion of any material changes in financial condition of 
each constituent institution from the end of the last fiscal year to the 
date of the interim balance sheet provided.
    (13) A discussion of any material changes in the results of 
operations of each constituent institution with respect to the most 
recent fiscal-year-to-date period for which an income statement is 
provided.
    (14) A discussion of any change in the tax status of the new 
institution from those of the constituent institutions as a result of 
merger or consolidation. A statement on any adverse tax consequences to 
the stockholders of the institution as a result of the change in tax 
status.
    (15) A statement on the proposed institution's relationship with an 
independent public accountant, including any change that may occur as a 
result of the merger or consolidation.
    (16) A pro forma balance sheet of the continuing or consolidated 
association presented as if the merger or consolidation had occurred as 
of the date on the balance sheets required in paragraph (e)(6) of this 
section, as recommended to the stockholders. A pro forma summary of 
earnings for the continuing or consolidated association presented as if 
the merger or consolidation had been effective at the beginning of the 
interim period between the end of the last fiscal year and the date of 
the balance sheets.

[[Page 68]]

    (17) A description of the type and dollar amount of any financial 
assistance that has been provided during the past year or will be 
provided by the funding bank or other party to assist the constituent or 
the continuing or new association(s), the conditions on which financial 
assistance has been or will be extended, the terms of repayment or 
retirement, if any, and the impact of the assistance on the subject 
association(s) or the stockholders.
    (18) A presentation for each constituent association of interest 
rate comparisons for the last 2 fiscal years preceding the date of the 
balance sheet, together with a statement of the continuing or new 
association's proposed interest rate and fee programs, interest 
collection policies, capitalization rates, dividends or patronage 
refunds, and other factors that would affect a borrower's cost of doing 
business with the continuing or new association. Where agreement has not 
been reached on such matters, current related information must be 
presented for each constituent association.
    (19) A description for each constituent association of any event 
subsequent to the date of the financial statements, but prior to the 
merger or consolidation vote, that would have a material impact on the 
financial condition of the constituent or continuing or new 
association(s).
    (20) A statement of any other material fact or circumstance that a 
stockholder would need in order to make an informed decision on the 
merger or consolidation proposal, or that is necessary to make the 
required disclosures not misleading.
    (21) Where proxies are to be solicited, a form of written proxy, 
together with instructions on the purpose and authority for its use, and 
the proper method for signature by the stockholder.
    (f) Where a proposed merger or consolidation will involve more than 
three associations, the FCA may require the supplementation, or allow 
the condensation or omission of any information required under paragraph 
(e) of this section in furtherance of meaningful disclosure to 
stockholders. Any waiver sought under this paragraph must be obtained 
before preparation of the financial statements and accompanying 
schedules required under paragraph (e) of this section.
    (g) The effective date of a merger or consolidation may not be less 
than 35 days after the date of mailing of the notification to 
stockholders of the results of the stockholder vote, or 15 days after 
the date of submission to the FCA of all required documents for the 
FCA's consideration of final approval, whichever occurs later.
    (1) The constituent institutions must agree on a second effective 
date to be used in the event the merger or consolidation is approved on 
reconsideration. The second effective date may not be less than 60 days 
after stockholder notification of the results of the first vote, or 15 
days after the date of the reconsideration vote, whichever occurs later.
    (2) If no reconsideration petition is filed with the FCA, upon final 
approval by the FCA, the merger or consolidation will be effective on 
the date specified in the merger agreement or at such later date as may 
be required by the FCA.
    (h) Each constituent association must notify its stockholders not 
later than 30 days after the stockholder vote of the final results of 
the vote. Upon approval of a proposed merger or consolidation by the 
stockholders of the constituent associations, each association must 
submit to the FCA a certified copy of the stockholders' resolution on 
which the stockholders cast their votes and a certification of the 
stockholder vote from the independent third party(s) used to tally the 
vote. After the time for submitting reconsideration petitions has 
expired, and if no petition is filed, the FCA will make a final approval 
decision on the merger or consolidation, imposing conditions as 
appropriate. The FCA will send written notice of the final FCA approval 
decision to the associations and provide a copy to the affiliated 
funding bank(s).
    (i) No Farm Credit institution, or any director, officer, employee, 
agent, or other person participating in the conduct of the affairs 
thereof, may make any untrue or misleading statement of a material fact, 
or fail to disclose any material fact necessary

[[Page 69]]

under the circumstances to make statements made not misleading, to a 
stockholder of any association in connection with an association merger 
or consolidation.
    (1) No Farm Credit institution or any director, officer, employee, 
agent, or other person participating in the conduct of the affairs of a 
Farm Credit institution may make an oral or written representation to 
any person that a preliminary or final approval by the FCA of a merger 
or consolidation constitutes, directly or indirectly, either a 
recommendation on the merits of the transaction or an assurance 
concerning the adequacy or accuracy of any information provided to any 
association's stockholders in connection therewith.
    (2) When a Farm Credit institution, or any of its employees, 
officers, directors, agents, or other person participating in the 
conduct of the affairs thereof, make disclosures or representations in 
connection with an association merger or consolidation that, in the 
judgment of the FCA, are incomplete, inaccurate, or misleading, whether 
or not such disclosure or representation is made in disclosure 
statements required by this subpart, such institution must make such 
additional or corrective disclosure as directed by the FCA and as is 
necessary to provide stockholders and the general public with full and 
fair disclosure.

[80 FR 51117, Aug. 24, 2015]



Sec. 611.1123  Association merger or consolidation agreements.

    (a) Associations operating under the same title of the Act may merge 
or consolidate voluntarily, but only pursuant to a written agreement. 
The agreement must set forth all of the terms of the transaction, 
including, but not limited to, the following:
    (1) The proposed effective date of the merger or consolidation.
    (2) The proposed name and headquarters location of the continuing or 
consolidated association.
    (3) The names of the persons nominated to serve as directors until 
the first regular annual meeting of the continuing or consolidated 
association to be held after the effective date of the merger or 
consolidation. Any director of a constituent association may be 
designated in the agreement to serve as a director of the continuing or 
consolidated association for a period not to exceed his or her current 
term, after which he or she must stand for reelection. However, the 
terms of the agreement must provide for the election of at least one 
director at each annual meeting subsequent to the effective date of the 
merger or consolidation. The bylaws of the continuing or consolidated 
association must reflect the provisions of the merger or consolidation 
agreement regarding director terms.
    (4) A statement of the formula to be used to exchange the stock of 
the constituent associations for the stock of the continuing or 
consolidated association. No fractional shares of stock may be issued.
    (5) A statement of any conditions which must be satisfied prior to 
the effective date of the proposed transaction, including but not 
limited to approval by stockholders, the funding bank, and the FCA.
    (6) A statement of the representations or warranties, if any, made 
or to be made by any association, or its officers, directors, or 
employees that is a party to the proposed transactions.
    (7) A statement that the board of directors of each constituent 
association can terminate the agreement before the effective date upon a 
determination by an association, with the concurrence of the FCA, that:
    (i) The information disclosed to stockholders contained material 
errors or omissions;
    (ii) Material misrepresentations were made to stockholders regarding 
the impact of the merger or consolidation;
    (iii) Fraudulent activities were used to obtain stockholders' 
approval; or
    (iv) An event occurred between the time of the vote and the merger 
that would have a significant adverse impact on the future viability of 
the continuing or consolidated association.
    (8) A description of the legal opinions or rulings (including those 
related to tax matters), if any, that have been obtained or furnished by 
any party in connection with the proposed transaction. Also, refer to 
paragraph (a)(5) of this section.

[[Page 70]]

    (9) The capitalization plan and capital structure for the continuing 
or consolidated association and a statement that the capitalization plan 
must comply with applicable FCA regulations.
    (10) Provision for the employee benefits plan, its subsequent 
continuation or adaptation by the board of directors of the continuing 
or consolidated association following the merger or consolidation.
    (11) A statement of the authority of those persons designated to 
carry out the terms of the agreement, including the authority to waive 
provisions of the agreement and to execute any documents necessary to 
perfect title, on behalf of the constituent associations.
    (b) As an attachment to the agreement, the constituent associations 
must set forth those provisions of the charter and bylaws of the 
continuing or consolidated association which differ from the existing 
charter or bylaw provisions of the constituent associations.

[50 FR 20400, May 16, 1985, as amended at 51 FR 32442, Sept. 12, 1986; 
53 FR 50396, Dec. 15, 1988; 80 FR 51119, Aug. 24, 2015]



Sec. 611.1124  Territorial adjustments.

    This section applies to any request submitted to the FCA to modify 
association charters for the purpose of transferring territory from one 
association to another.
    (a) Territorial adjustments, except as specified in paragraph (m) of 
this section, require approval of a majority of the voting stockholders 
of each association present and voting or voting by written proxy at a 
duly authorized meeting at which a quorum is present.
    (b) When two or more associations agree to transfer territory, each 
association must submit a proposal to the funding bank containing the 
following:
    (1) A statement of the reasons for the proposed transfer and the 
impact the transfer will have on its stockholders and holders of 
participation certificates;
    (2) A certified copy of the resolution of the board of directors of 
each association approving the proposed territory transfer;
    (3) A copy of the agreement to transfer territory that contains the 
following information:
    (i) A description of the territory to be transferred;
    (ii) Transferor association's plan to transfer loans and the types 
of loans to be transferred;
    (iii) Transferor association's plan to retire and transferee 
association's plan to issue equities held by holders of stock, 
participation certificates, and allocated equities, if any, and a 
statement by each association that the book value of its equities is at 
least equal to par;
    (iv) An inventory of the assets to be sold by the transferor 
association and purchased by the transferee association;
    (v) An inventory of the liabilities to be assumed from the 
transferor association by the transferee association;
    (vi) A statement that the holders of stock and participation 
certificates whose loans are subject to transfer have 60 days from the 
effective date of the territory transfer to inform the transferor 
association of their decision to remain with the transferor association 
for normal servicing until the current loan is paid;
    (vii) A statement that the transfer is conditioned upon the approval 
of the stockholders of each constituent association; and
    (viii) The effective date of the proposed territory transfer.
    (4) A copy of the stockholder disclosure statement provided for in 
paragraph (f) of this section; and
    (5) Any additional relevant information or documents that the 
association wishes to submit in support of its request or that may be 
required by the FCA.
    (c) Upon receipt of documents supporting a proposed territory 
transfer, the funding bank must review the materials submitted and 
provide the associations with its analysis of the proposal within a 
reasonable period of time. The funding bank must concurrently advise the 
FCA of its recommendation regarding the proposed territory transfer. 
Following review by the bank, the associations must transmit the 
proposal to the FCA together with all required documents.

[[Page 71]]

    (d) Upon receipt of an association's request to transfer territory, 
the FCA will review the request and either deny or grant preliminary 
approval to the request. The FCA may require submission of any 
supplemental information and analysis it deems appropriate for its 
consideration of the request to transfer territory.
    (1) When a request is denied, written notice stating the reasons for 
the denial will be transmitted to the associations, and a copy provided 
to the funding bank.
    (2) When a request is preliminarily approved, written notice of the 
preliminary approval will be transmitted to the associations, and a copy 
provided to the funding bank. Preliminary approval by the FCA does not 
constitute approval of the territory transfer. Final approval is granted 
only in accordance with paragraph (h) of this section. In connection 
with granting preliminary approval, the FCA may impose conditions in 
writing.
    (e) Upon receipt of preliminary approval by the FCA, each 
constituent association must, by written notice, and in accordance with 
its bylaws, call a meeting of its voting stockholders. The affirmative 
vote of a majority of the voting stockholders of each association 
present and voting or voting by written proxy at a meeting at which a 
quorum is present is required for stockholder approval of a territory 
transfer.
    (f) Notice of the meeting to consider and act upon a proposed 
territory transfer must be accompanied by the following information 
covering each constituent association:
    (1) A statement either on the first page of the materials or on the 
notice of the stockholders' meeting, in capital letters and bold face 
type, that:

THE FARM CREDIT ADMINISTRATION HAS NEITHER APPROVED NOR PASSED UPON THE 
   ACCURACY OR ADEQUACY OF THE INFORMATION ACCOMPANYING THE NOTICE OF 
    MEETING OR PRESENTED AT THE MEETING AND NO REPRESENTATION TO THE 
                 CONTRARY SHALL BE MADE OR RELIED UPON.

    (2) A copy of the Agreement to Transfer Territory and a summary of 
the major provisions of the Agreement;
    (3) The reason the territory transfer is proposed;
    (4) A map of the association's territory as it would look after the 
transfer;
    (5) A summary of the differences, if any, between the transferor and 
transferee associations' interest rates, interest rate policies, 
collection policies, service fees, bylaws, and any other items of 
interest that would impact a borrower's lending relationship with the 
institution;
    (6) A statement that all loans of the transferor association that 
finance operations located in the transferred territory will be 
transferred to the transferee association except as otherwise provided 
for in this section or in accordance with agreements between the 
associations as provided for in Sec. 614.4070;
    (7) Where proxies are to be solicited, a form of written proxy, 
together with instructions on the purpose and authority for its use, and 
the proper method for signature by the stockholders; and
    (8) A statement that the associations' bylaws, financial statements 
for the previous 3 years, and any financial information prepared by the 
associations concerning the proposed transfer of territory are available 
on request to the stockholders of any association involved in the 
transaction.
    (g) No Farm Credit institution, or director, officer, employee, 
agent, or other person participating in the conduct of the affairs 
thereof, may make any untrue or misleading statement of a material fact, 
or fail to disclose any material fact necessary under the circumstances 
to make statements made not misleading, to a stockholder of any

[[Page 72]]

Farm Credit institution in connection with a territory transfer.
    (h) Upon approval of a proposed territory transfer by the 
stockholders of the constituent associations, a certified copy of the 
stockholders' resolution for each constituent association and one 
executed Agreement to Transfer Territory must be forwarded to the FCA. 
The territory transfer will be effective when thereafter finally 
approved and on the date as specified by the FCA. Notice of final 
approval will be transmitted to the associations and a copy provided to 
the bank.
    (i) No director, officer, employee, agent, or other person 
participating in the conduct of the affairs of a Farm Credit institution 
may make an oral or written representation to any person that a 
preliminary or final approval by the FCA of a territory transfer 
constitutes, directly or indirectly, a recommendation on the merits of 
the transaction or an assurance concerning the adequacy or accuracy of 
any information provided to any association's stockholders in connection 
therewith.
    (j) When a Farm Credit institution, or any of its employees, 
officers, directors, agents, or other persons participating in the 
conduct of the affairs thereof, make disclosures or representations 
that, in the judgment of the FCA, are incomplete, inaccurate, or 
misleading in connection with a territory transfer, whether or not such 
disclosure or representation is made in disclosure statements required 
by this subpart, such institution must make such additional or 
corrective disclosure as directed by the FCA and as is necessary to 
provide stockholders and the general public with full and fair 
disclosure.
    (k) The notice and accompanying information required under paragraph 
(f) of this section may not be sent to stockholders until preliminary 
approval of the territory transfer has been granted by the FCA.
    (l) Where a territory transfer is proposed simultaneously with a 
merger or consolidation, both transactions may be voted on by 
stockholders at the same meeting. Only stockholders of a transferee or 
transferor association may vote on a territory transfer.
    (m) Each borrower whose real estate or operations is located in a 
territory that will be transferred must be provided with a written 
Notice of Territory Transfer immediately after the FCA has granted final 
approval of the territory transfer. The Notice must inform the borrower 
of the transfer of the borrower's loan to the transferee association and 
the exchange of related equities for equities of like kinds and amounts 
in the transferee association. If a like kind of equity is not available 
in the transferee association, similar equities must be offered that 
will not adversely affect the interest of the owner. The Notice must 
give the borrower 60 days from the effective date of the territory 
transfer to notify the transferor association in writing if the borrower 
decides to stay with the transferor association for normal servicing 
until the current loan is paid. Any application by the borrower for 
renewal or for additional credit must be made to the transferee 
association, except as otherwise provided for by an agreement between 
associations in accordance with Sec. 614.4070.
    (n) This section does not apply to territory transfers initiated by 
order of the FCA or to territory transfers due to the liquidation of the 
transferor association.
    (o) Where a proposed action involves the transfer of a portion of an 
association's territory to an association operating in a different 
district, such proposal must comply with the provisions of this section 
and section 5.17(a) of the Act.

[80 FR 51119, Aug. 24, 2015]



Sec. 611.1125  Treatment of associations not approving districtwide
mergers.

    (a) Issuance of charters. When issuing charters or certificates of 
territory for districtwide mergers or consolidations of associations, 
the FCA will not issue any charters or certificates of territory that 
include the territory of one or more associations whose stockholders 
voted to disapprove the merger or consolidation.
    (b) A funding bank must not take any of the following actions with 
respect to an association that has determined to not participate in a 
districtwide merger or consolidation:

[[Page 73]]

    (1) Discriminate in the provision of any financial service and 
assistance, including, but not limited to, access to loan funds and 
rates of interest on loans and discounts offered by the funding bank to 
associations and their member/borrowers;
    (2) Discriminate in the provision of any related services that are 
offered by the funding bank to associations and their member/borrowers;
    (3) Discriminate in the provision of any professional assistance 
that may be normally provided by the funding bank to associations; or
    (4) Discriminate in the provision of any technical assistance that 
may be normally provided by the funding bank to associations.
    (c) This regulation does not prohibit a funding bank from taking any 
action with respect to an association, including, but not limited to, 
charging different rates of interest or different prices for services, 
or declining to provide financial assistance; provided that any such 
action is fully documented and based on an objective analysis of 
applicable criteria that are uniformly and consistently applied by the 
funding bank to all associations in the district.

[51 FR 32443, Sept. 12, 1986, as amended at 60 FR 34099, June 30, 1995; 
80 FR 51121, Aug. 24, 2015]



Sec. 611.1126  Reconsiderations of mergers and consolidations.

    (a) Voting stockholders have the right to reconsider their approval 
of a merger or consolidation, provided that a petition is filed with the 
FCA. The petition must be signed by 15 percent of the stockholders (who 
were eligible to vote on the merger or consolidation proposal) of one or 
more of the constituent associations. The reconsideration petition must 
be filed with the FCA within 35 days after the date when the association 
mailed the notification of the final results of the stockholder vote 
pursuant to Sec. 611.1122(h).
    (b) Voting stockholders that intend to file a reconsideration 
petition have a right to obtain from the association of which they are a 
voting stockholder the voting record date list used by that association 
for the merger or consolidation vote. The association must provide the 
voting record date list as soon as possible, but not later than 7 days 
after receipt of the request. The list must be provided pursuant to the 
provisions of Sec. 618.8310(b) of this chapter.
    (c) A reconsideration petition must be addressed to the Secretary of 
the FCA Board and filed with the FCA on or before the deadline described 
in paragraph (a) of this section. Reconsideration petitions must 
identify a contact person and provide contact information for that 
person.
    (1) Filing of a reconsideration petition may only be accomplished 
through in-person delivery during normal business hours to any FCA 
employee in official duty status or by sending the petition by mail, 
facsimile, electronic transmission, carrier delivery, or other similar 
means to an FCA office.
    (2) The FCA will use the postmark, ship date, electronic stamp, or 
similar evidence as the date of filing the reconsideration petition.
    (d) The FCA will notify the named contact on the reconsideration 
petition whether the petition was filed on time. On the timely receipt 
of a reconsideration petition, the FCA will review the petition to 
determine whether it complies with the requirements of section 7.9 of 
the Act. Following a determination that the petition was timely filed 
and complies with applicable requirements, the FCA will give notice to 
the associations involved in the merger or consolidation for which the 
reconsideration petition was filed. The associations are not entitled to 
either a copy of the petition or the names of the petitioners.
    (e) Following FCA notification that a reconsideration petition has 
been properly filed, a special stockholders meeting must be called by 
the association(s) to reconsider the merger or consolidation vote. The 
reconsideration vote must be conducted according to the merger and 
consolidation voting requirements of Sec. 611.1122(d). If a majority of 
the stockholders voting, in person or by proxy, at a duly authorized 
stockholders' meeting from any one of the constituent associations vote 
against the merger or consolidation under the reconsideration vote, the 
merger or consolidation will not take place. In the event that the 
merger or consolidation is approved on reconsideration,

[[Page 74]]

the constituent associations must use the second effective date 
developed under Sec. 611.1122(g)(1).

[80 FR 51121, Aug. 24, 2015]



             Subpart H_Rules for Inter-System Fund Transfers



Sec. 611.1130  Inter-System transfer of funds and equities.

    (a) Section 5.17(a)(6) of the Act authorizes the FCA to regulate the 
borrowing, repayment, and transfer of funds and equities between 
institutions of the System, including banks, associations, and service 
corporations chartered under the Act. This section sets forth the 
circumstances and procedures under which the FCA may direct such a 
transfer of funds and equities based on its determination with respect 
to the financial condition of one or more institutions of the System. 
For purposes of this section, the term ``bond'' refers to long-term 
notes, bonds, debentures, or other similar obligations, or short-term 
discount notes issued by one or more banks pursuant to section 4.2 of 
the Act.
    (b) The FCA may direct a transfer of funds or equities by one or 
more banks of the System to another bank of the System where it 
determines that:
    (1) The receiving institution will not be able to make payments of 
principal or interest on bonds for which it is primarily liable within 
the meaning of section 4.4(a) of the Act; or
    (2) The common or preferred stock, participation certificates, or 
allocated equities of the receiving institution have a book value less 
than their par or stated values; or
    (3) The total bonds outstanding for which the receiving institution 
is primarily liable exceed 20 times the combined capital and surplus 
accounts of the bank; or
    (4) Based on application to it of one or more of the following 
ratios, the receiving institution is not financially viable in that it 
will not be able to continue to extend new or additional credit or 
financial assistance to its eligible borrowers:
    (i) The ratio of stock to earned net worth (including legal reserve, 
unallocated and reserved surplus, undistributed earnings, and allowance 
for losses) exceeds 2 to 1;
    (ii) The ratio of the outstanding bonds to capital and surplus 
exceeds 15 to 1;
    (iii) Nonearning assets (any noninterest-bearing assets, including 
but not limited to cash, noninterest-earning loans, net fixed assets, 
other property owned, accrued interest receivable, and accounts 
receivable) exceed 15 percent of total assets;
    (iv) Lendable net worth (interest-earning assets less interest-
bearing liabilities) is zero or less.
    (c) The FCA may direct a transfer of funds or equities between two 
or more Federal land bank associations or two or more production credit 
associations in district where it determines that such transfer:
    (1) Is necessary to provide financial support to the district bank 
in which those associations are stockholders based on application of the 
criteria to the bank as set forth in paragraph (b) of this section; or
    (2) Is necessary to provide financial support to one or more other 
like associations in the district based on application of the criteria 
set forth in paragraph (b)(2) or (b)(4) of this section to the 
associations, provided that in applying paragraph (b)(4)(ii) of this 
section the ratio of outstanding indebtedness to capital and surplus of 
the receiving association(s) shall not exceed 9 to 1; or
    (3) Is an integral part of a plan that has been adopted by other 
institutions of the System, and approved by the FCA, under which those 
institutions will extend financial assistance to the district bank in 
which those associations are stockholders.
    (d) A direction by the FCA for a transfer of funds or equities 
pursuant to this section shall be signed by the Chairman and shall 
establish the amount, timing, duration, repayment, and other terms of 
assessments necessary to accomplish such transfer, taking into 
consideration the financial condition of each institution to be 
assessed. Where the FCA directs a transfer of funds or equities between 
associations under paragraph (c) (1) or (2) of this section, it may 
authorize the district bank in which such associations

[[Page 75]]

are stockholders to accomplish the necessary assessments through debits 
and credits to the accounts of the bank.

[50 FR 36986, Sept. 11, 1985. Redesignated at 51 FR 8666, Mar. 13, 1986, 
as amended at 51 FR 41945, Nov. 20, 1986; 58 FR 48790, Sept. 20, 1993; 
59 FR 21643, Apr. 26, 1994; 78 FR 31831, May 28, 2013]



                     Subpart I_Service Corporations

    Source: 66 FR 16843, Mar. 28, 2001, unless otherwise noted.



Sec. 611.1135  Incorporation of service corporations.

    (a) What is the process for chartering a service corporation? A Farm 
Credit bank or association (you or your) may organize a corporation 
acting alone or with other Farm Credit banks or associations to perform, 
for you or on your behalf, any function or service that you are 
authorized to perform under the Act and Farm Credit Administration (we, 
us, or our) regulations, with two exceptions. Those exceptions are that 
your corporation may not extend credit or provide insurance services. To 
organize a service corporation, you must submit an application to us 
following the applicable requirements of paragraph (c) of this section. 
If what you propose in your application meets the requirements of the 
Act, our regulations, and any other conditions we may impose, we may 
issue a charter for your service corporation making it a federally 
chartered instrumentality of the United States. Your service corporation 
will be subject to examination, supervision, and regulation by us.
    (b) Who may own equities in your service corporation? (1) Your 
service corporation may only issue voting and non-voting stock to:
    (i) One or more Farm Credit banks and associations; and
    (ii) Persons that are not Farm Credit banks or associations, 
provided that at least 80 percent of the voting stock is at all times 
held by Farm Credit banks or associations.
    (2) For the purposes of this subpart, we define persons as 
individuals or legal entities organized under the laws of the United 
States or any state or territory thereof.
    (c) What must be included in your application to form a service 
corporation? Your application for a corporate charter must include:
    (1) The certified resolution of the board of each organizing bank or 
association authorizing the incorporation;
    (2) A request signed by the president(s) of the organizing bank(s) 
or association(s) to us to issue a charter, supported by a detailed 
statement demonstrating the need and the justification for the proposed 
entity; and
    (3) The proposed articles of incorporation addressing, at a minimum, 
the following:
    (i) The name of your corporation;
    (ii) The city and state where the principal offices of your 
corporation are to be located;
    (iii) The general purposes for the formation of your corporation;
    (iv) The general powers of your corporation;
    (v) The procedures for a Farm Credit bank or association or persons 
that are not Farm Credit institutions to become a stockholder;
    (vi) The procedures to adopt and amend your corporation's bylaws;
    (vii) The title, par value, voting and other rights, and authorized 
amount of each class of stock that your corporation will issue and the 
procedures to retire each class;
    (viii) The notice and quorum requirement for a meeting of 
shareholders, and the vote required for shareholder action on various 
matters;
    (ix) The procedures and shareholder voting requirements for the 
merger, voluntary liquidation, or dissolution of your corporation or the 
distribution of corporate assets;
    (x) The standards and procedures for the application and 
distribution of your corporation's earnings; and
    (xi) The length of time your corporation will exist.
    (4) The proposed bylaws, which must include the provisions required 
by Sec. 615.5220(b) of this chapter;
    (5) A statement of the proposed amounts and sources of 
capitalization and operating funds;
    (6) Any agreements between the organizing banks and associations 
relating to the organization or the operation of the corporation; and

[[Page 76]]

    (7) Any other supporting documentation that we may request.
    (d) What will we do with your application? If we approve your 
completed application, we will issue a charter for your service 
corporation as a corporate body and a federally chartered 
instrumentality. We may condition the issuance of a charter, including 
imposing minimum capital requirements, as we deem appropriate. For good 
cause, we may deny your application.
    (e) Once your service corporation is formed, how are its articles of 
incorporation amended? Your service corporation's articles of 
incorporation may be amended in either of two ways:
    (1) The board of directors of the corporation may request that we 
amend the articles of incorporation by sending us a certified resolution 
of the board of directors of the service corporation that states the:
    (i) Section(s) to be amended;
    (ii) Reason(s) for the amendment;
    (iii) Language of the articles of incorporation provision, as 
amended; and
    (iv) Requisite shareholder approval has been obtained. The request 
will be subject to our approval as stated in paragraphs (a) and (c) of 
this section.
    (2) We may at any time make any changes in the articles of 
incorporation of your service corporation that are necessary and 
appropriate for the accomplishment of the purposes of the Act.
    (f) When your service corporation issues equities, what are the 
disclosure requirements? Your service corporation must provide the 
disclosures described in Sec. 615.5255 of this chapter.

[66 FR 16843, Mar. 28, 2001, as amended at 70 FR 53907, Sept. 13, 2005; 
71 FR 65386, Nov. 8, 2006]



Sec. 611.1136  Regulation and examination of service corporations.

    (a) What regulations apply to a service corporation? Because a 
service corporation is formed by banks and associations, it is subject 
to applicable Farm Credit Administration (we, our) regulations.
    (b) Who examines a service corporation? We examine service 
corporations.
    (c) What types of service corporations are subject to our 
regulations and examination? All incorporated service corporations 
formed by banks and associations are subject to our regulations and 
examination.

[66 FR 16843, Mar. 28, 2001, as amended at 78 FR 31831, May 28, 2013]



Sec. 611.1137  Title VIII service corporations.

    (a) What is a title VIII service corporation? A title VIII service 
corporation is a service corporation organized for the purpose of 
exercising the authorities granted under title VIII of the Act to act as 
an agricultural mortgage marketing facility.
    (b) How do I form a title VIII service corporation? A title VIII 
service corporation is formed and subject to the same requirements as a 
service corporation formed under Sec. 611.1135, with one exception. The 
Federal Agricultural Mortgage Corporation or its affiliates may not form 
or own stock in a title VIII service corporation.



               Subpart J_Unincorporated Business Entities

    Source: 78 FR 31831, May 28, 2013, unless otherwise noted.



Sec. 611.1150  Purpose and scope.

    (a) Purpose. This subpart sets forth the parameters for one or more 
Farm Credit System (System) institutions to organize or invest in an 
Unincorporated Business Entity (UBE) in accordance with the Farm Credit 
Act of 1971, as amended (Act).
    (b) Scope. Except as authorized under these regulations, no System 
institution may manage, control, become a member or partner, or invest 
in a State-organized or chartered business entity. This subpart applies 
to each System institution that organizes or invests in a UBE, including 
a UBE organized for the express purpose of investing in a Rural Business 
Investment Company. This subpart does not apply to UBEs that one or more 
System institutions have the authority to establish as Rural Business 
Investment Companies pursuant to the provisions of title VI of the Farm 
Security and Rural Investment Act of 2002, as amended (FSRIA) and United 
States

[[Page 77]]

Department of Agriculture regulations implementing FSRIA.



Sec. 611.1151  Definitions.

    For purposes of this subpart, the following definitions apply:
    Articles of formation means registration certificates, charters, 
articles of organization, partnership agreements, membership or trust 
agreements, operating, administration or management agreements, fee 
agreements or any other documentation on the establishment, ownership, 
or operation of a UBE.
    Control means that one System institution, directly or indirectly, 
owns more than 50 percent of the UBE's equity or serves as the general 
partner of an LLLP, or constitutes the sole manager or the managing 
member of a UBE. However, under generally accepted accounting principles 
(GAAP), the power to control may also exist with a lesser percentage of 
ownership, for example, if a System institution is the UBE's primary 
beneficiary, exercises significant influence over the UBE or establishes 
control under other facts and circumstances in accordance with GAAP. 
Under this definition, a System institution also will be deemed to have 
control over the UBE if it exercises decision-making authority in a 
principal capacity of the UBE as defined under GAAP.
    Equity investment means a System institution's contribution of money 
or assets to the operating capital of a UBE that provides ownership 
rights in return.
    System institution means each System bank under titles I or III of 
the Act, each System association under title II of the Act, and each 
service corporation chartered under section 4.25 of the Act.
    Third-party UBE means a UBE that is owned or controlled by one or 
more non-System persons or entities as the term ``control'' is defined 
under GAAP.
    UBE means a Limited Partnership (LP), Limited Liability Partnership 
(LLP), Limited Liability Limited Partnership (LLLP), Limited Liability 
Company (LLC), Business or other Trust Entity (TE), or other business 
entity established and maintained under State law that is not 
incorporated under any law or chartered under Federal law.
    UBE business activity means the services and functions delivered by 
a UBE for one or more System institutions.
    Unusual and complex collateral means acquired property that may 
expose the owner to risks beyond those commonly associated with loans, 
including, but not limited to, acquired industrial or manufacturing 
properties where there is increased risk of incurring potential 
environmental or other liabilities that may accrue to the owners of such 
properties.



Sec. 611.1152  Authority over equity investments in UBEs for business
activity.

    (a) Regulation, supervisory, oversight, examination and enforcement 
authority. FCA has regulatory, supervisory, oversight, examination and 
enforcement authority over each System institution's equity investment 
in or control of a UBE and the services and functions that a UBE 
performs for the System institution. This includes FCA's authority to 
require a System institution's dissolution of, disassociation from, or 
divestiture of an equity investment in a UBE, or to otherwise condition 
the approval of equity investments in UBEs.
    (b) Assessing UBE investments and business activity. In accordance 
with section 5.15 of the Act, the cost of regulating and examining 
System institutions' activities involving UBEs will be taken into 
account when assessing a System institution for the cost of 
administering the Act.



Sec. 611.1153  General restrictions and prohibitions on the use of UBEs.

    (a) Authorized UBE business activity. All UBE business activity must 
be:
    (1) Necessary or expedient to the business of one or more System 
institutions owning the UBE; and
    (2) In no instance greater than the functions and services that one 
or more System institutions owning the UBE are authorized to perform 
under the Act and as determined by the FCA.

[[Page 78]]

    (b) Circumvention of cooperative principles. System institutions are 
prohibited from using UBEs to engage in direct lending activities or any 
other activity that would circumvent the application of cooperative 
principles, including borrower rights as described in section 4.14A of 
the Act, or stock ownership, voting rights or patronage as described in 
section 4.3A of the Act.
    (c) Transparency and the avoidance of conflicts of interest. Each 
System institution must ensure that:
    (1) The UBE is held out to the public as a separate or subsidiary 
entity;
    (2) The business transactions, accounts, and records of the UBE are 
not commingled with those of the System institution; and
    (3) All transactions between the UBE and System institution 
directors, officers, employees, and agents are conducted at arm's 
length, in the interest of the System institution, and in compliance 
with standards of conduct rules in Secs. 612.2130 through 612.2270.
    (d) Limit on one-member UBEs. A UBE owned solely by a single System 
institution (including between and among a parent agricultural credit 
association and its production credit association and Federal land 
credit association subsidiaries and between a parent agricultural credit 
bank and its subsidiary Farm Credit Bank) as a one-member UBE is limited 
to the following special purposes:
    (1) Acquiring and managing the unusual or complex collateral 
associated with loans; and
    (2) Providing limited services such as electronic transaction, fixed 
asset, trustee or other services that are integral to the daily internal 
operations of a System institution.
    (e) Limit on UBE partnerships. A System institution operating 
through a parent-subsidiary structure may not create a UBE partnership 
between or among the parent agricultural credit association and its 
production credit association and Federal land credit association 
subsidiaries or between a parent Agricultural Credit Bank and its Farm 
Credit Bank subsidiary.
    (f) Prohibition on UBE subsidiaries. Except as provided in this 
paragraph, a System institution may not create a subsidiary of a UBE 
that it has organized or invested in under this subpart or enable the 
UBE itself to create a subsidiary or any other type of affiliated 
entity. A System institution may establish a UBE as a subsidiary of a 
UBE formed pursuant to paragraph (d)(1) of this section to hold each 
investor's pro-rata interest in acquired property provided that the loan 
collateral at issue involves a multi-lender transaction that includes 
System and non-System lenders.
    (g) Limit on potential liability. (1) Each System institution's 
equity investment in a UBE must be established in a manner that will 
limit potential exposure of the System institution to no more than the 
amount of its investment in the UBE.
    (2) A System institution cannot become a general partner of any 
partnership other than an LLLP.
    (h) Limit on amount of equity investment in UBEs. The aggregate 
amount of equity investments that a single System institution is 
authorized to hold in UBEs must not exceed one percent of the 
institution's total outstanding loans, calculated at the time of each 
investment. On a case-by-case basis, FCA may approve an exception to 
this limitation that would exceed the one-percent aggregate limit. 
Conversely, FCA may impose a percentage limit lower than the one-percent 
aggregate limit based on safety or soundness and other relevant 
concerns. This one-percent aggregate limit does not apply to equity 
investments in one-member UBEs formed for acquired property as permitted 
in paragraph (d)(1) of this section. Any equity investment made in a UBE 
by a service corporation must be attributed to its System institution 
owners based on the ownership percentage of each bank or association.
    (i) Prohibition on relationship with a third-party UBE. A System 
institution is prohibited from:
    (1) Making any equity investment in a third-party UBE except as may 
be authorized on a case-by-case basis under Sec. 615.5140(e) of this 
chapter for de minimis and passive investments. Such requests would be 
considered outside of this rule.
    (2) Serving as the general partner or manager of a third-party UBE; 
or

[[Page 79]]

    (3) Being designated as the primary beneficiary of a third-party 
UBE, either alone or with other System institutions.
    (j) Limitation on non-System equity investments. Non-System persons 
or entities may not invest in a UBE that is controlled by a System 
institution except that non-System persons or entities may own 20 
percent or less of the equity of a System-controlled UBE organized to 
deliver services integral to the daily internal operations of a System 
institution.
    (k) UBEs formed for acquiring and managing collateral. The 
provisions of paragraphs (i) and (j) of this section do not apply to 
UBEs formed for the purpose of acquiring and managing unusual or complex 
collateral associated with multiple-lender loan transactions in which 
non-System persons or entities are participants.



Sec. 611.1154  Notice of equity investments in UBEs.

    (a) Applicability. This notice provision is applicable only to 
System institutions that wish to make an equity investment in UBEs whose 
activities are limited to the following purposes:
    (1) Acquiring and managing unusual or complex collateral associated 
with loans;
    (2) Providing hail or multi-peril crop insurance services in 
collaboration with another System institution in accordance with 
Sec. 618.8040 of this chapter; and
    (3) Any other UBE business activity that FCA determines to be 
appropriate for this notice provision.
    (b) Notice requirements. System institutions must provide written 
notice to FCA so that the notice is received by FCA no later than 10 
business days in advance of making an equity investment in a UBE for 
authorized UBE business activity described in paragraph (a) of this 
section. The notice must include:
    (1) The UBE's articles of formation, including its name and the 
State in which it is organized, length of time it will exist, its 
partners or members, and its management structure;
    (2) The dollar amount of the System institution's equity investment 
in the UBE;
    (3) A certified resolution of the System institution's board of 
directors authorizing the equity investment in, and business activity 
of, the UBE and the board's approval to submit the notice to the FCA. 
For UBEs organized to acquire and manage unusual or complex collateral 
associated with loans as identified in paragraph (a)(1) of this section, 
the board of directors may adopt a blanket board resolution to cover all 
such UBEs that the System institution will organize.
    (4) Except for those UBEs identified in paragraph (a)(1) of this 
section, a board statement included with the certified board resolution 
affirming that the UBE:
    (i) Is needed to achieve operating efficiencies and benefits;
    (ii) Is necessary or expedient to the System institution's business;
    (iii) Will operate with transparency;
    (iv) Will conduct its business activity in a manner designed to 
prevent conflicts of interest between its purpose and operations and the 
mission and operations of the System institution(s);
    (v) Will otherwise be in compliance with applicable Federal, State, 
and local laws; and
    (vi) Will not be used by the System institution to make direct 
loans; perform any functions or provide any services that the System 
institution is not authorized to perform or provide under the Act and 
FCA regulations; or to exceed the stated purpose of the UBE as set forth 
in its articles of formation.
    (5) A letter from the funding bank that it has approved the 
institution's equity investment in the UBE. For those UBEs organized to 
acquire and manage unusual or complex collateral associated with loans 
as identified in paragraph (a)(1) of this section, the funding bank may 
provide a blanket approval letter to cover all such UBEs that its 
district associations may invest in or organize.
    (6) Any additional information the System institution wishes to 
submit.
    (c) Supplementation or omission of information. FCA may require the 
supplementation or allow the omission of any information required under 
paragraph (b) of this section.
    (d) Other requirements. A System institution may not organize or 
invest in

[[Page 80]]

those UBEs identified in paragraph (a) of this section if the FCA 
notifies the institution before the end of the 10 business day advance 
notice period that such investment requires FCA approval under the 
provisions of Sec. 611.1155.



Sec. 611.1155  Approval of equity investments in UBEs.

    (a) Request. System institutions must receive FCA approval before 
organizing or investing in any UBE that does not qualify for the notice 
provision set forth in Sec. 611.1154(a). A request for approval under 
this section must include the following information:
    (1) A detailed statement of the risk characteristics of the 
investment, as required by Sec. 615.5140(e) of this chapter and the 
initial amount of equity investment;
    (2) A detailed statement on the purpose and objectives of the UBE; 
the need for the UBE and the operating efficiencies and benefits that 
will be achieved by using the UBE;
    (3) The proposed articles of formation addressing, at a minimum, the 
following:
    (i) The UBE's name, the State in which it is organized, the city and 
State in which its principal office is to be located, and its partners 
or members and management structure;
    (ii) Specific business activities that the UBE will conduct;
    (iii) General powers of the UBE;
    (iv) Ownership, voting, partnership, membership and operating 
agreements for the UBE;
    (v) Procedures to adopt and amend the partnership, membership or 
operating agreement of the UBE;
    (vi) The standards and procedures for the application and 
distribution of the UBE's earnings; and
    (vii) Length of time the UBE will exist.
    (4) A certified resolution of the System institution's board of 
directors authorizing the equity investment in the UBE and the UBE 
business activity and the board's approval to submit the request to the 
FCA. The certified board resolution must include a board statement 
affirming that the UBE:
    (i) Is necessary or expedient to the System institution's business;
    (ii) Will operate with transparency;
    (iii) Will conduct its business activity in a manner designed to 
prevent conflicts of interest between its purpose and operations and the 
mission and operations of the System institution(s);
    (iv) Will comply with applicable Federal, State, and local laws; and
    (v) Will not be used by the System institution to make direct loans; 
perform any functions or provide any services that the System 
institution is not authorized to perform or provide under the Act and 
FCA regulations; or exceed the purpose of the UBE as stated in its 
articles of formation.
    (5) A letter from the funding bank that it has approved the 
institution's equity investment in the UBE;
    (6) Any additional information the System institution wishes to 
submit.
    (b) Supplementation or omission of information. FCA may require the 
supplementation or allow the omission of any information required under 
paragraph (a) of this section based on the complex or noncomplex nature 
of the proposed UBE.
    (c) Denial of a request. The FCA will specify in writing to the 
submitting System institutions the reasons for denial of any request to 
organize or invest in a UBE.



Sec. 611.1156  Ongoing requirements.

    A System institution that organizes or invests in a UBE must also 
comply with the following requirements:
    (a) Maintain and ensure FCA's access to all books, papers, records, 
agreements, reports and other documents of each UBE necessary to 
document and protect the institution's interest in each entity;
    (b) Divest, as soon as practicable, the institution's equity or 
beneficial interest in, and sever any relationship with a UBE:
    (1) That conducts activities beyond those authorized to carry out 
its limited purpose or that are contrary to the Act or FCA regulations, 
or as otherwise directed to do so by FCA; or
    (2) Where non-System persons or entities obtain control as defined 
under GAAP. This paragraph does not apply

[[Page 81]]

to UBEs formed for the purpose of acquiring and managing unusual or 
complex collateral associated with multiple-lender loan transactions in 
which non-System persons or entities are participants.



Sec. 611.1157  Disclosure and reporting requirements.

    (a) Annual report to shareholders. In its annual report to 
shareholders, as set forth in Sec. 620.5(a)(12) of this chapter, a 
System institution must provide information on its UBE investment and 
business activity.
    (b) Periodic reports as directed. As directed by FCA, a System 
institution must submit periodic reports to FCA on any equity investment 
in a UBE or UBE status as provided under Sec. 621.12 of this chapter, 
and in accordance with Secs. 621.13 and 621.14 of this chapter.
    (c) Dissolution of a UBE. A System institution must submit a timely 
report to FCA on the dissolution of a UBE that it controls.



Sec. 611.1158  Grandfather provision.

    (a) Scope. The following equity investments in UBEs are 
grandfathered from the Notice and Approval provisions under 
Secs. 611.1154 and 611.1155, respectively.
    (1) Those UBE formations or equity investments that received 
specific, written approval by FCA prior to the effective date of this 
regulation; and
    (2) Those UBE formations or equity investments that occurred prior 
to the effective date of this regulation to acquire or manage unusual or 
complex collateral associated with loans.
    (b) System institutions' obligations. All System institutions with 
grandfathered UBEs:
    (1) Remain subject to their conditions of approval;
    (2) Are subject to the ongoing requirements of Sec. 611.1156 and the 
disclosure and reporting requirements of Sec. 611.1157; and
    (3) May not change or expand the authorized business activity, 
service, or function of the UBE as approved by FCA, add or increase the 
level of non-System ownership in the UBE to the extent such ownership is 
authorized under Sec. 611.1153(j), or change control of the UBE as 
control is defined in Sec. 611.1151 without giving written notice of 
such changes to FCA at least 10 business days in advance of any such 
change or expansion.
    (4) A System institution may not proceed with any change or 
expansion as defined in paragraph (b)(3) of this section if the FCA 
notifies the institution before the end of the 10 business day advance 
notice period that the proposed change or expansion is material and must 
be submitted for FCA approval under the provisions of Sec. 611.1155.
    (c) System institution investments or reinvestments in grandfathered 
UBEs. System institutions investing for the first time in grandfathered 
UBEs or reinvesting after having previously divested their equity 
investment must provide notice to FCA or obtain FCA approval under 
either the notice provision in Sec. 611.1154 or the approval provision 
in Sec. 611.1155 depending on the function, service, or activity of the 
grandfathered UBE in which the institution seeks to invest or reinvest.

Subparts K-O [Reserved]



           Subpart P_Termination of System Institution Status

    Source: 71 FR 44420, Aug. 4, 2006, unless otherwise noted.



Sec. 611.1200  Applicability of this subpart.

    The regulations in this subpart apply to each bank and association 
that desires to terminate its System institution status and become 
chartered as a bank, savings association, or other financial 
institution.



Sec. 611.1205  Definitions that apply in this subpart.

    Assets means all assets determined in conformity with GAAP, except 
as otherwise required in this subpart.
    Business days means days the FCA is open for business.
    Days means calendar days.
    Equity holders means holders of stock, participation certificates, 
or other equities such as allocated equities.
    GAAP means ``generally accepted accounting principles'' as that term 
is defined in Sec. 621.2(c) of this chapter.

[[Page 82]]

    OFI means an ``other financing institution'' that has a funding and 
discount agreement with a Farm Credit bank under section 1.7(b)(1) of 
the Act.
    Successor institution means the bank, savings association, or other 
financial institution that the terminating bank or association will 
become when we revoke its Farm Credit charter.



Sec. 611.1210  Advance notices--commencement resolution and notice 
to equity holders.

    (a) Adoption of commencement resolution. Your board of directors 
must begin the termination process by adopting a commencement resolution 
stating your intention to terminate Farm Credit status under section 
7.10 of the Act. Immediately after you adopt the commencement 
resolution, send a certified copy by overnight mail to us and to the 
Farm Credit System Insurance Corporation (FCSIC). If your institution is 
an association, also send a copy to your affiliated bank. If your 
institution is a bank, also send a copy to your affiliated associations, 
the other Farm Credit banks, and the Federal Farm Credit Banks Funding 
Corporation (Funding Corporation).
    (b) Advance notice. Within 5 business days after adopting the 
commencement resolution, you must:
    (1) Send us copies of all contracts and agreements related to the 
termination.
    (2) Subject to paragraph (b)(2)(ii) of this section:
    (i) Send an advance notice to all equity holders stating you are 
taking steps to terminate System status. Immediately upon mailing the 
notice to equity holders, you must also place it in a prominent location 
on your Web site. The advance notice must describe the following:
    (A) The process of termination;
    (B) The expected effect of termination on borrowers and other equity 
holders, including the effect on borrower rights and the consequences of 
any stock retirements before termination;
    (C) The type of charter the successor institution will have; and
    (D) Any bylaw creating a special class of borrower stock and 
participation certificates under paragraph (f) of this section.
    (ii) Send us a draft of the advance notice by facsimile or 
electronic mail before mailing it to your equity holders. If we have not 
contacted you within 2 business days of our receipt of the draft notice 
regarding modifications, you may mail the notice to your equity holders.
    (c) Bank negotiations on joint and several liability. If your 
institution is a terminating bank, within 10 days of adopting the 
commencement resolution, your bank and the other Farm Credit banks must 
begin negotiations to provide for your satisfaction of liabilities 
(other than your primary liability) under section 4.4 of the Act. The 
Funding Corporation may, at its option, be a party to the negotiations 
to the extent necessary to fulfill its duties with respect to financing 
and disclosure. The agreement must comply with the requirements in 
Sec. 611.1270(c).
    (d) Disclosure to loan applicants and equity holders after 
commencement resolution. Between the date your board of directors adopts 
the commencement resolution and the termination date, you must give the 
following information to your loan applicants and equity holders:
    (1) For each loan applicant who is not a current stockholder, 
describe at the time of loan application:
    (i) The effect of the proposed termination on the prospective loan; 
and
    (ii) Whether, after the proposed termination, the borrower will 
continue to have any of the borrower rights provided under the Act and 
regulations.
    (2) For any equity holders who ask to have their equities retired, 
explain that the retirement would extinguish the holder's right to 
exchange those equities for an interest in the successor institution. In 
addition, inform holders of equities entitled to your residual assets in 
liquidation that retirement before termination would extinguish their 
right to dissent from the termination and have their equities retired.
    (e) Terminating bank's right to continue issuing debt. Through the 
termination date, a terminating bank may continue to participate in the 
issuance of consolidated and System-wide obligations to the same extent 
it would be able to participate if it were not terminating.

[[Page 83]]

    (f) Special class of stock. Notwithstanding any requirements to the 
contrary in Sec. 615.5230(c) of this chapter, you may adopt bylaws 
providing for the issuance of a special class of stock and participation 
certificates between the date of adoption of a commencement resolution 
and the termination date. Your voting stockholders must approve the 
special class before you adopt the commencement resolution. The equities 
must comply with section 4.3A of the Act and be identical in all 
respects to existing classes of equities that are entitled to the 
residual assets of the institution in a liquidation, except for the 
value a holder will receive in a termination. In a termination, the 
holder of the special class of stock receives value equal to the lower 
of either par (or face) value, or the value calculated under 
Sec. 611.1280(c) and (d). A holder must have the same right to vote (if 
the equity is held on the voting record date) and to dissent as holders 
of similar equities issued before the commencement resolution. If the 
termination does not occur, the special classes of stock and 
participation certificates must automatically convert into shares of the 
otherwise identical equities.

[71 FR 44420, Aug. 4, 2006, as amended at 75 FR 18743, Apr. 12, 2010]



Sec. 611.1211  Special requirements.

    (a) Special assessments, analyses, studies, and rulings. At any time 
after we receive your commencement resolution, and as we deem necessary 
or useful to evaluate your proposal, we may require you to engage 
independent experts, acceptable to us, to conduct assessments, analyses, 
or studies, or to request rulings, including, but not limited to:
    (1) Assessments of fair value;
    (2) Analyses and rulings on tax implications; and
    (3) Studies of the effect of your proposal on equity holders 
(including the effect on holders in their capacity as borrowers), the 
System, and other parties.
    (b) Informational meetings. After the advance notice, but before the 
stockholder vote, we may require you to hold regional or local 
informational meetings in convenient locations, at convenient times, and 
in a manner conducive to accommodating all equity holders that wish to 
attend, to discuss equity holder issues and answer questions. These 
meetings are subject to the plain language requirements of 
Sec. 611.1217(b) regarding balanced statements.



Sec. 611.1215  Communications with the public and equity holders.

    (a) Communications after commencement resolution and before 
termination. The terminating institution may communicate with equity 
holders and the public regarding the proposed termination, as long as 
written communications (other than non-public communications among 
participants, i.e., persons or entities that are parties to a proposed 
corporate restructuring involving the successor institution, or their 
agents) made in connection with or relating to the proposed termination 
and any related transactions are filed in accordance with paragraph (c) 
of this section and the conditions in this section are satisfied.
    (b) To rely on this section, you must include the following legend 
in each communication in a prominent location:

    Equity holders should read the plan of termination that they have 
received or will receive (as appropriate) because it contains important 
information, including an enumerated statement of the anticipated 
benefits and potential disadvantages of the proposal.

    (c) All your written communications and all written communications 
by your directors, employees, and agents in connection with or relating 
to the proposed termination or any related transactions must be filed 
with us under this section on or before the date of first use.
    (d) We will require you to correct communications that we deem are 
misleading or inaccurate.
    (e) In addition to the filings we require under paragraph (c) of 
this section, we may require you to file timely any written 
communications you have knowledge of that are made by any other 
participants or their agents in connection with or related to the 
proposed termination or to any transaction related to the proposed 
termination.

[[Page 84]]

    (f) An immaterial or unintentional failure to file or a delay in 
filing a written communication described in this section will not result 
in a violation of this section, as long as:
    (1) A good faith and reasonable effort was made to comply with the 
filing requirement; and
    (2) The written communication is filed as soon as practicable after 
discovery of the failure to file.
    (g) Communications that exist in electronic form must be filed 
electronically with the FCA as we direct. For communications that do not 
exist in electronic form, you must timely notify us by electronic mail 
and send us a copy by regular mail.
    (h) You do not need to file a written communication that does not 
contain new or different information from that which you have previously 
publicly disclosed and filed under this section.



Sec. 611.1216  Public availability of documents related to the 
termination.

    (a) We may post on our Web site, or require you to post on your Web 
site:
    (1) Results of any special assessments, analyses, studies, and 
rulings required under Sec. 611.1211;
    (2) Documents you submit to us or file with us under Sec. 611.1215; 
and
    (3) Documents you submit to us under section 7.11 of the Act that 
are related directly or indirectly to the proposed termination, 
including but not limited to contracts entered into in connection with 
or relating to the proposed termination and any related transactions.
    (b) We will not post confidential information on our Web site and 
will not require you to post it on your Web site.
    (c) You may request that we treat specific information as 
confidential under the Freedom of Information Act, 5 U.S.C. 552 (see 12 
CFR part, 602 subpart B). You should draft your request for confidential 
treatment narrowly to extend only to those portions of a document you 
consider to be confidential. If you request confidential treatment for 
information that we do not consider to be confidential, we may post that 
information on our Web site after providing notice to you. On our own 
initiative, we may determine that certain information should be treated 
as confidential and, if so, we will not make that information public.



Sec. 611.1217  Plain language requirements.

    (a) Plain language presentation. All communications to equity 
holders required under Secs. 611.1210, 611.1223, 611.1240, and 611.1280 
must be clear, concise, and understandable. You must:
    (1) Use short, explanatory sentences, bullet lists or charts where 
helpful, and descriptive headings and subheadings;
    (2) Minimize the use of glossaries or defined terms;
    (3) Write in the active voice when possible; and
    (4) Avoid legal and highly technical business terminology.
    (b) Balanced statements. Communications to equity holders that 
describe or enumerate anticipated benefits of the proposed termination 
should also describe or enumerate the potential disadvantages to the 
same degree of detail.



Sec. 611.1218  Role of directors.

    (a) Statements by directors. Directors may not be prohibited by 
confidentiality agreements or otherwise from publicly or privately 
commenting orally or in writing on the termination proposal and related 
matters.
    (b) Directors' right to obtain independent advice. One or more 
directors of a terminating institution or an institution that is 
considering terminating have the right to obtain independent legal and 
financial advice regarding the proposed termination and related 
transactions. The institution must pay for such advice and related 
expenses as are reasonable in light of the circumstances. A request by a 
director or directors for the institution to pay such expenses cannot be 
denied unless the board of directors, by at least a two-thirds vote of 
the full board (the total number of current directors), denies the 
request. The institution must act on any request in a timely manner. For 
any denial of payment, the board must provide notice to the FCA within 1 
business day of the denial, fully document the reasons for such a 
denial, and ensure that the institution discloses the nature of the 
request and the reasons for any denial to the terminating

[[Page 85]]

institution's equity holders in the plan of termination.



Sec. 611.1219  Prohibited acts.

    (a) Statements about termination. Neither the institution nor any 
director, officer, employee, or agent may make any untrue or misleading 
statement of a material fact, or fail to disclose any material fact, to 
the FCA or a current or prospective equity holder about the proposed 
termination and any related transactions.
    (b) Representations regarding FCA approval. Neither the institution 
nor any director, officer, employee, or agent may make an oral or 
written representation to anyone that our approval of the plan of 
termination or the termination is, directly or indirectly, either a 
recommendation on the merits of the proposal or an assurance that the 
information you give to your equity holders is adequate or accurate.



Sec. 611.1220  Termination resolution.

    No more than 1 week before you submit your plan of termination to 
us, your board of directors must adopt a termination resolution stating 
its support for terminating your status as a System institution and 
authorizing:
    (a) Submission to us of a plan of termination and other required 
submissions that comply with Sec. 611.1223; and
    (b) Submission of the plan of termination to the voting stockholders 
if we approve the plan of termination under Sec. 611.1230 or, if we take 
no action, after the end of our approval period.



Sec. 611.1221  Submission to FCA of plan of termination and disclosure
information; other required submissions.

    (a) Filing. Send us an original and five copies of the plan of 
termination, including the disclosure information, and other required 
submissions. You may not file the plan of termination until at least 30 
days after you mail the equity holder notice under Sec. 611.1210(b). If 
you send us the plan of termination in electronic form, you must send us 
at least one hard copy with original signatures.
    (b) Plan contents. The plan of termination must include your equity 
holder disclosure information that complies with Sec. 611.1223.
    (c) Other submissions. You must also submit the following:
    (1) A statement of how you will transfer assets to, and have your 
liabilities assumed by, the successor institution;
    (2) A copy of the charter application for the successor institution, 
with any exhibits or other supporting information; and
    (3) A statement, if applicable, whether the successor institution 
will continue to borrow from a Farm Credit bank and how such a 
relationship will affect your provision for payment of debts. You must 
also provide evidence of any agreement and plan for satisfaction of 
outstanding debts.



Sec. 611.1223  Plan of termination--contents.

    (a) Disclaimer. Place the following statement in boldface type in 
the material to be sent to equity holders, either on the notice of 
meeting or the first page of the plan of termination:

    The Farm Credit Administration has not determined if this 
information is accurate or complete. You should not rely on any 
statement to the contrary.

    (b) Summary. The first part of the plan of termination must be a 
summary that concisely explains:
    (1) Which stockholders have a right to vote on the termination and 
related transactions;
    (2) The material changes the termination will cause to the rights of 
borrowers and other equity holders;
    (3) The effect of those changes;
    (4) The anticipated benefits and potential disadvantages of the 
termination;
    (5) The right of certain equity holders to dissent and receive 
payment for their existing equities; and
    (6) The estimated termination date.
    (7) If applicable, an explanation of any corporate restructuring 
that the successor institution expects to engage in within 18 months 
after the date of termination.
    (c) Remaining requirements. You must also disclose the following 
information to equity holders:
    (1) Termination resolution. Provide a certified copy of the 
termination resolution required under Sec. 611.1220.

[[Page 86]]

    (2) Plan of termination. Summarize the plan of termination.
    (3) Benefits and disadvantages. Provide an enumerated statement of 
the anticipated benefits and potential disadvantages of the termination.
    (4) Recommendation. Explain the board's basis for recommending the 
termination.
    (5) Exit fee. Explain the preliminary exit fee estimate, with any 
adjustments we require, and estimated expenses of termination and 
organization of the successor institution.
    (6) Initial board of directors. List the initial board of directors 
and senior officers for the successor institution, with a brief 
description of the business experience of each person, including 
principal occupation and employment during the past 5 years.
    (7) Relevant contracts and agreements. Include copies of all 
contracts and agreements related to the termination, including any 
proposed contracts in connection with the termination and subsequent 
operations of the successor institution. The FCA may, in its discretion, 
permit or require you to provide a summary or summaries of the documents 
in the disclosure information to be submitted to equity holders instead 
of copies of the documents.
    (8) Bylaws and charter. Summarize the provisions of the bylaws and 
charter of the successor institution that differ materially from your 
bylaws and charter. The summary must state:
    (i) Whether the successor institution will require a borrower to 
hold an equity interest as a condition for having a loan; and
    (ii) Whether the successor institution will require equity holders 
to do business with the institution.
    (9) Changes to equity. Explain any changes in the nature of equity 
investments in the successor institution, such as changes in dividends, 
patronage, voting rights, preferences, retirement of equities, and 
liquidation priority. If equities protected under section 4.9A of the 
Act are outstanding, the plan of termination must state that the Act's 
protections will be extinguished on termination.
    (10) Effect of termination on statutory and regulatory rights. 
Explain the effect of termination on rights granted to equity holders by 
the Act and FCA regulations. You must explain the effect termination 
will have on borrower rights granted in the Act and part 617 of this 
chapter.
    (11) Loan refinancing by borrowers. (i) State, as applicable, that 
borrowers may seek to refinance their loans with the System institutions 
that already serve, or will be permitted to serve, your territory. State 
that no System institution is obligated to refinance your loans.
    (ii) If we have assigned the chartered territory you serve to 
another System institution before the plan of termination is mailed to 
equity holders, or if another System institution is already chartered to 
make the same type of loans you make in the chartered territory, 
identify such institution(s) and provide the following information:
    (A) The name, address, and telephone number of the institution; and
    (B) An explanation of the institution's procedures for borrowers to 
apply for refinancing.
    (iii) If we have not assigned the territory before you mail the plan 
of termination, give the name, address, and telephone number of the 
System institution specified by us and state that borrowers may contact 
the institution for information about loan refinancing.
    (12) Equity exchanges. Explain the formula and procedure to exchange 
equity in your institution for equity in the successor institution.
    (13) Employment, retirement, and severance agreements. Describe any 
employment agreement or arrangement between the successor institution 
and any of your senior officers or directors. Describe any severance and 
retirement plans that cover your employees or directors and state the 
costs you expect to incur under the plans in connection with the 
termination.
    (14) Final exit fee and its calculation. Explain how the final exit 
fee will be calculated under Sec. 611.1255 and how it will be paid.
    (15) New charter. Describe the nature and type of financial 
institution the successor institution will be and any conditions of 
approval of the new chartering authority or regulator.
    (16) Differences in successor institution's programs and policies. 
Summarize

[[Page 87]]

any differences between you and the successor institution on:
    (i) Interest rates and fees;
    (ii) Collection policies;
    (iii) Services provided; and
    (iv) Any other item that would affect a borrower's lending 
relationship with the successor institution, including whether a 
stockholder's ability to borrow from the institution will be restricted.
    (17) Capitalization. Discuss expected capital requirements of the 
successor institution, and the amount and method of capitalization.
    (18) Sources of funding. Explain the sources and manner of funding 
for the successor institution's operations.
    (19) Contingent liabilities. Describe how the successor institution 
will address any contingent liability it will assume from you.
    (20) Tax status. Summarize the differences in tax status between 
your institution and the successor institution, and explain how the 
differences may affect equity holders.
    (21) Regulatory environment. Describe briefly how the regulatory 
environment for the successor institution will differ from your current 
regulatory environment, and any effect on the cost of doing business or 
the value of stockholders' equity.
    (22) Dissenters' rights. Explain which equity holders are entitled 
to dissenters' rights and what those rights are. The explanation must 
include the estimated liquidation value of the stock, procedures for 
exercising dissenters' rights, and a statement of when the rights may be 
exercised.
    (23) Financial information. (i) Present the following financial 
data:
    (A) A balance sheet and income statement for each of the 3 preceding 
fiscal years;
    (B) A balance sheet as of a date within 90 days of the date you send 
the plan of termination to us, presented on a comparative basis with the 
corresponding period of the previous 2 fiscal years;
    (C) An income statement for the interim period between the end of 
the last fiscal year and the date of the balance sheet required by 
paragraph (d)(23)(i)(B) of this section, presented on a comparative 
basis with the corresponding period of the previous 2 fiscal years;
    (D) A pro forma balance sheet of the successor institution presented 
as if termination had occurred as of the date of the most recent balance 
sheet presented in the plan of termination; and
    (E) A pro forma summary of earnings for the successor institution 
presented as if the termination had been effective at the beginning of 
the interim period between the end of the last fiscal year and the date 
of the balance sheet presented under paragraph (d)(23)(i)(D) of this 
section.
    (ii) The format for the balance sheet and income statement must be 
the same as the format in your annual report and must contain 
appropriate footnote disclosures, including data on high-risk assets, 
other property owned, and allowance for losses.
    (iii) The financial statements must include either:
    (A) A statement signed by the chief executive officer and each board 
member that the various financial statements are unaudited but have been 
prepared in all material respects in conformity with GAAP (except as 
otherwise disclosed) and are, to the best of each signer's knowledge, a 
fair and accurate presentation of the financial condition of the 
institution; or
    (B) A signed opinion by an independent certified public accountant 
that the various financial statements have been examined in conformity 
with generally accepted auditing standards and included such tests of 
the accounting records and other such auditing procedures as were 
considered necessary in the circumstances, and, as of the date of the 
statements, present fairly the financial position of the institution in 
conformity with GAAP applied on a consistent basis, except as otherwise 
disclosed.
    (24) Subsequent financial events. Describe any event after the date 
of the financial statements, but before the date you send the plan of 
termination to us, that would have a material impact on your financial 
condition or the condition of the successor institution.
    (25) Other subsequent events. Describe any event after you send the 
plan of termination to us that could have a

[[Page 88]]

material impact on any information in the plan of termination.
    (26) Other material disclosures. Describe any other material fact or 
circumstance that a stockholder would need to know to make an informed 
decision on the termination, or that is necessary to make the 
disclosures not misleading. We may require you to disclose any 
assessments, analyses, studies, or rulings we require under 
Sec. 611.1211.
    (27) Ballot and proxy. Include a ballot and proxy, with instructions 
on the purpose and authority for their use, and the proper method for 
the stockholder to sign the proxy.
    (28) Board of directors certification. Include a certification 
signed by the entire board of directors as to the truth, accuracy, and 
completeness of the information contained in the plan of termination. If 
any director refuses to sign the certification, the director must inform 
us of the reasons for refusing.
    (29) Directors' statements. You must include statements, if any, by 
directors regarding the proposed termination.
    (d) Requirement to provide updated information. After you send us 
the plan of termination, you must immediately send us:
    (1) Any material change to information in the plan of termination, 
including financial information, that occurs between the date you file 
the plan of termination and the termination date;
    (2) Copies of any additional written information on the termination 
that you have given or give to current or prospective equity holders 
before termination; and
    (3) A description of any subsequent event(s) that could have a 
material impact on any information in the plan of termination or on the 
termination.



Sec. 611.1230  FCA review and approval--plan of termination.

    (a) FCA review period. No later than 60 days after we receive the 
plan of termination, we will review it and either approve or disapprove 
the plan for submission to your equity holders. If we take no action on 
the plan of termination within the 60 days, you may submit the plan to 
your equity holders. The 60-day review period under section 7.11 of the 
Act will begin on the date we receive a complete plan of termination. We 
will advise you in writing when the 60-day period begins.
    (b) FCA approval of the plan of termination. Our approval of the 
plan of termination for submission to your equity holders:
    (1) Is not our approval of the termination; and
    (2) May be subject to any condition we impose.



Sec. 611.1235  Plan of termination--distribution.

    (a) Reaffirmation resolution. Not more than 14 days before mailing 
the plan of termination to your equity holders, your board of directors 
must adopt a resolution reaffirming support of the termination. A 
certified copy of the resolution must be sent to us and must accompany 
the plan of termination when it is distributed to stockholders.
    (b) Notice of meeting and distribution of plan. You must provide all 
equity holders with a notice of meeting and the plan of termination at 
least 45 days before the stockholder vote. You must also provide a copy 
of the plan to us when you provide it to your equity holders.



Sec. 611.1240  Voting record date and stockholder approval.

    (a) Stockholder meeting. You must call the meeting by written notice 
in compliance with your bylaws. The stockholder meeting to vote on the 
termination must occur at least 60 days after our approval of the plan 
of termination (or, if we take no action, at least 60 days after the end 
of our approval period).
    (b) Voting record date. The voting record date may not be more than 
70 days before the stockholders' meeting.
    (c) Quorum requirement for termination vote. At least 30 percent, 
unless your bylaws provide for a higher quorum, of the voting 
stockholders of the institution must be present at the meeting either in 
person or by proxy in order to hold the vote on the termination.
    (d) Approval requirement. The affirmative vote of a majority of the 
voting stockholders of the institution present and voting or voting by 
proxy at the duly authorized meeting at which a

[[Page 89]]

quorum is present as prescribed in paragraph (c) of this section is 
required for approval of the termination.
    (e) Voting procedures. The voting procedures must comply with 
Sec. 611.340. You must have an independent third party count the 
ballots. If a voting stockholder notifies you of the stockholder's 
intent to exercise dissenters' rights, the tabulator must be able to 
verify to you that the stockholder voted against the termination. 
Otherwise, the votes of stockholders must remain confidential.
    (f) Notice to FCA and equity holders of voting results. Within 10 
days of the termination vote, you must send us a certified record of the 
results of the vote. You must notify all equity holders of the results 
within 30 days after the stockholder meeting. If the stockholders 
approve the termination, you must give the following information to 
equity holders:
    (1) Stockholders who voted against termination and equity holders 
who were not entitled to vote have a right to dissent as provided in 
Sec. 611.1280; and
    (2) Voting stockholders have a right, under Sec. 611.1245, to file a 
petition with the FCA for reconsideration within 35 days after the date 
you mail to them the notice of the results of the termination vote.
    (g) Requirement to notify new equity holders. You must provide the 
information described in paragraph (f)(1) of this section to each person 
that becomes an equity holder after the termination vote and before 
termination.

[71 FR 44420, Aug. 4, 2006, as amended at 75 FR 18743, Apr. 12, 2010]



Sec. 611.1245  Stockholder reconsideration.

    (a) Right to reconsider termination. Voting stockholders have the 
right to reconsider their approval of the termination if a petition 
signed by at least 15 percent of the voting stockholders is filed with 
us within 35 days after you mail notices to stockholders that the 
termination was approved. If we determine that the petition complies 
with the requirements of section 7.9 of the Act, you must call a special 
stockholders' meeting to reconsider the vote. The meeting must occur 
within 60 days after the date on which you mailed to stockholders the 
results of the termination vote.
    (b) Quorum requirement for termination reconsideration vote. At 
least 30 percent, unless your bylaws provide for a higher quorum, of the 
voting stockholders of the institution must be present at the 
stockholders' meeting either in person or by proxy in order to hold the 
reconsideration vote. If a majority of the voting stockholders voting in 
person or by proxy vote against the termination, the termination may not 
take place.
    (c) Stockholder list and expenses. You must, at your expense, timely 
give stockholders who request it a list of the names and addresses of 
stockholders eligible to vote in the reconsideration vote. The 
petitioners must pay all other expenses for the petition. You must pay 
expenses that you incur for the reconsideration vote.



Sec. 611.1246  Filing of termination application and its contents.

    (a) Filing of termination application. Send us your termination 
application no later than 90 days after you send us notice of the 
stockholder vote approving the termination. Please send us an original 
and five copies of the termination application for review and approval. 
If you send us the termination application in electronic form, you must 
send us at least one hard copy with original signatures.
    (b) Contents of termination application. The application must 
contain:
    (1) A certified copy of the termination and reaffirmation 
resolutions;
    (2) A certification signed by the board of directors that the board 
continues to support the termination, there has been no material change 
to any of the information contained in the plan of termination or 
information statement after the FCA approved the plan of termination, 
and there have not been any subsequent events that could have a material 
impact on any of the information in the plan of termination or the 
termination; and
    (3) Any additional information that is required under this subpart, 
that we request or that your board of directors wishes to submit in 
support of the application.

[[Page 90]]



Sec. 611.1247  FCA review and approval--termination.

    (a) FCA action on application. After we receive the termination 
application, we will review it and either approve or disapprove the 
termination.
    (b) Basis for disapproval. We will disapprove the termination if we 
determine that there are one or more appropriate reasons for disapproval 
consistent with our authorities under the Act and our regulations. We 
will inform you of our reason(s) for disapproval in writing.
    (c) Conditions of FCA approval. We will approve your termination 
application only if:
    (1) Your stockholders have voted in favor of termination in the 
termination vote and in any reconsideration vote;
    (2) You have given us executed copies of all contracts, agreements, 
and other documents submitted under Secs. 611.1221 and 611.1223;
    (3) You have paid or made adequate provision for payment of debts, 
including responsibility for any contingent liabilities, and for 
retirement of equities;
    (4) A Federal or State chartering authority has granted a new 
charter to the successor institution;
    (5) You deposit into escrow an amount equal to 110 percent of the 
estimated exit fee plus 110 percent of the estimated amount you must pay 
to retire equities of dissenting stockholders and Farm Credit 
institutions, as described in Sec. 611.1255(c); and
    (6) You have fulfilled any condition of termination we impose.
    (d) Effective date of termination. If we approve the termination, we 
will revoke your charter, and the termination will be effective on the 
date that we provide, but no earlier than the last to occur of:
    (1) Fulfillment of all conditions listed in or imposed under 
paragraph (c) of this section;
    (2) Your proposed termination date;
    (3) Ninety (90) days after we receive your termination application 
described in Sec. 611.1246; or
    (4) Fifteen (15) days after any reconsideration vote.



Sec. 611.1250  Preliminary exit fee estimate.

    (a) Preliminary exit fee estimate--terminating association. You must 
provide a preliminary exit fee estimate to us when you submit the plan 
of termination under Sec. 611.1221. Calculate the preliminary exit fee 
estimate in the following order:
    (1) Base your exit fee calculation on the average daily balances of 
assets and liabilities for the 12-month period as of the quarter end 
immediately before the date you send us your plan of termination.
    (2) Any amounts we refer to in this section are average daily 
balances unless we specify that they are not. Amounts that are not 
average daily balances will be referred to as ``dollar amount.''
    (3) Compute the average daily balances based on financial statements 
that comply with GAAP. The financial statements, as of the quarter end 
immediately before the date you send us your plan of termination, must 
be independently audited by a qualified public accountant. We may, in 
our discretion, waive the audit requirement if an independent audit was 
performed as of a date less than 6 months before you submit the plan of 
termination.
    (4) Make adjustments to assets as follows:
    (i) Add back expenses you have incurred related to termination. 
Related expenses include, but are not limited to, legal services, 
accounting services, tax services, studies, auditing, business planning, 
equity holder meetings, and application fees for the termination and 
reorganization. Do not add back to assets expenses related to a 
requirement by the FCA to engage independent experts to conduct 
assessments, analyses, or studies, or to request rulings that solely 
address the impact of the termination on the System or parties other 
than the terminating institution and its stockholders.
    (ii) Subtract the dollar amount of estimated current and deferred 
tax expenses, if any, due to the termination.
    (iii) Add the dollar amount of estimated current and deferred tax 
benefits, if any, due to the termination.

[[Page 91]]

    (iv) Adjust for the dollar amount of significant transactions you 
reasonably expect to occur between the quarter end before you file your 
plan of termination and date of termination. Examples of these 
transactions include, but are not limited to, gains or losses on the 
sale of assets, retirements of equity, loan repayments, and patronage 
distributions. Do not make adjustments for future expenses related to 
termination, such as severance or special retirement payments, or stock 
retirements to dissenting stockholders and Farm Credit institutions.
    (5) Subtract from liabilities any liability that we treat as 
regulatory capital under the capital or collateral requirements in 
subparts H and K of part 615 of this chapter.
    (6) Make any adjustments we require under paragraph (c) of this 
section.
    (7) After making these adjustments to assets and liabilities, 
subtract liabilities from assets. This is your preliminary total capital 
for purposes of termination.
    (8) Multiply assets as adjusted above by 6 percent, and subtract 
this amount from preliminary total capital. This is your preliminary 
exit fee estimate.
    (b) Preliminary exit fee estimate--terminating bank. (1) Affiliated 
associations that are terminating with you must calculate their 
individual preliminary exit fee estimates as described in paragraph (a) 
of this section.
    (2) Base your exit fee calculation on the average daily balances of 
assets and liabilities for the 12-month period as of the quarter end 
immediately before the date you send us your plan of termination.
    (3) Any amounts we refer to in this section are average daily 
balances unless we specify that they are not. Amounts that are not 
average daily balances will be referred to as ``dollar amount.''
    (4) Compute the average daily balances based on bank-only financial 
statements that comply with GAAP. The financial statements, as of the 
quarter end immediately before the date you send us your plan of 
termination, must be independently audited by a qualified public 
accountant. We may, in our discretion, waive this requirement if an 
independent audit was performed as of a date less than 6 months before 
you submit the plan of termination.
    (5) Make adjustments to assets and liabilities as follows:
    (i) Add back to assets the following:
    (A) Expenses you have incurred related to termination. Related 
expenses include, but are not limited to, legal services, accounting 
services, tax services, studies, auditing, business planning, equity 
holder meetings, and application fees for the termination and 
reorganization. Do not add back to assets expenses related to a 
requirement by the FCA to engage independent experts to conduct 
assessments, analyses, or studies, or to request rulings that solely 
address the impact of the termination on the System or parties other 
than the terminating institution and its stockholders.
    (B) Any specific allowance for losses, and a pro rata portion of any 
general allowance for loan losses, on direct loans to associations that 
you do not expect to incur before or at termination.
    (ii) Subtract from your assets and liabilities an amount equal to 
your direct loans to your affiliated associations that are not 
terminating.
    (iii) Subtract the following from assets:
    (A) Equity investments in your institution that are held by 
nonterminating associations and that you expect to transfer to another 
System bank before or at termination. A nonterminating association's 
investment consists of purchased equities, allocated equities, and a 
share of the bank's unallocated surplus calculated in accordance with 
the bank's bylaw provisions on liquidation. We may require a different 
calculation method for the unallocated surplus if we determine that 
using the liquidation provision would be inequitable to stockholders; 
and
    (B) The dollar amount of estimated current and deferred tax 
expenses, if any, due to the termination.
    (iv) Add the dollar amount of current and deferred estimated tax 
benefits, if any, due to the termination.

[[Page 92]]

    (v) Subtract from liabilities any liability that we treat as 
regulatory capital under the capital or collateral requirements in 
subparts H and K of part 615 of this chapter.
    (vi) Adjust for the dollar amount of significant transactions you 
reasonably expect to occur between the quarter end before you file your 
plan of termination and date of termination. Examples of these 
transactions include, but are not limited to, retirements of equity, 
loan repayments, and patronage distributions. Do not make adjustments 
for future expenses related to termination, such as severance or special 
retirement payments, or stock retirements to dissenting stockholders and 
Farm Credit institutions.
    (6) Make any adjustments we require under paragraph (c) of this 
section.
    (7) After the above adjustments, combine your balance sheet with the 
balance sheets of your terminating associations after they have made the 
adjustments required in paragraph (a) of this section. Subtract 
liabilities from assets. This is your preliminary total capital estimate 
for purposes of termination.
    (8) Multiply the assets of the combined balance sheet after the 
above adjustments by 6 percent. Subtract this amount from the 
preliminary total capital estimate of the combined balance sheet. The 
remainder is the preliminary exit fee estimate of the bank and 
terminating affiliated associations.
    (9) Your preliminary exit fee estimate is the amount by which the 
preliminary exit fee estimate for the combined entity exceeds the total 
of the individual preliminary exit fee estimates of your affiliated 
terminating associations.
    (c) Adjustments. (1) We will review your account balances, 
transactions over the 3 years before the date of the termination 
resolution under Sec. 611.1220, and any subsequent transactions. Our 
review will include, but not be limited to, the following:
    (i) Additions to or subtractions from any allowance for losses;
    (ii) Additions to assets or liabilities, or subtractions from assets 
or liabilities, due to transactions that are outside your ordinary 
course of business;
    (iii) Dividends or patronage refunds exceeding your usual practices;
    (iv) Changes in the institution's capital plan, or in implementing 
the plan, that increased or decreased the level of borrower investment;
    (v) Contingent liabilities, such as loss-sharing obligations, that 
can be reasonably quantified; and
    (vi) Assets, including real property and servicing rights, that may 
be overvalued, undervalued, or not recorded on your books.
    (2) If we determine the account balances do not accurately show the 
value of your assets and liabilities (whether the assets and liabilities 
were booked before or during the 3-year look-back adjustment period), we 
will make any adjustments we deem necessary.
    (3) We may require you to reverse the effect of a transaction if we 
determine that:
    (i) You have retired capital outside the ordinary course of 
business;
    (ii) You have taken any other actions unrelated to your core 
business that have the effect of changing the exit fee; or
    (iii) You incurred expenses related to termination prior to the 12-
month average daily balance period on which the exit fee calculation is 
based.
    (4) We may require you to make these adjustments to the preliminary 
exit fee estimate that is disclosed in the information statement, the 
final exit fee calculation, and the calculations of the value of 
equities held by dissenting stockholders, Farm Credit institutions that 
choose to have their equities retired at termination, and reaffiliating 
associations.

[67 FR 17909, Apr. 12, 2002, as amended at 71 FR 76118, Dec. 20, 2006]



Sec. 611.1255  Exit fee calculation.

    (a) Final exit fee calculation--terminating association. Calculate 
the final exit fee in the following order:
    (1) Base your exit fee calculation on the average daily balances of 
assets and liabilities for the 12-month period preceding the termination 
date. Assume for this calculation that you have not paid or accrued the 
items described in paragraph (a)(4)(ii) and (iii) of this section.

[[Page 93]]

    (2) Any amounts we refer to in this section are average daily 
balances unless we specify that they are not. Amounts that are not 
average daily balances will be referred to as ``dollar amount.''
    (3) Compute the average daily balances based on financial statements 
that comply with GAAP. The financial statements, as of the termination 
date, must be independently audited by a qualified public accountant.
    (4) Make adjustments to assets and liabilities as follows:
    (i) Add back expenses related to the termination. Related expenses 
include, but are not limited to, legal services, accounting services, 
tax services, studies, auditing, business planning, payments of 
severance and special retirements, equity holder meetings, and 
application fees for the termination and reorganization. Do not add back 
to assets expenses related to a requirement by the FCA to engage 
independent experts to conduct assessments, analyses, or studies, or to 
request rulings that solely address the impact of the termination on the 
System or parties other than the terminating institution and its 
stockholders.
    (ii) Subtract from assets the dollar amount of current and deferred 
tax expenses, if any, due to the termination.
    (iii) Add to assets the dollar amount of current and deferred tax 
benefits, if any, due to the termination.
    (iv) Subtract from liabilities any liability that we treat as 
regulatory capital under the capital or collateral requirements in 
subparts H and K of part 615 of this chapter.
    (v) Make the adjustments that we require under Sec. 611.1250(c). For 
the final exit fee, we will review and may require additional 
adjustments for transactions between the date you adopted the 
termination resolution and the termination date.
    (5) After making these adjustments to assets and liabilities, 
subtract liabilities from assets. This is your total capital for 
purposes of termination.
    (6) Multiply assets by 6 percent, and subtract this amount from 
total capital. This is your final exit fee.
    (b) Final exit fee calculation--terminating bank. (1) The individual 
exit fees of affiliated associations that are terminating with you must 
be calculated as described in paragraph (a) of this section.
    (2) Base your exit fee calculation on the average daily balances of 
assets and liabilities for the 12-month period preceding the termination 
date. Assume for this calculation that you have not paid or accrued the 
items described in paragraph (b)(5)(iii)(B) and (b)(5)(iv) of this 
section.
    (3) Any amounts we refer to in this section are average daily 
balances unless we specify that they are not. Amounts that are not 
average daily balances will be referred to as ``dollar amount.''
    (4) Compute the average daily balances based on bank-only financial 
statements that comply with GAAP. The financial statements, as of the 
termination date, must be independently audited by a qualified public 
accountant.
    (5) Make adjustments to assets and liabilities as follows:
    (i) Add back the following to your assets:
    (A) Expenses you have incurred related to termination. Related 
expenses include, but are not limited to, legal services, accounting 
services, tax services, studies, auditing, business planning, payments 
of severance and special retirements, equity holder meetings, and 
application fees for the termination and reorganization. Do not add back 
to assets expenses related to a requirement by the FCA to engage 
independent experts to conduct assessments, analyses, or studies, or to 
request rulings that solely address the impact of the termination on the 
System or parties other than the terminating institution and its 
stockholders.
    (B) Any specific allowance for losses, and a pro rata share of any 
general allowance for losses, on direct loans to associations that are 
paid off or transferred before or at termination.
    (ii) Subtract from your assets and liabilities your direct loans to 
affiliated associations that were paid off or transferred in the 12-
month period before termination or at termination.
    (iii) Subtract from your assets the following:
    (A) Equity investments held in your institution by affiliated 
associations

[[Page 94]]

that you transferred at termination or during the 12 months before 
termination; and
    (B) The dollar amount of current and deferred tax expenses, if any, 
due to the termination;
    (iv) Add to assets, the dollar amount of estimated current and 
deferred tax benefits, if any, due to the termination.
    (v) Subtract from liabilities any liability that we treat as 
regulatory capital (or that we do not treat as a liability) under the 
capital or collateral requirements in subparts H and K of part 615 of 
this chapter.
    (vi) Make the adjustments that we require under Sec. 611.1250(c). 
For the final exit fee, we will review and may require additional 
adjustments for transactions between the date you adopted the 
termination resolution and the termination date.
    (6) After the above adjustments, combine your balance sheet with the 
balance sheets of terminating associations after making the adjustments 
required in paragraph (a) of this section.
    (7) Subtract combined liabilities from combined assets. This is the 
total capital of the combined balance sheet.
    (8) Multiply the assets of the combined balance sheet after the 
above adjustments by 6 percent. Subtract this amount from the total 
capital of the combined balance sheet. This amount is the combined final 
exit fee for your institution and the terminating affiliated 
associations.
    (9) Your final exit fee is the amount by which the combined final 
exit fee exceeds the total of the individual final exit fees of your 
affiliated terminating associations.
    (c) Payment of exit fee. On the termination date, you must:
    (1) Deposit into an escrow account acceptable to us and the FCSIC an 
amount equal to 110 percent of the preliminary exit fee estimate, 
adjusted to account for stock retirements to dissenting stockholders and 
Farm Credit institutions, and any other adjustments we require.
    (2) Deposit into an escrow account acceptable to us an amount equal 
to 110 percent of the equity you must retire for dissenting stockholders 
and System institutions holding stock that would be entitled to a share 
of the remaining assets in a liquidation.
    (d) Pay-out of escrow. Following the independent audit of the 
institution's account balances as of the termination date, we will 
determine the amount of the final exit fee and the amounts owed to 
stockholders to retire their equities. We will then direct the escrow 
agent to:
    (1) Pay the exit fee to the Farm Credit Insurance Fund;
    (2) Pay the amounts owed to dissenting stockholders and Farm Credit 
institutions; and
    (3) Return any remaining amounts to the successor institution.
    (e) Additional payment. If the amount held in escrow is not enough 
to pay the amounts under paragraph (d)(1) and (d)(2) of this section, 
the successor institution must pay any remaining liability to the escrow 
agent for distribution to the appropriate parties. The termination 
application must include evidence that, after termination, the successor 
institution will pay any remaining amounts owed.

[67 FR 17909, Apr. 12, 2002, as amended at 71 FR 76118, Dec. 20, 2006]



Sec. 611.1260  Payment of debts and assessments--terminating
association.

    (a) General rule. If your institution is a terminating association, 
you must pay or make adequate provision for the payment of all 
outstanding debt obligations and assessments.
    (b) No OFI relationship. If the successor institution will not 
become an OFI, you must either:
    (1) Pay debts and assessments owed to your affiliated Farm Credit 
bank at termination; or
    (2) With your affiliated Farm Credit bank's concurrence, arrange to 
pay any obligations or assessments to the bank after termination.
    (c) Obligations to other Farm Credit institutions. You must pay or 
make adequate provision for payment of obligations to any Farm Credit 
institution (other than your affiliated bank) under any loss-sharing or 
other agreement.

[[Page 95]]



Sec. 611.1265  Retirement of a terminating association's investment
in its affiliated bank.

    (a) Safety and soundness restrictions. Notwithstanding anything in 
this subpart to the contrary, we may prohibit a bank from retiring the 
equities you hold in the bank if the retirement would cause the bank to 
fall below its regulatory capital requirements after retirement, or if 
we determine that the bank would be in an unsafe or unsound condition 
after retirement.
    (b) Retirement agreement. Your affiliated bank may retire the 
purchased and allocated equities held by your institution in the bank 
according to the terms of the bank's capital revolvement plan or an 
agreement between you and the bank.
    (c) Retirement in absence of agreement. Your affiliated bank must 
retire any equities not subject to an agreement or revolvement plan no 
later than when you or the successor institution pays off your loan from 
the bank.
    (d) No retirement of unallocated surplus. When your bank retires 
equities you own in the bank, the bank must pay par or face value for 
purchased and allocated equities, less any impairment. The bank may not 
pay you any portion of its unallocated surplus.
    (e) Exclusion of equities from capital ratios. If another Farm 
Credit institution makes an agreement to retire equities you hold in 
that institution after termination, we may require that institution to 
exclude part or all of those equities from assets and capital when the 
institution calculates its regulatory capital under parts 615 and 628 of 
this chapter.

[71 FR 44420, Aug. 4, 2006, as amended at 81 FR 49772, July 28, 2016]



Sec. 611.1270  Repayment of obligations--terminating bank.

    (a) General rule. If your institution is a terminating bank, you 
must pay or make adequate provision for the payment of all outstanding 
debt obligations, and provide for your responsibility for any probable 
contingent liabilities identified.
    (b) Satisfaction of primary liability on consolidated or System-wide 
obligations. After consulting with the other Farm Credit banks, the 
Funding Corporation, and the FCSIC, you must pay or make adequate 
provision for payment of your primary liability on consolidated or 
System-wide obligations in a method that we deem acceptable. Before we 
make a final decision on your proposal and as we deem necessary, we may 
consult with the other Farm Credit banks, the Funding Corporation, and 
the FCSIC.
    (c) Satisfaction of joint and several liability and liability for 
interest on individual obligations. (1) You and the other Farm Credit 
banks must enter into an agreement, which is subject to our approval, 
covering obligations issued under section 4.2 of the Act and outstanding 
on the termination date. The agreement must specify how you and your 
successor institution will make adequate provision for the payment of 
your joint and several liability to holders of obligations other than 
those obligations on which you are primarily liable, in the event we 
make calls for payment under section 4.4 of the Act. You and your 
successor institution must also provide for your liability under section 
4.4(a)(1) of the Act to pay interest on the individual obligations 
issued by other System banks. As a part of the agreement, you must also 
agree that your successor institution will provide ongoing information 
to the Funding Corporation to enable it to fulfill its funding and 
disclosure duties. The Funding Corporation may, at its option, be a 
party to the agreement to the extent necessary to fulfill its duties 
with respect to financing and disclosure.
    (2) If you and the other Farm Credit banks are unable to reach 
agreement within 90 days before the proposed termination date, we will 
specify the manner in which you will make adequate provision for the 
payment of the liabilities in question and how we will make joint and 
several calls for those obligations outstanding on the termination date.
    (3) Notwithstanding any other provision in these regulations, the 
successor institution will be jointly and severally liable for 
consolidated and System-wide debt outstanding on the termination date 
(other than the obligations on which you are primarily liable). The 
successor institution will also be liable

[[Page 96]]

for interest on other banks' individual obligations as described in 
section 4.4(a)(1) of the Act and outstanding on the termination date. 
The termination application must include evidence that the successor 
institution will continue to be liable for consolidated and System-wide 
debt and for interest on other banks' individual obligations.



Sec. 611.1275  Retirement of equities held by other System 
institutions.

    (a) Retirement at option of equity holder. If your institution is a 
terminating institution, System institutions that own your equities have 
the right to require you to retire the equities on the termination date.
    (b) Value of equity holders' interests. You must retire the equities 
in accordance with the liquidation provisions in your bylaws unless we 
determine that the liquidation provisions would result in an inequitable 
distribution to stockholders. If we make such a determination, we will 
require you to distribute the equity in accordance with another method 
that we deem equitable to stockholders. Before you retire any equity, 
you must make the following adjustments to the amount of stockholder 
equity as stated in the financial statements on the termination date:
    (1) Make deductions for any taxes due to the termination that have 
not yet been recorded;
    (2) Deduct the amount of the exit fee; and
    (3) Make any adjustments described under Sec. 611.1250(c) that we 
may require as we deem appropriate.
    (c) Transfer of affiliated association's investment. As an 
alternative to equity retirement, an affiliated association that 
reaffiliates with another Farm Credit bank instead of terminating with 
its bank has the right to require the terminating bank to transfer its 
investment to its new affiliated bank when it reaffiliates. If your 
institution is a terminating bank, at the time of reaffiliation you must 
transfer the purchased and allocated equities held by the association, 
as well as its share of unallocated surplus, to the new affiliated bank. 
Calculate the association's share before deduction of the exit fee as of 
the month end preceding the reaffiliation date (or the termination date 
if it is the same as the reaffiliation date) in accordance with the 
liquidation provisions of your bylaws, unless we determine that the 
liquidation provisions would result in an inequitable distribution. If 
we make such a determination, we will require you to distribute the 
association's share of your unallocated surplus in accordance with 
another method that we deem equitable to stockholders. Before you 
distribute any unallocated surplus, you must make the following 
adjustments to stockholder equity as stated in the financial statements 
as of the month end preceding the reaffiliation date (or the termination 
date if it is the same as the reaffiliation date):
    (1) Add back any taxes due to the termination, and the exit fee; and
    (2) Make any adjustments described under Sec. 611.1250(c) that we 
may require as we deem appropriate.
    (d) Prohibition on certain affiliations. No Farm Credit institution 
may retain an equity interest otherwise prohibited by law in a successor 
institution



Sec. 611.1280  Dissenting stockholders' rights.

    (a) Definition. A dissenting stockholder is an equity holder (other 
than a System institution) in a terminating institution on the 
termination date who either:
    (1) Was eligible to vote on the termination resolution and voted 
against termination;
    (2) Was an equity holder on the voting record date but was not 
eligible to vote; or
    (3) Became an equity holder after the voting record date.
    (b) Retirement at option of a dissenting stockholder. A dissenting 
stockholder may require a terminating institution to retire the 
stockholder's equity interest in the terminating institution.
    (c) Value of a dissenting stockholder's interest. You must pay a 
dissenting stockholder according to the liquidation provision in your 
bylaws, except that you must pay at least par or face value for eligible 
borrower stock (as defined in section 4.9A(d)(2) of the Act). If we 
determine that the liquidation provision is inequitable to stockholders, 
we will require you to calculate their share in accordance with

[[Page 97]]

another formula that we deem equitable.
    (d) Calculation of interest of a dissenting stockholder. Before you 
retire any equity, you must make the following adjustments to the amount 
of stockholder equity as stated in the financial statements on the 
termination date:
    (1) Deduct any taxes due to the termination that you have not yet 
recorded;
    (2) Deduct the amount of the exit fee; and
    (3) Make any adjustments described under Sec. 611.1250(c) that we 
may require as we deem appropriate.
    (e) Form of payment to a dissenting stockholder. You must pay 
dissenting stockholders for their equities as follows:
    (1) Pay cash for the par or face value of purchased stock, less any 
impairment;
    (2) For equities other than purchased equities, you may:
    (i) Pay cash;
    (ii) Cause or otherwise provide for the successor institution to 
issue, on the date of termination, subordinated debt to the stockholder 
with a face value equal to the value of the remaining equities. This 
subordinated debt must have a maturity date of 7 years or less, must 
have priority in liquidation ahead of all equity, and must carry a rate 
of interest not less than the rate (at the time of termination) for debt 
of comparable maturity issued by the U.S. Treasury plus 1 percent; or
    (iii) Provide for a combination of cash and subordinated debt as 
described above.
    (f) Payment to holders of special class of stock. If you have 
adopted bylaws under Sec. 611.1210(f), you must pay a dissenting 
stockholder who owns shares of the special class of stock an amount 
equal to the lower of the par (or face) value or the value of such stock 
as determined under Sec. 611.1280(c) and (d).
    (g) Notice to equity holders. The notice to equity holders required 
in Sec. 611.1240(f) must include a form for stockholders to send back to 
you, stating their intention to exercise dissenters' rights. The notice 
must contain the following information:
    (1) A description of the rights of dissenting stockholders set forth 
in this section and the approximate value per share that a dissenting 
stockholder can expect to receive. State whether the successor 
institution will require borrowers to be stockholders or whether it will 
require stockholders to be borrowers.
    (2) A description of the current book and par value per share of 
each class of equities, and the expected book and market value of the 
stockholder's interest in the successor institution.
    (3) A statement that a stockholder must return the enclosed form to 
you within 30 days if the stockholder chooses to exercise dissenters' 
rights.
    (h) Notice to subsequent equity holders. Equity holders that acquire 
their equities after the termination vote must also receive the notice 
described in paragraph (g) of this section. You must give them at least 
5 business days to decide whether to request retirement of their stock.
    (i) Reconsideration. If a reconsideration vote is held and the 
termination is disapproved, the right of stockholders to exercise 
dissenters' rights is rescinded. If a reconsideration vote is held and 
the termination is approved, you must retire the equities of dissenting 
stockholders as if there had been no reconsideration vote.



Sec. 611.1285  Loan refinancing by borrowers.

    (a) Disclosure of credit and loan information. At the request of a 
borrower seeking refinancing with another System institution before you 
terminate, you must give credit and loan information about the borrower 
to such institution.
    (b) No reassignment of territory. If, at the termination date, we 
have not assigned your territory to another System institution, any 
System institution may lend in your territory, to the extent otherwise 
permitted by the Act and the regulations in this chapter.



Sec. 611.1290  Continuation of borrower rights.

    You may not require a waiver of contractual borrower rights 
provisions as a condition of borrowing from and owning equity in the 
successor institution.

[[Page 98]]

Institutions that become other financing institutions on termination 
must comply with the applicable borrower rights provisions in the Act 
and part 617 of this chapter.



PART 612_STANDARDS OF CONDUCT AND REFERRAL OF KNOWN OR SUSPECTED
CRIMINAL VIOLATIONS--Table of Contents



                     Subpart A_Standards of Conduct

Sec.
612.2130  Definitions.
612.2135  Director and employee responsibilities and conduct--generally.
612.2140  Directors--prohibited conduct.
612.2145  Director reporting.
612.2150  Employees--prohibited conduct.
612.2155  Employee reporting.
612.2157  Joint employees.
612.2160  Institution responsibilities.
612.2165  Policies and procedures.
612.2170  Standards of Conduct Official.
612.2260  Standards of conduct for agents.
612.2270  Purchase of System obligations.

      Subpart B_Referral of Known or Suspected Criminal Violations

612.2300  Purpose and scope.
612.2301  Referrals.
612.2302  Notification of board of directors and bonding company.
612.2303  Institution responsibilities.

    Authority: Secs. 5.9, 5.17, 5.19 of the Farm Credit Act (12 U.S.C. 
2243, 2252, 2254).

    Source: 59 FR 24894, May 13, 1994, unless otherwise noted.



                     Subpart A_Standards of Conduct



Sec. 612.2130  Definitions.

    For purposes of this part, the following terms are defined:
    (a) Agent means any person, other than a director or employee, who 
currently represents a System institution in contacts with third parties 
or who currently provides professional services to a System institution, 
such as legal, accounting, appraisal, and other similar services.
    (b) A conflict of interest or the appearance thereof exists when a 
person has a financial interest in a transaction, relationship, or 
activity that actually affects or has the appearance of affecting the 
person's ability to perform official duties and responsibilities in a 
totally impartial manner and in the best interest of the employing 
institution when viewed from the perspective of a reasonable person with 
knowledge of the relevant facts.
    (c) Controlled entity and entity controlled by mean an entity in 
which the individual, directly or indirectly, or acting through or in 
concert with one or more persons:
    (1) Owns 5 percent or more of the equity;
    (2) Owns, controls, or has the power to vote 5 percent or more of 
any class of voting securities; or
    (3) Has the power to exercise a controlling influence over the 
management of policies of such entity.
    (d) Employee means any salaried officer or part-time, full-time, or 
temporary salaried employee.
    (e) Entity means a corporation, company, association, firm, joint 
venture, partnership (general or limited), society, joint stock company, 
trust (business or otherwise), fund, or other organization or 
institution.
    (f) Family means an individual and spouse and anyone having the 
following relationship to either: parents, spouse, son, daughter, 
sibling, stepparent, stepson, stepdaughter, stepbrother, stepsister, 
half brother, half sister, uncle, aunt, nephew, niece, grandparent, 
grandson, granddaughter, and the spouses of the foregoing.
    (g) Financial interest means an interest in an activity, 
transaction, property, or relationship with a person or an entity that 
involves receiving or providing something of monetary value or other 
present or deferred compensation.
    (h) Financially obligated with means having a joint legally 
enforceable obligation with, being financially obligated on behalf of 
(contingently or otherwise), having an enforceable legal obligation 
secured by property owned by another, or owning property that secures an 
enforceable legal obligation of another.
    (i) Material, when applied to a financial interest or transaction or 
series of transactions, means that the interest or transaction or series 
of transactions is of such magnitude that a reasonable person with 
knowledge of the relevant facts would question the ability of the

[[Page 99]]

person who has the interest or is party to such transaction(s) to 
perform his or her official duties objectively and impartially and in 
the best interest of the institution and its statutory purpose.
    (j) Mineral interest means any interest in minerals, oil, or gas, 
including, but not limited to, any right derived directly or indirectly 
from a mineral, oil, or gas lease, deed, or royalty conveyance.
    (k) OFI means other financing institutions that have established an 
access relationship with a Farm Credit Bank or an agricultural credit 
bank under section 1.7(b)(1)(B) of the Act.
    (l) Officer means the chief executive officer, president, chief 
operating officer, vice president, secretary, treasurer, general 
counsel, chief financial officer, and chief credit officer of each 
System institution, and any person not so designated who holds a similar 
position of authority.
    (m) Ordinary course of business, when applied to a transaction, 
means:
    (1) A transaction that is usual and customary between two persons 
who are in business together; or
    (2) A transaction with a person who is in the business of offering 
the goods or services that are the subject of the transaction on terms 
that are not preferential. Preferential means that the transaction is 
not on the same terms as those prevailing at the same time for 
comparable transactions for other persons who are not directors or 
employees of a System institution.
    (n) Person means individual or entity.
    (o) Relative means any member of the family as defined in paragraph 
(g) of this section.
    (p) Service corporation means each service corporation chartered 
under the Act.
    (q) Standards of Conduct Official means the official designated 
under Sec. 612.2170 of these regulations.
    (r) Supervised institution is a term which only applies within the 
context of a System bank or an employee of a System bank and refers to 
each association supervised by that bank.
    (s) Supervising institution is a term that only applies within the 
context of an association or an employee of an association and refers to 
the bank that supervises that association.
    (t) System institution and institution mean any bank, association, 
or service corporation in the Farm Credit System, including the Farm 
Credit Banks, banks for cooperatives, Agricultural Credit Banks, Federal 
land bank associations, agricultural credit associations, Federal land 
credit associations, production credit associations, the Federal Farm 
Credit Banks Funding Corporation, and service corporations chartered 
under the Act.

[59 FR 24894, May 13, 1994, as amended at 71 FR 5762, Feb. 2, 2006; 78 
FR 31834, May 28, 2013]



Sec. 612.2135  Director and employee responsibilities and conduct
--generally.

    (a) Directors and employees of all System institutions shall 
maintain high standards of industry, honesty, integrity, impartiality, 
and conduct in order to ensure the proper performance of System business 
and continued public confidence in the System and each of its 
institutions. The avoidance of misconduct and conflicts of interest is 
indispensable to the maintenance of these standards.
    (b) To achieve these high standards of conduct, directors and 
employees shall observe, to the best of their abilities, the letter and 
intent of all applicable local, state, and Federal laws and regulations 
and policy statements, instructions, and procedures of the Farm Credit 
Administration and System institutions and shall exercise diligence and 
good judgment in carrying out their duties, obligations, and 
responsibilities.



Sec. 612.2140  Directors--prohibited conduct.

    A director of a System institution shall not:
    (a) Participate, directly or indirectly, in deliberations on, or the 
determination of, any matter affecting, directly or indirectly, the 
financial interest of the director, any relative of the director, any 
person residing in the director's household, any business partner of the 
director, or any entity controlled by the director or such persons 
(alone or in concert), except those matters of general applicability 
that affect all shareholders/borrowers in a

[[Page 100]]

nondiscriminatory way, e.g., a determination of interest rates.
    (b) Divulge or make use of, except in the performance of official 
duties, any fact, information, or document not generally available to 
the public that is acquired by virtue of serving on the board of a 
System institution.
    (c) Use the director's position to obtain or attempt to obtain 
special advantage or favoritism for the director, any relative of the 
director, any person residing in the director's household, any business 
partner of the director, any entity controlled by the director or such 
persons (alone or in concert), any other System institution, or any 
person transacting business with the institution, including borrowers 
and loan applicants.
    (d) Use the director's position or information acquired in 
connection with the director's position to solicit or obtain, directly 
or indirectly, any gift, fee, or other present or deferred compensation 
or for any other personal benefit on behalf of the director, any 
relative of the director, any person residing in the director's 
household, any business partner of the director, any entity controlled 
by the director or such persons (alone or in concert), any other System 
institution, or any person transacting business with the institution, 
including borrowers and loan applicants.
    (e) Accept, directly or indirectly, any gift, fee, or other present 
or deferred compensation that is offered or could reasonably be viewed 
as being offered to influence official action or to obtain information 
that the director has access to by reason of serving on the board of a 
System institution.
    (f) Knowingly acquire, directly or indirectly, except by inheritance 
or through public auction or open competitive bidding available to the 
general public, any interest in any real or personal property, including 
mineral interests, that was owned by the employing, supervising, or any 
supervised institution within the preceding 12 months and that had been 
acquired by any such institution as a result of foreclosure or similar 
action; provided, however, a director shall not acquire any such 
interest in real or personal property if he or she participated in the 
deliberations or decision to foreclose or to dispose of the property or 
in establishing the terms of the sale.
    (g) Directly or indirectly borrow from, lend to, or become 
financially obligated with or on behalf of a director, employee, or 
agent of the employing, supervising, or a supervised institution or a 
borrower or loan applicant of the employing institution, unless:
    (1) The transaction is with a relative or any person residing in the 
director's household;
    (2) The transaction is undertaken in an official capacity in 
connection with the institution's discounting, lending, or participation 
relationships with OFIs and other lenders; or
    (3) The Standards of Conduct Official determines, pursuant to 
policies and procedures adopted by the board, that the potential for 
conflict is insignificant because the transaction is in the ordinary 
course of business or is not material in amount and the director does 
not participate in the determination of any matter affecting the 
financial interests of the other party to the transaction except those 
matters affecting all shareholders/borrowers in a nondiscriminatory way.
    (h) Violate an institution's policies and procedures governing 
standards of conduct.



Sec. 612.2145  Director reporting.

    (a) Annually, as of the institution's fiscal year end, and at such 
other times as may be required to comply with paragraph (c) of this 
section, each director shall file a written and signed statement with 
the Standards of Conduct Official that fully discloses:
    (1) The names of any immediate family members as defined in 
Sec. 620.1(e) of this chapter, or affiliated organizations, as defined 
in Sec. 620.1(a) of this chapter, who had transactions with the 
institution at any time during the year;
    (2) Any matter required to be disclosed by Sec. 620.6 (f) of this 
chapter; and
    (3) Any additional information the institution may require to make 
the disclosures required by part 620 of this chapter.

[[Page 101]]

    (b) Each director shall, at such intervals as the institution's 
board shall determine is necessary to effectively enforce this 
regulation and the institution's standards-of-conduct policy adopted 
pursuant to Sec. 612.2165, file a written and signed statement with the 
Standards of Conduct Official that contains those disclosures required 
by the regulations and such policy. At a minimum, these requirements 
shall include:
    (1) The name of any relative or any person residing in the 
director's household, business partner, or any entity controlled by the 
director or such persons (alone or in concert) if the director knows or 
has reason to know that such individual or entity transacts business 
with the institution or any institution supervised by the director's 
institution; and
    (2) The name and the nature of the business of any entity in which 
the director has a material financial interest or on whose board the 
director sits if the director knows or has reason to know that such 
entity transacts business with:
    (i) The director's institution or any institution supervised by the 
director's institution; or
    (ii) A borrower of the director's institution or any institution 
supervised by the director's institution.
    (c) Any director who becomes or plans to become involved in any 
relationship, transaction, or activity that is required to be reported 
under this section or could constitute a conflict of interest shall 
promptly report such involvement in writing to the Standards of Conduct 
Official for a determination of whether the relationship, transaction, 
or activity is, in fact, a conflict of interest.
    (d) Unless a disclosure as a director candidate under part 620 of 
this chapter has been made within the preceding 180 days, a newly 
elected or appointed director shall report matters required to be 
reported in paragraphs (a), (b), and (c) of this section to the 
Standards of Conduct Official within 30 days after the election or 
appointment and thereafter shall comply with the requirements of this 
section.

[59 FR 24894, May 13, 1994, as amended at 77 FR 60596, Oct. 3, 2012]



Sec. 612.2150  Employees--prohibited conduct.

    An employee of a System institution shall not:
    (a) Participate, directly or indirectly, in deliberations on, or the 
determination of, any matter affecting, directly or indirectly, the 
financial interest of the employee, any relative of the employee, any 
person residing in the employee's household, any business partner of the 
employee, or any entity controlled by the employee or such persons 
(alone or in concert), except those matters of general applicability 
that affect all shareholders/borrowers in a nondiscriminating way, e.g. 
a determination of interest rates.
    (b) Divulge or make use of, except in the performance of official 
duties, any fact, information, or document not generally available to 
the public that is acquired by virtue of employment with a System 
institution.
    (c) Use the employee's position to obtain or attempt to obtain 
special advantage or favoritism for the employee, any relative of the 
employee, any person residing in the employee's household, any business 
partner of the employee, any entity controlled by the employee or such 
persons (alone or in concert), any other System institution, or any 
person transacting business with the institution, including borrowers 
and loan applicants.
    (d) Serve as an officer or director of an entity other than a System 
institution that transacts business with a System institution in the 
district or of any commercial bank, savings and loan, or other non-
System financial institution, except employee credit unions. For the 
purposes of this paragraph, ``transacts business'' does not include 
loans by a System institution to a family-owned entity, service on the 
board of directors of the Federal Agricultural Mortgage Corporation, or 
transactions with nonprofit entities or entities in which the System 
institution has an ownership interest. With the prior approval of the 
board of the employing institution, an employee of a Farm Credit Bank or 
association may serve as a director of a cooperative that borrows from a 
bank for cooperatives. Prior to approving an employee request, the board 
shall determine

[[Page 102]]

whether the employee's proposed service as a director is likely to cause 
the employee to violate any regulations in this part or the 
institution's policies, e.g., the requirements relating to devotion of 
time to official duties.
    (e) Use the employee's position or information acquired in 
connection with the employee's position to solicit or obtain any gift, 
fee, or other present or deferred compensation or for any other personal 
benefit for the employee, any relative of the employee, any person 
residing in the employee's household, any business partner of the 
employee, any entity controlled by the employee or such persons (alone 
or in concert), any other System institution, or any person transacting 
business with the institution, including borrowers and loan applicants.
    (f) Accept, directly or indirectly, any gift, fee, or other present 
or deferred compensation that is offered or could reasonably be viewed 
as being offered to influence official action or to obtain information 
the employee has access to by reason of employment with a System 
institution.
    (g) Knowingly acquire, directly or indirectly, except by 
inheritance, any interest in any real or personal property, including 
mineral interests, that was owned by the employing, supervising, or any 
supervised institution within the preceding 12 months and that had been 
acquired by any such institution as a result of foreclosure or similar 
action.
    (h) Directly or indirectly borrow from, lend to, or become 
financially obligated with or on behalf of a director, employee, or 
agent of the employing, supervising, or a supervised institution or a 
borrower or loan applicant of the employing institution, unless:
    (1) The transaction is with a relative or any person residing in the 
employee's household;
    (2) The transaction is undertaken in an official capacity in 
connection with the institution's discounting, lending, or participation 
relationships with OFIs and other lenders; or
    (3) The Standards of Conduct Official determines, pursuant to 
policies and procedures adopted by the board, that the potential for 
conflict is insignificant because the transaction is in the ordinary 
course of business or is not material in amount and the employee does 
not participate in the determination of any matter affecting the 
financial interests of the other party to the transaction except those 
matters affecting all shareholders/borrowers in a nondiscriminatory way.
    (i) Violate an institution's policies and procedures governing 
standards of conduct.
    (j) Act as a real estate agent or broker; provided that this 
paragraph shall not apply to transactions involving the purchase or sale 
of real estate intended for the use of the employee, a member of the 
employee's family, or a person residing in the employee's household.
    (k) Act as an agent or broker in connection with the sale and 
placement of insurance; provided that this paragraph shall not apply to 
the sale or placement of insurance authorized by section 4.29 of the 
Act.

[59 FR 24894, May 13, 1994, as amended at 71 FR 5762, Feb. 2, 2006]



Sec. 612.2155  Employee reporting.

    (a) Annually, as of the institution's fiscal yearend, and at such 
other times as may be required to comply with paragraph (c) of this 
section, each senior officer must file a written and signed statement 
with the Standards of Conduct Official that fully discloses:
    (1) The names of any immediate family members, as defined in 
Sec. 620.1(e) of this chapter, or affiliated organizations, as defined 
in Sec. 620.1(a) of this chapter, who had transactions with the 
institution at any time during the year;
    (2) Any matter required to be disclosed by Sec. 620.6(f) of this 
chapter; and
    (3) Any additional information the institution may require to make 
the disclosures required by part 620 of this chapter.
    (b) Each employee shall, at such intervals as the Board shall 
determine necessary to effectively enforce this regulation and the 
institution's standards-of-conduct policy adopted pursuant to 
Sec. 612.2165, file a written and signed statement with the Standards of 
Conduct Official that contains those disclosures required by the 
regulation

[[Page 103]]

and such policy. At a minimum, these requirements shall include:
    (1) The name of any relative or any person residing in the 
employee's household, any business partner, or any entity controlled by 
the employee or such persons (alone or in concert) if the employee knows 
or has reason to know that such individual or entity transacts business 
with the employing institution or any institution supervised by the 
employing institution; and
    (2) The name and the nature of the business of any entity in which 
the employee has a material financial interest or on whose board the 
employee sits if the employee knows or has reason to know that such 
entity transacts business with:
    (i) The employing institution or any institution supervised by the 
employing institution; or
    (ii) A borrower of the employing institution or any institution 
supervised by the employing institution.
    (c) Any employee who becomes or plans to become involved in any 
relationship, transaction, or activity that is required to be reported 
under this section or could constitute a conflict of interest shall 
promptly report such involvement in writing to the Standards of Conduct 
Official for a determination of whether the relationship, transaction, 
or activity is, in fact, a conflict of interest.
    (d) A newly hired employee shall report matters required to be 
reported in paragraphs (a), (b), and (c) of this section to the 
Standards of Conduct Official 5 business days after starting employment 
and thereafter shall comply with the requirements of this section.

[59 FR 24894, May 13, 1994, as amended at 71 FR 5763, Feb. 2, 2006; 71 
FR 65386, Nov. 8, 2006; 77 FR 60596, Oct. 3, 2012]



Sec. 612.2157  Joint employees.

    No officer of a Farm Credit Bank or an agricultural credit bank may 
serve as an employee of an association in its district and no employee 
of a Farm Credit Bank or an agricultural credit bank may serve as an 
officer of an association in its district. Farm Credit Bank or 
agricultural credit bank employees other than officers may serve as 
employees other than officers of an association in its district provided 
each institution appropriately reflects the expense of such employees in 
its financial statements.



Sec. 612.2160  Institution responsibilities.

    Each institution shall: (a) Ensure compliance with this part by its 
directors and employees and act promptly to preserve the integrity of 
and public confidence in the institution in any matter involving a 
conflict of interest, whether or not specifically addressed by this part 
or the policies and procedures adopted pursuant to Sec. 612.2165;
    (b) Take appropriate measures to ensure that all directors and 
employees are informed of the requirements of this regulation and 
policies and procedures adopted pursuant to Sec. 612.2165;
    (c) Adopt and implement policies and procedures that will preserve 
the integrity of and public confidence in the institution and the System 
pursuant to Sec. 612.2165;
    (d) Designate a Standards of Conduct Official pursuant to 
Sec. 612.2170; and
    (e) Maintain all standards-of-conduct policies and procedures, 
reports, investigations, determinations, and evidence of compliance with 
this part for a minimum of 6 years.



Sec. 612.2165  Policies and procedures.

    (a) Each institution's board of directors shall issue, consistent 
with this part, policies and procedures governing standards of conduct 
for directors and employees.
    (b) Board policies and procedures issued pursuant to paragraph (a) 
of this section shall reflect due consideration of the potential adverse 
impact of any activities permitted under the policies and shall at a 
minimum:
    (1) Establish such requirements and prohibitions as are necessary to 
promote public confidence in the institution and the System, preserve 
the integrity and independence of the supervisory process, and prevent 
the improper use of official property, position, or information. In 
developing such requirements and prohibitions, the institution shall 
address such issues as the hiring of relatives, political activity, 
devotion of time to duty, the exchange of gifts and favors among

[[Page 104]]

directors and employees of the employing, supervising, and supervised 
institution, and the circumstances under which gifts may be accepted by 
directors and employees from outside sources, in light of the foregoing 
objectives;
    (2) Outline authorities and responsibilities of the Standards of 
Conduct Official;
    (3) Establish criteria for business relationships and transactions 
not specifically prohibited by this part between employees or directors 
and borrowers, loan applicants, directors, or employees of the 
employing, supervised, or supervising institutions, or persons 
transacting business with such institutions, including OFIs or other 
lenders having an access or participation relationship;
    (4) Establish criteria under which employees may accept outside 
employment or compensation;
    (5) Establish conditions under which employees may receive loans 
from System institutions;
    (6) Establish conditions under which employees may acquire an 
interest in real or personal property that was mortgaged to a System 
institution at any time within the preceding 12 months;
    (7) Establish conditions under which employees may purchase any real 
or personal property of a System institution acquired by such 
institution for its operations. Farm Credit institutions must use open 
competitive bidding whenever they sell surplus property above a stated 
value (as established by the board) to their employees.
    (8) Provide for a reasonable period of time for directors and 
employees to terminate transactions, relationships, or activities that 
are subject to prohibitions that arise at the time of adoption or 
amendment of the policies.
    (9) Require new directors and new employees involved at the time of 
election or hiring in transactions, relationships, and activities 
prohibited by these regulations or internal policies to terminate such 
transactions within the same time period established for existing 
directors or employees pursuant to paragraph (b)(8) of this section, 
beginning with the commencement of official duties, or such shorter time 
period as the institution may establish.
    (10) Establish procedures providing for a director's or employee's 
recusal from official action on any matter in which he or she is 
prohibited from participating under these regulations or the 
institution's policies.
    (11) Establish documentation requirements demonstrating compliance 
with standards-of-conduct decisions and board policy;
    (12) Establish reporting requirements, consistent with this part, to 
enable the institution to comply with Secs. 620.5 and 620.6 of this 
chapter, monitor conflicts of interest, and monitor recusal compliance;
    (13) Establish appeal procedures available to any employee to whom 
any required approval has been denied;
    (14) Prohibit directors and employees from purchasing or retiring 
any stock in advance of the release of material non-public information 
concerning the institution to other stockholders; and
    (15) Establish when directors and employees may purchase and retire 
their preferred stock in the institution.

[59 FR 24894, May 13, 1994, as amended at 64 FR 43048, Aug. 9, 1999; 70 
FR 53907, Sept. 13, 2005; 77 FR 60596, Oct. 3, 2012]



Sec. 612.2170  Standards of Conduct Official.

    (a) Each institution's board shall designate a Standards of Conduct 
Official who shall:
    (1) Advise directors, director candidates, and employees concerning 
the provisions of this part;
    (2) Receive reports required by this part;
    (3) Make such determinations as are required by this part;
    (4) Maintain records of actions taken to resolve and/or make 
determinations upon each case reported relative to provisions of this 
part;
    (5) Make appropriate investigations, as directed by the 
institution's board; and
    (6) Report promptly, pursuant to part 617 of this chapter, to the 
institution's board and the Office of General Counsel, Farm Credit 
Administration, all cases where:

[[Page 105]]

    (i) A preliminary investigation indicates that a Federal criminal 
statute may have been violated;
    (ii) An investigation results in the removal of a director or 
discharge of an employee; or
    (iii) A violation may have an adverse impact on continued public 
confidence in the System or any of its institutions.
    (b) The Standards of Conduct Official shall investigate or cause to 
be investigated all cases involving:
    (1) Possible violations of criminal statutes;
    (2) Possible violations of Secs. 612.2140 and 612.2150, and 
applicable policies and procedures approved under Sec. 612.2165;
    (3) Complaints received against the directors and employees of such 
institution; and
    (4) Possible violations of other provisions of this part or when the 
activities or suspected activities are of a sensitive nature and could 
affect continued public confidence in the Farm Credit System.
    (c) An association board may comply with this section by contracting 
with the Farm Credit Bank or agricultural credit bank in its district to 
provide a Standards of Conduct Official.



Sec. 612.2260  Standards of conduct for agents.

    (a) Agents of System institutions shall maintain high standards of 
honesty, integrity, and impartiality in order to ensure the proper 
performance of System business and continued public confidence in the 
System and all its institutions. The avoidance of misconduct and 
conflicts of interest is indispensable to the maintenance of these 
standards.
    (b) System institutions shall utilize safe and sound business 
practices in the engagement, utilization, and retention of agents. These 
practices shall provide for the selection of qualified and reputable 
agents. Employing System institutions shall be responsible for the 
administration of relationships with their agents, and shall take 
appropriate investigative and corrective action in the case of a breach 
of fiduciary duties by the agent or failure of the agent to carry out 
other agent duties as required by contract, FCA regulations, or law.
    (c) System institutions shall be responsible for exercising 
corresponding special diligence and control, through good business 
practices, to avoid or control situations that have inherent potential 
for sensitivity, either real or perceived. These areas include the 
employment of agents who are related to directors or employees of the 
institutions; the solicitation and acceptance of gifts, contributions, 
or special considerations by agents; and the use of System and borrower 
information obtained in the course of the agent's association with 
System institutions.



Sec. 612.2270  Purchase of System obligations.

    (a) Employees and directors of System institutions, other than the 
Federal Farm Credit Banks Funding Corporation, may only purchase joint, 
consolidated, or Systemwide obligations that are:
    (1) Part of an offering available to the general public; and
    (2) Purchased through a dealer or dealer bank affiliated with a 
member of the selling group designated by the Federal Farm Credit Banks 
Funding Corporation or purchased in the secondary market.
    (b) No director or employee of the Federal Farm Credit Banks Funding 
Corporation may purchase or otherwise acquire, directly or indirectly, 
except by inheritance, any joint, consolidated, or Systemwide 
obligation.



      Subpart B_Referral of Known or Suspected Criminal Violations

    Source: 62 FR 24566, May 6, 1997, unless otherwise noted. 
Redesignated at 69 FR 10907, Mar. 9, 2004.



Sec. 612.2300  Purpose and scope.

    (a) This part applies to all institutions of the Farm Credit System 
as defined in section 1.2(a) of the Farm Credit Act of 1971, as amended, 
(Act) (12 U.S.C. 2002(a)) including, but not limited to, associations, 
banks, service corporations chartered under section 4.25 of the Act, the 
Federal Farm Credit Banks Funding Corporation, the

[[Page 106]]

Farm Credit Leasing Services Corporation, and the Federal Agricultural 
Mortgage Corporation (hereinafter, institutions). The purposes of this 
part are to ensure public confidence in the Farm Credit System, to 
ensure the reporting of known or suspected criminal activity, to reduce 
potential losses to institutions, and to ensure the safety and soundness 
of institutions. This part requires that institutions use the Farm 
Credit Administration Criminal Referral Form (hereinafter FCA Referral 
Form) to notify the appropriate Federal authorities when any known or 
suspected Federal criminal violations of the type described in 
Sec. 612.2301 are discovered by institutions.
    (b) The specific referral requirements of this part apply to known 
or suspected criminal violations of the United States Code involving the 
assets, operations, or affairs of an institution. This part prescribes 
procedures for referring those violations to the proper Federal 
authorities and the Farm Credit Administration. No specific procedural 
requirements apply to the referral of violations of State or local laws.
    (c) Nothing in this part should be construed as reducing in any way 
an institution's ability to report known or suspected criminal 
activities to the appropriate investigatory or prosecuting authorities, 
whether Federal, State, or local, even when the circumstances in which a 
report is required under Sec. 612.2301 are not present.
    (d) It shall be the responsibility of each System institution to 
determine whether there appears to be a reasonable basis to conclude 
that a criminal violation has been committed and, if so, to report the 
matter to the proper law enforcement authorities for consideration of 
prosecution.
    (e) Each referral required by Sec. 612.2301(a) shall be made on the 
FCA Referral Form in accordance with the FCA Referral Form instructions 
relating to its filing and distribution.

[62 FR 24566, May 6, 1997. Redesignated and amended at 69 FR 10907, Mar. 
9, 2004; 75 FR 35968, June 24, 2010.]



Sec. 612.2301  Referrals.

    (a) Each institution and its board of directors shall exercise due 
diligence to ensure the discovery, appropriate investigation, and 
reporting of criminal activity. Within 30 calendar days of determining 
that there is a known or suspected criminal violation of the United 
States Code involving or affecting its assets, operations, or affairs, 
the institution shall refer such criminal violation to the appropriate 
regional offices of the United States Attorney, and the Federal Bureau 
of Investigation or the United States Secret Service or both, using the 
FCA Referral Form. A copy of the completed FCA Referral Form, 
accompanied by any relevant documentation, shall be provided at the same 
time to the Farm Credit Administration's Office of General Counsel. In 
the event that a Farm Credit bank makes a loan through a Federal land 
bank association which services the loan, the Federal land bank 
association must inform the Farm Credit bank of any known or suspected 
violation involving that loan and the Farm Credit bank shall refer the 
violation to Federal law enforcement authorities under this section. A 
report is required in circumstances where there is:
    (1) Any known or suspected criminal activity (e.g., theft, 
embezzlement), mysterious disappearance, unexplained shortage, 
misapplication, or other defalcation of property and/or funds, 
regardless of amount, where an institution employee, officer, director, 
agent, or other person participating in the conduct of the affairs of 
such an institution is suspected;
    (2) Any known or suspected criminal activity involving an actual or 
potential loss of $5,000 or more, through false statements or other 
fraudulent means, where the institution has a substantial basis for 
identifying a possible suspect or group of suspects and the suspect(s) 
is not an institution employee, officer, director, agent, or other 
person participating in the conduct of the affairs of such an 
institution;
    (3) Any known or suspected criminal activity involving an actual or 
potential loss of $25,000 or more, through false statements or other 
fraudulent means, where the institution has no substantial basis for 
identifying a possible suspect or group of suspects; or

[[Page 107]]

    (4) Any known or suspected criminal activity involving a financial 
transaction in which the institution was used as a conduit for such 
criminal activity (such as money laundering/structuring schemes).
    (b) In circumstances where there is a known or suspected violation 
of State or local criminal law, the institution shall notify the 
appropriate State or local law enforcement authorities.
    (c) In addition to the requirements of paragraph (a) of this 
section, the institution shall immediately notify by telephone the 
appropriate Federal law enforcement authorities and FCA offices 
specified on the FCA Referral Form upon determining that a known or 
suspected criminal violation of Federal law requiring urgent attention 
has occurred or is ongoing. Such cases include, but are not limited to, 
those where:
    (1) There is a likelihood that the suspect(s) will flee;
    (2) The magnitude or the continuation of the known or suspected 
criminal violation may imperil the institution's continued operation; or
    (3) Key institution personnel are involved.



Sec. 612.2302  Notification of board of directors and bonding company.

    (a) The institution's board of directors shall be promptly notified 
of any criminal referral by the institution, except that if the criminal 
referral involves a member of the board of directors, discretion may be 
exercised in notifying such member of the referral.
    (b) The institution involved shall promptly make all required 
notifications under any applicable surety bond or other contract for 
protection.



Sec. 612.2303  Institution responsibilities.

    Each institution shall establish effective policies and procedures 
designed to ensure compliance with this part, including, but not limited 
to, adequate internal controls.



PART 613_ELIGIBILITY AND SCOPE OF FINANCING--Table of Contents



    Subpart A_Financing Under Titles I and II of the Farm Credit Act

Sec.
613.3000  Financing for farmers, ranchers, and aquatic producers or 
          harvesters.
613.3005  Lending objective.
613.3010  Financing for processing or marketing operations.
613.3020  Financing for farm-related service businesses.
613.3030  Rural home financing.

  Subpart B_Financing for Banks Operating Under Title III of the Farm 
                               Credit Act

613.3100  Domestic lending.
613.3200  International lending.

 Subpart C_Similar Entity Authority Under Sections 3.1(11)(B) and 4.18A 
                               of the Act

613.3300  Participations and other interests in loans to similar 
          entities.

    Authority: Secs. 1.5, 1.7, 1.9, 1.10, 1.11, 2.2, 2.4, 2.12, 3.1, 
3.7, 3.8, 3.22, 4.18A, 4.25, 4.26, 4.27, 5.9, 5.17 of the Farm Credit 
Act (12 U.S.C. 2013, 2015, 2017, 2018, 2019, 2073, 2075, 2093, 2122, 
2128, 2129, 2143, 2206a, 2211, 2212, 2213, 2243, 2252).



    Subpart A_Financing Under Titles I and II of the Farm Credit Act

    Source: 62 FR 4441, Jan. 30, 1997, unless otherwise noted.



Sec. 613.3000  Financing for farmers, ranchers, and aquatic producers
or harvesters.

    (a) Definitions. For purposes of this subpart, the following 
definitions apply:
    (1) Bona fide farmer or rancher means a person owning agricultural 
land or engaged in the production of agricultural products, including 
aquatic products under controlled conditions.
    (2) Legal entity means any partnership, corporation, estate, trust, 
or other legal entity that is established pursuant to the laws of the 
United States, any State thereof, the Commonwealth of Puerto Rico, the 
District of Columbia, or any tribal authority and is legally authorized 
to conduct a business.
    (3) Person means a legal entity or an individual who is a citizen of 
the

[[Page 108]]

United States or a foreign national who has been lawfully admitted into 
the United States either for permanent residency pursuant to 8 U.S.C. 
1101(a)(20) or on a visa pursuant to a provision in 8 U.S.C. 1101(a)(15) 
that authorizes such individual to own property or operate or manage a 
business or a legal entity.
    (4) Producer or harvester of aquatic products means a person engaged 
in producing or harvesting aquatic products for economic gain in open 
waters under uncontrolled conditions.
    (b) Eligible borrower. Farm Credit institutions that operate under 
titles I or II of the Act may provide financing to a bona fide farmer or 
rancher, or producer or harvester of aquatic products for any 
agricultural or aquatic purpose and for other credit needs.

[62 FR 4441, Jan. 30, 1997, as amended at 73 FR 30475, May 28, 2008]



Sec. 613.3005  Lending objective.

    It is the objective of each bank and association, except for banks 
for cooperatives, to provide full credit, to the extent of 
creditworthiness, to the full-time bona fide farmer (one whose primary 
business and vocation is farming, ranching, or producing or harvesting 
aquatic products); and conservative credit to less than full-time 
farmers for agricultural enterprises, and more restricted credit for 
other credit requirements as needed to ensure a sound credit package or 
to accommodate a borrower's needs as long as the total credit results in 
being primarily an agricultural loan. However, the part-time farmer who 
needs to seek off-farm employment to supplement farm income or who 
desires to supplement off-farm income by living in a rural area and is 
carrying on a valid agricultural operation, shall have availability of 
credit for mortgages, other agricultural purposes, and family needs in 
the preferred position along with full-time farmers. Loans to farmers 
shall be on an increasingly conservative basis as the emphasis moves 
away from the full-time bona fide farmer to the point where agricultural 
needs only will be financed for the applicant whose business is 
essentially other than farming. Credit shall not be extended where 
investment in agricultural assets for speculative appreciation is a 
primary factor.



Sec. 613.3010  Financing for processing or marketing operations.

    (a) Eligible borrowers. A borrower is eligible for financing for a 
processing or marketing operation under titles I and II of the Act only 
if the borrower:
    (1) Is a bona fide farmer, rancher, or producer or harvester of 
aquatic products who regularly produces some portion of the throughput 
used in the processing or marketing operation; or
    (2) Is a legal entity not eligible under paragraph (a)(1) of this 
section in which eligible borrowers under Sec. 613.3000(b) own more than 
50 percent of the voting stock or equity and regularly produce some 
portion of the throughput used in the processing or marketing operation; 
or
    (3) Is a legal entity not eligible under paragraph (a)(1) of this 
section in which eligible borrowers under Sec. 613.3000(b) own 50 
percent or less of the voting stock or equity, regularly produce some 
portion of the throughput used in the processing or marketing operation 
and:
    (i) Exercise majority voting control over the legal entity; or
    (ii) Constitute a majority of the directors of a corporation, 
general partners of a limited partnership, or managing members of a 
limited liability company who exercise control over the legal entity by 
determining and overseeing the policies, business practices, management, 
and decision-making process of the legal entity; or
    (4) Is a legal entity not eligible under paragraph (a)(1) of this 
section in which eligible borrowers under Sec. 613.3000(b) meet all of 
the following criteria:
    (i) Own at least 25 percent of the voting stock or equity in the 
processing or marketing operation;
    (ii) Regularly produce 20 percent or more of the throughput used in 
the processing or marketing operation;
    (iii) Maintain representation on the board of directors or in the 
applicable management structure of the entity.
    (5) Is a legal entity not eligible under paragraph (a)(1) of this 
section that is a direct extension or outgrowth of an

[[Page 109]]

eligible borrower's operation and meets all of the following criteria:
    (i) The legal entity was created for the primary purpose of 
processing or marketing the eligible borrower's throughput and would not 
exist but for the eligible borrower's involvement,
    (ii) The legal entity fulfills a business need and supports the 
operation of the eligible borrower through product branding or other 
value-added business activity directly related to the operations of the 
eligible borrower,
    (iii) The legal entity and the eligible borrower coordinate to 
operate in a functionally integrated manner, and
    (iv) The legal entity regularly receives throughput produced by the 
eligible borrower representing either:
    (A) At least 20 percent of the throughput used by the legal entity 
in the processing or marketing operation; or
    (B) At least 50 percent of the eligible borrower's total output of 
the commodity processed or marketed.
    (b) Portfolio restrictions for certain processing and marketing 
loans. Processing or marketing loans to eligible borrowers who regularly 
supply less than 20 percent of the throughput are subject to the 
following restrictions:
    (1) Bank limitation. The aggregate of such processing and marketing 
loans made by a Farm Credit bank shall not exceed 15 percent of all its 
outstanding retail loans at the end of the preceding fiscal year.
    (2) Association limitation. The aggregate of such processing and 
marketing loans made by all direct lender associations affiliated with 
the same Farm Credit bank shall not exceed 15 percent of the aggregate 
of their outstanding retail loans at the end of the preceding fiscal 
year. Each Farm Credit bank, in conjunction with all its affiliated 
direct lender associations, shall ensure that such processing or 
marketing loans are equitably allocated among its affiliated direct 
lender associations.
    (3) Calculation of outstanding retail loans. For the purposes of 
this paragraph, ``outstanding retail loans'' includes loans, loan 
participations, and other interests in loans that are either bought 
without recourse or sold with recourse.
    (c) Reporting requirements. Each System institution shall include 
information on loans made under authority of this section in the Reports 
of Condition and Performance required under Sec. 621.12 of this chapter, 
in the format prescribed by FCA reporting instructions.
    (d) Institution policies. The board of directors of each System 
institution making processing and marketing loans to legal entities 
under authority of this section must adopt a policy that addresses 
eligibility requirements for such entities and ensures that the 
institution, at a minimum, develops and implements:
    (1) Procedures on how, at or before the time a loan is made, the 
institution will document:
    (i) Eligible borrower ownership, control, throughput, integration of 
operations and other factors, as applicable, sufficient to establish 
eligibility of legal entities at the time a loan is made under this 
section; and
    (ii) Each legal entity's plan and intent for maintaining eligible 
borrower ownership, control, throughput, and integration of operations, 
as applicable, during the duration of the loan;
    (2) Procedures that encourage financing under paragraph (a)(4) of 
this section of credit-worthy entities whose operations directly benefit 
producers, have local community investment support and provide 
accessible ownership opportunities for local farmers and ranchers.
    (3) Procedures for determining functional integration for loans made 
under paragraph (a)(5) of this section that require consideration of all 
relevant facts and circumstances, which include the extent to which:
    (i) The operations share resources such as management, employees, 
facilities, and equipment;
    (ii) The operations are conducted in coordination with or reliance 
upon each other; and
    (iii) The eligible borrower and legal entity are dependent upon each 
other for economic success.
    (4) Portfolio restrictions necessary to comply with paragraph (b) of 
this section and any board-defined limits on financing provided under 
this section; and

[[Page 110]]

    (5) Reporting requirements necessary to comply with paragraph (c) of 
this section and any board-defined reporting on financing provided under 
this section.

[62 FR 4441, Jan. 30, 1997, as amended at 73 FR 30475, May 28, 2008]



Sec. 613.3020  Financing for farm-related service businesses.

    (a) Eligibility. An individual or legal entity that furnishes farm-
related services to farmers and ranchers that are directly related to 
their agricultural production is eligible to borrow from a Farm Credit 
bank or association that operates under titles I or II of the Act.
    (b) Purposes of financing. A Farm Credit Bank, agricultural credit 
bank, or direct lender association may finance:
    (1) All of the farm-related business activities of an eligible 
borrower who derives more than 50 percent of its annual income (as 
consistently measured on either a gross sales or net sales basis) from 
furnishing farm-related services that are directly related to the 
agricultural production of farmers and ranchers; or
    (2) Only the farm-related services activities of an eligible 
borrower who derives 50 percent or less of its annual income (as 
consistently measured on either a gross sales or net sales basis) from 
furnishing farm-related services that are directly related to the 
agricultural production of farmers and ranchers.
    (c) Limitation. The authority of Farm Credit banks and associations 
operating under section 1.7(a) of the Act to finance eligible farm-
related service businesses under paragraphs (b)(1) and (b)(2) of this 
section is limited to necessary capital structures, equipment, and 
initial working capital.

[62 FR 4441, Jan. 30, 1997, as amended at 66 FR 28643, May 24, 2001]



Sec. 613.3030  Rural home financing.

    (a) Definitions. (1) Rural homeowner means an individual who resides 
in a rural area and is not a bona fide farmer, rancher, or producer or 
harvester of aquatic products.
    (2) Rural home means a single-family moderately priced dwelling 
located in a rural area that will be owned and occupied as the rural 
homeowner's principal residence.
    (3) Rural area means open country within a State or the Commonwealth 
of Puerto Rico, which may include a town or village that has a 
population of not more than 2,500 persons.
    (4) Moderately priced means the price of any rural home that either:
    (i) Satisfies the criteria in section 8.0 of the Act pertaining to 
rural home loans that collateralize securities that are guaranteed by 
the Federal Agricultural Mortgage Corporation; or
    (ii) Is otherwise determined to be moderately priced for housing 
values for the rural area where it is located, as documented by data 
from a credible, independent, and recognized national or regional 
source, such as a Federal, State, or local government agency, or an 
industry source. Housing values at or below the 75th percentile of 
values reflected in such data will be deemed moderately priced.
    (b) Eligibility. Any rural homeowner is eligible to obtain financing 
on a rural home. No borrower shall have a loan from the Farm Credit 
System on more than one rural home at any one time.
    (c) Purposes of financing. Loans may be made to rural homeowners for 
the purpose of buying, building, remodeling, improving, repairing rural 
homes, and refinancing existing indebtedness thereon.
    (d) Portfolio limitations. (1) The aggregate of retail rural home 
loans by any Farm Credit Bank or agricultural credit bank shall not 
exceed 15 percent of the total of all of its outstanding loans at any 
one time.
    (2) The aggregate of rural home loans made by each direct lender 
association shall not exceed 15 percent of the total of its outstanding 
loans at the end of its preceding fiscal year, except with the prior 
approval of its funding bank.
    (3) The aggregate of rural home loans made by all direct lender 
associations that are funded by the same Farm Credit bank shall not 
exceed 15 percent of the total outstanding loans of all such 
associations at the end of the funding bank's preceding fiscal year.

[62 FR 4441, Jan. 30, 1997, as amended at 66 FR 28643, May 24, 2001]

[[Page 111]]



  Subpart B_Financing for Banks Operating Under Title III of the Farm 
                               Credit Act

    Source: 62 FR 4442, Jan. 30, 1997, unless otherwise noted.



Sec. 613.3100  Domestic lending.

    (a) Definitions. For purposes of this subpart, the following 
definitions apply:
    (1) Cooperative means any association of farmers, ranchers, 
producers or harvesters of aquatic products, or any federation of such 
associations, or a combination of such associations and farmers, 
ranchers, or producers or harvesters of aquatic products that conducts 
business for the mutual benefit of its members and has the power to:
    (i) Process, prepare for market, handle, or market farm or aquatic 
products;
    (ii) Purchase, test, grade, process, distribute, or furnish farm or 
aquatic supplies; or
    (iii) Furnish business and financially related services to its 
members.
    (2) Farm or aquatic supplies and farm or aquatic business services 
are any goods or services normally used by farmers, ranchers, or 
producers and harvesters of aquatic products in their business 
operations, or to improve the welfare or livelihood of such persons.
    (3) Public utility means a cooperative or other entity that is 
licensed under Federal, State, or local law to provide electric, 
telecommunication, cable television, water, or waste treatment services.
    (4) Rural area means all territory of a State that is not within the 
outer boundary of any city or town having a population of more than 
20,000 inhabitants based on the latest decennial census of the United 
States.
    (5) Service cooperative means a cooperative that is involved in 
providing business and financially related services (other than public 
utility services) to farmers, ranchers, aquatic producers or harvesters, 
or their cooperatives.
    (b) Cooperatives and other entities that serve agricultural or 
aquatic producers--(1) Eligibility of cooperatives. A bank for 
cooperatives or an agricultural credit bank may lend to a cooperative 
that satisfies the following requirements:
    (i) Unless the bank's board of directors establishes by resolution a 
higher voting control threshold for any type of cooperative, the 
percentage of voting control of the cooperative held by farmers, 
ranchers, producers or harvesters of aquatic products, or cooperatives 
shall be 80 percent except:
    (A) Sixty (60) percent for a service cooperative;
    (B) Sixty (60) percent for local farm supply cooperatives that have 
historically served the needs of a community that would not be 
adequately served by other suppliers and have experienced a reduction in 
the percentage of membership by agricultural or aquatic producers due to 
changed circumstances beyond their control; and
    (C) Sixty (60) percent for local farm supply cooperatives that 
provide or will provide needed services to a community, and are or will 
be in competition with a cooperative specified in 
Sec. 613.3100(b)(1)(i)(B);
    (ii) The cooperative deals in farm or aquatic products, or products 
processed therefrom, farm or aquatic supplies, farm or aquatic business 
services, or financially related services with or for members in an 
amount at least equal in value to the total amount of such business it 
transacts with or for non-members, excluding from the total of member 
and non-member business, transactions with the United States, or any 
agencies or instrumentalities thereof, or services or supplies furnished 
by a public utility; and
    (iii) The cooperative complies with one of the following two 
conditions:
    (A) No member of the cooperative shall have more than one vote 
because of the amount of stock or membership capital owned therein; or
    (B) The cooperative restricts dividends on stock or membership 
capital to the maximum percentage per year permitted by applicable state 
law.
    (iv) Any cooperative that has received a loan from a bank for 
cooperatives or an agricultural credit bank shall, without regard to the 
requirements in paragraph (b)(1) of this section, continue to be 
eligible for as long as more than 50 percent (or such higher percentage 
as is established by the bank board) of the voting control of the 
cooperative is held by farmers,

[[Page 112]]

ranchers, producers or harvesters of aquatic products, or other eligible 
cooperatives.
    (2) Other eligible entities. The following entities are eligible to 
borrow from banks for cooperatives and agricultural credit banks:
    (i) Any legal entity that holds more than 50 percent of the voting 
control of a cooperative that is an eligible borrower under paragraph 
(b)(1) of this section and uses the proceeds of the loan to fund the 
activities of its cooperative subsidiary on the terms and conditions 
specified by the bank;
    (ii) Any legal entity in which an eligible cooperative (or a 
subsidiary or other entity in which an eligible cooperative has an 
ownership interest) has an ownership interest, provided that if the 
percentage of ownership attributable to the eligible cooperative is less 
than 50 percent, financing may not exceed the percentage of ownership 
attributable to the eligible cooperative multiplied by the value of the 
total assets of such entity; or
    (iii) Any creditworthy private entity operated on a non-profit basis 
that satisfies the requirements for a service cooperative and complies 
with the requirements of either paragraphs (b)(1)(i)(A) and (b)(1)(iii) 
of this section, or paragraph (b)(1)(iv) of this section, and any 
subsidiary of such entity. An entity that is eligible to borrow under 
this paragraph shall be organized to benefit agriculture in furtherance 
of the welfare of the farmers, ranchers, and aquatic producers or 
harvesters who are its members.
    (c) Electric and telecommunication utilities--(1) Eligibility. A 
bank for cooperatives or an agricultural credit bank may lend to:
    (i) Electric and telephone cooperatives as defined by section 
3.8(a)(4)(A) of the Act that satisfy the eligibility criteria in 
paragraph (b)(1) of this section;
    (ii) Cooperatives and other entities that:
    (A) Have received a loan, loan commitment, insured loan, or loan 
guarantee from the Rural Utilities Service of the United States 
Department of Agriculture to finance rural electric and 
telecommunication services;
    (B) Have received a loan or a loan commitment from the Rural 
Telephone Bank of the United States Department of Agriculture; or
    (C) Are eligible under the Rural Electrification Act of 1936, as 
amended, for a loan, loan commitment, or loan guarantee from the Rural 
Utilities Service or the Rural Telephone Bank.
    (iii) The subsidiaries of cooperatives or other entities that are 
eligible under paragraph (c)(1)(ii) of this section.
    (iv) Any legal entity that holds more than 50 percent of the voting 
control of any public utility that is an eligible borrower under 
paragraph (c)(1)(ii) of this section, and uses the proceeds of the loan 
to fund the activities of the eligible subsidiary on the terms and 
conditions specified by the bank.
    (v) Any legal entity in which an eligible utility under paragraph 
(c)(1)(ii) of this section (or a subsidiary or other entity in which an 
eligible utility under paragraph (c)(1)(ii) has an ownership interest) 
has an ownership interest, provided that if the percentage of ownership 
attributable to the eligible utility is less than 50 percent, financing 
may not exceed the percentage of ownership attributable to the eligible 
utility multiplied by the value of the total assets of such entity.
    (2) Purposes for financing. A bank for cooperatives or agricultural 
credit bank may extend credit to entities that are eligible to borrow 
under paragraph (c)(1) of this section in order to provide electric or 
telecommunication services in a rural area. A subsidiary that is 
eligible to borrow under paragraph (c)(1)(iii) of this section may also 
obtain financing from a bank for cooperatives or agricultural credit 
bank for energy-related or public utility-related purposes that cannot 
be financed by the lenders referred to in paragraph (c)(1)(ii), 
including, without limitation, financing to operate a licensed cable 
television utility.
    (d) Water and waste disposal facilities--(1) Eligibility. A 
cooperative or a public agency, quasi-public agency, body, or other 
public or private entity that, under the authority of state or local 
law, establishes and operates water and waste disposal facilities in a 
rural area, as that term is defined by paragraph

[[Page 113]]

(a)(4) of this section, is eligible to borrow from a bank for 
cooperatives or an agricultural credit bank.
    (2) Purposes for financing. A bank for cooperatives or agricultural 
credit bank may extend credit to entities that are eligible under 
paragraph (d)(1) of this section solely for installing, maintaining, 
expanding, improving, or operating water and waste disposal facilities 
in rural areas.
    (e) Domestic lessors. A bank for cooperatives or agricultural credit 
bank may lend to domestic parties to finance the acquisition of 
facilities or equipment that will be leased to shareholders of the bank 
for use in their operations located inside of the United States.

[62 FR 4442, Jan. 30, 1997; 62 FR 33746, June 23, 1997, as amended at 69 
FR 43514, July 21, 2004; 71 FR 65386, Nov. 8, 2006]



Sec. 613.3200  International lending.

    (a) Definitions. For the purpose of this section only, the following 
definitions apply:
    (1) Agricultural supply includes:
    (i) A farm supply; and
    (ii) Agriculture-related processing equipment, agriculture-related 
machinery, and other capital goods related to the storage or handling of 
agricultural commodities or products.
    (2) Farm supply refers to an input that is used in a farming or 
ranching operation.
    (b) Import transactions. The following parties are eligible to 
borrow from a bank for cooperatives or an agricultural credit bank 
pursuant to section 3.7(b) of the Act for the purpose of financing the 
import of agricultural commodities or products therefrom, aquatic 
products, and agricultural supplies into the United States:
    (1) An eligible cooperative as defined by Sec. 613.3100(b);
    (2) A counterparty with respect to a specific import transaction 
with a voting stockholder of the bank for the substantial benefit of the 
shareholder; and
    (3) Any foreign or domestic legal entity in which eligible 
cooperatives hold an ownership interest.
    (c) Export transactions. Pursuant to section 3.7(b)(2) of the Act, a 
bank for cooperatives or an agricultural credit bank is authorized to 
finance the export (including the cost of freight) of agricultural 
commodities or products therefrom, aquatic products, or agricultural 
supplies from the United States to any foreign country. The board of 
directors of each bank for cooperatives and agricultural credit bank 
shall adopt policies that ensure that exports of agricultural products 
and commodities, aquatic products, and agricultural supplies which 
originate from eligible cooperatives are financed on a priority basis. 
The total amount of balances outstanding on loans made under this 
paragraph shall not, at any time, exceed 50 percent of the capital of 
any bank for cooperatives or agricultural credit bank for loans that:
    (1) Finance the export of agricultural commodities and products 
therefrom, aquatic products, or agricultural supplies that are not 
originally sourced from an eligible cooperative; and
    (2) At least 95 percent of the loan amount is not guaranteed by a 
department, agency, bureau, board, or commission of the United States or 
a corporation that is wholly owned directly or indirectly by the United 
States.
    (d) International business operations. A bank for cooperatives or an 
agricultural credit bank may finance a domestic or foreign entity which 
is at least partially owned by eligible cooperatives described in 
Sec. 613.3100(b), and facilitates the international business operations 
of such cooperatives.
    (e) Restrictions. (1) When eligible cooperatives own less than 50 
percent of a foreign or domestic legal entity, the amount of financing 
that a bank for cooperatives or agricultural credit bank may provide to 
the entity for imports, exports, or international business operations 
shall not exceed the percentage of ownership that eligible cooperatives 
hold in such entity multiplied by the value of the total assets of such 
entity; and
    (2) A bank for cooperatives or agricultural credit bank shall not 
finance the relocation of any plant or facility from the United States 
to a foreign country.

[62 FR 4442, Jan. 30, 1997, as amended at 69 FR 43514, July 21, 2004]

[[Page 114]]



 Subpart C_Similar Entity Authority Under Sections 3.1(11)(B) and 4.18A 
                               of the Act



Sec. 613.3300  Participations and other interests in loans to similar
entities.

    (a) Definitions. (1) Participate and participation, for the purpose 
of this section, refer to multi-lender transactions, including 
syndications, assignments, loan participations, subparticipations, other 
forms of the purchase, sale, or transfer of interests in loans, or other 
extensions of credit, or other technical and financial assistance.
    (2) Similar entity means a party that is ineligible for a loan from 
a Farm Credit bank or association, but has operations that are 
functionally similar to the activities of eligible borrowers in that a 
majority of its income is derived from, or a majority of its assets are 
invested in, the conduct of activities that are performed by eligible 
borrowers.
    (b) Similar entity transactions. A Farm Credit bank or a direct 
lender association may participate with a lender that is not a Farm 
Credit System institution in loans to a similar entity that is not 
eligible to borrow directly under Sec. 613.3000, Sec. 613.3010, 
Sec. 613.3020, Sec. 613.3100, or Sec. 613.3200, for purposes similar to 
those for which an eligible borrower could obtain financing from the 
participating FCS institution.
    (c) Restrictions. Participations by a Farm Credit bank or 
association in loans to a similar entity under this section are subject 
to the following limitations:
    (1) Lending limits--(i) Farm Credit banks operating under title I of 
the Act and direct lender associations. The total amount of all loan 
participations that any Farm Credit bank, agricultural credit bank, or 
direct lender association has outstanding under paragraph (b) of this 
section to a single credit risk shall not exceed:
    (A) Ten (10) percent of its total capital; or
    (B) Twenty-five (25) percent of its total capital if a majority of 
voting stockholders voting of the respective Farm Credit bank or direct 
lender association so approve.
    (ii) Farm Credit banks operating under title III of the Act. The 
total amount of all loan participations that any bank for cooperatives 
or agricultural credit bank has outstanding under paragraph (b) of this 
section to a single credit risk shall not exceed 10 percent of its total 
capital;
    (2) Percentage held in the principal amount of the loan. The 
participation interest in the same loan held by one or more Farm Credit 
bank(s) or association(s) shall not, at any time, equal or exceed 50 
percent of the principal amount of the loan; and
    (3) Portfolio limitations. The total amount of participations that 
any Farm Credit bank or direct lender association has outstanding under 
paragraph (b) of this section shall not exceed 15 percent of its total 
outstanding assets at the end of its preceding fiscal year.
    (d) Approval by other Farm Credit System institutions. A bank for 
cooperatives or agricultural credit bank may not participate in a loan 
to a similar entity under title III of the Act if the similar entity has 
a loan or loan commitment outstanding with a Farm Credit Bank or an 
association chartered under the Act, unless agreed to by the Farm Credit 
Bank or association.

[62 FR 4444, Jan. 30, 1997, as amended at 69 FR 43514, July 21, 2004; 75 
FR 18743, Apr. 12, 2010]



PART 614_LOAN POLICIES AND OPERATIONS--Table of Contents



                      Subpart A_Lending Authorities

Sec.
614.4000  Farm Credit Banks.
614.4010  Agricultural credit banks.
614.4020  Banks for cooperatives.
614.4030  Federal land credit associations.
614.4040  Production credit associations.
614.4050  Agricultural credit associations.
614.4055  Federal Agricultural Mortgage Corporation loan participations.
614.4060  Affiliates established pursuant to section 8.5(e)(1) of the 
          Farm Credit Act of 1971.

                     Subpart B_Chartered Territories

614.4070  Loans and chartered territory--Farm Credit Banks, agricultural 
          credit banks, Federal land bank associations, Federal land 
          credit associations, production credit associations, and 
          agricultural credit associations.

[[Page 115]]

614.4080  Loans and chartered territory--banks for cooperatives.

             Subpart C_Bank/Association Lending Relationship

614.4100  Policies governing lending through Federal land bank 
          associations.
614.4110  Transfer of direct lending authority to Federal land bank 
          associations and agricultural credit associations.
614.4120  Policies governing extensions of credit to direct lender 
          associations and OFIs.
614.4125  Funding and discount relationships between Farm Credit Banks 
          or agricultural credit banks and direct lender associations.
614.4130  Funding and discount relationships between Farm Credit Banks 
          or agricultural credit banks and OFIs.

       Subpart D_General Loan Policies for Banks and Associations

614.4150  Lending policies and loan underwriting standards.
614.4155  Interest rates.
614.4160  Differential interest rate programs.
614.4165  Young, beginning, and small farmers and ranchers.
614.4170  General.
614.4175  Uninsured voluntary and involuntary accounts.

                   Subpart E_Loan Terms and Conditions

614.4200  General requirements.
614.4231  Certain seasonal commodity loans to cooperatives.
614.4232  Loans to domestic lessors.
614.4233  International loans.

              Subpart F_Collateral Evaluation Requirements

614.4240  Collateral definitions.
614.4245  Collateral evaluation policies.
614.4250  Collateral evaluation standards.
614.4255  Independence requirements.
614.4260  Evaluation requirements.
614.4265  Real property evaluations.
614.4266  Personal and intangible property evaluations.
614.4267  Professional association membership; competency.

Subpart G [Reserved]

                   Subpart H_Loan Purchases and Sales

614.4325  Purchase and sale of interests in loans.
614.4330  Loan participations.
614.4335  Borrower stock requirements.
614.4337  Disclosure to borrowers.

                    Subpart I_Loss-Sharing Agreements

614.4340  General.
614.4345  Guaranty agreements.

                  Subpart J_Lending and Leasing Limits

614.4350  Definitions.
614.4351  Computation of lending and leasing limit base.
614.4352  Farm Credit Banks and agricultural credit banks.
614.4353  Direct lender associations.
614.4354  [Reserved].
614.4355  Banks for cooperatives.
614.4356  Farm Credit Leasing Services Corporation.
614.4357  Banks for cooperatives look-through notes.
614.4358  Computation of obligations.
614.4359  Attribution rules.
614.4360  Lending and leasing limit violations.
614.4361  Transition.
614.4362  Loan and lease concentration risk mitigation policy.

Subparts K-L [Reserved]

                  Subpart M_Loan Approval Requirements

614.4450  General requirements.
614.4460  Loan approval responsibility.
614.4470  Loans subject to bank approval.

Subpart N [Reserved]

                   Subpart O_Special Lending Programs

614.4525  General.
614.4530  Special loans, production credit associations and agricultural 
          credit associations.

  Subpart P_Farm Credit Bank and Agricultural Credit Bank Financing of 
                      Other Financing Institutions

614.4540  Other financing institution access to Farm Credit Banks and 
          agricultural credit banks for funding, discount, and other 
          similar financial assistance.
614.4550  Place of discount.
614.4560  Requirements for OFI funding relationships.
614.4570  Recourse and security.
614.4580  Limitation on the extension of funding, discount and other 
          similar financial assistance to an OFI.
614.4590  Equitable treatment of OFIs and Farm Credit System 
          associations.
614.4595  Public disclosure about OFIs.

[[Page 116]]

614.4600  Insolvency of an OFI.

Subpart Q_Banks for Cooperatives and Agricultural Credit Banks Financing 
                           International Trade

614.4700  Financing foreign trade receivables.
614.4710  [Reserved]
614.4720  Letters of credit.
614.4800  Guarantees and contracts of suretyship.
614.4810  Standby letters of credit.
614.4900  Foreign exchange.

                 Subpart R_Secondary Market Authorities

614.4910  Basic authorities.

                 Subpart S_Flood Insurance Requirements

614.4920  Purpose and scope.
614.4925  Definitions.
614.4930  Requirement to purchase flood insurance where available.
614.4932  Exemptions.
614.4935  Escrow requirement.
614.4940  Required use of standard flood hazard determination form.
614.4945  Force placement of flood insurance.
614.4950  Determination fees.
614.4955  Notice of special flood hazards and availability of Federal 
          disaster relief assistance.
614.4960  Notice of servicer's identity.

Appendix A to Subpart S of Part 614--Sample Form of Notice of Special 
          Flood Hazards and Availability of Federal Disaster Relief 
          Assistance
Appendix B to Subpart S of Part 614--Sample Clause for Option to Escrow 
          for Outstanding Loans

    Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs. 1.3, 
1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 2.13, 
2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A, 4.13B, 
4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.18A, 4.19, 4.25, 4.26, 4.27, 
4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.8, 7.12, 7.13, 8.0, 
8.5 of the Farm Credit Act (12 U.S.C. 2011, 2013, 2014, 2015, 2017, 
2018, 2019, 2071, 2073, 2074, 2075, 2091, 2093, 2094, 2097, 2121, 2122, 
2124, 2128, 2129, 2131, 2141, 2149, 2183, 2184, 2201, 2202, 2202a, 
2202c, 2202d, 2202e, 2206, 2206a, 2207, 2211, 2212, 2213, 2214, 2219a, 
2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279b, 2279c-1, 2279f, 2279f-1, 
2279aa, 2279aa-5); sec. 413 of Pub. L. 100-233, 101 Stat. 1568, 1639.



                      Subpart A_Lending Authorities

    Source: 55 FR 24880, June 19, 1990, unless otherwise noted.



Sec. 614.4000  Farm Credit Banks.

    (a) Long-term real estate lending. Except to the extent such 
authorities are transferred pursuant to section 7.6 of the Act, Farm 
Credit Banks are authorized, subject to the requirements in 
Sec. 614.4200 of this part, to make real estate mortgage loans with 
maturities of not less than 5 years nor more than 40 years and 
continuing commitments to make such loans.
    (b) Extensions of credit to Farm Credit direct lender associations. 
Farm Credit Banks are authorized to make loans and extend other similar 
financial assistance to associations with direct lending authority and 
discount for or purchase from such associations, with the association's 
endorsement or guaranty, any note, draft, and other obligations for 
loans that have been made in accordance with the provisions of subparts 
D and E of part 614 of these regulations. Such extensions of credit 
shall be made pursuant to a written financing agreement meeting the 
requirements of Sec. 614.4125.
    (c) Extensions of credit to other financing institutions. Farm 
Credit Banks are authorized to make loans and extend other similar 
financial assistance to any national bank, State bank, trust company, 
agricultural credit corporation, incorporated livestock loan company, 
savings institution, credit union, or any association of agricultural 
producers or any corporation engaged in the making of loans to farmers 
and ranchers or producers or harvesters of aquatic products 
(collectively, ``other financing institutions''), for purposes eligible 
for financing by a production credit association in accordance with 
Sec. 614.4130 and subpart P of this part. Farm Credit Banks are 
authorized to discount for or purchase from such institutions, with the 
institution's endorsement or guaranty, notes, drafts, and other 
obligations or loans made to persons and for purposes eligible for 
financing by a production credit association, in accordance with 
Sec. 614.4130 and subpart P of this part.
    (d) Loan participations. Subject to the requirements of subpart H of 
part 614, a Farm Credit Bank may enter into loan participation 
agreements with:

[[Page 117]]

    (1) Farm Credit banks and associations that are direct lenders and 
lenders that are not Farm Credit institutions on loans of the type it is 
authorized to make under title I of the Act;
    (2) Farm Credit banks and associations that are direct lenders on 
loans it is not authorized to make, provided the borrower eligibility, 
membership, term, amount, loan security, and stock or participation 
certificate requirements of the originating institution are met; and
    (3) The Federal Agricultural Mortgage Corporation to the extent 
provided in Sec. 614.4055.
    (e) Other interests in loans. (1) Subject to the requirements of 
subpart H of this part, Farm Credit Banks may sell interests in loans 
only to:
    (i) Farm Credit System institutions authorized to purchase such 
interests;
    (ii) Other lenders that are not Farm Credit System institutions; and
    (iii) Any certified agricultural mortgage marketing facility, as 
defined by section 8.0(3) of the Act, for the purpose of pooling and 
securitizing such loans under title VIII of the Act.
    (2) Subject to the requirements of subpart H of this part, Farm 
Credit Banks may purchase interests other than participation interests 
in loans and nonvoting stock from other Farm Credit System institutions.
    (3) Farm Credit Banks, in their capacity as certified agricultural 
mortgage marketing facilities under title VIII of the Act, may purchase 
interests in loans (other than participation interests authorized in 
paragraph (d) of this section) from institutions other than Farm Credit 
System institutions only for the purpose of pooling and securitizing 
such loans under title VIII of the Act.
    (f) Residual powers after the transfer of lending authority to an 
association. After transferring its authority to make and participate in 
long-term real estate loans to an agricultural credit association or a 
Federal land credit association pursuant to section 7.6(a) of the Act 
and subpart E of part 611 of these regulations, a Farm Credit Bank 
retains residual authority to:
    (1) Enter into loan participation agreements pursuant to paragraph 
(d) of this section;
    (2) Purchase or sell other interests in loans in accordance with 
paragraph (e) of this section; and
    (3) Make long-term real estate loans in accordance with paragraph 
(a) of this section in areas of its chartered territory where no active 
association operates.

[55 FR 24880, June 19, 1990, as amended at 57 FR 38246, Aug. 24, 1992; 
57 FR 43290, Sept. 18, 1992; 62 FR 51013, Sept. 30, 1997; 63 FR 5723, 
Feb. 4, 1998; 64 FR 43049, Aug. 9, 1999; 65 FR 24102, Apr. 25, 2000; 67 
FR 1285, Jan. 10, 2002]



Sec. 614.4010  Agricultural credit banks.

    (a) Long-term real estate lending. Except to the extent such 
authorities are transferred pursuant to section 7.6 of the Act, 
agricultural credit banks are authorized, subject to the requirements of 
Sec. 614.4200, to make real estate mortgage loans with maturities of not 
less than 5 years nor more than 40 years and continuing commitments to 
make such loans.
    (b) Extensions of credit to Farm Credit direct lender associations. 
Agricultural credit banks are authorized to make loans and extend other 
similar financial assistance to associations with direct lending 
authority and discount for or purchase from such associations, with the 
association's endorsement or guaranty, any note, draft, and other 
obligations for loans made by the association in accordance with the 
provisions of this part. Such extensions of credit shall be made 
pursuant to a written financing agreement meeting the requirements of 
Sec. 614.4125.
    (c) Extensions of credit to other financing institutions. 
Agricultural credit banks are authorized to make loans and extend other 
similar financial assistance to any national bank, State bank, trust 
company, agricultural credit corporation, incorporated livestock loan 
company, savings institution, credit union, or any association of 
agricultural producers or corporation engaged in the making of loans to 
farmers, ranchers, or producers or harvesters of aquatic products 
(collectively, ``other financing institutions''), for purposes eligible 
for financing by a production credit association, in accordance with 
Sec. 614.4130 and subpart P of this part. Agricultural credit banks

[[Page 118]]

are authorized to discount for or purchase from such other financing 
institutions, with the institution's endorsement or guaranty, notes, 
drafts, and other obligations or loans made to persons and for purposes 
eligible for financing by a production credit association, in accordance 
with the requirements of Sec. 614.4130 and subpart P of this part.
    (d) Extensions of credit to or on behalf of eligible cooperatives. 
Agricultural credit banks are authorized to make loans and commitments 
and extend other technical and financial assistance, including but not 
limited to, collateral custody, discounting notes and other obligations, 
guarantees, and currency exchanges necessary to service transactions 
financed under paragraphs (d)(4) and (d)(5) of this section, to:
    (1) Eligible cooperatives, as defined in Sec. 613.3100(b)(1), in 
accordance with Secs. 614.4200, 614.4231, 614.4232, 614.4233, and 
subpart Q of part 614;
    (2) Other eligible entities, as defined in Sec. 613.3100(b)(2), in 
accordance with Secs. 614.4200, 614.4231, and 614.4232;
    (3) Domestic lessors, for the purpose of providing leased assets to 
stockholders of the bank eligible to borrow under section 3.7(a) of the 
Act for use in such stockholders' operations in the United States, in 
accordance with Sec. 614.4232;
    (4) Domestic or foreign parties with respect to a transaction with a 
voting stockholder of the bank, for the import of agricultural 
commodities, farm supplies, or aquatic products through purchases, sales 
or exchanges, provided such stockholder substantially benefits as a 
result of such extension of credit or assistance, in accordance with 
policies of the bank's board, Sec. 614.4233, and subpart Q of part 614; 
and
    (5) Domestic or foreign parties in which a voting stockholder of the 
bank has a minimum ownership interest, for the purpose of facilitating 
such stockholder's import operations of the type described in paragraph 
(d)(4) of this section, provided the stockholder substantially benefits 
as a result of such extension of credit or assistance, in accordance 
with policies of the bank's board, Sec. 614.4233, and subpart Q of part 
614.
    (6) Any party, subject to the requirements in Sec. 613.3200(c) of 
this chapter, for the export (including the cost of freight) of 
agricultural commodities or products therefrom, aquatic products, or 
farm supplies from the United States to any foreign country, in 
accordance with Sec. 614.4233 and subpart Q of this part 614; and
    (7) Domestic or foreign parties in which eligible cooperatives, as 
defined in Sec. 613.3100 of this chapter, hold an ownership interest, 
for the purpose of facilitating the international business operations of 
such cooperatives pursuant to the requirements of Sec. 613.3200 (d) and 
(e) of this chapter.
    (e) Loan participations. Subject to the requirements of subpart H of 
this part, an agricultural credit bank may enter into loan participation 
agreements with:
    (1) Farm Credit banks and associations that are direct lenders and 
lenders that are not Farm Credit institutions on loans of the type it is 
authorized to make under the Act;
    (2) Farm Credit banks and associations that are direct lenders on 
loans it is not authorized to make, provided the borrower eligibility, 
membership, term, amount, loan security, and stock or participation 
certificate requirements of the originating institution are met; and
    (3) The Federal Agricultural Mortgage Corporation to the extent 
provided in Sec. 614.4055.
    (f) Other interest in loans. (1) Subject to subpart H of this part, 
agricultural credit banks may sell interests in real estate mortgage 
loans identified in paragraph (a) of this section to Farm Credit System 
institutions authorized to purchase such interests, other lenders, and 
certified agricultural mortgage marketing facilities for the Federal 
Agricultural Mortgage Corporation. Agricultural credit banks may also 
sell interests in the types of loans listed in paragraph (d) of this 
section to other Farm Credit System institutions that are authorized to 
purchase such interests.
    (2) Subject to the requirements of subpart H of this part, 
agricultural credit banks may purchase interests other than 
participation interests in

[[Page 119]]

loans and nonvoting stock from other Farm Credit System institutions.
    (3) Agricultural credit banks, in their capacity as certified 
agricultural mortgage marketing facilities under title VIII of the Act, 
may purchase interests in loans (other than participation interests 
authorized in paragraph (e) of this section) from institutions other 
than Farm Credit System institutions only for the purpose of pooling and 
securitizing such loans under title VIII of the Act.
    (g) Residual powers after the transfer of lending authority to an 
association. After transferring its authority to make and participate in 
long-term real estate loans to an agricultural credit association or a 
Federal land credit association pursuant to section 7.6(a) of the Act 
and subpart E of part 611 of these regulations, an agricultural credit 
bank retains residual authority to:
    (1) Enter into loan participation agreements pursuant to paragraph 
(e) of this section;
    (2) Purchase or sell other interests in loans in accordance with 
paragraph (f) of this section; and
    (3) Make long-term real estate loans in accordance with paragraph 
(a) of this section in areas of its chartered territory where no active 
association operates.

[55 FR 24880, June 19, 1990, as amended at 57 FR 38246, Aug. 24, 1992; 
57 FR 43290, Sept. 18, 1992; 62 FR 4445, Jan. 30, 1997; 62 FR 51013, 
Sept. 30, 1997; 63 FR 5723, Feb. 4, 1998; 64 FR 43049, Aug. 9, 1999; 65 
FR 24102, Apr. 25, 2000; 67 FR 1285, Jan. 10, 2002; 71 FR 65387, Nov. 8, 
2006]



Sec. 614.4020  Banks for cooperatives.

    (a) Banks for cooperatives are authorized to make loans and 
commitments and extend other technical and financial assistance, 
including but not limited to, collateral custody, discounting notes and 
other obligations, guarantees, and currency exchanges necessary to 
service transactions financed under paragraphs (a)(4) and (a)(5) of this 
section, to:
    (1) Eligible cooperatives, as defined in Sec. 613.3100(b)(1), in 
accordance with Secs. 614.4200, 614.4231, 614.4232, 614.4233, and 
subpart Q of this part;
    (2) Other eligible entities as defined in Sec. 613.3100(b)(2), in 
accordance with Secs. 614.4200, 614.4231, and 614.4232;
    (3) Domestic lessors, for the purpose of providing leased assets to 
stockholders of the bank eligible to borrow under section 3.7(a) of the 
Act for use in such stockholder's operations in the United States, in 
accordance with Sec. 614.4232;
    (4) Domestic or foreign parties with respect to a transaction with a 
voting stockholder of the bank, for the import of agricultural 
commodities, farm supplies, or aquatic products through purchases, sales 
or exchanges, provided such stockholder substantially benefits as a 
result of such extension of credit or assistance, in accordance with 
policies of the bank's board, Sec. 614.4233, and subpart Q of this part; 
and
    (5) Domestic or foreign parties in which a voting stockholder of the 
bank has an ownership interest, for the purpose of facilitating the 
import operations of the type described in paragraph (a)(4) of this 
section, in accordance with policies of the bank's board, Sec. 614.4233, 
and subpart Q of this part.
    (6) Any party, subject to the requirements in Sec. 613.3200(c) of 
this chapter, for the export (including the cost of freight) of 
agricultural commodities or products therefrom, aquatic products, or 
farm supplies from the United States to any foreign country, in 
accordance with Sec. 614.4233 and subpart Q of this part; and
    (7) Domestic or foreign parties in which eligible cooperatives, as 
defined in Sec. 613.3100 of this chapter, hold an ownership interest, 
for the purpose of facilitating the international business operations of 
such cooperatives pursuant to the requirements in Sec. 613.3200 (d) and 
(e) of this chapter.
    (b) Loan participations. Subject to the requirements of subpart H of 
this part, a bank for cooperatives may enter into loan participation 
agreements with:
    (1) Farm Credit banks and associations that are direct lenders and 
lenders that are not Farm Credit institutions on loans of the type it is 
authorized to make under title III of the Act;
    (2) Farm Credit banks and associations that are direct lenders on 
loans of the type it is not authorized to make,

[[Page 120]]

provided the borrower eligibility, membership, term, amount, loan 
security, and stock or participation certificate requirements of the 
originating institution are met; and
    (3) The Federal Agricultural Mortgage Corporation to the extent 
provided in Sec. 614.4055.

[55 FR 24880, June 19, 1990, as amended at 62 FR 4445, Jan. 30, 1997; 62 
FR 51013, Sept. 30, 1997; 67 FR 1285, Jan. 10, 2002; 71 FR 65387, Nov. 
8, 2006]



Sec. 614.4030  Federal land credit associations.

    (a) Long-term real estate lending. Federal land credit associations 
are authorized, subject to the requirments of Sec. 614.4200, to make 
real estate mortgage loans with maturities of not less than 5 years nor 
more than 40 years and continuing commitments to make such loans.
    (b) Loan participations. Subject to the requirements of subpart H of 
this part, Federal land credit associations may enter into participation 
agreements with:
    (1) Farm Credit banks and associations that are direct lenders and 
lenders that are not Farm Credit institutions on loans of the type it is 
authorized to make under title I of the Act;
    (2) Farm Credit banks and associations that are direct lenders on 
loans it is not authorized to make, provided the borrower eligibility, 
membership, term, amount, loan security, and stock or participation 
certificate requirements of the originating institution are met; and
    (3) The Federal Agricultural Mortgage Corporation to the extent 
provided in Sec. 614.4055.
    (c) Other interests in loans. (1) Subject to the requirements of 
subpart H of this part and the supervision of their respective funding 
banks, Federal land credit associations may sell interests in loans made 
under paragraph (a) of this section only to:
    (i) Farm Credit System institutions, as authorized by their 
respective funding banks;
    (ii) Other lenders that are not Farm Credit System institutions, as 
authorized by their respective funding banks; and
    (iii) Any certified agricultural mortgage marketing facility, as 
defined by section 8.0(3) of the Act, for the purpose of pooling and 
securitizing such loans under title VIII of the Act.
    (2) Subject to the requirements of subpart H of this part, Federal 
land credit associations may purchase interests in loans that comply 
with the requirements of paragraph (a) of this section and nonvoting 
stock from Farm Credit System institutions.
    (3) Federal land credit associations, in their capacity as certified 
agricultural mortgage marketing facilities under title VIII of the Act, 
may purchase interests in loans (other than participation interests 
under paragraph (b) of this section) from institutions other than Farm 
Credit System institutions for the purpose of pooling and securitizing 
such loans under title VIII of the Act.

[55 FR 24880, June 19, 1990, as amended at 57 FR 38247, Aug. 24, 1992; 
62 FR 51013, Sept. 30, 1997; 64 FR 43049, Aug. 9, 1999; 65 FR 24102, 
Apr. 25, 2000; 67 FR 1285, Jan. 10, 2002]



Sec. 614.4040  Production credit associations.

    (a) Loan terms. (1) Production credit associations are authorized to 
make or guarantee loans and other similar financial assistance for the 
following terms:
    (i) Not more than 7 years
    (ii) More than 7 years, but not more than 10 years, subject to 
authorization in policies approved by the funding bank
    (iii) Not more than 15 years to producers or harvesters of aquatic 
products for major capital expenditures, including but not limited to 
the purchase of vessels, construction or purchase of shore facilities, 
and similar purposes directly related to the producing or harvesting 
operation
    (2) Subject to policies approved by the funding bank, production 
credit associations may amortize loans over a period greater than the 
loan terms authorized under paragraph (a)(1) of this section, provided 
that:
    (i) The loan is amortized over a period not to exceed 15 years
    (ii) The loan may be refinanced only if the lender determines, at 
the time of

[[Page 121]]

refinancing, that the loan meets its loan policy and underwriting 
criteria;
    (iii) Any refinancing may not extend repayment beyond 15 years from 
the date of the original loan; and
    (iv) The loan is not being made solely for the purpose of acquiring 
unimproved real estate; and
    (3) Short- and intermediate-term loans shall be made with maturities 
that are appropriate for the purpose and underlying collateral of the 
loan and that comply with an institution's loan underwriting standards 
adopted pursuant to Sec. 614.4150 and the general requirements of 
Sec. 614.4200 of this part.
    (b) Loan participations. Subject to the requirements of subpart H of 
this part, a production credit association may enter into participation 
agreements with:
    (1) Farm Credit banks and associations that are direct lenders and 
lenders that are not Farm Credit institutions on loans of the type it is 
authorized to make under title II of the Act;
    (2) Farm Credit banks and associations that are direct lenders on 
loans it is not authorized to make, provided the borrower eligibility, 
membership, term, amount, loan security, and stock or participation 
certificate requirements of the originating institution are met; and
    (3) The Federal Agricultural Mortgage Corporation to the extent 
provided in Sec. 614.4055.
    (c) Other interests in loans. (1) Subject to the requirements of 
subpart H of this part and the supervision of their respective funding 
banks, production credit associations may sell interests in loans that 
are made under paragraph (a) of this section to:
    (i) Banks of the Farm Credit System, as authorized by their 
respective funding banks; and
    (ii) Any certified agricultural mortgage marketing facility, as 
defined by section 8.0(3) of the Act, for the purpose of pooling and 
securitizing such loans under title VIII of the Act.
    (2) Subject to the requirements of subpart H of this part, 
production credit associations, as authorized by their respective 
funding banks, may purchase interests in loans that comply with the 
requirements of paragraph (a) of this section and nonvoting stock from 
banks of the Farm Credit System.
    (3) Production credit associations, in their capacity as certified 
mortgage marketing facilities under title VIII of the Act, may purchase 
from Farm Credit System institutions and institutions that are not Farm 
Credit System institutions interests in loans (other than participation 
interests authorized by paragraph (c) of this section) for the purpose 
of pooling and securitizing such loans under title VIII of the Act.

[55 FR 24880, June 19, 1990; 55 FR 28511, July 11, 1990, as amended at 
57 FR 38247, Aug. 24, 1992; 62 FR 51013, Sept. 30, 1997; 64 FR 43049, 
Aug. 9, 1999; 65 FR 24102, Apr. 25, 2000; 67 FR 1285, Jan. 10, 2002]



Sec. 614.4050  Agricultural credit associations.

    Agricultural credit associations are authorized to make or 
guarantee, subject to the requirements of Sec. 614.4200 of this part:
    (a) Long-term real estate mortgage loans with maturities of not less 
than 5 nor more than 40 years, and continue commitments to make such 
loans; and
    (b) Short- and intermediate-term loans and provide other similar 
financial assistance for a term of not more than 10 years (15 years for 
aquatic producers and harvesters.
    (c) Loan participations. Subject to the requirements of subpart H of 
this part, agricultural credit associations may enter into participation 
agreements with:
    (1) Farm Credit banks and associations that are direct lenders and 
lenders that are not Farm Credit institutions on loans of the type it is 
authorized to make under titles I and II of the Act;
    (2) Farm Credit banks and associations that are direct lenders on 
loans of the type it is not authorized to make, provided the borrower 
eligibility, membership, term, amount, loan security, and stock or 
participation certificate requirements of the originating institution 
are met; and
    (3) The Federal Agricultural Mortgage Corporation to the extent 
provided in Sec. 614.4055.
    (d) Other interests in loans. (1) Subject to the requirements of 
subpart H of this part and the supervision of their

[[Page 122]]

respective funding banks, agricultural credit associations may sell:
    (i) Interests in loans made under paragraph (a) of this section only 
to:
    (A) Farm Credit System institutions, as authorized by their 
respective funding banks;
    (B) Lenders that are not Farm Credit System institutions, as 
authorized by their respective funding banks; and
    (C) Any certified agricultural mortgage marketing facility, as 
defined by section 8.0(3) of the Act, for the purpose of pooling and 
securitizing such loans under title VIII of the Act.
    (ii) Interests in loans made under paragraph (b) of this part only 
to:
    (A) Banks of the Farm Credit System, as authorized by their 
respective funding banks; and
    (B) Any certified agricultural mortgage marketing facility, as 
defined by section 8.0(3) of the Act, for the purpose of pooling and 
securitizing such loans under title VIII of the Act.
    (2) Subject to the requirements of subpart H of this part, 
agricultural credit associations may purchase:
    (i) Interests in loans that comply with the requirements in 
paragraph (a) of this section from institutions of the Farm Credit 
System;
    (ii) Interests in loans that comply with the requirements of 
paragraph (b) of this section from banks of the Farm Credit System; and
    (iii) Nonvoting stock from institutions of the Farm Credit System.
    (3) Agricultural credit associations, in their capacity as certified 
agricultural mortgage marketing facilities under title VIII of the Act, 
may purchase interests in loans, other than participation interests 
authorized by paragraph (c) of this section, from institutions other 
than Farm Credit System institutions for the purpose of pooling and 
securitizing such loans under title VIII of the Act.

[55 FR 24880, June 19, 1990; 55 FR 28511, July 11, 1990, as amended at 
57 FR 38247, Aug. 24, 1992; 62 FR 51013, Sept. 30, 1997; 64 FR 43049, 
Aug. 9, 1999; 65 FR 24102, Apr. 25, 2000; 67 FR 1285, Jan. 10, 2002]



Sec. 614.4055  Federal Agricultural Mortgage Corporation loan 
participations.

    Subject to the requirements of subpart H of this part 614:
    (a) Any Farm Credit System bank or direct lender association may buy 
from, and sell to, the Federal Agricultural Mortgage Corporation, 
participation interests in ``qualified loans.''
    (b) The Federal Agricultural Mortgage Corporation may buy from, and 
sell to, any Farm Credit System bank or direct lender association, or 
lender that is not a Farm Credit System institution, participation 
interests in ``qualified loans.''
    (c) For purposes of this section, ``qualified loans'' means 
qualified loans as defined in section 8.0(9) of the Act.

[67 FR 1285, Jan. 10, 2002]



Sec. 614.4060  Affiliates established pursuant to section 8.5(e)(1)
of the Farm Credit Act of 1971.

    An affiliate established by one or more Farm Credit System 
institutions pursuant to section 8.5(e)(1) of the Act and Sec. 611.1137 
of this chapter, as a certified agricultural mortgage marketing 
facility, may purchase loans from Farm Credit System institutions and 
institutions other than Farm Credit System institutions in accordance 
with title VIII of the Act and any applicable regulation promulgated 
thereunder.

[57 FR 38247, Aug. 24, 1992]



                     Subpart B_Chartered Territories



Sec. 614.4070  Loans and chartered territory--Farm Credit Banks, 
agricultural credit banks, Federal land bank associations, Federal
land credit associations,production credit associations, and
agricultural credit associations.

    (a) A bank or association chartered under title I or II of the Act 
may finance eligible borrower operations conducted wholly within its 
chartered territory regardless of the residence of the applicant.
    (b) A bank or association operating under title I or II of the Act 
may finance the operations of a borrower headquartered and operating in 
its territory even though the operation financed is conducted partially 
outside

[[Page 123]]

its territory, provided notice is given to all Farm Credit institutions 
providing similar credit in the territory(ies) in which the operations 
being financed are conducted. A bank or association operating under 
title I or II of the Act may lend to a borrower headquartered outside 
its territory to finance eligible borrower operations that are conducted 
partially within its territory and partially outside its territory only 
if the concurrence of Farm Credit institutions providing similar credit 
for the territories in which the operations are conducted is obtained.
    (c) A bank or association chartered under title I or II of the Act 
may finance eligible borrower operations conducted wholly outside its 
chartered territory, provided such loans are authorized by the policies 
of the bank and/or association involved, do not constitute a significant 
shift in loan volume away from the bank or association's assigned 
territory, and are made and administered in accordance with paragraphs 
(c)(1) and (c)(2) of this section.
    (1) If a loan is made to an eligible borrower whose operations are 
conducted wholly outside the chartered territory of the lending bank or 
association, the lending institution shall obtain concurrence of all 
Farm Credit institutions providing similar credit in the territory(ies) 
in which the operation being financed is conducted.
    (2) Loans to finance eligible borrower operations conducted wholly 
outside a bank's or association's territory shall be appropriately 
designated by the bank or association to provide adequate identification 
of the number and volume of such loans, which shall be monitored by the 
bank or association.
    (d) A bank or association chartered under title I or II of the Act 
may finance eligible borrower operations conducted wholly or partially 
outside its chartered territory through the purchase of loans from the 
Federal Deposit Insurance Corporation in compliance with 
Sec. 614.4325(b)(3), provided:
    (1) Notice is given to the Farm Credit System institution(s) 
chartered to serve the territory where the headquarters of the 
borrower's operation being financed is located; and
    (2) After loan purchase, additional financing of eligible borrower 
operations complies with paragraphs (a), (b), and (c) of this section.

[55 FR 24882, June 19, 1990, as amended at 76 FR 30250, May 25, 2011]



Sec. 614.4080  Loans and chartered territory--banks for cooperatives.

    Loans made under title III by banks for cooperatives and 
agricultural credit banks may be made to eligible domestic parties 
domiciled within any territory that may be served by Farm Credit 
institutions under section 1.2 of the Act and to eligible foreign 
parties without regard to domicile.

[55 FR 24882, June 19, 1990]



             Subpart C_Bank/Association Lending Relationship



Sec. 614.4100  Policies governing lending through Federal land bank
associations.

    (a) Farm Credit Banks and agricultural credit banks may delegate 
authority to make credit decisions to Federal land bank associations 
that demonstrate the ability to extend and administer credit soundly, 
provided the association develops, implements and maintains adequate 
credit administration guidelines, standards, and practices.
    (b) The board of directors of each Farm Credit Bank and each 
agricultural credit bank lending through Federal land bank associations 
shall adopt policies and procedures governing the exercise of statutory 
and delegated authorities by such associations. Policies governing the 
delegated authorities shall:
    (1) Define authorities to be delegated;
    (2) Require the documented evaluation of the capability and 
responsibility of individuals exercising delegated authorities;
    (3) Provide for reporting of actions taken under delegated authority 
to the delegating bank;
    (4) Provide procedures for periodic review and enforcement;
    (5) Provide for withdrawal of authority where appropriate; and

[[Page 124]]

    (6) Where redelegation from the association's board to association 
employees is authorized, require similar control measures to be used.

[55 FR 24883, June 19, 1990]



Sec. 614.4110  Transfer of direct lending authority to Federal land 
bank associations and agricultural credit associations.

    (a) Upon the transfer of authority to make and participate in long-
term agricultural real estate mortgage loans by a Farm Credit Bank or 
agricultural credit bank to a Federal land bank association pursuant to 
section 7.6(a) of the Act and subpart E of part 611 of these 
regulations, the association shall be designated a Federal land credit 
association and shall have the powers set forth in Sec. 614.4030.
    (b) Upon the transfer of the authority to make and participate in 
long-term real estate loans by a Farm Credit Bank or agricultural credit 
bank to an agricultural credit association pursuant to section 7.6(d) of 
the Act, the association shall have all of the powers set forth in 
Sec. 614.4050.
    (c) An association to which such long-term lending authority is to 
be transferred shall have in place, prior to the transfer, policies and 
procedures guiding the extension and administration of credit within its 
territory.

[55 FR 24883, June 19, 1990]



Sec. 614.4120  Policies governing extensions of credit to direct
lender associations and OFIs.

    The board of directors of each Farm Credit Bank and agricultural 
credit bank shall adopt policies and procedures governing the making of 
direct loans to and the discounting of loans for direct lender 
associations and OFIs. The policies and procedures shall prescribe 
lending policies and loan underwriting standards that are consistent 
with sound financial and credit practices. The policies shall require a 
periodic review of the lending relationship with each direct lender 
association and OFI at intervals consistent with the term of the general 
financing agreement but in no case longer than 5 years. The policies 
shall require an evaluation of the creditworthiness of a direct lender 
association on the basis of credit factors and lending policies and loan 
underwriting standards set forth in part 614, subpart D, and may permit 
lending to such an institution on an unsecured basis only if the overall 
condition of the institution warrants. The stated term of a general 
financing agreement shall not exceed 5 years but may be automatically 
renewable for additional terms not to exceed 5 years if neither party 
objects at the time of renewal. The term of any general financing 
agreement that provides for unsecured lending to a direct lender 
association shall not exceed 1 year and may not be automatically 
renewed.

[63 FR 5724, Feb. 4, 1998]



Sec. 614.4125  Funding and discount relationships between Farm Credit
Banks or agricultural credit banks and direct lender associations.

    (a) A Farm Credit Bank or agricultural credit bank shall not advance 
funds to, or discount loans for, any direct lender association except 
pursuant to a general financing agreement. Each general financing 
agreement must require that the amount of financing available to a 
direct lender association not be based on loans that are ineligible 
under the Act and the regulations in this chapter. If financing under a 
general financing agreement is based on a loan that FCA determines is 
ineligible under the Act and the regulations in this chapter, then the 
amount of financing available must be recalculated without that 
ineligible loan.
    (b) The Farm Credit Bank or agricultural credit bank shall deliver a 
copy of the executed general financing agreement and all related 
documents, such as a promissory note or security agreement, and all 
amendments of any of these documents, within 10 business days after any 
such document or amendment is executed, to the Chief Examiner, Farm 
Credit Administration, or to the Farm Credit Administration office that 
the Chief Examiner designates.
    (c) The general financing agreement shall address only those matters 
that are reasonably related to the debtor/creditor relationship between 
the Farm Credit Bank or agricultural credit bank and the direct lender 
association.

[[Page 125]]

    (d) The total credit extended to a direct lender association, 
through direct loan or discounts, shall be consistent with the Farm 
Credit Bank's or agricultural credit bank's lending policies and loan 
underwriting standards and the creditworthiness of the direct lender 
association. The general financing agreement or promissory note shall 
establish a maximum credit limit determined by objective standards as 
established by the Farm Credit Bank or agricultural credit bank.
    (e) A Farm Credit Bank or agricultural credit bank that provides 
notice to a direct lender association that it is in material default of 
any covenant, term, or condition of the general financing agreement, 
promissory note, security agreement, or other related documents 
simultaneously shall provide written notification to the Chief Examiner, 
Farm Credit Administration, or to the Farm Credit Administration office 
that the Chief Examiner designates and the Director, Risk Management, 
Farm Credit System Insurance Corporation.
    (f) A direct lender association shall provide written notification 
to the Chief Examiner, Farm Credit Administration, or to the Farm Credit 
Administration office that the Chief Examiner designates, and the 
Director, Risk Management, Farm Credit System Insurance Corporation 
immediately upon receipt of a notice that it is in material default 
under any general financing agreement, loan agreement, promissory note, 
security agreement, or other related documents with a Farm Credit Bank, 
agricultural credit bank or non-Farm Credit institution.
    (g) A Farm Credit Bank or agricultural credit bank shall obtain 
prior written consent of the Farm Credit Administration before it takes 
any action that leads to or could lead to the liquidation of a direct 
lender association.
    (h) No direct lender association shall obtain financing from any 
party unless the parties agree to the requirements of this paragraph. No 
Farm Credit Bank, agricultural credit bank, or other party shall 
petition any Federal or State court to appoint a conservator, receiver, 
liquidation agent, or other administrator to manage the affairs of or 
liquidate a direct lender association.

[63 FR 5724, Feb. 4, 1998, as amended at 69 FR 43514, July 21, 2004]



Sec. 614.4130  Funding and discount relationships between Farm Credit
Banks or agricultural credit banks and OFIs.

    (a) A Farm Credit Bank or agricultural credit bank shall not advance 
funds to, or discount loans for, an OFI, as defined in Sec. 611.1205 of 
this chapter, except pursuant to a general financing agreement.
    (b) The Farm Credit Bank or agricultural credit bank shall deliver a 
copy of the executed general financing agreement and all related 
documents, such as a promissory note or security agreement, and all 
amendments of any of these documents, within 10 business days after any 
such document or amendment is executed, to the Chief Examiner, Farm 
Credit Administration, or to the Farm Credit Administration office that 
the Chief Examiner designates.
    (c) The total credit extended to the OFI, through direct loan or 
discounts, shall be consistent with the Farm Credit Bank's or 
agricultural credit bank's lending policies and loan underwriting 
standards and the creditworthiness of the OFI. The general financing 
agreement or promissory note shall establish a maximum credit limit 
determined by objective standards as established by the Farm Credit Bank 
or agricultural credit bank.

[63 FR 5724, Feb. 4, 1998, as amended at 67 FR 17917, Apr. 12, 2002]



       Subpart D_General Loan Policies for Banks and Associations



Sec. 614.4150  Lending policies and loan underwriting standards.

    Under the policies of its board, each institution shall adopt 
written standards for prudent lending and shall issue written policies, 
operating procedures, and control mechanisms that reflect prudent credit 
practices and comply with all applicable laws and regulations. Written 
policies and procedures shall, at a minimum, prescribe:

[[Page 126]]

    (a) The minimum supporting credit and financial information, 
frequency for collection of information, and verification of information 
required in relation to loan size, complexity and risk exposure
    (b) The procedures to be followed in credit analysis
    (c) The minimum standards for loan disbursement, servicing and 
collections
    (d) Requirements for collateral and methods for its administration
    (e) Loan approval delegations and requirements for reporting to the 
board
    (f) Loan pricing practices
    (g) Loan underwriting standards that include measurable standards:
    (1) For determining that an applicant has the operational, 
financial, and management resources necessary to repay the debt from 
cashflow
    (2) That are appropriate for each loan program and the institution's 
risk-bearing ability; and
    (3) That consider the nature and type of credit risk, amount of the 
loan, and enterprises being financed
    (h) Requirements that loan terms and conditions are appropriate for 
the loan; and
    (i) Such other requirements as are necessary for the professional 
conduct of a lending organization, including documentation for each loan 
transaction of compliance with the loan underwriting standards or the 
compensating factors or extenuating circumstances that establish 
repayment of the loan notwithstanding the failure to meet any one or 
more loan underwriting standard.

[62 FR 51014, Sept. 30, 1997]



Sec. 614.4155  Interest rates.

    Loans made by each bank and direct lender association shall bear 
interest at a rate or rates as may be determined by the institution 
board. The board shall set interest rates or approve individual interest 
rate changes either on a case-by-case basis or pursuant to an interest 
rate plan within which management may establish rates. Any interest rate 
plan shall set loan-pricing policies and objectives, provide guidance 
regarding the circumstances under which management may adjust rates, and 
provide the upper and lower limits on management authority. Any interest 
rate plan adopted shall be reviewed on a continuing basis by the board, 
as well as in conjunction with its review and approval of the 
institution's operational and strategic business plan.

[62 FR 66818, Dec. 22, 1997]



Sec. 614.4160  Differential interest rate programs.

    Pursuant to policies approved by the board of directors, 
differential interest rates may be established for loans based on a 
variety of factors that may include type, purpose, amount, quality, 
funding or operating costs, or similar factors or combinations of 
factors. Differential interest rate programs should achieve equitable 
rate treatment within categories of borrowers. In the adoption of 
differential interest rate programs, institutions may consider, among 
other things, the effect that such interest rate structures will have on 
the achievement of objectives relating to the special credit needs of 
young, beginning or small farmers.

[61 FR 67186, Dec. 20, 1996. Redesignated at 62 FR 66818, Dec. 22, 1997]



Sec. 614.4165  Young, beginning, and small farmers and ranchers.

    (a) Definitions. (1) For purposes of this subpart, the term 
``credit'' includes:
    (i) Loans made to farmers and ranchers and producers or harvesters 
of aquatic products under title I or II of the Act; and
    (ii) Interests in participations made to farmers and ranchers and 
producers or harvesters of aquatic products under title I or II of the 
Act.
    (2) For purposes of this subpart, the term ``services'' includes:
    (i) Leases made to farmers and ranchers and producers or harvesters 
of aquatic products under title I or II of the Act; and
    (ii) Related services to farmers and ranchers and producers or 
harvesters of aquatic products under title I or II of the Act.
    (b) Farm Credit bank policies. Each Farm Credit Bank and 
Agricultural Credit Bank must adopt written policies that direct:

[[Page 127]]

    (1) The board of each affiliated direct lender association to 
establish a program to provide sound and constructive credit and 
services to young, beginning, and small farmers and ranchers and 
producers or harvesters of aquatic products (YBS farmers and ranchers or 
YBS). The terms ``bona fide farmer or rancher,'' and ``producer or 
harvester of aquatic products'' are defined in Sec. 613.3000 of this 
chapter;
    (2) Each affiliated direct lender association to include in its YBS 
farmers and ranchers program provisions ensuring coordination with other 
System institutions in the territory and other governmental and private 
sources of credit;
    (3) Each affiliated direct lender association to provide, annually, 
a complete and accurate YBS farmers and ranchers operations and 
achievements report to its funding bank; and
    (4) The bank to provide the agency a complete and accurate annual 
report summarizing the YBS program operations and achievements of its 
affiliated direct lender associations.
    (c) Direct lender association YBS programs. The board of directors 
of each direct lender association must establish a program to provide 
sound and constructive credit and services to YBS farmers and ranchers 
in its territory. Such a program must include the following minimum 
components:
    (1) A mission statement describing program objectives and specific 
means for achieving such objectives.
    (2) Annual quantitative targets for credit to YBS farmers and 
ranchers that are based on an understanding of reasonably reliable 
demographic data for the lending territory. Such targets may include:
    (i) Loan volume and loan number goals for ``young,'' ``beginning,'' 
and ``small'' farmers and ranchers in the territory;
    (ii) Percentage goals representative of the demographics for 
``young,'' ``beginning,'' and ``small'' farmers and ranchers in the 
territory;
    (iii) Percentage goals for loans made to new borrowers qualifying as 
``young,'' ``beginning,'' and ``small'' farmers and ranchers in the 
territory; or
    (iv) Goals for capital committed to loans made to ``young,'' 
``beginning,'' and ``small'' farmers and ranchers in the territory.
    (3) Annual qualitative YBS goals that must include efforts to:
    (i) Offer related services either directly or in coordination with 
others that are responsive to the needs of the ``young,'' ``beginning,'' 
and ``small'' farmers and ranchers in the territory;
    (ii) Take full advantage of opportunities for coordinating credit 
and services offered with other System institutions in the territory and 
other governmental and private sources of credit who offer credit and 
services to those who qualify as ``young,'' ``beginning,'' and ``small'' 
farmers and ranchers; and
    (iii) Implement effective outreach programs to attract YBS farmers 
and ranchers, which may include the use of advertising campaigns and 
educational credit and services programs beneficial to ``young,'' 
``beginning,'' and ``small'' farmers and ranchers in the territory, as 
well as an advisory committee comprised of ``young,'' ``beginning,'' and 
``small'' farmers and ranchers to provide views on how the credit and 
services of the direct lender association could best serve the credit 
and services needs of YBS farmers and ranchers.
    (4) Methods to ensure that credit and services offered to YBS 
farmers and ranchers are provided in a safe and sound manner and within 
a direct lender association's risk-bearing capacity. Such methods could 
include customized loan underwriting standards, loan guarantee programs, 
fee waiver programs, or other credit enhancement programs.
    (d) Review and approval of YBS programs. The YBS program of each 
direct lender association is subject to the review and approval of its 
funding bank. However, the funding bank's review and approval is limited 
to a determination that the YBS program contains all required components 
as set forth in paragraph (c) of this section. Any conclusion by the 
bank that a YBS program is incomplete must be communicated to the direct 
lender association in writing.
    (e) YBS program and the operational and strategic business plan. 
Targets and goals outlined in paragraphs (c)(2) and

[[Page 128]]

(c)(3) of this section must be included in each direct lender 
association's operational and strategic business plan for at least the 
succeeding 3 years (as set forth in Sec. 618.8440 of this chapter).
    (f) YBS program internal controls. Each direct lender association 
must have internal controls that establish clear lines of responsibility 
for YBS program implementation, YBS performance results, and YBS 
quarterly reporting to the association's board of directors.

[69 FR 16470, Mar. 30, 2004]



Sec. 614.4170  General.

    Direct lenders shall be responsible for the servicing of the loans 
that they make. However, loan participation agreements may designate 
specific loan servicing efforts to be accomplished by a participating 
institution. Each direct lender shall adopt loan servicing policies and 
procedures to assure that loans will be serviced fairly and equitably 
for the borrower while minimizing the risk for the lender. Procedures 
shall include specific plans that help preserve the quality of sound 
loans and that help correct credit deficiencies as they develop.
    (a) The Farm Credit Bank shall provide guidelines for the servicing 
of loans by the Federal land bank associations. The servicing may be 
accomplished either under the direct supervision of the bank or under 
delegated authority.
    (b) The servicing of loans which are participated in by Farm Credit 
System institutions shall be in accordance with Sec. 614.4325.
    (c) In the development of loan servicing policies and procedures, 
the following criteria shall be included:
    (1) Term loans. The objective shall be to provide borrowers with 
prompt and efficient service with respect to actions in such areas as 
personal liability, partial release of security, insurance requirements 
or adjustments, loan divisions or transfers, or conditional payments. 
Procedures shall provide for adequate inspections, reanalyses, 
reappraisals, controls on payment of insurance and taxes (and for 
payment when necessary), and prompt exercise of legal options to 
preserve the lender's collateral position or guard against loss. Loan 
servicing policies for rural home loans shall recognize the inherent 
differences between agricultural and rural home lending.
    (2) Operating loans. The objective shall be to service such loans to 
assure disbursement in accordance with the basis of approval, repayment 
from the sources obligated or pledged, and to minimize risk exposure to 
the lender. Procedures shall require:
    (i) The procurement of periodic operating data essential for 
maintaining control, for the proper analysis of such data, and prompt 
action as needed;
    (ii) Inspections, reappraisals, and borrower visits appropriate to 
the nature and quality of the loan; and
    (iii) Controls on insurance, margin requirements, warehousing, and 
the prompt exercise of legal options to preserve the lender's collateral 
position and guard against loss.
    (3) Legal entity loans. In addition to the foregoing servicing 
objectives for term and operating loans, procedures for servicing these 
loans shall require procurement of data on changes in ownership, 
control, and management; review of business objectives, financing 
programs, organizational structure, and operating methods, and 
appropriate analysis of such changes with provision for action as 
needed.

[37 FR 11424, June 7, 1972, as amended at 40 FR 17745, Apr. 22, 1975. 
Redesignated at 46 FR 51878, Oct. 22, 1981 and amended at 48 FR 54475, 
Dec. 5, 1983; 51 FR 39502, Oct. 28, 1986; 57 FR 38250, Aug. 24, 1992; 61 
FR 67187, Dec. 20, 1996. Redesignated at 75 FR 35968, June 24, 2010]



Sec. 614.4175  Uninsured voluntary and involuntary accounts.

    (a) Borrowers may make voluntary advance payments on their loans or, 
under agreement with a System institution, may make voluntary advance 
conditional payments intended to be applied to future maturities. The 
monies in the advance conditional payment accounts may be available for 
return to the borrower in lieu of increasing his loan. System 
institutions may pay interest on advance conditional payments for the 
time the funds are held unapplied at a rate not to exceed the rate 
charged on the related loan(s). System institutions shall hold any 
advance conditional payments received in

[[Page 129]]

accordance with this section in voluntary advance payment accounts.
    (b) System institutions may establish involuntary payment accounts 
including, but not limited to, funds held for the borrower, such as loan 
proceeds to be disbursed for which the borrower is obligated; the 
unapplied insurance proceeds arising from any insured loss; and total 
insurance premiums and applicable taxes collected in advance in 
connection with any loan.

[53 FR 35454, Sept. 14, 1988. Redesignated at 75 FR 35968, June 24, 
2010]



                   Subpart E_Loan Terms and Conditions

    Source: 55 FR 24884, June 19, 1990, unless otherwise noted.



Sec. 614.4200  General requirements.

    (a) Terms and conditions. (1) The terms and conditions of each loan 
made by a Farm Credit bank or association shall be set forth in a 
written document or documents, such as a loan agreement, promissory 
note, or other instrument(s) appropriate to the type and amount of the 
credit extension, in order to establish loan conditions and performance 
requirements. Copies of all documents executed by the borrower in 
connection with the closing of a loan made under titles I or II of the 
Act shall be provided to the borrower at the time of execution and at 
any time thereafter that the borrower requests additional copies.
    (2) The terms and conditions of all loans shall be adequately 
disclosed in writing to the borrower not later than loan closing. For 
loans made under titles I and II of the Act, the institution shall 
provide prompt written notice of the approval of the loan.
    (3) Applicants shall be provided notification of the action taken on 
each credit application in compliance with the requirements of 12 CFR 
202.9.
    (b) Security. (1) Long-term real estate mortgage loans must be 
secured by a first lien interest in real estate, except that the loans 
may be secured by a second lien interest if the institution also holds 
the first lien on the property. No funds shall be advanced, under a 
legally binding commitment or otherwise, if the outstanding loan balance 
after the advance would exceed 85 percent (or 97 percent as provided in 
section 1.10(a) of the Act) of the appraised value of the real estate, 
except that a loan on which private mortgage insurance is obtained may 
exceed 85 percent of the appraised value of the real estate to the 
extent that the loan amount in excess of 85 percent is covered by such 
insurance. The real estate that is used to satisfy the loan-to-value 
limitation must be comprised primarily of agricultural or rural 
property, including agricultural land and improvements thereto, a farm-
related business, a marketing or processing operation, a rural 
residence, or real estate used as an integral part of an aquatic 
operation.
    (2) Notwithstanding the requirements of paragraph (b)(1) of this 
section, the lending institution may advance funds for the payment of 
taxes or insurance premiums with respect to the real estate, reschedule 
loan payments, grant partial releases of security interests in the real 
estate, and take other actions necessary to protect the lender's 
collateral position. Any action taken that results in exceeding the 
loan-to-value limitation shall be in accordance with a policy of the 
institution's board of directors and adequately documented in the loan 
file.
    (3) Short- and intermediate-term loans may be secured or unsecured 
as the documented creditworthiness of the borrower warrants.
    (4) In addition to the requirements in paragraph (b)(1) of this 
section, a long-term, non-farm rural home loan, including a revolving 
line of credit, shall be secured by a first lien on the property, except 
that it may be secured by a second lien if the institution also holds 
the first lien on the property. A short- or intermediate-term loan on a 
rural home, including a revolving line of credit, must be secured by a 
lien on the property unless the financing is provided exclusively for 
repairs, remodeling, or other improvements to the rural home, in which 
case the loan may be secured by other property or unsecured if warranted 
by the documented creditworthiness of the borrower.

[[Page 130]]

    (5) Except as provided in Sec. 614.4231, loans made under title III 
of the Act may be secured or unsecured, as appropriate for the purpose 
of the loan and the documented creditworthiness of the borrower.

[62 FR 51014, Sept. 30, 1997]



Sec. 614.4231  Certain seasonal commodity loans to cooperatives.

    Loans on certain commodities that are part of government programs 
shall comply with the criteria established for those programs. Security 
taken on program commodities shall be consistent with prudent lending 
practices and ensure compliance with the government program. The bank 
shall provide for periodic review by bank officials of any custodial 
activities and shall provide notice to the custodians that their 
activities are subject to review and examination by the Farm Credit 
Administration.

[62 FR 51015, Sept. 30, 1997]



Sec. 614.4232  Loans to domestic lessors.

    Loans and financial assistance extended by banks for cooperatives 
and agricultural credit banks to domestic lessors to finance equipment 
or facilities leased by a stockholder of the bank shall be subject to 
the following terms and conditions:
    (a) The term of the loan shall not be longer than the total period 
of the lease;
    (b) The contract between the lessor and lessee shall establish that 
the leased assets are effectively under the control of the lessee and 
that such control shall continue in effect for essentially all of the 
term of the lease;
    (c) The lessee must hold at least one share of stock or one 
participation certificate; and
    (d) The leased equipment and facilities must be primarily for use in 
the lessee's operations in the United States.

[55 FR 24884, June 19, 1990, as amended at 64 FR 34517, June 28, 1999]



Sec. 614.4233  International loans.

    Term loans made by banks for cooperatives and agricultural credit 
banks under the authority of section 3.7(b) of the Act and Sec. 613.3200 
of this chapter to foreign or domestic parties who are not shareholders 
of the bank shall be subject to the following conditions:
    (a) The loan shall be denominated in a currency to eliminate foreign 
exchange risk on repayment.
    (b) The borrower's obligations shall be guaranteed or insured 
against default under such policies as are available in the United 
States and other countries. Exceptions may be made where a prospective 
borrower has had a longstanding successful business relationship with an 
eligible cooperative borrower or an eligible cooperative which is not a 
borrower if the prospective borrower has a high credit rating as 
determined by the bank.
    (c) For a borrower in which a voting stockholder of the bank has a 
majority ownership interest, financing may be extended for the full 
value of the transaction; otherwise, financing may be extended only to 
approximate the percent of ownership.

[55 FR 24884, June 19, 1990, as amended at 55 FR 28886, July 16, 1990; 
55 FR 50544, Dec. 7, 1990; 56 FR 5927, Feb. 14, 1991; 62 FR 4445, Jan. 
30, 1997]



              Subpart F_Collateral Evaluation Requirements

    Source: 59 FR 46730, Sept. 12, 1994, unless otherwise noted.



Sec. 614.4240  Collateral definitions.

    For the purposes of this part, the following definitions shall 
apply:
    (a) Abundance of caution, when used to describe decisions to require 
collateral, means that the collateral is taken in circumstances in 
which:
    (1) It is not required by statute, regulation, or the institution's 
policies; and
    (2) A prudent lender would extend credit based on a borrower's 
income and/or other collateral, absent the real estate, and the decision 
to extend credit was, in fact, based on other sources of revenue or 
collateral.
    (b) Appraisal means a written statement independently and 
impartially prepared by a qualified appraiser setting forth an opinion 
as to the market value of an adequately described property as of a 
specific date(s), supported

[[Page 131]]

by the presentation and analysis of relevant market information.
    (c) Appraisal Foundation means the Appraisal Foundation established 
on November 30, 1987, by professional appraisal organizations, as a not-
for-profit corporation under the laws of Illinois, in order to enhance 
the quality of professional appraisals.
    (d) Appraisal Subcommittee means the Appraisal Subcommittee of the 
Federal Financial Institutions Examination Council.
    (e) Business loan means a loan or other extension of credit to any 
corporation, general or limited partnership, business trust, joint 
venture, sole proprietorship, or other business entity (including 
entities and individuals engaged in farming enterprises).
    (f) Cost approach means the process by which an evaluator 
establishes an indicated value by measuring the current market cost to 
construct a reproduction of or replacement for the improvements, minus 
the amount of depreciation (physical deterioration, or functional and/or 
external obsolescence) evident in the structure from all causes, plus 
the market value of the land.
    (g) Evaluation means a study of the nature, quality, or utility of, 
interest in, or aspects of, an asset. An evaluation may take the form of 
a valuation or an appraisal.
    (h) Fee appraiser means a qualified evaluator who is not an employee 
of the party contracting for the completion of the evaluation and who 
performs an evaluation on a fee basis. For purposes of this subpart, a 
fee appraiser may include a staff evaluator from another Farm Credit 
System institution only if the employing institution is not operating 
under joint management with the contracting institution. In addition, 
for purposes of personal and intangible collateral evaluations, the term 
``fee appraiser'' includes, but is not limited to, certified public 
accountants, equipment dealers, grain buyers, livestock buyers, and 
auctioneers.
    (i) FIRREA means the Financial Institutions Recovery, Reform, and 
Enforcement Act of 1989.
    (j) Highest and best use means the reasonable and most probable use 
of the property that would result in the highest market value of vacant 
land or improved property, as of the date of valuation; or that use, 
from among reasonably probable and legally alternative uses, found to be 
physically possible, appropriately supported, financially feasible, and 
which results in the highest land value.
    (k) Income capitalization approach means the procedure that values 
property by measuring the present value of the expected future benefits 
of property ownership. This value is derived from either:
    (1) Capitalizing a single year's income expectancy or an annual 
average of several years' income expectancies at a market-derived 
capitalization rate that reflects a specific income pattern, return on 
investment, and change in the value of the investment; or
    (2) Discounting the annual cashflows for the holding period and the 
reversion at a specified yield rate or specified yield rates which 
reflect market behavior.
    (l) Market value means the most probable price that a property 
should bring in a competitive and open market under all conditions 
requisite to a fair sale, the buyer and seller each acting prudently, 
knowledgeably, and assuming neither is under duress. Implicit in this 
definition is the consummation of a sale as of a specified date and the 
passing of title from seller to buyer under conditions whereby:
    (1) Buyer and seller are typically motivated;
    (2) Both parties are well informed or well advised, and acting in 
what they consider their best interests;
    (3) A reasonable time is allowed for exposure in the open market;
    (4) Payment is made in terms of cash in United States dollars or in 
terms of financial arrangements comparable thereto; and
    (5) The price represents the normal consideration for the property 
sold unaffected by special or creative financing or sales concessions 
granted by anyone associated with the sale.
    (m) Personal property, for purposes of this subpart, means all 
tangible and movable property not considered real property or fixtures.

[[Page 132]]

    (n) Qualified evaluator means an individual who is competent, 
reputable, impartial, and has demonstrated sufficient training and 
experience to properly evaluate property of the type that is the subject 
of the evaluation. For the purposes of this definition, the term 
``qualified evaluator'' includes an appraiser or valuator.
    (o) Real estate means an identified parcel or tract of land, 
including improvements, if any.
    (p) Real estate-related financial transactions means any transaction 
involving:
    (1) The sale, lease, purchase, investment in, or exchange of real 
property, including interests in property or the financing thereof; or
    (2) The refinancing of real property or interests in real property; 
or
    (3) The use of real property or interests in real property as 
security for a loan or investment, including mortgage-backed securities.
    (q) Real property means all interests, benefits, and rights inherent 
in the ownership of real estate.
    (r) Sales comparison approach means the procedure that values 
property by comparing the subject property to similar properties located 
in relatively close proximity, having similar size and utility, and 
having been recently sold in arm's-length transactions (comparable 
sales). The sales comparison approach requires the evaluator to estimate 
the degree of similarity and difference between the subject property and 
comparable sales. Such comparison shall be made on the basis of 
conditions of sale, financing terms, market conditions, location, 
physical characteristics, and income characteristics. Appropriate 
adjustments shall be made to the sales price of the comparable property 
based on the identified deficiencies or superiorities of the subject 
property to arrive at a probable price for which the subject property 
could be sold on the date of the collateral evaluation.
    (s) State certified appraiser means any individual who has satisfied 
the requirements for and has been certified as a real estate appraiser 
by a State or territory whose requirements for certification currently 
meet or exceed the minimum criteria for certification issued by the 
Appraiser Qualification Board of the Appraisal Foundation. No individual 
shall be a State certified appraiser unless such individual has achieved 
a passing grade on a suitable examination administered by a State or 
territory that is consistent with and equivalent to the Uniform State 
Certification Examination issued or endorsed by the Appraiser 
Qualification Board of the Appraisal Foundation. In addition, the 
Appraisal Subcommittee must not have issued a finding that the policies, 
practices, or procedures of the State or territory are inconsistent with 
title XI of FIRREA.
    (t) State licensed appraiser means any individual who has satisfied 
the requirements for licensing and has been licensed as a real estate 
appraiser by a State or territory in which the licensing procedures 
comply with title XI of FIRREA and in which the Appraisal Subcommittee 
has not issued a finding that the policies, practices, or procedures of 
the State or territory are inconsistent with title XI of FIRREA.
    (u) Transaction value means:
    (1) For loans or other extensions of credit, the amount of the loan, 
loan commitment, or other extensions of credit;
    (2) For sales, leases, purchases, investments in, or exchanges of 
real property, the market value of the property interest involved; and
    (3) For the pools of loans or interests in real property, the 
transaction value of the individual loans or the market value of the 
real property interests comprising the pool.
    (v) USPAP means the Uniform Standards of Professional Appraisal 
Practice adopted by the Appraisal Foundation.
    (w) Valuation means the process of estimating a defined value of an 
identified interest or interests in a specific asset or assets as of a 
given date. A valuation results from the completion of a collateral 
evaluation that does not require an appraisal.



Sec. 614.4245  Collateral evaluation policies.

    (a) The board of directors of each Farm Credit System institution 
that engages in lending or leasing secured by collateral shall adopt 
well-defined

[[Page 133]]

and effective collateral evaluation policies and standards, that comply 
with the regulations in this subpart, to ensure that collateral 
evaluations are:
    (1) Sufficiently descriptive and detailed to provide ample support 
to the institution's related credit decisions;
    (2) Performed based on criteria established for the purpose of 
determining the circumstances under which collateral evaluations will be 
required and when they will be required. Such criteria must, at a 
minimum:
    (i) Establish when an institution will require a collateral 
appraisal completed under the USPAP rather than a collateral valuation; 
and
    (ii) Take into account such factors as market trends, market 
volatility, and various types of credit, loan servicing, collection, and 
liquidation actions; and
    (3) Completed by a qualified evaluator in an unbiased manner.
    (b) The policies and standards required by this section shall, at a 
minimum, address the criteria outlined in Secs. 614.4250 through 
614.4267 of this subpart.
    (c) A Federal land bank association shall, with the approval of its 
respective Farm Credit bank, adopt collateral evaluation policies that 
are consistent with the bank's policies and standards.
    (d) An institution's board of directors may adopt specific 
collateral evaluation requirements, consistent with the regulations in 
this subpart, for loans designated as part of a minimum information 
program.

[59 FR 46730, Sept. 12, 1994, as amended at 62 FR 51015, Sept. 30, 1997]



Sec. 614.4250  Collateral evaluation standards.

    (a) When real, personal, or intangible property is taken as security 
for a loan or is the subject of a lease, an evaluation of such property 
shall be performed in accordance with Sec. 614.4260 and the 
institutions' policies and procedures. Such a collateral evaluation 
shall be identified as either a collateral valuation or a collateral 
appraisal. Specifically, all collateral evaluations must:
    (1) Value the subject property based upon market value as defined in 
Sec. 614.4240(l);
    (2) Be presented in a written format;
    (3) Consider the purpose for which the property will be used and the 
property's highest and best use, if different from the intended use;
    (4) Be sufficiently descriptive to enable the reader to ascertain 
the reasonableness of the estimated market value and the rationale for 
the estimate;
    (5) Provide sufficient detail (including an identification and 
description of the property) and depth of analysis to reflect the 
relevant characteristics and complexity of the subject property;
    (6) Analyze and report, as appropriate, for real, intangible, and/or 
personal property, on:
    (i) The current income producing capacity of the property;
    (ii) A reasonable marketing period for the property;
    (iii) The current market conditions and trends that will affect 
projected income, to the extent such conditions will affect the value of 
the property;
    (iv) The appropriate deductions and discounts as they would apply to 
the property, including but not limited to, those based on the condition 
of the property, as well as the specialization of the operation and 
property; and
    (v) Potential liabilities, including those associated with any 
hazardous waste or other environmental concerns; and
    (7) Include in the evaluation report a certification that the 
evaluation was not based on a requested minimum valuation or specific 
valuation or approval of a loan.
    (b) For purposes of determining appraisal value as required in 
section 1.10(a) of the Act, the definition of market value and the 
requirements of this subpart shall apply.



Sec. 614.4255  Independence requirements.

    (a) Prohibitions. For all personal and intangible property, and for 
all real property exempted under Sec. 614.4260(c) of this subpart, no 
person may:
    (1) Perform evaluations in connection with transactions in which 
such person has a direct or indirect interest, financial or otherwise, 
in the loan or subject property;
    (2) As a director, vote on or approve a loan decision on which such 
person performed a collateral evaluation; or

[[Page 134]]

    (3) As a director, perform a collateral evaluation in connection 
with any transaction on which such person made or will be required to 
make a credit decision.
    (b) Officers and employees. If the institution's internal control 
procedures required by Sec. 618.8430 of this chapter include 
requirements for either a prior approval or post-review of credit 
decisions, officers and employees may:
    (1) Participate in a vote or approval involving assets on which they 
performed a collateral evaluation; or
    (2) Perform a collateral evaluation in connection with a transaction 
on which they have made or will be required to make a credit decision.
    (c) Real estate appraiser. Except as provided in Sec. 614.4260(c) of 
this subpart, all evaluations of real property that serve as the primary 
security for a loan shall be performed by a qualified real estate 
appraiser who has no direct or indirect interest, financial or 
otherwise, in the loan or subject property and is not engaged in the 
marketing, lending, collection, or credit decision processes of any of 
the following:
    (1) A Farm Credit System institution making or originating the loan;
    (2) A Farm Credit System institution operating under common 
management with the institution making or originating the loan; or
    (3) A Farm Credit System institution purchasing an interest in the 
loan.
    (d) Fee appraisers. Fee appraisers shall be engaged directly by the 
Farm Credit System institution or its agent, and shall have no direct or 
indirect interest, financial or otherwise, in the property or 
transaction. A Farm Credit System institution may accept a real estate 
appraisal that was prepared by an appraiser engaged directly by another 
Farm Credit System institution, by a United States Government agency, a 
Government-Sponsored Enterprise or by a financial institution subject to 
title XI of FIRREA.
    (e) Loan purchases. No employee who, acting as a State licensed or 
State certified appraiser, performed a real estate appraisal on any 
collateral supporting a loan shall subsequently participate in any 
decision related to the loan purchase.



Sec. 614.4260  Evaluation requirements.

    (a) Valuation. Valuations of personal and intangible property, as 
well as real property exempted under paragraph (c) of this section, 
shall be performed by qualified individuals who meet the established 
standards of this subpart and the Farm Credit System institution 
obtaining the collateral valuation.
    (b) Appraisal. (1) Appraisals for real estate-related financial 
transactions with transaction values of more than $250,000 shall be 
performed by a qualified appraiser who is a State licensed or a State 
certified real estate appraiser.
    (2) Appraisals for real estate-related financial transactions with 
transaction values of more than $1,000,000 shall be performed by a 
qualified appraiser who is a State certified real estate appraiser.
    (c) Appraisals not required. An appraisal performed by a State 
certified or State licensed appraiser is not required for any real 
estate-related financial transaction in which any of the following 
conditions are met:
    (1) The transaction value is $250,000 or less;
    (2) The transaction is a ``business loan'' as defined in 
Sec. 614.4240(e) that:
    (i) Has a transaction value of $1,000,000 or less; and
    (ii) Is not dependent on income derived from the sale or cash rental 
of real estate as the primary source of repayment;
    (3) A lien on real property has been taken as collateral in an 
abundance of caution, and the application, when evaluated on the five 
basic credit factors, without considering the subject real estate, would 
support the credit decision that was based on other sources of repayment 
or collateral;
    (4) A lien on real estate is not statutorily required and has been 
taken for purposes other than the real estate's value;
    (5) Subsequent loan transactions (which include but are not limited 
to loan servicing actions, reamortizations, modifications of loan terms, 
and partial releases), provided that either:
    (i) The transaction does not involve the advancement of new loan 
funds other than funds necessary to cover reasonable closing costs; or

[[Page 135]]

    (ii) There has been no obvious and material change in market 
conditions or physical aspects of the property that threatens the 
adequacy of the Farm Credit System institution's real estate collateral 
protection, even with the advancement of new loan funds;
    (6) A Farm Credit System institution purchases a loan or an interest 
in a loan, pool of loans, or interests in real property, including 
mortgage-backed securities, provided that:
    (i) The appraisal prepared for each loan, pooled loan, or real 
property interest, when originated, met the standards of this subpart, 
other Federal regulations adopted pursuant to FIRREA, or the 
requirements of the government-sponsored secondary market intermediaries 
under whose auspices the interest is sold; and
    (ii) There has been no obvious and material change in market 
conditions or physical aspects of the property that would threaten the 
Farm Credit System institution's collateral position, or
    (7) A Farm Credit System institution makes or purchases a loan 
secured by real estate, which loan is guaranteed by an agency of the 
United States Government and is supported by an appraisal that conforms 
to the requirements of the guaranteeing agency.
    To qualify for exceptions in paragraphs (c)(1) through (c)(7) of 
this section from the requirements of this subpart, the institution must 
have documentation justifying the use of such exceptions in the 
applicable loan file(s). In addition, the institution must document that 
the repayment of a ``business loan'' is not dependent on income derived 
from the sale or cash rental of real estate.
    (d) FCA-required appraisals. The FCA reserves the right to require 
an appraisal under this subpart whenever it believes it is necessary to 
address safety and soundness issues.
    (e) Reciprocity. The requirements of this subpart are satisfied by 
the use of State certified or State licensed appraisers from any State 
provided that:
    (1) The appraiser is qualified to perform such appraisals;
    (2) The applicable Farm Credit System institution has established 
policies providing for such interstate appraisals; and
    (3) The applicable State appraiser licensing and certification 
agency recognizes the certification or license of the appraiser's State 
of permanent certification or licensure.

[59 FR 46730, Sept. 12, 1994, as amended at 60 FR 2687, Jan. 11, 1995]



Sec. 614.4265  Real property evaluations.

    (a) Real estate shall be valued on the basis of market value.
    (b) Market value shall be determined by a reasonable valuation 
method that:
    (1) Considers the income capitalization approach, the sales 
comparison approach, and/or the cost approach, as appropriate, to 
determine market value;
    (2) Explains and documents the elimination of any approach not used.
    (3) Reconciles the market values of the applicable approaches; and
    (c) At a minimum, the institution shall develop and document the 
evaluation of the income and debt servicing capacity for the property 
and operation where the transaction value exceeds $250,000 and the real 
estate taken as collateral:
    (1) Is an integral part of and supports the principal source of loan 
repayment; or
    (2) Is not an integral part of and does not support the principal 
source of loan repayment, but has demonstrable rental market appeal, is 
statutorily required, and fully or partially constitutes an integral 
part of an agricultural or aquatic operation.
    (d) The income-earning and debt-servicing capacity established under 
paragraph (c) of this section on such properties shall be documented as 
part of the credit analysis for any related loan action, whether or not 
the income capitalization approach value is used as the basis for the 
market value conclusion stated in the evaluation report.
    (e) Collateral closely aligned with, an integral part of, and 
normally sold with real estate (fixtures) may be included in the value 
of the real estate. All other collateral associated with the real 
estate, but designated as personal property, shall be evaluated as 
personal property in accordance with Secs. 614.4250 and 614.4266.
    (f) The evaluation shall properly identify all nonagricultural 
influences,

[[Page 136]]

including, but not limited to, urban development, mineral deposits, and 
commercial building development value, and the reasoning supporting the 
evaluator's highest and best-use conclusion.
    (g) Where an evaluation of real property is completed by a fee 
appraiser, as defined in Sec. 614.4240(g), the institution's standards 
shall include provisions for periodic collateral inspections performed 
by the institution's account officer or appropriate designee.

[59 FR 46730, Sept. 12, 1994, as amended at 71 FR 65387, Nov. 8, 2006; 
75 FR 35968, June 24, 2010]



Sec. 614.4266  Personal and intangible property evaluations.

    (a) Personal property and intangibles shall be valued on the basis 
of market value in accordance with the institution's evaluation 
standards and policies.
    (b) Personal property evaluations shall include a source of 
comparisons of value (i.e., equipment dealer listings, Blue Book, market 
sales reports, etc.) and a description of the property being evaluated, 
including location of the property and, where applicable, quantity, 
species/variety, measure/weight, value per unit and in total, type of 
identification (such as brand, bill of lading, or warehouse receipt), 
quality, condition, and date.
    (c) Evaluations of intangibles shall include a review and 
description of the documents supporting the property interests and the 
marketability of the intangible property, including applicable terms, 
conditions, and restrictions contained in the document that would affect 
the value of the property.
    (d) Where an evaluation of personal or intangible property is 
completed by a fee appraiser, as defined in Sec. 614.4240(g), the 
institution's standards shall include provisions for periodic collateral 
inspections and verification by the institution's account officer or 
appropriate designee.
    (e) When a Farm Credit System institution deems an appraisal 
necessary, personal or intangible property shall be appraised in 
accordance with procedures and standards established by the institution 
by individuals deemed qualified by the institution to complete the work 
under the USPAP Competency and Ethics Provisions.

[59 FR 46730, Sept. 12, 1994, as amended at 59 FR 50964, Oct. 6, 1994]



Sec. 614.4267  Professional association membership; competency.

    (a) Membership in appraisal organizations. A State certified 
appraiser or a State licensed appraiser may not be excluded from 
consideration for an assignment for a real estate-related transaction 
solely by virtue of membership or lack of membership in any particular 
appraisal organization.
    (b) Competency. All staff and fee evaluators, including appraisers, 
performing evaluations in connection with real, personal, or intangible 
property taken as collateral in connection with extensions of credit 
must meet the qualification requirements of this subpart. However, an 
evaluator (as defined in Sec. 614.4240(n)) may not be considered 
competent solely by virtue of being certified, licensed, or accredited. 
Any determination of competency shall be based on the individual's 
experience and educational background as they relate to the particular 
evaluation assignment for which such individual is being considered.

Subpart G [Reserved]



                   Subpart H_Loan Purchases and Sales

    Source: 57 FR 38247, Aug. 24, 1992, unless otherwise noted.



Sec. 614.4325  Purchase and sale of interests in loans.

    (a) Definitions. For the purposes of this subpart, the following 
definitions shall apply:
    (1) Interests in loans means ownership interests in the principal 
amount, interest payments, or any aspect of a loan transaction and 
transactions involving a pool of loans, including servicing rights.
    (2) Lead lender means a lending institution having a direct 
contractual relationship with a borrower to advance funds, which 
institution sells or assigns an interest or interests in such loan to 
one or more other lenders.

[[Page 137]]

    (3) Loan means any extension of credit or similar financial 
assistance of the type authorized under the Act, such as guarantees, 
letters of credit, and other similar transactions.
    (4) Participating institution means an institution that purchases a 
participation interest in a loan originated by another lender.
    (5) Sale with recourse means a sale of a loan or an interest in a 
loan in which the seller:
    (i) Retains some risk of loss from the transferred asset for any 
cause except the seller's breach of usual and customary warranties or 
representations designed to protect the purchaser against fraud or 
misrepresentation; or
    (ii) Has an obligation to make payments of principal or interest to 
any party resulting from:
    (A) Default on the payment of principal or interest on the loan by 
the borrower or guarantor or any other deficiencies in the obligor's 
performance;
    (B) Changes in the market value of the assets after transfer;
    (C) Any contractual relationship between the seller and purchaser 
incident to the transfer that, by its terms, could continue even after 
final payment, default, or other termination of the assets transferred; 
or
    (D) Any other cause, except the retention at servicing rights alone 
shall not constitute recourse.
    (6) Subordinated participation interest means an interest in a loan 
that bears the first risk of loss, including the retention of such an 
interest when a loan is sold to a pooler certified by the Federal 
Agricultural Mortgage Corporation pursuant to title VIII of the Act, or 
an interest in a pool of subordinated participation interests purchased 
to satisfy the requirements of title VIII of the Act with respect to a 
loan sold to such a certified pooler.
    (b) Authority to purchase and sell interests in loans. Loans and 
interests in loans may only be sold in accordance with each 
institution's lending authorities, as set forth in subpart A of this 
part. No Farm Credit System institution may purchase any interest in a 
loan from an institution that is not a Farm Credit System institution, 
except:
    (1) For the purpose of pooling and securitizing such loans under 
title VIII of the Act;
    (2) Purchases of a participation interest that qualifies under the 
institution's lending authority, as set forth in subpart A of this part, 
and meets the requirements of Sec. 614.4330 of this subpart;
    (3) Loans purchased from the Federal Deposit Insurance Corporation, 
provided that the Farm Credit System institution with direct lending 
authority under title I, II or III of the Act:
    (i) Conducts a thorough due diligence prior to purchase to ensure 
that the loan, or pool of loans, qualifies under the institution's 
lending authority as set forth in subpart A of this part, and meets 
scope of financing and eligibility requirements in subpart A or subpart 
B of part 613;
    (ii) Obtains funding bank approval if a Farm Credit System 
association purchases loans or pools of loans that exceed 10 percent of 
total its capital;
    (iii) Establishes a program whereby each eligible borrower of the 
loan purchased is offered an opportunity to acquire the institution's 
required minimum amount of voting stock;
    (iv) Determines whether each loan purchased, except for loans 
purchased that could be financed only by a bank for cooperatives under 
title III of the Act, is a distressed loan as defined in Sec. 617.7000, 
and provides borrowers of purchased loans who acquire voting stock the 
rights afforded in Sec. 617.7000, subparts A, and D through G if the 
loan is distressed; and
    (v) Divests eligible purchased loans when the borrowers elect not to 
acquire stock under the program offered in paragraph (b)(3)(iii) of this 
section in the same manner it would divest loans under its current 
business practices.
    (vi) Includes information on loans purchased under authority of this 
section in the Reports of Condition and Performance required under 
Sec. 621.12 of this chapter, in the format prescribed by FCA reporting 
instructions.
    (c) Policies. Each Farm Credit System institution that is authorized 
to sell or purchase interests in loans under subpart A of this part 
shall exercise that authority in accordance with a policy

[[Page 138]]

adopted by its board of directors that addresses the following matters:
    (1) The types of purchasers to which the institution is authorized 
to sell interests in loans;
    (2) The types of loans in which the institution may purchase or sell 
an interest and the types of interests which may be purchased or sold;
    (3) The underwriting standards to be applied in the purchase of 
interests in loans:
    (4) Such limitations on the aggregate principal amount of interests 
in loans that the institution may purchase from a single institution as 
are necessary to diversify risk, and such limitations on the aggregate 
amount the institution may purchase from all institutions as are 
necessary to assure that service to the territory is not impeded;
    (5) Provision for the identification and reporting of loans in which 
interests are sold or purchased;
    (6) Requirements for providing and securing in a timely manner 
adequate credit and other information needed to make an independent 
credit judgment; and
    (7) Any limitations or conditions to which sales or purchases are 
subject that the board deems appropriate, including arbitration.
    (d) Purchase and sale agreements. Agreements to purchase or sell an 
interest in a loan shall, at a minimum:
    (1) Identify the particular loan(s) to be covered by the agreement;
    (2) Provide for the transfer of credit and other borrower 
information on a timely and continuing basis;
    (3) Provide for sharing, dividing, or assigning collateral;
    (4) Identify the nature of the interest(s) sold or purchased;
    (5) Set forth the rights and obligations of the parties and the 
terms and conditions of the sale; and
    (6) Contain any terms necessary for the appropriate administration 
of the loan and the protection of the interests of the Farm Credit 
System institution.
    (e) Independent credit judgment. Each institution that purchases an 
interest in a loan shall make a judgment on the creditworthiness of the 
borrower that is independent of the originating or lead lender and any 
intermediary seller or broker prior to the purchase of the interest and 
prior to any servicing action that alters the terms of the original 
agreement, which judgment shall not be delegated to any person(s) not 
employed by the institution. A Farm Credit System institution that 
purchases a loan or any interest therein may use information, such as 
appraisals or collateral inspections, furnished by the originating or 
lead lender, or any intermediary seller or broker; however, the 
purchasing Farm Credit System institution shall independently evaluate 
such information when exercising its independent credit judgment. No 
employee who performed a real estate appraisal on any collateral 
supporting a loan shall participate in the decision to purchase that 
loan. The independent credit judgment shall be documented by a credit 
analysis that considers factors set forth in the loan underwriting 
standards adopted pursuant to Sec. 614.4150 of this part and is 
independent of the originating institution and any intermediary seller 
or broker. The credit analysis shall consider such credit and other 
borrower information as would be required by a prudent lender and shall 
include an evaluation of the capacity and reliability of the servicer. 
Boards of directors of jointly managed institutions shall adopt 
procedures to ensure that the interests of their respective shareholders 
are protected in participation between such institutions.
    (f) Limitations. The aggregate principal amount of interests in 
loans purchased from a single lead lender and the aggregate principal 
amount of interests in loans purchased from other institutions shall not 
exceed the limits set in the institution's policy.
    (g) Sales with recourse. When a loan or interest in a loan is sold 
with recourse, it shall be accorded the following treatment:
    (1) The loan shall be considered, to the extent of the recourse, an 
extension of credit by the purchaser to the seller, as well as an 
extension of credit from the seller to the borrower(s), for the purpose 
of determining whether credit extensions to a borrower are within the 
lending limits established in subpart J of this part.

[[Page 139]]

    (2) The amount of the loan subject to the recourse agreement shall 
be considered a loan sold with recourse for the purpose of computing 
permanent capital ratios.
    (h) Transactions through agents. Transactions pertaining to 
purchases of loans, including the judgement on creditworthiness, may be 
performed through an agent, provided that:
    (1) The institution establishes the necessary criteria in a written 
agency agreement that outlines, at a minimum, the scope of the agency 
relationship and obligates the agent to comply with the institution's 
underwriting standards;
    (2) The institution periodically reviews the agency relationship to 
determine if the agent's actions are in the best interest of the 
institution;
    (3) The agent must be independent of the seller or intermediate 
broker in the transaction; and
    (4) If an association's funding bank serves as its agent, the agency 
agreement must provide that:
    (i) The association can terminate the agreement upon no more than 60 
days notice to the bank;
    (ii) The association may, in its discretion, require the bank to 
purchase from the association any interest in a loan that the 
association determines does not comply with the terms of the agency 
agreement or the association's loan underwriting standards.

[57 FR 38247, Aug. 24, 1992, as amended at 58 FR 40321, July 28, 1993; 
62 FR 51015, Sept. 30, 1997; 64 FR 34517, June 28, 1999; 67 FR 1285, 
Jan. 10, 2002; 76 FR 30250, May 25, 2011]



Sec. 614.4330  Loan participations.

    Agreements to purchase or sell a participation interest shall be 
subject to the provisions of Sec. 614.4325 of this subpart, and, in 
addition, shall satisfy the requirements of this section.
    (a) Participation agreements. Agreements to purchase or sell a 
participation interest in a loan shall, in addition to meeting the 
requirements of Sec. 614.4325(d) of this subpart, at a minimum:
    (1) Define the duties and responsibilities of the participating 
institution and the lead lender, and/or the servicing institution, if 
different from the lead lender.
    (2) Provide for loan servicing and monitoring of the servicer;
    (3) Set forth authorization and conditions for action in the event 
of borrower distress or default;
    (4) Provide for sharing of risk;
    (5) Set forth conditions for the offering and acceptance of the loan 
participation and termination of the agreement;
    (6) Provide for sharing of fees, interest charges, and costs between 
participating institutions;
    (7) Provide for a method of resolution of disagreements arising 
under the agreement between two or more institutions;
    (8) Specify whether the contract is assignable by either party; and
    (9) Provide for the issuance of certificates evidencing a 
participation interest in a loan.
    (b) Intrasystem participations. Loans participated between or among 
Farm Credit System institutions shall meet the borrower eligibility, 
membership, loan term, loan amount, loan security, and stock purchase 
requirements of the originating lender.

[57 FR 38247, Aug. 24, 1992, as amended at 67 FR 1285, Jan. 10, 2002]



Sec. 614.4335  Borrower stock requirements.

    (a) In general. Except as provided in paragraph (b) of this section, 
a borrower shall meet the minimum borrower stock purchase requirements 
as a condition of obtaining a loan.
    (b) Loans designated for sale into a secondary market. (1) An 
institution's bylaws may provide that the institution's minimum borrower 
stock purchase requirements do not apply if a loan is designated, at the 
time it is made, for sale into a secondary market.
    (2) If a loan designated for sale under paragraph (b)(1) of this 
section is not sold into a secondary market during the 180-day period 
that begins on the date of designation, the institution's minimum 
borrower stock purchase requirements shall apply.
    (c) Retirement of borrower stock--(1) In general. Borrower stock may 
be retired only if the institution meets the minimum permanent capital 
requirements imposed by the FCA pursuant to the

[[Page 140]]

Act or regulations and, except as provided in paragraph (c)(2) of this 
section, in accordance with the following:
    (i) Borrower stock may be retired if the entire loan is sold without 
recourse, provided that when the loan is sold without recourse to 
another Farm Credit System institution, the borrower may elect to hold 
stock in either the selling or purchasing institution.
    (ii) Borrower stock may not be retired when the entire loan is sold 
with recourse.
    (iii) When an interest in a loan is sold without recourse, a 
proportionate amount of borrower stock may be retired, but in no event 
may stock be retired below the institution's minimum stock purchase 
requirements for the interest retained.
    (iv) If an institution repurchases a loan on which the stock has 
been retired, the borrower shall be required to repurchase stock in the 
amount of the minimum stock purchase requirement.
    (2) Loans sold into a secondary market. An institution's bylaws may 
provide that all outstanding voting stock held by a borrower with 
respect to a loan shall be retired when the loan is sold into a 
secondary market.
    (d) Applicability. In the case of a loan sold into a secondary 
market under title VIII of the Act, paragraphs (b)(1) and (c)(2) of this 
section apply regardless of whether the institution retains a 
subordinated participation interest in a loan or pool of loans or 
contributes to a cash reserve.

[62 FR 63646, Dec. 2, 1997]



Sec. 614.4337  Disclosure to borrowers.

    When a loan or an interest in a loan other than a participation 
interest is sold with servicing rights, the disclosure shall be made to 
the borrower in accordance with this section:
    (a) The selling institution shall disclose to the borrower at least 
10 days prior to the borrower's next payment date;
    (1) The name, address, and telephone number of the purchasing 
institution;
    (2) The name and address of the party to whom payment is to be made;
    (3) A description of the impact of the sale on statutory borrower 
rights after the sale;
    (4) Any terms in the agreement that would permit a purchaser to 
change the terms or conditions of the loan.
    (b) A Farm Credit System institution that purchases a loan or a non-
participation interest therein shall not take any servicing action that 
adversely affects the borrower until it ensures that disclosure has been 
made to the borrower of:
    (1) The name, address, and telephone number of the purchasing 
institution; and
    (2) The address where the payment should be sent.



                    Subpart I_Loss-Sharing Agreements



Sec. 614.4340  General.

    (a) Upon the approval of the board of directors of the respective 
Farm Credit System institutions, any System bank, association, or 
service corporation or service association may enter into an agreement 
to share loan and other losses with any other institution(s) of the 
System. As appropriate, a loss-sharing agreement may contain provisions 
relating to definitions of terms, terms and conditions for activation, 
determinations of assessment formulas, limitations on assessments, 
reimbursements, administration, arbitration, and provisions for 
amendment and termination.
    (b) System institutions may agree among themselves to share losses 
for the purpose of protecting against the impairment of capital stock or 
participation certificates, or for any other purpose. Agreements may 
provide for sharing losses that arise in the future or that were 
recognized by one or more of the signatory institutions before the date 
of the agreement. Agreements may contain provisions that are not 
entirely reciprocal among the signatories to the agreement. Loss-sharing 
agreements can provide for the sharing of loan losses, operating losses, 
casualty losses, losses on high risk assets, or any other losses.

[49 FR 48910, Dec. 17, 1984, as amended at 54 FR 1151, Jan. 12, 1989; 54 
FR 50736, Dec. 11, 1989]

[[Page 141]]



Sec. 614.4345  Guaranty agreements.

    Guaranty agreements under which a percentage of the risk associated 
with specific loans is assumed may be entered into by or among System 
banks and associations.

[49 FR 48910, Dec. 17, 1984, as amended at 54 FR 1151, Jan. 12, 1989; 54 
FR 50736, Dec. 11, 1989]



                  Subpart J_Lending and Leasing Limits

    Source: 58 FR 40321, July 28, 1993, unless otherwise noted.



Sec. 614.4350  Definitions.

    For purposes of this subpart, the following definitions shall apply:
    (a) Borrower means an individual, partnership, joint venture, trust, 
corporation, or other business entity to which an institution has made a 
loan or a commitment to make a loan either directly or indirectly. 
Excluded are a Farm Credit System association or other financing 
institution that comply with the criteria in section 1.7(b) of the Act 
and the regulations in subpart P of this part. For the purposes of this 
subpart, the term ``borrower'' includes any customer to whom an 
institution has made a lease or a commitment to make a lease.
    (b) Commitment means a legally binding obligation to extend credit, 
enter into lease financing, purchase or participate in loans or leases, 
or pay the obligation of another, which becomes effective at the time 
such commitment is made.
    (c) Loan means any extension of, or commitment to extend, credit 
authorized under the Act whether it results from direct negotiations 
between a lender and a borrower or is purchased from or discounted for 
another lender. This includes participation interests. The term ``loan'' 
includes loans and leases outstanding, obligated but undisbursed 
commitments to lend or lease, contracts of sale, notes receivable, other 
similar obligations, guarantees, and all types of leases. An institution 
``makes a loan or lease'' when it enters into a commitment to lend or 
lease, advances new funds, substitutes a different borrower or lessee 
for a borrower or lessee who is released, or where any other person's 
liability is added to the outstanding loan, lease or commitment.
    (d) Primary liability means an obligation to repay that is not 
conditioned upon an unsuccessful prior demand on another party.
    (e) Secondary liability means an obligation to repay that only 
arises after an unsuccessful demand on another party.

[58 FR 40321, July 28, 1993, as amended at 64 FR 34517, June 28, 1999]



Sec. 614.4351  Computation of lending and leasing limit base.

    (a) Lending and leasing limit base. An institution's lending and 
leasing limit base is composed of the permanent capital of the 
institution, as defined in Sec. 615.5201 of this chapter, with 
adjustments applicable to the institution provided for in Sec. 615.5207 
of this chapter, and with the following further adjustments:
    (1) Where one institution invests in another institution in 
connection with the sale of a loan participation interest, the amount of 
investment in the institution purchasing this participation interest 
that is owned by the institution originating the loan shall be counted 
in the lending and leasing limit base of the originating institution and 
shall not be counted in the lending and leasing limit base of the 
purchasing institution.
    (2) Any amounts of preferred stock not eligible to be included in 
total capital as defined in Sec. 628.2 of this chapter must be deducted 
from the lending limit base, except that otherwise eligible third-party 
capital that is required to be excluded from total capital under 
Sec. 628.23 of this chapter may be included in the lending limit base.
    (b) Timing of calculation. The lending limit base will be calculated 
on a monthly basis as of the preceding month end.

[58 FR 40321, July 28, 1993, as amended at 59 FR 37403, July 22, 1994; 
64 FR 34517, June 28, 1999; 70 FR 35348, June 17, 2005; 70 FR 53907, 
Sept. 13, 2005; 81 FR 49772, July 28, 2016]

[[Page 142]]



Sec. 614.4352  Farm Credit Banks and agricultural credit banks.

    (a) Farm Credit Banks. No Farm Credit Bank may make or discount a 
loan to a borrower if the consolidated amount of all loans outstanding 
and undisbursed commitments to that borrower exceed 15 percent of the 
bank's lending and leasing limit base.
    (b) Agricultural credit banks. (1) No agricultural credit bank may 
make or discount a loan to a borrower under the authority of title I of 
the Act if the consolidated amount of all loans outstanding and 
undisbursed commitments to that borrower exceed 15 percent of the bank's 
lending and leasing limit base.
    (2) No agricultural credit bank may make or discount a loan to a 
borrower under the authority of title III of the Act if the consolidated 
amount of all loans outstanding and undisbursed commitments to that 
borrower exceed the lending and leasing limits prescribed in 
Sec. 614.4355 of this subpart.

[58 FR 40321, July 28, 1993, as amended at 64 FR 34517, June 28, 1999; 
76 FR 29997, May 24, 2011]



Sec. 614.4353  Direct lender associations.

    No direct lender association may make a loan to a borrower if the 
consolidated amount of all loans outstanding and undisbursed commitments 
to that borrower exceed 15 percent of the association's lending and 
leasing limit base.

[58 FR 40321, July 28, 1999, as amended at 64 FR 34517, June 28, 1999; 
76 FR 29997, May 24, 2011]



Sec. 614.4354  [Reserved]



Sec. 614.4355  Banks for cooperatives.

    No bank for cooperatives may make a loan if the consolidated amount 
of all loans outstanding and undisbursed commitments to that borrower 
exceeds the following percentages of the lending and leasing limit base 
of the bank:
    (a) Basic limit. (1) Term loans to eligible cooperatives: 25 
percent.
    (2) Term loans to foreign and domestic parties: 10 percent.
    (3) Lease loans qualifying under Sec. 614.4020(a)(3) and applying to 
the lessee: 25 percent.
    (4) Standby letters of credit qualifying under Sec. 614.4810: 35 
percent.
    (5) Guarantees qualifying under Sec. 614.4800: 35 percent.
    (6) Seasonal loans exclusive of commodity loans qualifying under 
Sec. 614.4231: 35 percent.
    (7) Foreign trade receivables qualifying under Sec. 614.4700: 50 
percent.
    (8) Commodity loans qualifying under Sec. 614.4231: 50 percent.
    (9) Export and import letters of credit qualifying under 
Sec. 614.4720: 50 percent.
    (b) Total limit. (1) The sum of term and seasonal loans exclusive of 
commodity loans qualifying under Sec. 614.4231: 35 percent.
    (2) The sum of paragraphs (a)(1) through (a)(9) of this section: 50 
percent.

[58 FR 40321, July 28, 1993, as amended at 62 FR 51015, Sept. 30, 1997; 
64 FR 34517, June 28, 1999; 71 FR 65387, Nov. 8, 2006]



Sec. 614.4356  Farm Credit Leasing Services Corporation.

    The Farm Credit Leasing Services Corporation may enter into a lease 
agreement with a lessee if the consolidated amount of all leases and 
undisbursed commitments to that lessee or any related entities does not 
exceed 15 percent of its lending and leasing limit base.

[64 FR 34517, June 28, 1999,as amended at 76 FR 29997, May 24, 2011]



Sec. 614.4357  Banks for cooperatives look-through notes.

    Where a bank for cooperatives makes a loan to an eligible borrower 
that is secured by notes of individuals or business entities, the basic 
lending limits provided in Sec. 614.4355 may be applied to each original 
notemaker rather than to the loan to the eligible borrower, if:
    (a) Each note is current and carries a full recourse endorsement or 
unconditional guarantee by the borrower;
    (b) The bank determines the financial condition, repayment capacity, 
and other credit factors of the loan to the original maker reasonably 
justify the credit granted by the endorser; and
    (c) The loans are fully supported by documented loan files, which 
include, at a minimum:

[[Page 143]]

    (1) A credit report supporting the bank's finding that the financial 
condition, repayment capacity, and other factors of the maker of the 
notes being pledged justify the credit extended by the bank and/or 
endorser;
    (2) A certification by a bank officer designated for that purpose by 
the loan or executive committee that the financial responsibility of the 
original notemaker has been evaluated by the loan committee and the bank 
is relying primarily on each such maker for the payment of the 
obligation; and
    (3) Other credit information normally required of a borrower when 
making and administering a loan.

[58 FR 40321, July 28, 1993. Redesignated at 64 FR 34517, June 28, 1999]



Sec. 614.4358  Computation of obligations.

    (a) Inclusions. The computation of total loans to each borrower for 
the purpose of computing their lending and leasing limit shall include:
    (1) The total unpaid principal of all loans and lease balances 
outstanding and the total amount of undisbursed commitments except as 
excluded by paragraph (b) of this section. This amount shall include 
loans that have been charged off on the books of the institution in 
whole or in part but have not been collected, except to the extent that 
such amounts are not legally collectible;
    (2) Purchased interests in loans, including participation interests, 
to the extent of the amount of the purchased interest, including any 
undisbursed commitment;
    (3) Loans attributed to a borrower in accordance with Sec. 614.4359.
    (b) Exclusions. The following loans when adequately documented in 
the loan file, may be excluded from loans to a borrower subject to the 
lending and leasing limit:
    (1) Any loan or portion of a loan that carries a full faith and 
credit performance guaranty or surety of any department, agency, bureau, 
board, commission, or establishment of the United States government, 
provided there is no evidence to suggest that the guaranty has become 
unenforceable and the institution can demonstrate that it is in 
compliance with the terms and conditions of the guaranty.
    (2) Any loan or portion of a loan guaranteed by a Farm Credit System 
institution, pursuant to the provisions of Sec. 614.4345 on guaranty 
agreements. This exclusion does not apply to the institution providing 
the guaranty.
    (3) Any loan or portion of a loan that is secured by bonds, notes, 
certificates of indebtedness, or Treasury bills of the United States or 
by other obligations guaranteed as to principal and interest by the 
United States government, provided the loans are fully secured by the 
current market value of such obligations. If the market value of the 
collateral declines to below the balance of the loan, and the entire 
loan, individually, or when combined with other loans and undisbursed 
commitments to or attributed to the borrower, causes the borrower's 
total indebtedness to exceed the institution's lending limit, the 
institution shall have 5 business days to bring the loan into 
conformance before it shall be deemed to be in violation of the lending 
limit.
    (4) Interests in loans sold, including participation interests, when 
the sale agreement meets the following requirements:
    (i) The interest must be sold without recourse; and
    (ii) The agreement under which the interest is sold must provide for 
the sharing of all payments of principal, collection expenses, 
collateral proceeds, and risk of loss on a pro rata basis according to 
the percentage interest in the principal amount of the loan. Agreements 
that provide for the pro rata sharing to commence at the time of default 
or similar event, as defined in the agreement under which the interest 
is sold, shall be considered to be pro rata agreements, notwithstanding 
the fact that advances are made and payments are distributed on a basis 
other than pro rata prior to that time.
    (5) Interests in leases sold when the sale agreement provides that:
    (i) The interest sold must be:
    (A) An undivided interest in all the lease payments or the residual 
value of all the leased property; or
    (B) A fractional undivided interest in the total lease transaction;

[[Page 144]]

    (ii) The interest must be sold without recourse; and
    (iii) Sharing of all lease payments must be on a pro rata basis 
according to the percentage interest in the lease payments.
    (6) Loans sold in their entirety to a pooler certified by the 
Federal Agricultural Mortgage Corporation, if an interest in a pool of 
subordinated participation interests is purchased to satisfy the 
requirements of title VIII of the Act.

[58 FR 40321, July 28, 1993. Redesignated and amended at 64 FR 34517, 
June 28, 1999; 67 FR 1285, Jan. 10, 2002]



Sec. 614.4359  Attribution rules.

    (a) For the purpose of applying the lending and leasing limit to the 
indebtedness of a borrower, loans to a related borrower shall be 
combined with loans outstanding to the borrower and attributed to the 
borrower when any one of the following three conditions exist:
    (1) Liability. (i) The borrower has primary or secondary liability 
on a loan made to the related borrower. The amount of such loan 
attributable to the borrower is limited to the amount of the borrower's 
liability.
    (ii) This section does not require attribution of a guarantee taken 
out of an abundance of caution. To qualify for the abundance of caution 
exception to the requirements of this subpart, the institution must 
document in the loan file that the loan, when evaluated under the loan 
underwriting standards adopted pursuant to Sec. 614.4150 of this part 
without considering the guarantee, would support the credit decision 
under the same basic terms and conditions.
    (iii) For the banks for cooperatives and agricultural credit banks 
operating under title III authorities of the Act, look-through notes are 
exempt from the lending limit provisions provided they meet the criteria 
of Sec. 614.4357.
    (2) Financial interdependence. The operations of a borrower and 
related borrower are financially interdependent. Financial 
interdependence exists if the borrower is the primary source of 
repayment for a related borrower's loan, or if the operations of the 
borrower and the related borrower are commingled.
    (i) The borrower shall be considered the primary source of repayment 
on the loan to the related borrower if the borrower is obligated to 
supply 50 percent or more of the related borrower's annual gross 
receipts, and reliance on the income from one another is such that, 
regardless of the solvency and liquidity of the borrower's operations, 
the debt service obligation of the related borrower could not be met if 
income flow from the borrower is interrupted or terminated. For the 
purpose of this paragraph, gross receipts include, but are not limited 
to, revenues, intercompany loans, dividends and capital contributions.
    (ii) The assets or operations of the borrower and related borrower 
are considered to be commingled if they cannot be separated without 
materially impacting the economic survival of the individual operations 
and their ability to repay their loans.
    (3) Control. The borrower directly or indirectly controls the 
related borrower. A borrower is deemed to control a related borrower if 
either paragraph (a)(3)(i) or (a)(3)(ii) of this section exist:
    (i) The borrower, directly or acting through one or more other 
persons, owns 50 percent or more of the stock of the related borrower; 
or
    (ii) The borrower, directly or acting through one or more other 
persons, owns or has the power to vote 25 percent or more of the voting 
stock of a related borrower, and meets at least one of the following 
three conditions:
    (A) The borrower shares a common directorate or management with a 
related borrower. A common directorate is deemed to exist when a 
majority of the directors, trustees, or other persons performing similar 
functions of one borrower also serves the other borrower in a like 
capacity. A common management is deemed to exist if any employee of the 
borrower holds the position of chief executive officer, chief operating 
officer, chief financial officer, or an equivalent position in the 
related borrower's organization.
    (B) The borrower controls in any manner the election of a majority 
of directors of a related borrower.

[[Page 145]]

    (C) The borrower exercises or has the power to exercise a 
controlling influence over management of a related borrower's operations 
through the provisions of management placement or marketing agreements, 
or providing services such as insurance carrier or bookkeeping.
    (b) Each institution shall make provisions for appropriately 
designating loans to a related borrower that are combined with the 
borrower's loan and attributed to the borrower to ensure that loans to 
the borrower are within the lending and leasing limits.
    (c) Attribution rules table. For the purposes of applying the 
lending and leasing limit to the indebtedness of a borrower, loans to a 
related borrower shall be combined with loans outstanding to the 
borrower and attributed to the borrower when any one of three 
attribution rules are met as outlined in Table 1.

                                 Table 1
------------------------------------------------------------------------
                                    Criteria per Sec.
        Attribution rule                614.4359            Attribute
------------------------------------------------------------------------
(A) Liability..................  Borrower has primary    Yes.*
                                  or secondary
                                  liability.
*to the extent of the            Borrower's liability    No.*
 borrower's liability.            is taken out of an
                                  abundance of caution.
                                 Look-through notes (BC  No.
                                  only).
(B) Financial Interdependence..  Source of Repayment:
(Economic survival of the        Borrower is obligated   Yes.
 borrower's operation will        to supply 50 percent
 materially impact economic       or more of related
 survival of the related          borrower's annual
 borrowers operation).            gross receipts, and
                                  reliance on the
                                  income from one
                                  another is such that
                                  the debt service of
                                  the related borrower
                                  could not be met if
                                  income flow from the
                                  borrower is
                                  interrupted or
                                  terminated.
                                 Commingled Operations:
                                 Assets or operations    Yes.
                                  of the borrowers are
                                  commingled and cannot
                                  be separated without
                                  materially impacting
                                  the borrowers'
                                  repayment capacity
(C) Control....................  The borrower owns 50    Yes.
                                  percent or more of
                                  the stock of the
                                  related borrower.
(The borrower, directly or       The borrower owns or    Yes.
 indirectly, controls the         has the power to vote
 related borrower).               25 percent or more of
                                  the voting stock of a
                                  related borrower, and
                                 (1) Shares a common
                                  directorate or
                                  management with a
                                  related borrower, or.
                                 (2) Controls the
                                  election of a
                                  majority of directors
                                  of a related
                                  borrower, or.
                                 (3) Exercises a
                                  controlling influence
                                  over management of a
                                  related borrower's
                                  operations through
                                  the provisions of
                                  management placement
                                  or marketing
                                  agreements, or
                                  providing services
                                  such as insurance
                                  carrier or
                                  bookkeeping.
------------------------------------------------------------------------


[58 FR 40321, July 28, 1993, as amended at 62 FR 51015, Sept. 30, 1997. 
Redesignated and amended at 64 FR 34517, June 28, 1999]



Sec. 614.4360  Lending and leasing limit violations.

    (a) Each loan, except loans that are grandfathered under the 
provisions of Sec. 614.4361, shall be in compliance with the lending and 
leasing limit on the date the loan is made, and at all times thereafter. 
Except as provided for in paragraph (b) of this section, loans which are 
in violation of the lending and leasing limit shall comply with the 
provisions of Sec. 615.5090 of this chapter.
    (b) Under the following conditions a loan that violates the lending 
and leasing limit shall be exempt from the provisions of Sec. 615.5090 
of this chapter:
    (1) A loan in which the total amount of principal outstanding and 
undisbursed commitments exceed the lending and leasing limit because of 
a decline in permanent capital after the loan was made.
    (2) Loans on which funds are advanced pursuant to a commitment that 
was within the lending and leasing limit at the time the commitment was 
made, even if the lending and leasing limit subsequently declines.
    (3) A loan that exceeds the lending and leasing limit as a result of 
the consolidation of the debt of two or more borrowers as a consequence 
of a merger or the acquisition of one borrower's operations by another 
borrower. Such a loan may be extended or renewed, for a period not to 
exceed 1 year from the

[[Page 146]]

date of such merger or acquisition, during which period the institution 
may advance and/or readvance funds not to exceed the greater of:
    (i) 110 percent of the advances to the borrower in the prior 
calendar year; or
    (ii) 110 percent of the average of the advances to the borrower in 
the past 3 calendar years.
    (c) For all lending and leasing limit violations except those 
exempted under Sec. 614.4360(b)(3), within 90 days of the identification 
of the violation, the institution must develop a written plan 
prescribing the specific actions that will be taken by the institution 
to bring the total amount of loans and commitments outstanding or 
attributed to that borrower within the new lending and leasing limit, 
and must document the plan in the loan file.
    (d) All leases, except those permitted under Sec. 614.4361, reading 
``effective date of this subpart'' in Sec. 614.4361(a) and ``effective 
date of these regulations'' in Sec. 614.4361(b) as ``effective date of 
this amendment,'' must comply with the lending and leasing limit on the 
date the lease is made, and at all times after that.
    (e) Nothing in this section limits the authority of the FCA to take 
administrative action, including, but not limited to, monetary 
penalties, as a result of lending and leasing limit violations.

[58 FR 40321, July 28, 1993. Redesignated and amended at 64 FR 34517, 
June 28, 1999]



Sec. 614.4361  Transition.

    (a) A loan (not including a commitment) made or attributed to a 
borrower prior to the effective date of this subpart, which does not 
comply with the limits contained in this subpart, will not be considered 
a violation of the lending and leasing limits during the existing 
contract terms of such loans. A new loan must conform with the rules set 
forth in this subpart. A new loan includes but is not limited to:
    (1) Funds advanced in excess of existing commitment;
    (2) A different borrower is substituted for a borrower who is 
subsequently released; or
    (3) An additional person becomes an obligor on the loan.
    (b) A commitment made prior to the effective date of these 
regulations which exceeds the lending and leasing limit may be funded to 
the full extent of the legal commitment. Any advances that exceed the 
lending and leasing limit are subject to the provisions prescribed in 
Sec. 614.4360.

[58 FR 40321, July 28, 1993. Redesignated and amended at 64 FR 34517, 
34518, June 28, 1999]



Sec. 614.4362  Loan and lease concentration risk mitigation policy.

    The board of directors of each title I, II, and III System 
institution must adopt and ensure implementation of a written policy to 
effectively measure, limit and monitor exposures to concentration risks 
resulting from the institution's lending and leasing activities.
    (a) Policy elements. The policy must include:
    (1) A purpose and objective;
    (2) Clearly defined and consistently used terms;
    (3) Quantitative methods to measure and limit identified exposures 
to significant and reasonably foreseeable loan and lease concentration 
risks (as set forth in paragraph (b) of this section); and
    (4) Internal controls that delineate authorities delegated to 
management, authorities retained by the board, and a process for 
addressing exceptions and reporting requirements.
    (b) Quantitative methods. (1) At a minimum, the quantitative methods 
included in the policy must measure and limit identified exposures to 
significant and reasonably foreseeable concentration risks emanating 
from:
    (i) A single borrower;
    (ii) A single-industry sector;
    (iii) A single counterparty; or
    (iv) Other lending activities unique to the institution because of 
its territory, the nature and scope of its activities and its risk-
bearing capacity.
    (2) In determining concentration limits, the policy must consider 
other risk factors that could identify significant and reasonably 
foreseeable loan and lease losses. Such risk factors could include 
borrower risk ratings, the institution's relationship with the borrower, 
the borrower's knowledge and experience, loan structure and purpose, 
type or location of collateral (including loss given default ratings), 
loans to

[[Page 147]]

emerging industries or industries outside of an institution's area of 
expertise, out-of-territory loans, counterparties, or weaknesses in due 
diligence practices.

[76 FR 29997, May 24, 2011]

Subparts K-L [Reserved]



                  Subpart M_Loan Approval Requirements



Sec. 614.4450  General requirements.

    Authority for loan approval is vested in the Farm Credit banks and 
associations.

[51 FR 41947, Nov. 20, 1986]



Sec. 614.4460  Loan approval responsibility.

    Approval of the following loans is the responsibility of each 
district board of directors. The responsibility may be discharged by 
prior approval of such loans by the appropriate bank board, or 
establishment of a policy under which the authority to approve such 
loans is delegated to bank management (except paragraphs (d) and (e) of 
this section which cannot be delegated to management). If the approval 
of such loans is to be delegated to bank management, the loans are to be 
submitted promptly for post review by the bank board and a report 
disclosing all material facts relating to the credit relationship 
involved shall be submitted annually by bank management to the district 
board.
    (a) Loans to a member of the Farm Credit Administration Board.
    (b) Loans to a member of the district board.
    (c) Loans to a cooperative of which a member of a bank board of 
directors is a member of the board of directors, an officer, or 
employee.
    (d) Loans to the president of a Farm Credit bank.
    (e) Loans to employees of the Farm Credit Administration.
    (f) Loans where directors, officers or employees designated above:
    (1) Are to receive proceeds of the loan in excess of an amount 
prescribed by an appropriate bank board, or
    (2) Are stockholders or owners of equity in a legal entity to which 
the loan is to be made wherein they have a significant personal or 
beneficial interest in the loan proceeds thereof or the security, or
    (3) Are endorsers, guarantors or co-makers in excess of an amount 
prescribed by an appropriate bank board.

[38 FR 27837, Oct. 9, 1973, as amended at 39 FR 29585, Aug. 16, 1974. 
Redesignated at 46 FR 51878, Oct. 22, 1981, and amended at 51 FR 41947, 
Nov. 20, 1986; 54 FR 1151, Jan. 12, 1989; 54 FR 50736, Dec. 11, 1989; 56 
FR 2674, Jan. 24, 1991]



Sec. 614.4470  Loans subject to bank approval.

    (a) The following loans (unless such loans are of a type prohibited 
under part 612) shall be subject to prior approval of the bank 
supervising the association in which the loan application originates:
    (1) Loans to a director of the association.
    (2) Loans to a director of an association which is under joint 
management when the application originates in one of the associations.
    (3) Loans to an employee of the association.
    (4) Loans to an employee of an association which is under joint 
management when the application originates in one of the associations.
    (5) Loans to bank employees when the application originates in one 
of the associations supervised by the employing bank.
    (b) Loans to any borrower shall be subject to the prior approval of 
the bank supervising the association in which the loan application 
originates whenever a director or an employee of the association or an 
employee of the bank supervising the association:
    (1) Will receive proceeds of the loan in excess of the amount 
prescribed by the supervising bank board, or
    (2) Has a significant personal or beneficial interest in the loan, 
the proceeds, or the security, or controls the borrower, or
    (3) Is an endorser, guarantor, or comaker with respect to the loan 
in excess of an amount prescribed by the supervising bank board.

[[Page 148]]

    (c) Any loan which will result in any one borrower being obligated 
(as defined in subpart J of this part) in excess of an amount 
established by the supervising bank under its policies for delegation of 
authority to associations shall be subject to prior approval of the 
supervising bank.

[47 FR 49832, Nov. 3, 1982, as amended at 58 FR 40324, July 28, 1993; 60 
FR 20010, Apr. 24, 1995]

Subpart N [Reserved]



                   Subpart O_Special Lending Programs



Sec. 614.4525  General.

    (a) To provide the best possible credit service to farmers, 
ranchers, and producers or harvesters of aquatic products, bank and 
association boards may adopt policies permitting the bank or association 
to enter into agreements with agents, dealers, cooperatives, other 
lenders, and individuals to facilitate its making of loans to eligible 
farmers, ranchers, and producers or harvesters of aquatic products.
    (b) A bank or association, pursuant to its board policies, may enter 
into an agreement with third parties that will accrue to the benefit of 
the borrower and the lender to perform functions in the making or 
servicing of loans other than the evaluation and approval of loans. When 
such an agreement is developed, and the territory covered by the 
agreement extends outside the territorial limits of the originating 
association or bank, the written consent of all affected banks or 
associations is required. Reasonable compensation may be paid for 
services rendered.
    (c) Production credit associations and agricultural credit 
associations may enter into agreements with private dealers or 
cooperatives permitting them to take applications for loans from the 
association to purchase farm or aquatic equipment, supplies, and 
machinery. Such agreements shall normally be limited to persons or 
businesses selling to farmers, ranchers, or producers or harvesters of 
aquatic products and shall contain credit limits consistent with sound 
credit standards. When the sales territory of a dealer or cooperative 
extends outside the territory of the originating association or the Farm 
Credit district, written consent of each bank and association affected 
shall be obtained before making such loans. Reasonable compensation may 
be paid or charged to a dealer or cooperative for services rendered in 
connection with such programs.
    (d) Farm Credit System institutions that are direct lenders may 
enter into memoranda of understanding among themselves or with other 
lenders for the simultaneous processing and closing of loans to a mutual 
borrower. The basic policies and principles of each System lender shall 
apply.

[47 FR 12146, Mar. 22, 1982. Redesignated at 53 FR 35454, Sept. 14, 
1988, and amended at 55 FR 24886, June 19, 1990; 61 FR 67187, Dec. 20, 
1996]



Sec. 614.4530  Special loans, production credit associations and 
agricultural credit associations.

    Under policies approved by the bank board and procedures developed 
by the bank, production credit associations and agricultural credit 
associations may make the following special types of loans on 
commodities covered by price support programs. Notwithstanding the 
regulations covering other loans made by an association, loans may be 
made to members on any commodity for which a Commodity Credit 
Corporation price support program is in effect, at such rate of interest 
and upon such terms as the bank board may prescribe subject to the 
following conditions:
    (a) The commodity offered as security for the loan shall be eligible 
for price support under a Commodity Credit Corporation price support 
program and shall be stored in a bonded public warehouse, holding 
storage agreement for such commodity approved by Commodity Credit 
Corporation.
    (b) The member shall have complied with all Commodity Credit 
Corporation eligibility requirements.
    (c) The loan shall mature not later than 30 days prior to the 
expiration of the period during which the Commodity Credit Corporation 
loan or other price support may be obtained on the commodity and shall 
be secured by

[[Page 149]]

pledge of negotiable warehouse receipts covering the commodity.
    (d) The borrower shall appoint the association as his attorney-in-
fact to obtain a Commodity Credit Corporation loan (or other such price 
support as is available) in the event that the borrower fails to do so 
prior to maturity or repayment of the loan.

[37 FR 11424, June 7, 1972. Redesignated at 46 FR 51878, Oct. 22, 1981, 
and amended at 55 FR 24886, June 19, 1990]



  Subpart P_Farm Credit Bank and Agricultural Credit Bank Financing of 
                      Other Financing Institutions

    Source: 63 FR 36547, July 7, 1998, unless otherwise noted.



Sec. 614.4540  Other financing institution access to Farm Credit
Banks and agricultural credit banks for funding, discount,
and other similar financial assistance.

    (a) Basic criteria for access. Any national bank, State bank, trust 
company, agriculture credit corporation, incorporated livestock loan 
company, savings association, credit union, or any association of 
agricultural producers engaged in the making of loans to farmers and 
ranchers, and any corporation engaged in the making of loans to 
producers or harvesters of aquatic products may become an other 
financing institution (OFI) that funds, discounts, and obtains other 
similar financial assistance from a Farm Credit Bank or agricultural 
credit bank in order to extend short- and intermediate-term credit to 
eligible borrowers for authorized purposes pursuant to sections 1.10(b) 
and 2.4(a) and (b) of the Act. Each OFI shall be duly organized and 
qualified to make loans and leases under the laws of each jurisdiction 
in which it operates.
    (b) Assured access. Each Farm Credit Bank or agricultural credit 
bank must fund, discount, or provide other similar financial assistance 
to any creditworthy OFI that:
    (1) Maintains at least 15 percent of its loan volume at a seasonal 
peak in loans and leases to farmers, ranchers, aquatic producers and 
harvesters. The Farm Credit Bank or agricultural credit bank shall not 
include the loan assets of the OFI's parent, affiliates, or subsidiaries 
when determining compliance with the requirement of this paragraph; and
    (2) Executes a general financing agreement with the Farm Credit Bank 
or agricultural credit bank that establishes a financing or discount 
relationship for at least 2 years.
    (c) Underwriting standards. Each Farm Credit Bank and agricultural 
credit bank shall establish objective policies, procedures, pricing 
guidelines, and loan underwriting standards for determining the 
creditworthiness of each OFI applicant. A copy of such policies, 
procedures, guidelines, and standards shall be made available, upon 
request to each OFI and OFI applicant.
    (d) Denial of OFI access. A Farm Credit Bank or an agricultural 
credit bank may deny the funding request of any creditworthy OFI that 
meets the conditions in paragraph (b) of this section only when such 
request would:
    (1) Adversely affect a Farm Credit Bank or agricultural credit 
bank's ability to:
    (i) Achieve and maintain established or projected capital levels; or
    (ii) Raise funds in the money markets; or
    (2) Otherwise expose the Farm Credit Bank or agricultural credit 
bank to safety and soundness risks.
    (e) Notice to applicants. Each Farm Credit Bank or agricultural 
credit bank shall render its decision on an OFI application in as 
expeditious a manner as is practicable. Upon reaching a decision on an 
application, the Farm Credit Bank or agricultural credit bank shall 
provide prompt written notice of its decision to the applicant. When the 
Farm Credit Bank or agricultural credit bank makes an adverse credit 
decision on an application, the written notice shall include the 
specific reason(s) for the decision.
    (f) Reports to the board of directors. Each Farm Credit Bank and 
agricultural credit bank shall provide its board of directors with a 
written annual report regarding the scope of OFI program activities 
during the preceding fiscal year.

[63 FR 36547, July 7, 1998, as amended at 69 FR 29862, May 26, 2004]

[[Page 150]]



Sec. 614.4550  Place of discount.

    A Farm Credit Bank or agricultural credit bank may provide funding, 
discounting, or other similar financial assistance to any OFI applicant. 
However, a Farm Credit Bank or agricultural credit bank cannot fund, 
discount, or extend other similar financial assistance to an OFI that 
maintains its headquarters, or has more than 50 percent of its 
outstanding loan volume to eligible borrowers who conduct agricultural 
or aquatic operations in the chartered territory of another Farm Credit 
bank unless it notifies such bank in writing within five (5) business 
days of receiving the OFI's application for financing. Two or more Farm 
Credit banks cannot simultaneously fund the same OFI.

[69 FR 29863, May 26, 2004]



Sec. 614.4560  Requirements for OFI funding relationships.

    (a) As a condition for extending funding, discount and other similar 
financial assistance to an OFI, each Farm Credit Bank or agricultural 
credit bank shall require every OFI to:
    (1) Execute a general financing agreement pursuant to the 
regulations in subpart C of part 614; and
    (2) Purchase non-voting stock in its Farm Credit Bank or 
agricultural credit bank pursuant to the bank's bylaws.
    (b) A Farm Credit Bank or agricultural credit bank shall extend 
funding, discount and other similar financial assistance to an OFI only 
for purposes and terms authorized under sections 1.10(b) and 2.4(a) and 
(b) of the Act.
    (c) Rural home loans to borrowers who are not bona fide farmers, 
ranchers, and aquatic producers and harvesters are subject to the 
restrictions in Sec. 613.3030 of this chapter. Loans that an OFI makes 
to processing and marketing operators who supply less than 20 percent of 
the throughput shall be included in the calculation that 
Sec. 613.3010(b)(1) of this chapter establishes for Farm Credit Banks 
and agricultural credit banks.
    (d) The borrower rights requirements in part C of title IV of the 
Act, and the regulations in part 617 of this chapter shall apply to all 
loans that an OFI funds or discounts through a Farm Credit Bank or 
agricultural credit bank, unless such loans are subject to the Truth-in-
Lending Act, 15 U.S.C. 1601 et seq.
    (e) As a condition for obtaining funding, discount and other similar 
financial assistance from a Farm Credit Bank or agricultural credit 
bank, all State banks, trust companies, or State-chartered savings 
associations shall execute a written consent that authorizes their State 
regulators to furnish examination reports to the Farm Credit 
Administration upon its request. Any OFI that is not a depository 
institution shall consent in writing to examination by the Farm Credit 
Administration as a condition precedent for obtaining funding, discount 
and other similar financial assistance from a Farm Credit Bank or 
agricultural credit bank, and file such consent with its Farm Credit 
funding bank.

[63 FR 36547, July 7, 1998, as amended at 69 FR 10906, Mar. 9, 2004; 69 
FR 29863, May 26, 2004]



Sec. 614.4570  Recourse and security.

    (a) Full recourse and guarantee. All obligations that are funded or 
discounted through a Farm Credit Bank or agricultural credit bank shall 
be endorsed with the full recourse or unconditional guarantee of the 
OFI.
    (b) General collateral. (1) Each Farm Credit Bank and agricultural 
credit bank shall take as collateral all notes, drafts, and other 
obligations that it funds or discounts for each OFI; and
    (2) Each Farm Credit Bank and agricultural credit bank shall 
perfect, in accordance with State law, a senior security interest in any 
and all obligations and the proceeds thereunder that the OFI pledges as 
collateral.
    (c) Supplemental collateral. (1) Each Farm Credit Bank and 
agricultural credit bank shall develop policies and loan underwriting 
standards that establish uniform and objective requirements to determine 
the need and amount of supplemental collateral or other credit 
enhancements that each OFI shall provide as a condition for obtaining 
funding, discount and other similar financial assistance from such Farm 
Credit bank.
    (2) The amount, type, and quality of supplemental collateral or 
other credit

[[Page 151]]

enhancements required for each OFI shall be established in the general 
financing agreement and shall be proportional to the level of risk that 
the OFI poses to the Farm Credit Bank or agricultural credit bank.



Sec. 614.4580  Limitation on the extension of funding, discount and
other similar financial assistance to an OFI.

    (a) No obligation shall be purchased from or discounted for and no 
loan shall be made or other similar financial assistance extended by a 
Farm Credit Bank or agricultural credit bank to an OFI if the amount of 
such obligation added to the aggregate liabilities of such OFI, whether 
direct or contingent (other than bona fide deposit liabilities), exceeds 
ten times the paid-in and unimpaired capital and surplus of such OFI or 
the amount of such liabilities permitted under the laws of the 
jurisdiction creating such OFI, whichever is less.
    (b) It shall be unlawful for any national bank that is indebted to 
any Farm Credit Bank or agricultural credit bank, on paper discounted or 
purchased, to incur any additional indebtedness, if by virtue of such 
additional indebtedness its aggregate liabilities, direct or contingent, 
will exceed the limitation described in paragraph (a) of this section.



Sec. 614.4590  Equitable treatment of OFIs and Farm Credit System 
associations.

    (a) Each Farm Credit Bank and agricultural credit bank shall apply 
comparable and objective loan underwriting standards and pricing 
requirements to both OFIs and Farm Credit System direct lender 
associations.
    (b) The total charges that a Farm Credit Bank or agricultural credit 
bank assesses an OFI through capitalization requirements, interest 
rates, and fees shall be comparable to the charges that the same Farm 
Credit Bank or agricultural credit bank imposes on its direct lender 
associations. Any variation between the overall funding costs that OFIs 
and direct lender associations are charged by the same funding bank 
shall result from differences in credit risk and administrative costs to 
the Farm Credit Bank or agricultural credit bank.
    (c) Upon request, each Farm Credit Bank or agricultural credit bank 
must provide each OFI and OFI applicant, that has or is seeking to 
establish a funding relationship with the Farm Credit Bank or 
agricultural credit bank, a copy of its policies, procedures, loan 
underwriting standards, and pricing guidelines for OFIs. The pricing 
guidelines must identify the specific components that make up the cost 
of funds for OFIs, and the amount of these components expressed in basis 
points.
    (d) Upon request of any OFI or OFI applicant, that has or is seeking 
to establish a funding relationship with the Farm Credit Bank or 
agricultural credit bank, the bank must explain in writing the reasons 
for any variation in the overall funding costs it charges to OFIs and 
affiliated direct lender associations. The written explanation must 
compare the cost of funds that the Farm Credit Bank or agricultural 
credit bank charges the OFIs and affiliated direct lender associations. 
When possible, the written explanation shall compare the costs of 
funding that the bank charges several OFIs and Farm Credit associations 
that are similar in size. However, the Farm Credit Bank or agricultural 
credit bank must not disclose financial or confidential information 
about any individual Farm Credit association.

[63 FR 36547, July 7, 1998, as amended at 69 FR 29863, May 26, 2004]



Sec. 614.4595  Public disclosure about OFIs.

    A Farm Credit Bank or agricultural credit bank may disclose to 
members of the public the name, address, telephone number, and Internet 
Web site address of any affiliated OFI only if such OFI, through a duly 
authorized officer, consents in writing. Each Farm Credit Bank and 
agricultural credit bank must adopt policies and procedures for 
requesting, obtaining, and maintaining the consent of its OFIs and for 
disclosing this information to the public.

[69 FR 29863, May 26, 2004]

[[Page 152]]



Sec. 614.4600  Insolvency of an OFI.

    If an OFI that is indebted to a Farm Credit Bank or agricultural 
credit bank becomes insolvent, is in process of liquidation, or fails to 
service its loans properly, the Farm Credit Bank or agricultural credit 
bank may take over such loans and other assets that the OFI pledged as 
collateral. Once the Farm Credit Bank or agricultural credit bank 
exercises its remedies, it shall have the authority to make additional 
advances, to grant renewals and extensions, and to take such other 
actions as may be necessary to collect and service loans to the OFI's 
borrower. The funding Farm Credit Bank or agricultural credit bank may 
also liquidate the OFI's loans and other assets in order to achieve 
repayment of the debt.



Subpart Q_Banks for Cooperatives and Agricultural Credit Banks Financing 
                           International Trade



Sec. 614.4700  Financing foreign trade receivables.

    (a) Banks for cooperatives and agricultural credit banks, under 
policies adopted by their boards of directors, are authorized to finance 
foreign trade receivables on behalf of eligible cooperatives to include 
the following:
    (1) Advances against collections;
    (2) Trade acceptances;
    (3) Factoring; and
    (4) Open accounts.
    (b) To reduce credit, political, and other risks associated with 
foreign trade receivable financing, the banks for cooperatives and 
agricultural credit banks shall avail themselves of such guarantee and 
insurance plans as are available in the United States and other 
countries, such as the Foreign Credit Insurance Association and the 
Export-Import Bank of the United States. Exceptions may be made where a 
prospective borrower has had a longstanding successful business 
relationship with the eligible cooperative borrower or an eligible 
cooperative which is not a borrower if the prospective borrower has a 
high credit rating as determined by the bank.
    (c) When financing a draft drawn on a foreign importer, the banks 
should retain recourse to the exporter unless their credit evaluation of 
and experience with the importer indicate recourse is not necessary or 
unless appropriate guarantees or insurance plans are used.
    (d) The financing of foreign trade receivables shall be limited by 
the policies of each bank's board of directors. The policies shall 
provide a method of determining the maximum amount in dollars, by 
country, to be financed and establishing a maximum percentage of the 
amount of a draft drawn on a foreign party against which the bank may 
advance funds. The banks shall take into consideration the following 
factors:
    (1) The reputation and financial strength of the foreign importer.
    (2) The reputation and payment record of the class of importers in 
the same country as the subject importer in regard to prompt payment of 
drafts drawn upon them.
    (3) The quality of the supporting documents offered with the draft.
    (4) The degree of ease with which necessary foreign exchange 
conversion can be made, or the extent to which foreign currency exposure 
may be hedged by forward or future contracts.
    (5) The reputation and financial strength of the exporter.
    (e) The banks may establish foreign trade receivable financing 
programs by which eligible parties pledge collections to the bank, and 
then may borrow from the bank up to a stated maximum percentage of the 
total amount of receivables pledged at any one time.
    (f) When financing foreign trade receivables, the banks shall take 
such precautions and obtain such credit information as necessary to 
ascertain that all parties to the transaction(s) being financed are 
reputable and capable of performing their responsibilities under the 
contract of sale.
    (g) When financing foreign trade receivables, the banks shall 
determine that all shipments are covered by maritime insurance while on 
the high seas.
    (h) Countries where credit is to be extended will be analyzed 
periodically and systematically on a centralized basis. The resulting 
country studies will be disseminated to all banks for cooperatives and 
agricultural credit

[[Page 153]]

banks to be used as inputs in credit grading decisions.

[46 FR 51879, Oct. 22, 1981, as amended at 55 FR 24886, June 19, 1990; 
62 FR 4445, Jan. 30, 1997]



Sec. 614.4710  [Reserved]



Sec. 614.4720  Letters of credit.

    Banks for cooperatives and agricultural credit banks, under policies 
adopted by their boards of directors, may issue, advise, or confirm 
import or export letters of credit in accordance with the Uniform 
Commercial Code, or the Uniform Customs and Practice for Documentary 
Credits, to or on behalf of its customers. In addition, as a matter of 
sound banking practice, letters of credit shall be issued in conformity 
with the list which follows.
    (a) Each letter of credit shall be in writing and shall 
conspicuously state that it is a letter of credit, or be conspicuously 
entitled as such.
    (b) The letter of credit shall contain a specified expiration date 
or be for a definite term.
    (c) The letter of credit shall contain a sum certain.
    (d) The bank's obligation to pay should arise only upon fulfilling 
the terms and conditions as specified in the letter of credit. The bank 
must not be called upon to determine questions of fact or law at issue 
between the account party and the beneficiary.
    (e) The bank's customer should have an unqualified obligation to 
reimburse the bank for payments made under the letter of credit.
    (f) All letters of credit shall be irrevocable.

[46 FR 51879, Oct. 22, 1981, as amended at 55 FR 24887, June 19, 1990; 
62 FR 4445, Jan. 30, 1997; 64 FR 43049, Aug. 9, 1999]



Sec. 614.4800  Guarantees and contracts of suretyship.

    A bank for cooperatives or an agricultural credit bank, under a 
policy approved by the bank's board of directors, may lend its credit, 
be itself a surety to indemnify another, or otherwise become a guarantor 
if an eligible cooperative substantially benefits from the performance 
of the transaction involved. A bank may guarantee the debt of eligible 
cooperatives and foreign parties or otherwise agree to make payments on 
the occurrence of readily ascertainable events if the guarantee or 
agreement specifies a maximum monetary liability. Guarantees may be 
secured or unsecured, and can include, but are not limited to, such 
events as nonpayment of taxes, rentals, customs duties, costs of 
transport, and loss of or nonconformance of shipping documents. The 
bank's customer shall have an unqualified obligation to reimburse the 
bank for payments made under a guarantee or surety.

[55 FR 24887, June 19, 1990, as amended at 62 FR 4445, Jan. 30, 1997]



Sec. 614.4810  Standby letters of credit.

    (a) The banks for cooperatives and agricultural credit banks are 
authorized to issue on behalf of parties eligible for financing under 
regulations Sec. 614.4010(d) or Sec. 614.4020 standby letters of credit 
that represent an obligation to the beneficiary on the part of the 
issuer:
    (1) To repay money borrowed by, advanced to, or for the account of 
the account party, or
    (2) To make payment on account of any indebtedness undertaken by the 
account party, or
    (3) To make payment on account of any default by the account party 
in the performance of an obligation.
    (b) As a matter of sound banking practice, banks for cooperatives 
and agricultural credit banks shall evaluate applications for standby 
letters of credit on the basis of the loan underwriting standards 
adopted pursuant to Sec. 614.4150 of the regulations.

[46 FR 51879, Oct. 22, 1981, as amended at 55 FR 24887, June 19, 1990; 
62 FR 4445, Jan. 30, 1997; 62 FR 51015, Sept. 30, 1997]



Sec. 614.4900  Foreign exchange.

    (a) Before a bank for cooperatives or an agricultural credit bank 
may engage in any financial transaction which transports monetary 
instruments from any place within the United States to or through any 
place outside the United States or to any place within the United 
States, the bank must have policies adopted by the bank's board of 
directors governing

[[Page 154]]

such transactions and must have established bank procedures to safeguard 
the interests of the stockholders of the bank in regard to such 
transactions.
    (b) Under policies adopted by the bank's board of directors, a bank 
for cooperatives or an agricultural credit bank may engage in currency 
exchange activities necessary to service individual transactions that 
may be financed under the regulations authorizing export, import, and 
other internationally related credit and financial services. These 
currency exchange activities shall not include any loans or commitments 
intended to finance speculative futures transactions by eligible 
borrowers in foreign currencies. The bank may engage, on behalf of the 
eligible borrowers or on its own behalf, in bona fide hedging 
transactions and positions, where such transactions or positions 
normally reduce risks in the conduct and management of international 
financial activities. The bank's policies should include established 
guidelines for:
    (1) Net overnight positions, by currency.
    (2) Maturity distribution, by currency, of foreign currency assets, 
liabilities, and foreign exchange contracts.
    (3) Outstanding contracts with individual customers and banks.
    (4) Credit approval procedures safeguarding against delivery or 
settlement risk.
    (5) Total value of outstanding contracts--spot and forward.
    (c) A bank for cooperatives or an agricultural credit bank is 
responsible for its compliance with the laws of the United States in 
regard to reporting requirements of the Department of the Treasury 
pertaining to currency exchange activities and international transfers 
of monetary instruments.
    (d) A bank for cooperatives or an agricultural credit bank engaged 
in foreign exchange trading shall have written policies describing the 
scope of trading activity authorized, delegation of authority, types of 
services offered, trading limits, reporting requirements, and internal 
accounting controls.
    (e) The bank's trading guideline policies should provide for 
reporting procedures adequate to inform management properly of trading 
activities and to facilitate detection of lack of compliance with policy 
directives.
    (f) The bank's policies shall establish foreign exchange delivery 
limits for eligible customers with relationship to the customer's 
financial capability to bear the financial risks assumed. The bank will 
be expected to maintain documentary evidence that a customer's delivery 
exposure is reasonable, and that responsible bank officers routinely 
review outstanding delivery exposure of individual customers.
    (g) The bank's personnel policies shall include written standards of 
conduct for those involved with foreign exchange activities, including 
the following which should be prohibited:
    (1) Trading with entities affiliated with the bank or with members 
of the board of directors.
    (2) Foreign exchange and deposit transactions with other bank 
employees.
    (3) Personal business relationships with foreign exchange and money 
brokers with whom the bank deals.
    (h) The bank's policies should provide detailed instructions 
regarding the need for bank officers to disclose the limits of 
responsibility and liability of the bank when it holds positions or 
executes contracts for the account of eligible parties. The bank's 
policies regarding the respective procedures should provide reasonable 
assurance that reports on trading activities are current and complete, 
and that the opportunity for concealment of unauthorized transactions is 
kept at the absolute minimum.
    (i) The banks for cooperatives and agricultural credit banks shall 
use the Funding Corporation for purposes of trading foreign exchange. 
All foreign exchange transactions shall be made by the Funding 
Corporation on behalf of the banks consistent with instructions received 
from the respective banks.
    (j) Guidelines (b) through (i) of this section will not apply if a 
bank purchases or sells foreign exchange through a commercial bank and 
has no foreign exchange risk exposure.

[46 FR 51879, Oct. 22, 1981, as amended at 55 FR 24887, June 19, 1990; 
62 FR 4445, Jan. 30, 1997]

[[Page 155]]



                 Subpart R_Secondary Market Authorities



Sec. 614.4910  Basic authorities.

    (a) Any bank or association of the Farm Credit System, except a bank 
for cooperatives, with direct lending authority may originate 
agricultural real estate loans for sale to one or more certified 
agricultural mortgage marketing facilities under title VIII of the Act.
    (b) Any bank or association of the Farm Credit System, except a bank 
for cooperatives, may operate as an agricultural mortgage marketing 
facility under title VIII of the Act, either acting alone or jointly 
with other banks and/or associations, if so certified by the Federal 
Agricultural Mortgage Corporation.

[54 FR 1155, Jan. 12, 1989]



                 Subpart S_Flood Insurance Requirements

    Source: 80 FR 43254, July 21, 2015, unless otherwise noted.



Sec. 614.4920  Purpose and scope.

    (a) Purpose. This subpart implements the National Flood Insurance 
Act of 1968 and the Flood Disaster Protection Act of 1973, as amended 
(42 U.S.C. 4001-4129).
    (b) Scope. This subpart, except for Secs. 614.4940 and 614.4950, 
applies to loans secured by buildings or mobile homes located or to be 
located in areas determined by the Administrator of the Federal 
Emergency Management Agency to have special flood hazards. Sections 
614.4940 and 614.4950 apply to loans secured by buildings or mobile 
homes, regardless of location.



Sec. 614.4925  Definitions.

    For purposes of this subpart:
    1968 Act means the National Flood Insurance Act of 1968 and the 
Flood Disaster Protection Act of 1973, as amended (42 U.S.C. 4001-4129).
    Administrator of FEMA means the Administrator of the Federal 
Emergency Management Agency.
    Building means a walled and roofed structure, other than a gas or 
liquid storage tank, that is principally above ground and affixed to a 
permanent site, and a walled and roofed structure while in the course of 
construction, alteration, or repair.
    Community means a State or a political subdivision of a State that 
has zoning and building code jurisdiction over a particular area having 
special flood hazards.
    Designated loan means a loan secured by a building or mobile home 
that is located or to be located in a special flood hazard area in which 
flood insurance is available under the 1968 Act.
    Mobile home means a structure, transportable in one or more 
sections, that is built on a permanent chassis and designed for use with 
or without a permanent foundation when attached to the required 
utilities. The term mobile home does not include a recreational vehicle. 
For purposes of this subpart, the term mobile home means a mobile home 
on a permanent foundation. The term mobile home includes a manufactured 
home as that term is used in the NFIP.
    NFIP means the National Flood Insurance Program authorized under the 
1968 Act.
    Residential improved real estate means real estate upon which a home 
or other residential building is located or to be located.
    Servicer means the person responsible for:
    (1) Receiving any scheduled, periodic payments from a borrower under 
the terms of a loan, including amounts for taxes, insurance premiums, 
and other charges with respect to the property securing the loan; and
    (2) Making payments of principal and interest and any other payments 
from the amounts received from the borrower as may be required under the 
terms of the loan.
    Special flood hazard area means the land in the flood plain within a 
community having at least a one percent chance of flooding in any given 
year, as designated by the Administrator of FEMA.
    Table funding means a settlement at which a loan is funded by a 
contemporaneous advance of loan funds and an assignment of the loan to 
the person advancing the funds.

[[Page 156]]



Sec. 614.4930  Requirement to purchase flood insurance where 
available.

    (a) In general. A System institution shall not make, increase, 
extend, or renew any designated loan unless the building or mobile home 
and any personal property securing the loan is covered by flood 
insurance for the term of the loan. The amount of insurance must be at 
least equal to the lesser of the outstanding principal balance of the 
designated loan or the maximum limit of coverage available for the 
particular type of property under the 1968 Act. Flood insurance coverage 
under the 1968 Act is limited to the building or mobile home and any 
personal property that secures a loan and not the land itself.
    (b) Table funded loans. A System institution that acquires a loan 
from a mortgage broker or other entity through table funding shall be 
considered to be making a loan for the purposes of this subpart.



Sec. 614.4932  Exemptions.

    The flood insurance requirement prescribed by Sec. 614.4930 does not 
apply with respect to:
    (a) Any State-owned property covered under a policy of self-
insurance satisfactory to the Administrator of FEMA, who publishes and 
periodically revises the list of States falling within this exemption;
    (b) Property securing any loan with an original principal balance of 
$5,000 or less and a repayment term of one year or less; or
    (c) Any structure that is a part of any residential property but is 
detached from the primary residential structure of such property and 
does not serve as a residence. For purposes of this paragraph (c):
    (1) ``A structure that is a part of a residential property'' is a 
structure used primarily for personal, family, or household purposes, 
and not used primarily for agricultural, commercial, industrial, or 
other business purposes;
    (2) A structure is ``detached'' from the primary residential 
structure if it is not joined by any structural connection to that 
structure; and
    (3) ``Serve as a residence'' shall be based upon the good faith 
determination of the System institution that the structure is intended 
for use or actually used as a residence, which generally includes 
sleeping, bathroom, or kitchen facilities.



Sec. 614.4935  Escrow requirement.

    (a) In general--(1) Applicability. Except as provided in paragraph 
(a)(2) or paragraph (c) of this section, a System institution, or a 
servicer acting on its behalf, shall require the escrow of all premiums 
and fees for any flood insurance required under Sec. 614.4930 for any 
designated loan secured by residential improved real estate or a mobile 
home that is made, increased, extended, or renewed on or after January 
1, 2016, payable with the same frequency as payments on the designated 
loan are required to be made for the duration of the loan.
    (2) Exceptions. Paragraph (a)(1) of this section does not apply if:
    (i) The loan is an extension of credit primarily for business, 
commercial, or agricultural purposes;
    (ii) The loan is in a subordinate position to a senior lien secured 
by the same residential improved real estate or mobile home for which 
the borrower has obtained flood insurance coverage that meets the 
requirements of Sec. 614.4930;
    (iii) Flood insurance coverage for the residential improved real 
estate or mobile home is provided by a policy that:
    (A) Meets the requirements of Sec. 614.4930;
    (B) Is provided by a condominium association, cooperative, 
homeowners association, or other applicable group; and
    (C) The premium for which is paid by the condominium association, 
cooperative, homeowners association, or other applicable group as a 
common expense;
    (iv) The loan is a home equity line of credit;
    (v) The loan is a nonperforming loan, which is a loan that is 90 or 
more days past due and remains nonperforming until it is permanently 
modified or until the entire amount past due, including principal, 
accrued interest, and penalty interest incurred as the result of past 
due status, is collected or otherwise discharged in full; or
    (vi) The loan has a term of no longer than 12 months.

[[Page 157]]

    (3) Duration of exception. If a System institution, or a servicer 
acting its behalf, determines at any time during the term of a 
designated loan secured by residential improved real estate or a mobile 
home that is made, increased, extended, or renewed on or after January 
1, 2016, that an exception under paragraph (a)(2) of this section does 
not apply, then the System institution, or the servicer acting on its 
behalf, shall require the escrow of all premiums and fees for any flood 
insurance required under Sec. 614.4930 as soon as reasonably practicable 
and, if applicable, shall provide any disclosure required under section 
10 of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2609) 
(RESPA).
    (4) Escrow account. The System institution, or a servicer acting on 
its behalf, shall deposit the flood insurance premiums and fees on 
behalf of the borrower in an escrow account. This escrow account will be 
subject to escrow requirements adopted pursuant to section 10 of RESPA, 
which generally limits the amount that may be maintained in escrow 
accounts for certain types of loans and requires escrow account 
statements for those accounts, only if the loan is otherwise subject to 
RESPA. Following receipt of a notice from the Administrator of FEMA or 
other provider of flood insurance that premiums are due, the System 
institution, or a servicer acting on its behalf, shall pay the amount 
owed to the insurance provider from the escrow account by the date when 
such premiums are due.
    (b) Notice. For any loan for which a System institution is required 
to escrow under paragraph (a)(1) or paragraph (c)(2) of this section or 
may be required to escrow under paragraph (a)(3) of this section during 
the term of the loan, the System institution, or a servicer acting on 
its behalf, shall mail or deliver a written notice with the notice 
provided under Sec. 614.4955 informing the borrower that the System 
institution is required to escrow all premiums and fees for required 
flood insurance, using language that is substantially similar to model 
clauses on the escrow requirement in appendix A to this subpart.
    (c) Small lender exception--(1) Qualification. Except as may be 
required under applicable State law, paragraphs (a), (b), and (d) of 
this section do not apply to a System institution:
    (i) That has total assets of less than $1 billion as of December 31 
of either of the two prior calendar years; and
    (ii) On or before July 6, 2012:
    (A) Was not required under Federal or State law to deposit taxes, 
insurance premiums, fees, or any other charges in an escrow account for 
the entire term of any loan secured by residential improved real estate 
or a mobile home; and
    (B) Did not have a policy of consistently and uniformly requiring 
the deposit of taxes, insurance premiums, fees, or any other charges in 
an escrow account for any loans secured by residential improved real 
estate or a mobile home.
    (2) Change in status. If a System institution previously qualified 
for the exception in paragraph (c)(1) of this section, but no longer 
qualifies for the exception because it had assets of $1 billion or more 
for two consecutive calendar year ends, the System institution must 
escrow premiums and fees for flood insurance pursuant to paragraph (a) 
of this section for any designated loan made, increased, extended, or 
renewed on or after July 1 of the first calendar year of changed status.
    (d) Option to escrow--(1) In general. A System institution, or a 
servicer acting on its behalf, shall offer and make available to the 
borrower the option to escrow all premiums and fees for any flood 
insurance required under Sec. 614.4930 for any loan secured by 
residential improved real estate or a mobile home that is outstanding on 
January 1, 2016, or July 1 of the first calendar year in which the 
System institution has had a change in status pursuant to paragraph 
(c)(2) of this section, unless:
    (i) The loan or the System institution qualifies for an exception 
from the escrow requirement under paragraph (a)(2) or (c) of this 
section, respectively;
    (ii) The borrower is already escrowing all premiums and fees for 
flood insurance for the loan; or

[[Page 158]]

    (iii) The System institution is required to escrow flood insurance 
premiums and fees pursuant to paragraph (a) of this section.
    (2) Notice. For any loan subject to paragraph (d) of this section, 
the System institution, or a servicer acting on its behalf, shall mail 
or deliver to the borrower no later than June 30, 2016, or September 30 
of the first calendar year in which the System institution has had a 
change in status pursuant to paragraph (c)(2) of this section, a notice 
in writing, or if the borrower agrees, electronically, informing the 
borrower of the option to escrow all premiums and fees for any required 
flood insurance and the method(s) by which the borrower may request the 
escrow, using language similar to the model clause in appendix B to this 
subpart.
    (3) Timing. The System institution, or the servicer acting on its 
behalf, must begin escrowing premiums and fees for flood insurance as 
soon as reasonably practicable after the System institution, or 
servicer, receives the borrower's request to escrow.

[80 FR 43256, July 21, 2015]



Sec. 614.4940  Required use of standard flood hazard determination
form.

    (a) Use of form. A System institution shall use the standard flood 
hazard determination form developed by the Administrator of FEMA when 
determining whether the building or mobile home offered as collateral 
security for a loan is or will be located in a special flood hazard area 
in which flood insurance is available under the 1968 Act. The standard 
flood hazard determination form may be used in a printed, computerized, 
or electronic manner. A System institution may obtain the standard flood 
hazard determination form from FEMA's Web site at www.fema.gov.
    (b) Retention of form. A System institution shall retain a copy of 
the completed standard flood hazard determination form, in either hard 
copy or electronic form, for the period of time the System institution 
owns the loan.



Sec. 614.4945  Force placement of flood insurance.

    (a) Notice and purchase of coverage. If a System institution, or a 
servicer acting on behalf of the System institution, determines at any 
time during the term of a designated loan, that the building or mobile 
home and any personal property securing the designated loan is not 
covered by flood insurance or is covered by flood insurance in an amount 
less than the amount required under Sec. 614.4930, then the System 
institution, or a servicer acting on its behalf, shall notify the 
borrower that the borrower should obtain flood insurance, at the 
borrower's expense, in an amount at least equal to the amount required 
under Sec. 614.4930, for the remaining term of the loan. If the borrower 
fails to obtain flood insurance within 45 days after notification, then 
the System institution, or its servicer, shall purchase insurance on the 
borrower's behalf. The System institution, or its servicer, may charge 
the borrower for the cost of premiums and fees incurred in purchasing 
the insurance, including premiums or fees incurred for coverage 
beginning on the date on which flood insurance coverage lapsed or did 
not provide a sufficient coverage amount.
    (b) Termination of force-placed insurance--(1) Termination and 
refund. Within 30 days of receipt by a System institution, or by a 
servicer acting on its behalf, of a confirmation of a borrower's 
existing flood insurance coverage, the System institution, or its 
servicer, shall:
    (i) Notify the insurance provider to terminate any insurance 
purchased by the System institution, or its servicer, under paragraph 
(a) of this section; and
    (ii) Refund to the borrower all premiums paid by the borrower for 
any insurance purchased by the System institution, or by its servicer, 
under paragraph (a) of this section during any period during which the 
borrower's flood insurance coverage and the insurance coverage purchased 
by the System institution, or its servicer, were each in effect, and any 
related fees charged to the borrower with respect to the insurance 
purchased by the System institution, or its servicer, during such 
period.

[[Page 159]]

    (2) Sufficiency of demonstration. For purposes of confirming a 
borrower's existing flood insurance coverage under paragraph (b) of this 
section, a System institution, or a servicer acting on its behalf, shall 
accept from the borrower an insurance policy declarations page that 
includes the existing flood insurance policy number and the identity of, 
and contact information for, the insurance company or agent.



Sec. 614.4950  Determination fees.

    (a) General. Notwithstanding any Federal or State law other than the 
Flood Disaster Protection Act of 1973, as amended (42 U.S.C. 4001-4129), 
any System institution, or a servicer acting on behalf of the System 
institution, may charge a reasonable fee for determining whether the 
building or mobile home securing the loan is located or will be located 
in a special flood hazard area. A determination fee may also include, 
but is not limited to, a fee for life-of-loan monitoring.
    (b) Borrower fee. The determination fee authorized by paragraph (a) 
of this section may be charged to the borrower if the determination:
    (1) Is made in connection with a making, increasing, extending, or 
renewing of the loan that is initiated by the borrower;
    (2) Reflects the Administrator of FEMA's revision or updating of 
flood plain areas or flood-risk zones;
    (3) Reflects the Administrator of FEMA's publication of a notice or 
compendium that:
    (i) Affects the area in which the building or mobile home securing 
the loan is located; or
    (ii) By determination of the Administrator of FEMA, may reasonably 
require a determination whether the building or mobile home securing the 
loan is located in a special flood hazard area; or
    (4) Results in the purchase of flood insurance coverage by the 
lender, or its servicer, on behalf of the borrower under Sec. 614.4945.
    (c) Purchaser or transferee fee. The determination fee authorized by 
paragraph (a) of this section may be charged to the purchaser or 
transferee of a loan in the case of the sale or transfer of the loan.



Sec. 614.4955  Notice of special flood hazards and availability of
Federal disaster relief assistance.

    (a) Notice requirement. When a System institution makes, increases, 
extends, or renews a loan secured by a building or a mobile home located 
or to be located in a special flood hazard area, the System institution 
shall mail or deliver a written notice to the borrower and to the 
servicer in all cases whether or not flood insurance is available under 
the 1968 Act for the collateral securing the loan.
    (b) Contents of notice. The written notice must include the 
following information:
    (1) A warning, in a form approved by the Administrator of FEMA, that 
the building or the mobile home is or will be located in a special flood 
hazard area;
    (2) A description of the flood insurance purchase requirements set 
forth in section 102(b) of the Flood Disaster Protection Act of 1973, as 
amended (42 U.S.C. 4012a(b));
    (3) A statement, where applicable, that flood insurance coverage is 
available from private insurance companies that issue standard flood 
insurance policies on behalf of the NFIP or directly from the NFIP;
    (4) A statement that flood insurance that provides the same level of 
coverage as a standard flood insurance policy under the NFIP also may be 
available from a private insurance company that issues policies on 
behalf of the company;
    (5) A statement that the borrower is encouraged to compare the flood 
insurance coverage, deductibles, exclusions, conditions, and premiums 
associated with flood insurance policies issued on behalf of the NFIP 
and policies issued on behalf of private insurance companies and that 
the borrower should direct inquiries regarding the availability, cost, 
and comparisons of flood insurance coverage to an insurance agent; and
    (6) A statement whether Federal disaster relief assistance may be 
available in the event of damage to the building or mobile home caused 
by flooding in a Federally declared disaster.
    (c) Timing of notice. The System institution shall provide the 
notice required

[[Page 160]]

by paragraph (a) of this section to the borrower within a reasonable 
time before the completion of the transaction, and to the servicer as 
promptly as practicable after the System institution provides notice to 
the borrower and in any event no later than the time the System 
institution provides other similar notices to the servicer concerning 
hazard insurance and taxes. Notice to the servicer may be made 
electronically or may take the form of a copy of the notice to the 
borrower.
    (d) Record of receipt. The System institution shall retain a record 
of the receipt of the notices by the borrower and the servicer for the 
period of time it owns the loan.
    (e) Alternate method of notice. Instead of providing the notice to 
the borrower required by paragraph (a) of this section, a System 
institution may obtain satisfactory written assurance from a seller or 
lessor that, within a reasonable time before the completion of the sale 
or lease transaction, the seller or lessor has provided such notice to 
the purchaser or lessee. The System institution shall retain a record of 
the written assurance from the seller or lessor for the period of time 
it owns the loan.
    (f) Use of sample form of notice. A System institution will be 
considered to be in compliance with the requirement for notice to the 
borrower of this section by providing written notice to the borrower 
containing the language presented in appendix A to this subpart within a 
reasonable time before the completion of the transaction. The notice 
presented in appendix A to this subpart satisfies the borrower notice 
requirements of the 1968 Act.

[80 FR 43254, July 21, 2015, as amended at 80 FR 43257, July 21, 2015]



Sec. 614.4960  Notice of servicer's identity.

    (a) Notice requirement. When a System institution makes, increases, 
extends, renews, sells, or transfers a loan secured by a building or 
mobile home located or to be located in a special flood hazard area, it 
shall notify the Administrator of FEMA (or the Administrator's designee) 
in writing of the identity of the servicer of the loan. The 
Administrator of FEMA has designated the insurance provider to receive 
the System institution's notice of the servicer's identity. This notice 
may be provided electronically if electronic transmission is 
satisfactory to the Administrator of FEMA's designee.
    (b) Transfer of servicing rights. The System institution shall 
notify the Administrator of FEMA (or the Administrator's designee) of 
any change in the servicer of a loan described in paragraph (a) of this 
section within 60 days after the effective date of the change. This 
notice may be provided electronically if electronic transmission is 
satisfactory to the Administrator of FEMA's designee. Upon any change in 
the servicing of a loan described in paragraph (a) of this section, the 
duty to provide notice under this paragraph (b) shall transfer to the 
transferee servicer.



   Sec. Appendix A to Subpart S of Part 614--Sample Form of Notice of 
   Special Flood Hazards and Availability of Federal Disaster Relief 
                               Assistance

  Notice of Special Flood Hazards and Availability of Federal Disaster 
                            Relief Assistance

    We are giving you this notice to inform you that:
    The building or mobile home securing the loan for which you have 
applied is or will be located in an area with special flood hazards.
    The area has been identified by the Administrator of the Federal 
Emergency Management Agency (FEMA) as a special flood hazard area using 
FEMA's Flood Insurance Rate Map or the Flood Hazard Boundary Map for the 
following community: ___. This area has a one percent (1%) chance of a 
flood equal to or exceeding the base flood elevation (a 100-year flood) 
in any given year. During the life of a 30-year mortgage loan, the risk 
of a 100-year flood in a special flood hazard area is 26 percent (26%).
    Federal law allows a lender and borrower jointly to request the 
Administrator of FEMA to review the determination of whether the 
property securing the loan is located in a special flood hazard area. If 
you would like to make such a request, please contact us for further 
information.
    __ The community in which the property securing the loan is located 
participates in the National Flood Insurance Program (NFIP). Federal law 
will not allow us to make you the loan that you have applied for if you 
do not purchase flood insurance. The flood insurance must be maintained 
for the life of the loan. If you fail to purchase or

[[Page 161]]

renew flood insurance on the property, Federal law authorizes and 
requires us to purchase the flood insurance for you at your expense.
      At a minimum, flood insurance purchased must cover the 
lesser of:
    (1) The outstanding principal balance of the loan; or
    (2) the maximum amount of coverage allowed for the type of property 
under the NFIP.
    Flood insurance coverage under the NFIP is limited to the building 
or mobile home and any personal property that secures your loan and not 
the land itself.
      Federal disaster relief assistance (usually in the form of 
a low-interest loan) may be available for damages incurred in excess of 
your flood insurance if your community's participation in the NFIP is in 
accordance with NFIP requirements.
      Although you may not be required to maintain flood 
insurance on all structures, you may still wish to do so, and your 
mortgage lender may still require you to do so to protect the collateral 
securing the mortgage. If you choose not to maintain flood insurance on 
a structure and it floods, you are responsible for all flood losses 
relating to that structure.

            Availability of Private Flood Insurance Coverage

    Flood insurance coverage under the NFIP may be purchased through an 
insurance agent who will obtain the policy either directly through the 
NFIP or through an insurance company that participates in the NFIP. 
Flood insurance that provides the same level of coverage as a standard 
flood insurance policy under the NFIP may be available from private 
insurers that do not participate in the NFIP. You should compare the 
flood insurance coverage, deductibles, exclusions, conditions, and 
premiums associated with flood insurance policies issued on behalf of 
the NFIP and policies issued on behalf of private insurance companies 
and contact an insurance agent as to the availability, cost, and 
comparisons of flood insurance coverage.

                [Escrow Requirement for Residential Loans

    Federal law may require a lender or its servicer to escrow all 
premiums and fees for flood insurance that covers any residential 
building or mobile home securing a loan that is located in an area with 
special flood hazards. If your lender notifies you that an escrow 
account is required for your loan, then you must pay your flood 
insurance premiums and fees to the lender or its servicer with the same 
frequency as you make loan payments for the duration of your loan. These 
premiums and fees will be deposited in the escrow account, which will be 
used to pay the flood insurance provider.]
    __ Flood insurance coverage under the NFIP is not available for the 
property securing the loan because the community in which the property 
is located does not participate in the NFIP. In addition, if the non-
participating community has been identified for at least one year as 
containing a special flood hazard area, properties located in the 
community will not be eligible for Federal disaster relief assistance in 
the event of a Federally declared flood disaster.

[80 FR 43258, July 21, 2015]



 Sec. Appendix B to Subpart S of Part 614--Sample Clause for Option to 
                      Escrow for Outstanding Loans

                          Escrow Option Clause

    You have the option to escrow all premiums and fees for the payment 
on your flood insurance policy that covers any residential building or 
mobile home that is located in an area with special flood hazards and 
that secures your loan. If you choose this option:
      Your payments will be deposited in an escrow account to be 
paid to the flood insurance provider.
      The escrow amount for flood insurance will be added to the 
regular mortgage payment that you make to your lender or its servicer.
      The payments you make into the escrow account will 
accumulate over time and the funds will be used to pay your flood 
insurance policy when your lender or servicer receives a notice from 
your flood insurance provider that the flood insurance premium is due.
    To choose this option, follow the instructions below. If you have 
any questions about the option, contact [Insert Name of Lender or 
Servicer] at [Insert Contact Information].
    [Insert Instructions for Selecting to Escrow]

[80 FR 43258, July 21, 2015]



PART 615_FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,
AND FUNDING OPERATIONS--Table of Contents



                            Subpart A_Funding

Sec.
615.5000  General responsibilities.
615.5010  Funding Corporation.
615.5030  Borrowings from commercial banks.
615.5040  Borrowings from financial institutions other than commercial 
          banks.

[[Page 162]]

                          Subpart B_Collateral

615.5045  Definitions.
615.5050  Collateral requirements.
615.5060  Special collateral requirement.
615.5090  Reduction in carrying value of collateral.

 Subpart C_Issuance of Bonds, Notes, Debentures and Similar Obligations

615.5100  Authority to issue.
615.5101  Requirements for issuance.
615.5102  Issuance of debt obligations through the Funding Corporation.
615.5103-615.5104  [Reserved]
615.5105  Consolidated Systemwide notes.

                         Subpart D_Other Funding

615.5110  Authority to issue (other funding).
615.5120  Purchase eligibility requirement.
615.5130  Procedures.

                     Subpart E_Investment Management

615.5131  Definitions.
615.5132  Investment purposes.
615.5133  Investment management.
615.5134  Liquidity reserve.
615.5136  Emergencies impeding normal access of Farm Credit banks to 
          capital markets.
615.5140  Eligible investments.
615.5142  Association investments.
615.5143  Management of ineligible investments and reservation of 
          authority to require divestiture.
615.5144  Banks for cooperatives and agricultural credit banks.

     Subpart F_Property, Transfers of Capital, and Other Investments

615.5170  Real and personal property.
615.5171  Transfer of capital from banks to associations.
615.5172  Production credit association and agricultural credit 
          association investment in farmers' notes given to cooperatives 
          and dealers.
615.5173  Stock of the Federal Agricultural Mortgage Corporation.
615.5174  Farmer Mac securities.
615.5175  Investments in Farm Credit System institution preferred stock.

                Subpart G_Risk Assessment and Management

615.5180  Bank interest rate risk management program.
615.5182  Interest rate risk management by associations and other Farm 
          Credit System institutions other than banks.

                       Subpart H_Capital Adequacy

615.5200  Capital planning.
615.5201  Definitions.
615.5205  Minimum permanent capital standards.
615.5206  Permanent capital ratio computation.
615.5207  Capital adjustments and associated reductions to assets.
615.5208  Allotment of allocated investments.
615.5209-615.5212  [Reserved]
615.5215  Distribution of earnings.
615.5216  [Reserved]

                     Subpart I_Issuance of Equities

615.5220  Capitalization bylaws.
615.5230  Implementation of cooperative principles.
615.5240  Regulatory capital requirements.
615.5245  Limitations on association preferred stock.
615.5250  Disclosure requirements for sales of borrower stock.
615.5255  Disclosure and review requirements for sales of other 
          equities.

        Subpart J_Retirement of Equities and Payment of Dividends

615.5260  Retirement of eligible borrower stock.
615.5270  Retirement of other equities.
615.5280  Retirement in event of default.
615.5290  Retirement of capital stock and participation certificates in 
          event of restructuring.
615.5295  Payment of dividends.

Subpart K [Reserved]

  Subpart L_Establishment of Minimum Capital Ratios for an Individual 
                               institution

615.5350  General--Applicability.
615.5351  Standards for determination of appropriate individual 
          institution minimum capital ratios.
615.5352  Procedures.
615.5353  Relation to other actions.
615.5354  Enforcement.

                Subpart M_Issuance of a Capital Directive

615.5355  Purpose and scope.
615.5356  Notice of intent to issue a capital directive.
615.5357  Response to notice.
615.5358  Decision.
615.5359  Issuance of a capital directive.
615.5360  Reconsideration based on change in circumstances.
615.5361  Relation to other administrative actions.

Subpart N [Reserved]

[[Page 163]]

       Subpart O_Book-Entry Procedures for Farm Credit Securities

615.5450  Definitions.
615.5451  Book-entry and definitive securities.
615.5452  Law governing rights and obligations of Federal Reserve Banks, 
          Farm Credit banks, and Funding Corporation; rights of any 
          person against Federal Reserve Banks, Farm Credit banks, and 
          Funding Corporation.
615.5453  Law governing other interests.
615.5454  Creation of participant's security entitlement; security 
          interests.
615.5455  Obligations of the Farm Credit banks and the Funding 
          Corporation; no adverse claims.
615.5456  Authority of Federal Reserve Banks.
615.5457  Withdrawal of eligible book-entry securities for conversion to 
          definitive form.
615.5458  Waiver of regulations.
615.5459  Liability of Farm Credit banks, Funding Corporation and 
          Federal Reserve Banks.
615.5460  Additional provisions.
615.5461  Lost, stolen, destroyed, mutilated or defaced Farm Credit 
          securities, including coupons.
615.5462  Restrictive endorsement of bearer securities.

                    Subpart P_Global Debt Securities

615.5500  Definitions.
615.5502  Issuance of global debt securities.

                      Subpart Q_Bankers Acceptances

615.5550  Bankers' acceptances.

Subpart R [Reserved]

     Subpart S_Federal Agricultural Mortgage Corporation Securities

615.5570  Book-entry procedures for Federal Agricultural Mortgage 
          Corporation

    Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5, 
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 
6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm Credit 
Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 
2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 2211, 2243, 
2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-7, 
2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a), Pub. L. 100-233, 101 Stat. 
1568, 1608; sec. 939A, Pub. L. 111-203, 124 Stat. 1326, 1887 (15 U.S.C. 
78o-7 note).



                            Subpart A_Funding



Sec. 615.5000  General responsibilities.

    (a) The System banks, acting through the Federal Farm Credit Banks 
Funding Corporation (Funding Corporation), have the primary 
responsibility for obtaining funds for the lending operations of the 
System institutions.
    (b) The System's funding operations have a significant impact upon 
the investment community, the general public, and the national economy 
in both the volume and the manner by which funds are raised. The Farm 
Credit Administration supervises compliance with the statutory 
collateral requirements for the debt obligations issued. The Chairman of 
the Farm Credit Administration, under policies adopted by the Board, 
consults with the Secretary of the Treasury concerning the System's 
funding activities, pursuant to section 5.10 of the Act.

[54 FR 1158, Jan. 12, 1989]



Sec. 615.5010  Funding Corporation.

    (a) The Funding Corporation shall issue, market, and handle the 
obligations of the banks issued under section 4.2(b) through (d) of the 
Act and interbank or intersystem flow of funds as may from time to time 
be required, and, upon request of the banks, shall handle investment 
portfolios. The Funding Corporation shall maintain accurate and timely 
records. The System banks shall provide for the sale of such obligations 
through the Funding Corporation by negotiation, offer, bid, or syndicate 
sale, and for the delivery of such obligations by book entry, wire 
transfer, or such other means as may be appropriate.
    (b) The interaction of the System with the financial community shall 
be conducted principally through the Funding Corporation. The Funding 
Corporation shall be subject to regulation and examination by the Farm 
Credit Administration.

[54 FR 1158, Jan. 12, 1989]

[[Page 164]]



Sec. 615.5030  Borrowings from commercial banks.

    Each System bank board, by resolution, shall authorize all 
commercial bank borrowings by that System bank.

[54 FR 1159, Jan. 12, 1989, as amended at 75 FR 35968, June 24, 2010]



Sec. 615.5040  Borrowings from financial institutions other than 
commercial banks.

    The Farm Credit banks may borrow from other financial institutions, 
such as insurance companies, Federal agencies, or Federal reserve banks.

[37 FR 11434, June 7, 1972, as amended at 54 FR 1151, Jan. 12, 1989; 54 
FR 50736, Dec. 11, 1989]



                          Subpart B_Collateral

    Source: 54 FR 1159, Jan. 12, 1989, unless otherwise noted.



Sec. 615.5045  Definitions.

    (a) Cost means the actual amount paid for any asset.
    (b) Market value means the price at which a willing seller would 
sell to a willing buyer, neither under any compulsion to buy or sell.
    (c) Unpaid balance means total principal and accrued interest owed.
    (d) Secured interbank loan means a loan from one Farm Credit System 
bank to another Farm Credit System bank, secured by assets of the 
borrowing Farm Credit System bank.



Sec. 615.5050  Collateral requirements.

    (a) Each bank shall have on hand at the time of issuance of any 
notes, bonds, debentures, or other similar obligations, and at all times 
thereafter maintain, free from any lien or other pledge, assets 
consisting of notes and other obligations representing loans made under 
the authority of the Act, real or personal property acquired in 
connection with loans made under the Act, obligations of the United 
States or any agency thereof direct or fully guaranteed, other bank 
assets (including marketable securities) approved by the Farm Credit 
Administration, cash, or cash equivalents approved by the Farm Credit 
Administration, in an aggregate value equal to the total amount of 
notes, bonds, debentures, or other similar obligations outstanding for 
which the bank is primarily liable.
    (b) The collateral value of eligible investments (as defined in 
Sec. 615.5140) shall be the lower of cost or market value.
    (c)(1) Except as otherwise provided in this paragraph, the 
collateral value of notes and other obligations representing loans made 
under the authority of any Farm Credit Act shall be the unpaid balance 
of such loans adjusted for any allowance for loan losses (except as 
provided for in Sec. 615.5090).
    (2) The collateral value of loans in process of liquidation or 
foreclosure, judgments, and sales contracts shall be the unpaid balance 
of such loans, judgments, and contracts adjusted for any allowance for 
losses.
    (3) The collateral value of loans which have been restructured by 
any action, such as an extension, deferment, or partial release, shall 
be the new unpaid balance of the loans adjusted for any allowance for 
losses.
    (4) The collateral value of property acquired in the liquidation of 
loans shall be the book value of such property adjusted for any 
allowance for losses.
    (5) Collateral shall not include the amount of any loan that exceeds 
the maximum amount authorized under the Act or part 614 of these 
regulations.
    (6) Collateral may include the collateral value of secured interbank 
loans, computed as provided in Sec. 615.5050(c)(1), provided that the 
assets securing the loan could serve as collateral supporting the 
issuance of obligations under Sec. 615.5050(a). In computing its 
eligible collateral, the borrowing bank shall not count the assets 
securing such loan.
    (d) Each bank shall have procedures which will ensure that the bank 
is in compliance with the statutory requirements for maintenance of 
collateral. Such procedures shall include provisions for:
    (1) Adequate safekeeping facilities;
    (2) Methods to determine that debt instruments meet all requirements 
of law and regulations;
    (3) A report signed by an authorized bank officer at each regular 
meeting of the board of directors certifying the

[[Page 165]]

eligibility and the adequacy of collateral. Items to be reported will 
include but not be limited to the total amount of eligible collateral, 
amount of ineligible loans, amount of deductions, and the amount of 
excess collateral; and
    (4) Written procedures and practices to ensure that there will be a 
high degree of accuracy in protecting and accounting for the collateral.



Sec. 615.5060  Special collateral requirement.

    (a) An attorney lien certification need not be obtained at the time 
a note is accepted as collateral if the counsel for the bank or 
association has determined, in writing, that the bank or association 
procedures provide sufficient safeguards to ensure that a real estate 
mortgage loan, within the meaning of section 1.7(a) of the Act, made by 
the bank or association will be secured by a first lien or its 
equivalent on the borrower's interest in the primary real estate 
security. However, the note shall be withdrawn from collateral upon the 
expiration of 1 year from the date of the loan closing, unless, before 
the end of such period:
    (1) An attorney has certified that the bank or association has a 
first lien or its equivalent from a security standpoint in the primary 
real estate security for the loan; or
    (2) The bank or association has obtained a title insurance policy 
insuring that it has a first lien or its equivalent from a security 
standpoint in the primary real estate security for the loan, and all of 
the following requirements are satisfied:
    (i) The final policy was issued by a title insurance company that 
has been licensed to issue such policies by the appropriate state 
insurance regulatory body or bodies, has not been barred or suspended, 
and has been approved by the lending institution;
    (ii) The standard form on which the final policy was issued has been 
approved by the counsel for the lending institution;
    (iii) The final policy was issued for an amount at least equal to 
the balance outstanding on the real estate mortgage loan or, if separate 
policies are issued to insure separate tracts, the minimum amount 
insured by each policy shall bear the same ratio to the outstanding 
balance of the loan that the appraised value of the tract insured by 
that policy bears to the appraised value of all the real estate security 
for the loan; and
    (iv) Personnel meeting written standards of training and experience 
in real estate title matters prescribed by the counsel for the lending 
institution certified in writing that:
    (A) They reviewed the final policy and that the policy complies with 
standards prescribed by such counsel; and
    (B) The final policy insures that a first lien or its equivalent 
from a security standpoint has been obtained on the primary real estate 
security for the loan.
    (b) A loan participation agreement to which a System bank or 
association is a participant and involving a loan originated by another 
lender shall constitute an obligation meeting the collateral 
requirements of Sec. 615.5050(a).

[54 FR 1159, Jan. 12, 1989, as amended at 59 FR 3787, Jan. 27, 1994]



Sec. 615.5090  Reduction in carrying value of collateral.

    When the bank or Farm Credit Administration determines that a loan 
did not conform to the requirements of the law or regulations at the 
time the loan was closed, such loan shall be withdrawn from collateral 
until the cause of ineligibility is remedied. When a loan has been 
classified as a loss loan, the bank shall adjust the collateral value of 
the loan accordingly.



 Subpart C_Issuance of Bonds, Notes, Debentures and Similar Obligations



Sec. 615.5100  Authority to issue.

    The Act authorizes each bank of the System, subject to the 
collateral requirements of section 4.3(c) of the Act, to issue:
    (a) Notes, bonds, debentures, or other similar obligations;
    (b) Consolidated obligations, together with any or all banks 
organized and operating under the same title of the Act;

[[Page 166]]

    (c) Systemwide obligations, together with other banks of the System; 
and
    (d) Investment bonds to the authorized purchasers subject to the 
limitations contained in the regulations set forth in subpart D.

[54 FR 1160, Jan. 12, 1989]



Sec. 615.5101  Requirements for issuance.

    Except as provided in section 4.2(e) of the Act, each debt 
obligation shall meet the following requirements:
    (a) Each debt obligation shall be issued through the Federal Farm 
Credit Banks Funding Corporation acting for System banks.
    (b) Each debt obligation shall be authorized by resolution of the 
board(s) of directors of the issuer(s). Each participating bank shall 
provide, in its authorizing resolution, for its primary liability on the 
portion of any consolidated or Systemwide obligation issued on its 
behalf and be jointly and severally liable for the payment of any 
additional sums as called upon by the Farm Credit Administration, in 
accordance with section 4.4 of the Act, in the event any bank primarily 
liable therefor is unable to pay.
    (c) Each issuance of debt obligations shall meet the collateral 
requirements set forth in subpart B.
    (d) Each issuance of debt obligations shall be approved by the Farm 
Credit Administration.
    (e)(1) Consultation with the Secretary of the Treasury required by 
31 U.S.C. 9108 shall be conducted by System representatives and shall 
have occurred prior to each debt issuance.
    (2) Under policies adopted by the Board of the Farm Credit 
Administration, the Chairman will consult with the Secretary of the 
Treasury on a regular basis concerning the exercise by the System of the 
powers conferred under section 4.2 of the Act.

[54 FR 1160, Jan. 12, 1989]



Sec. 615.5102  Issuance of debt obligations through the Funding 
Corporation.

    (a) The amount, maturities, rates or interest, terms and conditions 
of participation by the System banks in each issue of joint, 
consolidated or Systemwide obligations shall be determined by the 
Funding Corporation established pursuant to section 4.9 of the Act, 
acting for the banks of the System, subject to the approval of the Farm 
Credit Administration in accordance with Sec. 615.5102.
    (b) The Funding Corporation shall plan and develop funding 
guidelines, priorities, and objectives based upon the asset/liability 
management policies of the System institutions and the requirements of 
the market. The guidelines, priorities, and objectives shall be designed 
to ensure that the debt marketing responsibilities of the Funding 
Corporation will continue to provide flexibility for the banks and are 
fiscally sound.
    (c) For all debt issuances conducted by the Funding Corporation, the 
specific prior approval of the Farm Credit Administration must be 
obtained prior to the distribution and sale of the obligation pursuant 
to section 4.9 of the Act.

[54 FR 1160, Jan. 12, 1989]



Secs. 615.5103-615.5104  [Reserved]



Sec. 615.5105  Consolidated Systemwide notes.

    Consolidated Systemwide notes authorized under Sec. 615.5100(b) 
shall be subject to the following provisions unless otherwise approved 
by the Farm Credit Administration:
    (a) Maturities shall be not less than five days nor more than 365 
days.
    (b) Prices shall be on a discount yield basis or as determined by 
the Funding Corporation.

[42 FR 32227, June 24, 1977, as amended at 47 FR 28609, July 1, 1982; 54 
FR 1160, Jan. 12, 1989; 60 FR 20011, Apr. 24, 1995]



                         Subpart D_Other Funding



Sec. 615.5110  Authority to issue (other funding).

    Any Farm Credit bank may issue Farm Credit Investment Bonds directly 
to those eligible as set forth in Sec. 615.5120(a). The bonds are 
subject to the limitations contained in the Federal Reserve Board's 
Regulation Q.

[43 FR 47489, Oct. 16, 1978; 43 FR 55239, Nov. 27, 1978]

[[Page 167]]



Sec. 615.5120  Purchase eligibility requirement.

    (a) Limitations. Eligibility to purchase Farm Credit Investment 
Bonds shall be limited to members and employees of the Farm Credit banks 
and associations, except any bank officers, directors, and employees who 
are involved in setting the term or rate, to retired employees who are 
beneficiaries of a pension or retirement program of the Farm Credit 
banks or associations, and to retired employees of the Farm Credit 
Administration. A member of a Farm Credit association or a bank for 
cooperatives need not be an active borrower to be eligible. A member of 
any Farm Credit institution may purchase investment bonds from any of 
the institutions in the district which offer the purchase program. 
Patrons, members, employees, or stockholder of other financing 
institutions discounting loans with a Farm Credit Bank or agricultural 
credit bank or of any legal entity which is a borrower from any Farm 
Credit institution as such are ineligible as they are not members of a 
Farm Credit institution. Stock or participation certificates shall not 
be sold merely to qualify a party for the purchase of Farm Credit 
Investment Bonds. For purposes of this section ``member'' means a 
stockholder or participation certificate holder who acquired stock or 
participation certificates to obtain a loan, to purchase stock for 
investment or to qualify for other services of the association or bank. 
A person who assumes a loan is not a member unless he becomes a 
stockholder or participation certificate holder in connection with that 
loan. Employee means a regular full-time employee of a Farm Credit bank 
or association. Retired employee means a retiree who is a direct 
beneficiary of a pension or retirement program of a Farm Credit bank or 
association or the Farm Credit Administration under civil service 
retirement.
    (b) Form and ownership. Farm Credit Investment Bonds are registered 
bonds issued in definitive or book-entry form depending on investor 
preference. The registration used must express the actual ownership of 
an interest in the bond and will be considered by the issuing 
institution as conclusive of such ownership and interest. No designation 
of an attorney, agent, or other representative to request or receive 
payment on behalf of the owner or coowner, nor any restriction on the 
right of the owner or coowner to receive payment of the bond or 
interest, except as provided in this section may be made in the 
registration or otherwise. Registrations requested in applications for 
the purchase shall be clear, accurate, complete, and conform with one of 
the registration provisions set forth in this section, and include the 
appropriate taxpayer identifying number. Registrations requested will be 
inscribed on the face of the bond if in definitive form or on the 
confirmation of investment if in book-entry form. The following 
provisions shall apply for registration of Farm Credit Investment Bonds:
    (1) In all cases the member's name (whether a natural person, 
fiduciary, or legal entity) or employee's name must appear as owner of 
the bond.
    (2) A bond may be registered in the name of a fiduciary only if the 
fiduciary is in fact the member.
    (3) A member or employee may not use a form of registration (such as 
a gift to a minor, irrevocable trust, etc.) which would divest himself 
of ownership. However, a minor may be named as coowner or beneficiary.
    (4) If a member is a natural person, a second natural person, member 
or nonmember, may be named as coowner or beneficiary. Coownership may 
not involve a fiduciary or private organization.
    (5) In the coownership form the connective ``or'' shall serve the 
same purpose as ``joint tenants with right of survivorship.''

[43 FR 47489, Oct. 16, 1978; 43 FR 55239, Nov. 27, 1978, as amended at 
56 FR 2675, Jan. 24, 1991; 61 FR 67187, Dec. 20, 1996]



Sec. 615.5130  Procedures.

    Procedures relating to issuance, pricing, payment of interest, 
redemption, replacement of lost or stolen bonds and other matters shall 
be promulgated under the authority of this regulation as operating 
instructions to banks and associations.

[37 FR 11434, June 7, 1972]

[[Page 168]]



                     Subpart E_Investment Management



Sec. 615.5131  Definitions.

    For purposes of this subpart, the following definitions apply:
    Asset-backed securities (ABS) mean investment securities that 
provide for ownership of a fractional undivided interest or collateral 
interests in specific assets of a trust that are sold and traded in the 
capital markets. For the purposes of this subpart, ABS exclude mortgage 
securities that are defined in this section.
    Eurodollar time deposit means a non-negotiable deposit denominated 
in United States dollars and issued by an overseas branch of a United 
States bank or by a foreign bank outside the United States.
    Final maturity means the last date on which the remaining principal 
amount of a security is due and payable (matures) to the registered 
owner. It does not mean the call date, the expected average life, the 
duration, or the weighted average maturity.
    General obligations of a State or political subdivision means:
    (1) The full faith and credit obligations of a State, the District 
of Columbia, the Commonwealth of Puerto Rico, a territory or possession 
of the United States, or a political subdivision thereof that possesses 
general powers of taxation, including property taxation; or
    (2) An obligation that is unconditionally guaranteed by an obligor 
possessing general powers of taxation, including property taxation.
    Government agency means the United States Government or an agency, 
instrumentality, or corporation of the United States Government whose 
obligations are fully and explicitly insured or guaranteed as to the 
timely repayment of principal and interest by the full faith and credit 
of the United States Government.
    Government-sponsored agency means an agency, instrumentality, or 
corporation chartered or established to serve public purposes specified 
by the United States Congress but whose obligations are not fully and 
explicitly insured or guaranteed by the full faith and credit of the 
United States Government, including but not limited to any Government-
sponsored enterprise.
    Liquid investments are assets that can be promptly converted into 
cash without significant loss to the investor. In the money market, a 
security is liquid if the spread between its bid and ask price is narrow 
and a reasonable amount can be sold at those prices.
    Loans are defined by Sec. 621.2(f) of this chapter and they are 
calculated quarterly (as of the last day of March, June, September, and 
December) by using the average daily balance of loans during the 
quarter.
    Market risk means the risk to the financial condition of your 
institution because the value of your holdings may decline if interest 
rates or market prices change. Exposure to market risk is measured by 
assessing the effect of changing rates and prices on either the earnings 
or economic value of an individual instrument, a portfolio, or the 
entire institution.
    Mortgage securities means securities that are either:
    (1) Pass-through securities or participation certificates that 
represent ownership of a fractional undivided interest in a specified 
pool of residential (excluding home equity loans), multifamily or 
commercial mortgages, or
    (2) A multiclass security (including collateralized mortgage 
obligations and real estate mortgage investment conduits) that is backed 
by a pool of residential, multifamily or commercial real estate 
mortgages, pass-through mortgage securities, or other multiclass 
mortgage securities.
    Nationally Recognized Statistical Rating Organization (NRSRO) means 
a rating organization that the Securities and Exchange Commission 
recognizes as an NRSRO.
    Revenue bond means an obligation of a municipal government that 
finances a specific project or enterprise but it is not a full faith and 
credit obligation. The obligor pays a portion of the revenue generated 
by the project or enterprise to the bondholders.
    Weighted average life (WAL) means the average time until the 
investor receives the principal on a security, weighted by the size of 
each principal payment and calculated under specified prepayment 
assumptions.

[[Page 169]]

    You means a Farm Credit bank, association, or service corporation.

[64 FR 28895, May 28, 1999, as amended at 70 FR 51589, Aug. 31, 2005; 77 
FR 66370, Nov. 5, 2012]



Sec. 615.5132  Investment purposes.

    (a) Each Farm Credit bank may hold eligible investments, listed 
under Sec. 615.5140, in an amount not to exceed 35 percent of its total 
outstanding loans, to comply with its liquidity requirements in 
Sec. 615.5134, manage surplus short-term funds, and manage interest rate 
risk under Sec. 615.5180. To comply with this calculation, the 30-day 
average daily balance of investments is divided by loans. Investments 
are calculated at amortized cost. Loans are calculated as defined in 
Sec. 615.5131. For the purpose of this calculation, loans include 
accrued interest and do not include any allowance for loan loss 
adjustments. Compliance with the calculation is measured on the last day 
of every month.
    (b) The following investments may be excluded when calculating the 
amount of eligible investments held by the Farm Credit bank pursuant to 
Sec. 615.5132(a):
    (1) Eligible investments listed under Sec. 615.5140 that are pledged 
by a Farm Credit bank to meet margin requirements for derivative 
transactions; and
    (2) Any other investments FCA determines are appropriate for 
exclusion.

[77 FR 66371, Nov. 5, 2012]



Sec. 615.5133  Investment management.

    (a) Responsibilities of board of directors. Your board of directors 
must adopt written policies for managing your investment activities. 
Your board must also ensure that management complies with these policies 
and that appropriate internal controls are in place to prevent loss. At 
least annually, the board, or a designated committee of the board, must 
review the sufficiency of these investment policies. Any changes to the 
policies must be adopted by the board and be documented.
    (b) Investment policies--general requirements. Your board's written 
investment policies must address the purposes and objectives of 
investments; risk tolerance; delegations of authority; internal 
controls; due diligence; and reporting requirements. Moreover, your 
investment policies must fully address the extent of pre-purchase 
analysis that management must perform for various classes of 
investments. Furthermore, your investment policies must address the 
means for reporting, and approvals needed for, exceptions to established 
policies. Investment policies must be sufficiently detailed, consistent 
with, and appropriate for the amounts, types, and risk characteristics 
of your investments.
    (c) Investment policies--risk tolerance. Your investment policies 
must establish risk limits for the various types, classes, and sectors 
of eligible investments and for the entire investment portfolio. These 
policies must include concentration limits to ensure prudent 
diversification of credit, market, and liquidity risks in the investment 
portfolio. Risk limits must be based on all relevant factors, including 
your institutional objectives, capital position, earnings, and quality 
and reliability of risk management systems and must take into 
consideration the interest rate risk management program required by 
Sec. 615.5180 or Sec. 615.5182, as applicable. Your policies must 
identify the types and quantity of investments that you will hold to 
achieve your objectives and control credit, market, liquidity, and 
operational risks. Each association or service corporation that holds 
significant investments and each bank must establish risk limits in its 
investment policies for these four types of risk.
    (1) Credit risk. Investment policies must establish:
    (i) Credit quality standards, limits on counterparty risk, and risk 
diversification standards that limit concentrations. Limits must be set 
for single or related counterparty(ies), a geographical area, 
industries, and asset classes or obligations with similar 
characteristics.
    (ii) Criteria for selecting brokers, dealers, and investment bankers 
(collectively, securities firms). You must buy and sell eligible 
investments with more than one securities firm. As part of your review 
of your investment policies required under paragraph (a) of this 
section, your board of directors, or a designated committee of the 
board, must

[[Page 170]]

review the criteria for selecting securities firms. Any changes to the 
criteria must be approved by the board.
    (iii) Collateral margin requirements on repurchase agreements. You 
must regularly mark the collateral to market and ensure appropriate 
controls are maintained over collateral held.
    (2) Market risk. Investment policies must set market risk limits for 
specific types of investments and for the investment portfolio.
    (3) Liquidity risk. Investment policies must describe the liquidity 
characteristics of eligible investments that you will hold to meet your 
liquidity needs and other institutional objectives.
    (4) Operational risk. Investment policies must address operational 
risks, including delegations of authority and internal controls in 
accordance with paragraphs (d) and (e) of this section.
    (d) Delegation of authority. All delegations of authority to 
specified personnel or committees must state the extent of management's 
authority and responsibilities for investments.
    (e) Internal controls. You must:
    (1) Establish appropriate internal controls to detect and prevent 
loss, fraud, embezzlement, conflicts of interest, and unauthorized 
investments.
    (2) Establish and maintain a separation of duties between personnel 
who supervise or execute investment transactions and personnel who 
supervise or engage in all other investment-related functions.
    (3) Maintain records and management information systems that are 
appropriate for the level and complexity of your investment activities.
    (4) Implement an effective internal audit program to review, at 
least annually, your investment management function, controls, 
processes, and compliance with FCA regulations. The scope of the annual 
review must be appropriate for the size, risk and complexity of the 
investment portfolio.
    (f) Due diligence--(1) Pre-purchase analysis. (i) Eligibility, 
purpose, and compliance with investment policies. Before you purchase an 
investment, you must conduct sufficient due diligence to determine 
whether it is eligible under Sec. 615.5140, is for an authorized purpose 
under Sec. 615.5132 or Sec. 615.5142, as applicable, and complies with 
your board's investment policies. You must document your assessment and 
the information used in your assessment. Your board must approve your 
decision to hold an investment that does not comply with your investment 
policies.
    (ii) Valuation. Prior to purchase, you must verify the value of the 
investment (unless it is a new issue) with a source that is independent 
of the broker, dealer, counterparty or other intermediary to the 
transaction.
    (iii) Risk assessment. Your assessment of each investment at the 
time of purchase must at a minimum include an evaluation of credit risk, 
liquidity risk, market risk, interest rate risk, and the underlying 
collateral of the investment. This assessment must be commensurate with 
the complexity and risk in the investment. You must perform stress 
testing on any investment that is structured or that has uncertain cash 
flows, including all mortgage-backed securities and asset-backed 
securities, before you purchase it. The stress test must be commensurate 
with the risk and complexity of the investment and must enable you to 
determine that the investment does not expose your capital, earnings, or 
liquidity to risks that are greater than those specified in your 
investment policies. The stress testing must comply with the 
requirements in paragraph (f)(4)(ii) of this section.
    (2) Ongoing value determination. At least monthly, you must 
determine the fair market value of each investment in your portfolio and 
the fair market value of your whole investment portfolio.
    (3) Ongoing analysis of credit risk. You must establish and maintain 
processes to monitor and evaluate changes in the credit quality of each 
investment in your portfolio and in your whole investment portfolio on 
an ongoing basis.
    (4) Quarterly stress testing. (i) You must stress test your entire 
investment portfolio, including stress tests of all investments 
individually and stress tests of the portfolio as a whole, at the end of 
each quarter. The stress tests must enable you to determine that your 
investment securities, both individually and on a portfolio-wide basis, 
do not expose your capital, earnings, or liquidity to risks that exceed 
the risk

[[Page 171]]

tolerance specified in your investment policies. If your portfolio risk 
exceeds your investment policy limits, you must develop a plan to comply 
with those limits.
    (ii) Your stress tests must be defined in a board-approved policy 
and must include defined parameters for the types of securities you 
purchase. The stress tests must be comprehensive and appropriate for the 
risk profile of your institution. At a minimum, the stress tests must be 
able to measure the price sensitivity of investments over a range of 
possible interest rate/yield curve scenarios. The methodology that you 
use to analyze investment securities must be appropriate for the 
complexity, structure, and cash flows of the investments in your 
portfolio. You must rely to the maximum extent practicable on verifiable 
information to support all your assumptions, including prepayment and 
interest rate volatility assumptions, when you apply your stress tests. 
You must document the basis for all assumptions that you use to evaluate 
the security and its underlying collateral. You must also document all 
subsequent changes in your assumptions.
    (5) Presale value verification. Before you sell an investment, you 
must verify its value with a source that is independent of the broker, 
dealer, counterparty, or other intermediary to the transaction.
    (g) Reports to the board of directors. At least quarterly, your 
management must report on the following to your board of directors or a 
designated board committee:
    (1) Plans and strategies for achieving the board's objectives for 
the investment portfolio;
    (2) Whether the investment portfolio effectively achieves the 
board's objectives;
    (3) The current composition, quality, and liquidity profile of the 
investment portfolio;
    (4) The performance of each class of investments and the entire 
investment portfolio, including all gains and losses realized during the 
quarter on individual investments that you sold before maturity and why 
they were liquidated;
    (5) Potential risk exposure to changes in market interest rates as 
identified through quarterly stress testing and any other factors that 
may affect the value of your investment holdings;
    (6) How investments affect your capital, earnings, and overall 
financial condition;
    (7) Any deviations from the board's policies (must be specifically 
identified);
    (8) The status and performance of each investment described in 
Sec. 615.5143(a) and (b) or that does not comply with your investment 
policies; including the expected effect of these investments on your 
capital, earnings, liquidity, and collateral position; and
    (9) The terms and status of any required divestiture plan or risk 
reduction plan.

[77 FR 66371, Nov. 5, 2012]



Sec. 615.5134  Liquidity reserve.

    (a) Liquidity policy--(1) Board responsibility. The board of each 
Farm Credit bank must adopt a written liquidity policy. The liquidity 
policy must be compatible with the investment management policies that 
the bank's board adopts pursuant to Sec. 615.5133 of this part. At least 
once every year, the bank's board must review its liquidity policy, 
assess the sufficiency of its liquidity policy, and make any revisions 
it deems necessary. The board of each Farm Credit bank must ensure that 
adequate internal controls are in place so that management complies with 
and carries out this liquidity policy.
    (2) Policy content. At a minimum, the liquidity policy of each Farm 
Credit bank must address:
    (i) The purpose and objectives of the liquidity reserve;
    (ii) Diversification requirements for the liquidity reserve 
portfolio;
    (iii) The target amount of days of liquidity that the bank needs 
based on its business model and risk profile;
    (iv) Delegations of authority pertaining to the liquidity reserve; 
and
    (v) Reporting requirements, which at a minimum must require 
management to report to the board at least once every quarter about 
compliance with

[[Page 172]]

the bank's liquidity policy and the performance of the liquidity reserve 
portfolio. However, management must report any deviation from the bank's 
liquidity policy, or failure to meet the board's liquidity targets to 
the board before the end of the quarter if such deviation or failure has 
the potential to cause material loss to the bank.
    (b) Liquidity reserve requirement. Each Farm Credit bank must 
maintain at all times a liquidity reserve sufficient to fund at least 90 
days of the principal portion of maturing obligations and other 
borrowings of the bank. At a minimum, each Farm Credit Bank must hold 
instruments in its liquidity reserve listed and discounted in the Table 
below that are sufficient to cover:
    (1) Days 1 through 15 only with Level 1 instruments;
    (2) Days 16 through 30 only with Level 1 and Level 2 instruments; 
and
    (3) Days 31 through 90 with Level 1, Level 2, and Level 3 
instruments.

------------------------------------------------------------------------
                                                      Discount (multiply
     Liquidity level              Instruments                by)
------------------------------------------------------------------------
Level 1..................    Cash,           100 percent.
                            including cash due from
                            traded but not yet
                            settled debt.
                             Overnight       100 percent.
                            money market
                            investments.
                             Obligations of  97 percent.
                            the United States with
                            a final remaining
                            maturity of 3 years or
                            less.
                             Government-     95 percent.
                            sponsored agency senior
                            debt securities that
                            mature within 60 days,
                            excluding securities
                            issued by the Farm
                            Credit System.
                             Diversified     95 percent
                            investment funds
                            comprised exclusively
                            of Level 1 instruments.
Level 2..................    Additional      Discount for each
                            Level 1 investments.      Level 1 investment
                                                      applies.
                             Obligations of  97 percent.
                            the United States with
                            a final remaining
                            maturity of more than 3
                            years.
                             Mortgage-       95 percent.
                            backed securities that
                            are explicitly backed
                            by the full faith and
                            credit of the United
                            States as to the timely
                            repayment of principal
                            and interest.
                             Diversified     95 percent.
                            investment funds
                            comprised exclusively
                            of Levels 1 and 2
                            instruments.
Level 3..................    Additional      Discount for each
                            Level 1 or Level 2        Level 1 or Level 2
                            investments.              investment
                                                      applies.
                             Government-     93 percent for all
                            sponsored agency senior   instruments in
                            debt securities with      Level 3.
                            maturities exceeding 60
                            days, excluding senior
                            debt securities of the
                            Farm Credit System.
                             Government-
                            sponsored agency
                            mortgage-backed
                            securities that the
                            timely repayment of
                            principal and interest
                            are not explicitly
                            backed by the full
                            faith and credit of the
                            United States.
                             Money market
                            instruments maturing
                            within 90 days.
                             Diversified
                            investment funds
                            comprised exclusively
                            of levels 1, 2, and 3
                            instruments.
------------------------------------------------------------------------

    (c) Unencumbered. All investments that a Farm Credit bank holds in 
its liquidity reserve and supplemental liquidity buffer in accordance 
with this section must be unencumbered. For the purpose of this section, 
an investment is unencumbered if it is free of lien, and it is not 
explicitly or implicitly pledged to secure, collateralize, or enhance 
the credit of any transaction. Additionally, an unencumbered investment 
held in the liquidity reserve cannot be used as a hedge against interest 
rate risk if liquidation of that particular investment would expose the 
bank to a material risk of loss.
    (d) Marketable. All investments that a Farm Credit bank holds in its 
liquidity reserve in accordance with this section must be readily 
marketable. For the purposes of this section, an investment is 
marketable if it:
    (1) Can be easily and quickly converted into cash with little or no 
loss in value;
    (2) Exhibits low credit and market risks;
    (3) Has ease and certainty of valuation; and
    (4) Except for money market instruments, can be easily bought and 
sold in active and sizeable markets without significantly affecting 
prices.
    (e) Supplemental liquidity buffer. Each Farm Credit bank must hold 
supplemental liquid assets in excess of the 90-

[[Page 173]]

day minimum liquidity reserve. The supplemental liquidity buffer must be 
comprised of cash and qualified eligible investments authorized by 
Sec. 615.5140 of this part. A Farm Credit bank must be able to liquidate 
any qualified eligible investment in its supplemental liquidity buffer 
within the liquidity policy timeframe established in the bank's 
liquidity policy at no less than 80 percent of its book value. A Farm 
Credit bank must remove from its supplemental liquidity buffer any 
investment that has, at any time, a market value that is less than 80 
percent of its book value. Each investment in the supplemental liquidity 
buffer that has a market value of at least 80 percent of its book value, 
but does not qualify for Levels 1, 2, or 3 of the liquidity reserve, 
must be discounted to (multiplied by) 90 percent of its market value. 
The amount of supplemental liquidity that each Farm Credit bank holds, 
at minimum, must meet the requirements of its board's liquidity policy, 
provide excess liquidity beyond the days covered by the liquidity 
reserve, and satisfy the applicable portions of the bank's CFP in 
accordance with paragraph (f).
    (f) Contingency Funding Plan (CFP). The board of each Farm Credit 
bank must adopt a CFP to ensure sources of liquidity are sufficient to 
fund normal operations under a variety of stress events. Such stress 
events include, but are not limited to market disruptions, rapid 
increase in loan demand, unexpected draws on unfunded commitments, 
difficulties in renewing or replacing funding with desired terms and 
structures, requirements to pledge collateral with counterparties, and 
reduced market access. Each Farm Credit bank must maintain an adequate 
level of unencumbered and marketable assets in its liquidity reserve 
that can be converted into cash to meet its net liquidity needs for 30 
days based on estimated cash inflows and outflows under an acute stress 
scenario. The board of directors must review and approve the CFP at 
least once every year and make adjustments to reflect changes in the 
bank's risk profile and market conditions. The CFP must:
    (1) Be customized to the financial condition and liquidity risk 
profile of the bank and the board's liquidity risk tolerance policy.
    (2) Identify funding alternatives that the Farm Credit bank can 
implement whenever access to funding is impeded, which must include, at 
a minimum, arrangements for pledging collateral to secure funding and 
possible initiatives to raise additional capital.
    (3) Require periodic stress testing that analyzes the possible 
effects on the bank's cash inflows and outflows, liquidity position, 
profitability and solvency under a variety of stress scenarios.
    (4) Establish a process for managing events that imperil the bank's 
liquidity, and assign appropriate personnel and implement executable 
action plans that carry out the CFP.

[78 FR 23455, Apr. 18, 2013; 78 FR 26701, May 8, 2013]



Sec. 615.5136  Emergencies impeding normal access of Farm Credit
banks to capital markets.

    An emergency shall be deemed to exist whenever a financial, 
economic, agricultural, national defense, or other crisis could impede 
the normal access of Farm Credit banks to the capital markets. Whenever 
the Farm Credit Administration determines, after consultation with the 
Federal Farm Credit Banks Funding Corporation to the extent practicable, 
that such an emergency exists, the Farm Credit Administration Board may, 
in its sole discretion, adopt a resolution that:
    (a) Modifies the amount, qualities, and types of eligible 
investments that Farm Credit banks are authorized to hold pursuant to 
Sec. 615.5132 of this subpart;
    (b) Modifies or waives the liquidity requirement(s) in Sec. 615.5134 
of this subpart; and/or
    (c) Authorizes other actions as deemed appropriate.

[77 FR 66372, Nov. 5, 2012]



Sec. 615.5140  Eligible investments.

    (a) You may hold only the following types of investments listed in 
the Investment Eligibility Criteria Table. These investments must be 
denominated in United States dollars.

[[Page 174]]



                                      Investment Eligibility Criteria Table
----------------------------------------------------------------------------------------------------------------
                                    Final maturity       NRSRO Credit                             Investment
           Asset class                   limit              rating        Other requirements    portfolio limit
----------------------------------------------------------------------------------------------------------------
(1) Obligations of the United     None..............  NA................  None..............  None.
 States.
  Treasuries.
  Agency securities
 (except mortgage securities).
  Other obligations
 fully insured or guaranteed by
 the United States, its
 agencies, instrumentalities and
 corporations.
(2) Municipal Securities:
  General obligations...  10 years..........  One of the highest  None..............  None.
                                                       two.
  Revenue bonds.........  5 years...........  Highest...........  At the time of      15%.
                                                                           purchase, you
                                                                           must document
                                                                           that the issue is
                                                                           actively traded
                                                                           in an established
                                                                           secondary market.
(3) International and             None..............  None..............  The United States   None.
 Multilateral Development Bank                                             must be a voting
 Obligations.                                                              shareholder.
(4) Money Market Instruments:
  Federal funds.........  1 day or            One of the two      None..............  None.
                                   continuously        highest short-
                                   callable up to      term.
                                   100 days.
  Negotiable              1 year............  One of the two      None..............  None.
 certificates of deposit.                              highest short-
                                                       term.
  Bankers acceptances...  None..............  One of the two      Issued by a         None.
                                                       highest short-      depository
                                                       term.               institution.
  Commercial paper......  270 days..........  Highest short-term  None..............  None.
  Non-callable Term       100 days..........  Highest short-term  None..............  20%.
 Federal funds and Eurodollar
 time deposits.
  Master notes..........  270 days..........  Highest short-term  None..............  20%.
  Repurchase agreements   100 days..........  NA................  None..............  None.
 collateralized by eligible
 investments or marketable
 securities rated in the highest
 credit rating category by an
 NRSRO.
(5) Mortgage Securities:
  Issued or guaranteed    None..............  NA................  None..............  None.
 by the United States.
  Fannie Mae or Freddie   None..............  NA................  None..............  50%.
 Mac mortgage securities.
  Non-Agency securities   None..............  Highest...........  None..............  15%.
 that comply 15 U.S.C. 77d(5) or
 15 U.S.C. 78c(a)(41).
  Commercial mortgage-    None..............  Highest...........    Security
 backed securities.                                                        must be backed by
                                                                           a minimum of 100
                                                                           loans.
                                                                            Loans
                                                                           from a single
                                                                           mortgagor cannot
                                                                           exceed 5% of the
                                                                           pool.
                                                                            Pool
                                                                           must be
                                                                           geographically
                                                                           diversified
                                                                           pursuant to the
                                                                           board's policy.

[[Page 175]]

 
(6) Asset-Backed Securities       None..............  Highest...........  5-year WAL for      20%.
 secured by.                                                               fixed rate or
  Credit card                                                      floating rate ABS
 receivables..                                                             at their
  Automobile loans......                                           contractual
  Home equity loans.....                                           interest rate
  Wholesale automobile                                             caps.
 dealer loans..                                                           7-year WAL for
  Student loans.........                                           floating rate ABS
  Equipment loans.......                                           that remain below
  Manufactured housing                                             their contractual
 loans..                                                                   interest rate
                                                                           cap..
(7) Corporate Debt Securities...  5 years...........  One of the two      Cannot be           20%.
                                                       highest.            convertible to
                                                                           equity securities.
(8) Diversified Investment Funds  NA................  NA................  The portfolio of    None, if your
Shares of an investment company                                            the investment      shares in each
 registered under section 8 of                                             company must        investment
 the Investment Company Act of                                             consist solely of   company comprise
 1940..                                                                    eligible            10% or less of
                                                                           investments         your portfolio.
                                                                           authorized by       Otherwise counts
                                                                           Secs.  615.5140     toward limit for
                                                                           and 615.5174.       each type of
                                                                          The investment       investment.
                                                                           company's risk
                                                                           and return
                                                                           objectives and
                                                                           use of
                                                                           derivatives must
                                                                           be consistent
                                                                           with FCA guidance
                                                                           and your
                                                                           investment
                                                                           policies..
----------------------------------------------------------------------------------------------------------------

    (b) Rating of foreign countries. Whenever the obligor or issuer of 
an eligible investment is located outside the United States, the host 
country must maintain the highest sovereign rating for political and 
economic stability by an NRSRO.
    (c) Marketable securities. All eligible investments, except money 
market instruments, must be marketable. An eligible investment is 
marketable if you can sell it quickly at a price that closely reflects 
its fair value in an active and universally recognized secondary market.
    (d) Obligor limits. (1) You may not invest more than 20 percent of 
your total capital in eligible investments issued by any single 
institution, issuer, or obligor. This obligor limit does not apply to 
obligations, including mortgage securities, that are issued or 
guaranteed as to interest and principal by the United States, its 
agencies, instrumentalities, or corporations.
    (2) Obligor limits for your holdings in an investment company. You 
must count securities that you hold through an investment company 
towards the obligor limit of this section unless the investment 
company's holdings of the security of any one issuer do not exceed five 
(5) percent of the investment company's total portfolio.
    (e) Other investments approved by the FCA. You may purchase and hold 
other investments that we approve. Your request for our approval must 
explain the risk characteristics of the investment and your purpose and 
objectives for making the investment.

[64 FR 28896, May 28, 1999, as amended at 77 FR 66372, Nov. 5, 2012]



Sec. 615.5142  Association investments.

    An association may hold eligible investments listed in 
Sec. 615.5140, with the approval of its funding bank, for the purposes 
of reducing interest rate risk and managing surplus short-term funds. 
Each bank must review annually the investment portfolio of every 
association that it funds.

[64 FR 28899, May 28, 1999]



Sec. 615.5143  Management of ineligible investments and reservation
of authority to require divestiture.

    (a) Investments ineligible when purchased. Investments that do not 
satisfy the eligibility criteria set forth in

[[Page 176]]

Sec. 615.5140 at the time of purchase are ineligible. You must not 
purchase ineligible investments. If you determine that you have 
purchased an ineligible investment, you must notify us within 15 
calendar days after the determination. You must divest of the investment 
no later than 60 calendar days after you determine that the investment 
is ineligible unless we approve, in writing, a plan that authorizes you 
to divest the investment over a longer period of time. Until you divest 
of the investment:
    (1) It must not be used to satisfy your liquidity requirement(s) 
under Sec. 615.5134;
    (2) It must continue to be included in the Sec. 615.5132 investment 
portfolio limit calculation; and
    (3) It must be excluded as collateral under Sec. 615.5050.
    (b) Investments that no longer satisfy eligibility criteria. If you 
determine that an investment (that satisfied the eligibility criteria 
set forth in Sec. 615.5140 when purchased) no longer satisfies the 
eligibility criteria, you may continue to hold it, subject to the 
following requirements:
    (1) You must notify us within 15 calendar days after such 
determination;
    (2) You must not use the investment to satisfy your liquidity 
requirement(s) under Sec. 615.5134;
    (3) You must continue to include the investment in the Sec. 615.5132 
investment portfolio limit calculation;
    (4) You may continue to hold the investment as collateral under 
Sec. 615.5050 at the lower of cost or market value; and
    (5) You must develop a plan to reduce the investment's risk to you.
    (c) Reservation of authority. FCA retains the authority to require 
you to divest of any investment at any time for failure to comply with 
Sec. 615.5132(a) or Sec. 615.5142 or for safety and soundness reasons. 
The timeframe set by FCA will consider the expected loss on the 
transaction (or transactions) and the effect on your financial condition 
and performance.

[77 FR 66374, Nov. 5, 2012, as amended at 81 FR 49773, July 28, 2016]



Sec. 615.5144  Banks for cooperatives and agricultural credit banks.

    As may be authorized by the banks for cooperatives' or agricultural 
credit banks boards of directors ownership investment may be made in 
foreign business entities solely for the purpose of obtaining credit 
information and other services needed to facilitate transactions which 
may be financed under section 3.7(b) of the Farm Credit Act Amendments 
of 1980. Such an investment shall not exceed the level required to 
access credit and other services of the entity and shall not be made for 
earnings purposes. The business entity shall be deemed to be principally 
engaged in providing credit information to and performing such servicing 
functions for its members where such activities constitute a materially 
important line of business to its members. Also, investments must be 
made by a bank for cooperatives or agricultural credit bank for its own 
account and not on behalf of its members. The bank for cooperatives or 
agricultural credit bank shall use only those services provided by the 
business entity as necessary to facilitate transactions authorized by 
section 3.7(b) of the Farm Credit Act Amendments of 1980.

[46 FR 55088, Nov. 6, 1981, as amended at 54 FR 1151, Jan. 12, 1989; 54 
FR 50736, Dec. 11, 1989; 61 FR 67187, Dec. 20, 1996. Redesignated at 64 
FR 28899, May 28, 1999]



     Subpart F_Property, Transfers of Capital, and Other Investments



Sec. 615.5170  Real and personal property.

    Real estate and personal property may be acquired, held, or disposed 
of by any Farm Credit institution for the necessary and normal 
operations of its business. The purchase, lease, or construction of 
office quarters shall be limited to facilities reasonably necessary to 
meet the foreseeable requirements of the institution. Property shall not 
be acquired if it involves, or appears to involve, a bank or association 
in the real estate or other unrelated business.

[50 FR 48554, Nov. 26, 1985. Redesignated at 58 FR 63056, Nov. 30, 1993, 
and amended at 60 FR 20011, Apr. 24, 1995]

[[Page 177]]



Sec. 615.5171  Transfer of capital from banks to associations.

    (a) Definitions for this section--(1) Transfer of capital means any 
payment or forbearance by a Farm Credit Bank or agricultural credit bank 
(collectively, bank) to an affiliated association, including but not 
limited to:
    (i) The purchase of nonvoting stock or participation certificates;
    (ii) The payment of cash;
    (iii) Debt forgiveness or reduction;
    (iv) Interest rate concessions or interest-free loans;
    (v) The transfer of loans at other than fair market value;
    (vi) The reduction or elimination of standard loan servicing or 
other fees; and
    (vii) The assumption of operating or other expenses, such as legal 
fees or insurance premiums.
    (2) Preferential transfer of capital means a transfer of capital 
that is not available to all similarly situated affiliated associations.
    (3) Nonroutine transfer of capital means a transfer of capital that 
is not available in the ordinary course of business.
    (b) Considerations for preferential or nonroutine transfers of 
capital. Before authorizing a preferential or nonroutine transfer of 
capital, a bank board of directors must take into account and document 
whether:
    (1) The transfer of capital is in the best interests of all of the 
shareholders;
    (2) The bank will be able to achieve its capital adequacy and 
business plan goals after making the transfer of capital; and
    (3) The transfer of capital is the ``least cost'' alternative 
available and will enable the association to maintain sound, adequate, 
and constructive service to borrowers.
    (c) Notification requirements. At least 30 days before making a 
preferential or nonroutine transfer of capital to an affiliated 
association, banks must provide shareholders and the Chief Examiner of 
the Farm Credit Administration with a description of the transfer and 
the documentation required by paragraph (b) of this section.

[64 FR 49961, Sept. 15, 1999]



Sec. 615.5172  Production credit association and agricultural credit
association investment in farmers' notes given to cooperatives and
dealers.

    (a) In accordance with policies prescribed by the board of directors 
of the Farm Credit Bank or agricultural credit bank and each production 
credit association and agricultural credit association (hereinafter 
association(s)), such association(s) may invest in notes, conditional 
sales contracts, and other similar obligations given to cooperatives and 
private dealers by farmers and ranchers eligible to borrow from such 
associations.
    (b) Such notes and other obligations evidencing purchases of farm 
machinery, supplies, equipment, home appliances, and other items of a 
capital nature handled by cooperatives and private dealers will be 
eligible for purchase as investments.
    (c) The total amount which an association may invest in such 
obligations at any one time shall not exceed 15 percent of the balance 
of its loans outstanding at the close of the association's preceding 
fiscal year. In addition, the total amount which an association may 
invest in such obligations that are originated by any one cooperative or 
private dealer, at any one time, shall not exceed 50 percent of 
association capital and surplus.
    (d) All notes in which an association invests shall be endorsed with 
full recourse against the cooperative or dealer. The association shall 
contact each notemaker who meets the association's credit standards to 
encourage him to become a borrower.

[54 FR 1158, Jan. 12, 1989, as amended at 55 FR 24888, June 19, 1990; 55 
FR 38313, Sept. 18, 1990. Redesignated at 58 FR 63056, Nov. 30, 1993]



Sec. 615.5173  Stock of the Federal Agricultural Mortgage Corporation.

    Banks and associations of the Farm Credit System are authorized to 
purchase and hold Class B common stock of the Federal Agricultural 
Mortgage Corporation pursuant to section 8.4 of the Farm Credit Act.

[58 FR 63058, Nov. 30, 1993]

[[Page 178]]



Sec. 615.5174  Farmer Mac securities.

    (a) General authority. You may purchase and hold mortgage securities 
that are issued or guaranteed as to both principal and interest by the 
Federal Agricultural Mortgage Corporation (Farmer Mac securities). You 
may purchase and hold Farmer Mac securities for the purposes of managing 
credit and interest rate risks, and furthering your mission to finance 
agriculture. The total value of your Farmer Mac securities cannot exceed 
your total outstanding loans, as defined by Sec. 615.5131.
    (b) Board and management responsibilities. Your board of directors 
must adopt written policies that will govern your investments in Farmer 
Mac securities. All delegations of authority to specified personnel or 
committees must state the extent of management's authority and 
responsibilities for managing your investments in Farmer Mac securities. 
The board of directors must also ensure that appropriate internal 
controls are in place to prevent loss, in accordance with 
Sec. 615.5133(e). Management must submit quarterly reports to the board 
of directors on the performance of all investments in Farmer Mac 
securities. Annually, your board of directors must review these policies 
and the performance of your Farmer Mac securities and make any changes 
that are needed.
    (c) Policies. Your board of directors must establish investment 
policies for Farmer Mac securities that include your:
    (1) Objectives for holding Farmer Mac securities.
    (2) Credit risk parameters including:
    (i) The quantities and types of Farmer Mac mortgage securities that 
are collateralized by qualified agricultural mortgages, rural home 
loans, and loans guaranteed by the Farm Service Agency.
    (ii) Product and geographic diversification for the loans that 
underlie the security; and
    (iii) Minimum pool size, minimum number of loans in each pool, and 
maximum allowable premiums or discounts on these securities.
    (3) Liquidity risk tolerance and the liquidity characteristics of 
Farmer Mac securities that are suitable to meet your institutional 
objectives. A bank may not include Farmer Mac mortgage securities in the 
liquidity reserve maintained to comply with Sec. 615.5134.
    (4) Market risk limits based on the effects that the Farmer Mac 
securities have on your capital and earnings.
    (d) Stress test. You must perform stress tests, in accordance with 
Sec. 615.5133(f)(1)(iii) and Sec. 615.5133(f)(4), on mortgage 
securities, issued or guaranteed by Farmer Mac, that are backed by loans 
that you did not originate.
    (e) You. Means a Farm Credit bank, association, or service 
corporation.

[64 FR 28899, May 28, 1999, as amended at 70 FR 51590, Aug. 31, 2005; 77 
FR 66374, Nov. 5, 2012]



Sec. 615.5175  Investments in Farm Credit System institution preferred
stock.

    Except as provided for in Sec. 615.5171, Farm Credit banks, 
associations and service corporations may only purchase preferred stock 
issued by another Farm Credit System institution, including the Federal 
Agricultural Mortgage Corporation, with the written prior approval of 
the Farm Credit Administration. The request for approval should explain 
the terms and risk characteristics of the investment and the purpose and 
objectives for making the investment.

[70 FR 53908, Sept. 13, 2005]



                Subpart G_Risk Assessment and Management

    Source: 63 FR 39225, July 22, 1998, unless otherwise noted.



Sec. 615.5180  Bank interest rate risk management program.

    (a) The board of directors of each Farm Credit bank must develop, 
implement, and effectively oversee an interest rate risk management 
program tailored to the needs of the institution. The program must 
establish a risk management process that effectively identifies, 
measures, monitors, and controls interest rate risk. The board of 
directors of each Farm Credit bank must be knowledgeable of the nature 
and level of interest rate risk taken by the institution.

[[Page 179]]

    (b) Senior management is responsible for ensuring that interest rate 
risk is properly managed on both a long-range and a day-to-day basis.
    (c) The board of directors of each Farm Credit bank must adopt an 
interest rate risk management section of an asset/liability management 
policy that establishes interest rate risk exposure limits as well as 
the criteria to determine compliance with these limits. At a minimum, 
the interest rate risk management section must establish policies and 
procedures for the bank to:
    (1) Address the purpose and objectives of interest rate risk 
management;
    (2) Identify and analyze the causes of risks within its existing 
balance sheet structure;
    (3) Measure the potential effect of these risks on projected 
earnings and market values by conducting interest rate shock tests and 
simulations of multiple economic scenarios at least on a quarterly basis 
and by considering the effect of investments on interest rate risk based 
on the results of the stress testing required under Sec. 615.5133(f)(4);
    (4) Describe and implement actions needed to obtain its desired risk 
management objectives;
    (5) Identify exception parameters and approvals needed for any 
exceptions to the requirements of the board's policies;
    (6) Describe delegations of authority;
    (7) Describe reporting requirements, including exceptions to limits 
contained in the board's policies;
    (8) Consider the nature and purpose of derivative contracts and 
establish counterparty risk thresholds and limits for derivatives.
    (d) At least quarterly, management of each Farm Credit bank must 
report to its board of directors, or a designated committee of the 
board, describing the nature and level of interest rate risk exposure. 
Any deviations from the board's policy on interest rate risk must be 
specifically identified in the report and approved by the board or 
designated committee of the board.

[77 FR 66374, Nov. 5, 2012]



Sec. 615.5182  Interest rate risk management by associations and
other Farm Credit System institutions other than banks.

    Any association or other Farm Credit System institution other than 
Farm Credit banks, excluding the Federal Agricultural Mortgage 
Corporation, with interest rate risk that could lead to significant 
declines in net income or in the market value of capital must comply 
with the requirements of Sec. 615.5180. The interest rate risk 
management program required under Sec. 615.5180 must be commensurate 
with the level of interest rate risk of the institution.

[77 FR 66375, Nov. 5, 2012]



                       Subpart H_Capital Adequacy

    Source: 53 FR 39247, Oct. 6, 1988, unless otherwise noted.



Sec. 615.5200  Capital planning.

    (a) The Board of Directors of each System institution shall 
determine the amount of regulatory capital needed to assure the System 
institution's continued financial viability and to provide for growth 
necessary to meet the needs of its borrowers. The minimum capital 
standards specified in this part and part 628 of this chapter are not 
meant to be adopted as the optimal capital level in the System 
institution's capital adequacy plan. Rather, the standards are intended 
to serve as minimum levels of capital that each System institution must 
maintain to protect against the credit and other general risks inherent 
in its operations.
    (b) Each Board of Directors shall establish, adopt, and maintain a 
formal written capital adequacy plan as a part of the financial plan 
required by Sec. 618.8440 of this chapter. The plan shall include the 
capital targets that are necessary to achieve the System institution's 
capital adequacy goals as well as the minimum permanent capital, common 
equity tier 1 (CET1) capital, tier 1 capital, total capital, and tier 1 
leverage ratios (including the unallocated retained earnings (URE) and 
URE equivalents minimum) standards. The plan shall address any projected 
dividend payments, patronage

[[Page 180]]

payments, equity retirements, or other action that may decrease the 
System institution's capital or the components thereof for which minimum 
amounts are required by this part and part 628 of this chapter. The plan 
shall set forth the circumstances and minimum timeframes in which 
equities may be redeemed or revolved consistent with the System 
institution's applicable bylaws or board of directors resolutions. Such 
bylaws or resolutions must include the information described in 
paragraph (d) of this section.
    (c) In addition to factors that must be considered in meeting the 
minimum standards, the board of directors shall also consider at least 
the following factors in developing the capital adequacy plan:
    (1) Capability of management and the board of directors (the 
assessment of which may be a part of the assessments required in 
paragraphs (b)(2)(ii) and (b)(7)(i) of Sec. 618.8440 of this chapter);
    (2) Quality of operating policies, procedures, and internal 
controls;
    (3) Quality and quantity of earnings;
    (4) Asset quality and the adequacy of the allowance for losses to 
absorb potential loss within the loan and lease portfolios;
    (5) Sufficiency of liquid funds;
    (6) Needs of a System institution's customer base; and
    (7) Any other risk-oriented activities, such as funding and interest 
rate risks, potential obligations under joint and several liability, 
contingent and off-balance-sheet liabilities or other conditions 
warranting additional capital.
    (d) In order to include otherwise eligible purchased and allocated 
equities in tier 1 capital and tier 2 capital under part 628 of this 
chapter, a System institution must adopt a capitalization bylaw, or its 
board of directors must adopt a resolution, which resolution must be re-
affirmed by the board on an annual basis in the capital adequacy plan, 
in which the institution undertakes the following:
    (1) The institution shall obtain prior FCA approval under 
Sec. 628.20(f) of this chapter before:
    (i) Redeeming or revolving equities included in CET1 capital;
    (ii) Redeeming or calling equities included in additional tier 1 
capital; and
    (iii) Redeeming, revolving, or calling instruments included in tier 
2 capital other than limited life preferred stock or subordinated debt 
on the maturity date.
    (2) The institution shall have a minimum redemption or revolvement 
period of 7 years for equities included in CET1 capital, a minimum no-
call or redemption period of 5 years for additional tier 1 capital, and 
a minimum no-call, redemption, or revolvement period of 5 years for tier 
2 capital.
    (3) The institution shall obtain prior FCA approval before:
    (i) Redesignating URE equivalents as equities that the institution 
may exercise its discretion to redeem other than upon dissolution or 
liquidation;
    (ii) Removing equities or other instruments from CET1, additional 
tier 1, or tier 2 capital other than through repurchase, cancellation, 
redemption or revolvement; and
    (iii) Redesignating equities included in one component of regulatory 
capital (CET1 capital, additional tier 1 capital, or tier 2 capital) for 
inclusion in another component of regulatory capital.
    (4) The institution shall not exercise its discretion to revolve URE 
equivalents except upon dissolution or liquidation and shall not offset 
URE equivalents against a loan in default except as required under final 
order of a court of competent jurisdiction or if required under 
Sec. 615.5290 in connection with a restructuring under part 617 of this 
chapter.

[81 FR 49773, July 28, 2016]



Sec. 615.5201  Definitions.

    For the purpose of this subpart, the following definitions apply:
    Allocated investment means earnings allocated but not paid in cash 
by a System bank to an association or other recipient.
    Deferred tax assets (DTAs) means an amount of income taxes 
refundable or recoverable in future years as a result of temporary 
differences and net operating loss or tax credit carryforwards that 
exist at the reporting date. There are three types of DTAs and they 
arise from:
    (1) A temporary difference that a System institution could realize 
through a net loss carryback;

[[Page 181]]

    (2) A temporary difference that a System institution could not 
realize through net loss carryback; and
    (3) An operating loss and tax credit carryforward.
    Nonagreeing association means an association that does not have an 
allotment agreement in effect with a Farm Credit Bank or agricultural 
credit bank pursuant to Sec. 615.5207(b)(2).
    Permanent capital, subject to adjustments as described in 
Sec. 615.5207, includes:
    (1) Current year earnings;
    (2) Allocated and unallocated earnings (which, in the case of 
earnings allocated in any form by a System bank to any association or 
other recipient and retained by the bank, must be considered, in whole 
or in part, permanent capital of the bank or of any such association or 
other recipient as provided under an agreement between the bank and each 
such association or other recipient);
    (3) All surplus;
    (4) Stock issued by a System institution, except:
    (i) Stock that may be retired by the holder of the stock on 
repayment of the holder's loan, or otherwise at the option or request of 
the holder;
    (ii) Stock that is protected under section 4.9A of the Act or is 
otherwise not at risk;
    (iii) Farm Credit Bank equities required to be purchased by Federal 
land bank associations in connection with stock issued to borrowers that 
is protected under section 4.9A of the Act;
    (iv) Capital subject to revolvement, unless:
    (A) The bylaws of the System institution clearly provide that there 
is no express or implied right for such capital to be retired at the end 
of the revolvement cycle or at any other time; and
    (B) The System institution clearly states in the notice of 
allocation that such capital may only be retired at the sole discretion 
of the board of directors in accordance with statutory and regulatory 
requirements and that the institution does not grant any express or 
implied right to have such capital retired at the end of the revolvement 
cycle or at any other time;
    (5) [Reserved]
    (6) Financial assistance provided by the Farm Credit System 
Insurance Corporation that the FCA determines appropriate to be 
considered permanent capital; and
    (7) Any other debt or equity instruments or other accounts the FCA 
has determined are appropriate to be considered permanent capital. The 
FCA may permit one or more System institutions to include all or a 
portion of such instrument, entry, or account as permanent capital, 
permanently or on a temporary basis, for purposes of this part.
    Preferred stock means stock that is permanent capital and has 
dividend and/or liquidation preference over common stock.
    Risk-adjusted asset base means ``standardized total risk-weighted 
assets'' as defined in Sec. 628.2 of this chapter, adjusted in 
accordance with Sec. 615.5207 and excluding the deduction in paragraph 
(2) of that definition for the amount of the System institution's 
allowance for loan losses that is not included in tier 2 capital.
    Stock means stock and participation certificates.
    System bank means a Farm Credit bank as defined in Sec. 619.9140 of 
this chapter, which includes Farm Credit Banks, agricultural credit 
banks, and banks for cooperatives.
    System institution means a System bank, an association of the Farm 
Credit System, Farm Credit Leasing Services Corporation, and their 
successors, and any other institution chartered by the FCA that the FCA 
determines should be considered a System institution for the purposes of 
this subpart.
    Term preferred stock means preferred stock with an original maturity 
of at least 5 years and on which, if cumulative, the board of directors 
has the option to defer dividends, provided that, at the beginning of 
each of the last 5 years of the term of the stock, the amount that is 
eligible to be counted as permanent capital is reduced by 20 percent of 
the original amount of the stock (net of redemptions).

[81 FR 49773, July 28, 2016]

[[Page 182]]



Sec. 615.5205  Minimum permanent capital standards.

    Each institution shall at all times maintain permanent capital at a 
level of at least 7 percent of its risk-adjusted asset base.

[62 FR 4446, Jan. 30, 1997]



Sec. 615.5206  Permanent capital ratio computation.

    (a) The System institution's permanent capital ratio is determined 
on the basis of the financial statements of the System institution 
prepared in accordance with generally accepted accounting principles.
    (b) The System institution's asset base and permanent capital are 
computed using average daily balances for the most recent 3 months.
    (c) The System institution's permanent capital ratio is calculated 
by dividing the System institution's permanent capital, adjusted in 
accordance with Sec. 615.5207 (the numerator), by the risk-adjusted 
asset base (the denominator) as defined in Sec. 615.5201, to derive a 
ratio expressed as a percentage.

[81 FR 49774, July 28, 2016]



Sec. 615.5207  Capital adjustments and associated reductions to assets.

    For the purpose of computing the System institution's permanent 
capital ratio, the following adjustments must be made prior to assigning 
assets to risk-weight categories and computing the ratio:
    (a) Where two System institutions have stock investments in each 
other, such reciprocal holdings must be eliminated to the extent of the 
offset. If the investments are equal in amount, each System institution 
must deduct from its assets and its permanent capital an amount equal to 
the investment. If the investments are not equal in amount, each System 
institution must deduct from its permanent capital and its assets an 
amount equal to the smaller investment. The elimination of reciprocal 
holdings required by this paragraph must be made prior to making the 
other adjustments required by this section.
    (b) Where an association has an equity investment in a System bank, 
the double counting of capital is eliminated in the following manner:
    (1) For a purchased investment, each association must deduct its 
investment in a System bank from its permanent capital. Each System bank 
will consider all purchased stock investments as its permanent capital.
    (2) For an allocated investment, each System bank and each of its 
affiliated associations may enter into an agreement that specifies, for 
computing permanent capital only, a dollar amount and/or percentage 
allotment of the association's allocated investment between the bank and 
the association. Section 615.5208 provides conditions for allotment 
agreements or defines allotments in the absence of such agreements.
    (c) A Farm Credit Bank or agricultural credit bank and a recipient, 
other than an affiliated association, of allocated earnings from such 
bank may enter into an agreement specifying a dollar amount and/or 
percentage allotment of the recipient's allocated earnings in the bank 
between the bank and the recipient. Such agreement must comply with 
Sec. 615.5208, except that, in the absence of an agreement, the 
allocated investment must be allotted 100 percent to the allocating bank 
and 0 percent to the recipient. All equities of the bank that are 
purchased by a recipient are considered as permanent capital of the 
issuing bank.
    (d) A bank for cooperatives and a recipient of allocated earnings 
from such bank may enter into an agreement specifying a dollar amount 
and/or percentage allotment of the recipient's allocated earnings in the 
bank between the bank and the recipient. Such agreement must comply with 
Sec. 615.5208, except that, in the absence of an agreement, the 
allocated investment must be allotted 100 percent to the allocating bank 
and 0 percent to the recipient. All equities of a bank that are 
purchased by a recipient shall be considered as permanent capital of the 
issuing bank.
    (e) Where a System institution has an equity investment in another 
System institution to capitalize a loan participation interest, the 
investing System institution must deduct from its permanent capital an 
amount equal

[[Page 183]]

to its investment in the participating System institution.
    (f) Each System institution must deduct from permanent capital any 
equity investment in a service corporation chartered under section 4.25 
of the Act or the Funding Corporation chartered under section 4.9 of the 
Act.
    (g) Each System institution must deduct from its permanent capital 
an amount equal to all goodwill, whenever acquired.
    (h) Each System institution must deduct from its risk-adjusted asset 
base any item deducted from permanent capital under this section.
    (i) Where a System bank and an association have an enforceable 
written agreement to share losses on specifically identified assets on a 
predetermined quantifiable basis, such assets must be counted in each 
System institution's risk-adjusted asset base in the same proportion as 
the System institutions have agreed to share the loss.
    (j) The permanent capital of a System institution must exclude any 
accumulated other comprehensive income (loss) as reported under GAAP.
    (k) For purposes of calculating capital ratios under this part, 
deferred-tax assets are subject to the conditions, limitations, and 
restrictions described in Sec. 628.22(a)(3) of this chapter.
    (l) [Reserved]

[81 FR 49774, July 28, 2016]



Sec. 615.5208  Allotment of allocated investments.

    (a) The following conditions apply to agreements that a System bank 
enters into with an affiliated association pursuant to 
Sec. 615.5207(b)(2):
    (1) The agreement must be for a term of 1 year or longer.
    (2) The agreement must be entered into on or before its effective 
date.
    (3) The agreement may be amended according to its terms, but no more 
frequently than annually except in the event that a party to the 
agreement is merged or reorganized.
    (4) On or before the effective date of the agreement, a certified 
copy of the agreement, and any amendments thereto, must be sent to the 
field office of the Farm Credit Administration responsible for examining 
the System institution. A copy must also be sent within 30 calendar days 
of adoption to the bank's other affiliated associations.
    (5) Unless the parties otherwise agree, if the System bank and the 
association have not entered into a new agreement on or before the 
expiration of an existing agreement, the existing agreement will 
automatically be extended for another 12 months, unless either party 
notifies the Farm Credit Administration in writing of its objection to 
the extension prior to the expiration of the existing agreement.
    (b) In the absence of an agreement between a System bank and one or 
more associations, or in the event that an agreement expires and at 
least one party has timely objected to the continuation of the terms of 
its agreement, the following formula applies with respect to the 
allocated investments held by those associations with which there is no 
agreement (nonagreeing associations), and does not apply to the 
allocated investments held by those associations with which the bank has 
an agreement (agreeing associations):
    (1) The allotment formula must be calculated annually.
    (2) The permanent capital ratio of the System bank must be computed 
as of the date that the existing agreement terminates, using a 3-month 
average daily balance, excluding the allocated investment from 
nonagreeing associations but including any allocated investments of 
agreeing associations that are allotted to the bank under applicable 
allocation agreements. The permanent capital ratio of each nonagreeing 
association must be computed as of the same date using a 3-month average 
daily balance, and must be computed excluding its allocated investment 
in the bank.
    (3) If the permanent capital ratio of the System bank calculated in 
accordance with paragraph (b)(2) of this section is 7 percent or above, 
the allocated investment of each nonagreeing association whose permanent 
capital ratio calculated in accordance with paragraph (b)(2) of this 
section is 7 percent or above must be allotted 50 percent to the bank 
and 50 percent to the association.

[[Page 184]]

    (4) If the permanent capital ratio of the System bank calculated in 
accordance with paragraph (b)(2) of this section is 7 percent or above, 
the allocated investment of each nonagreeing association whose capital 
ratio is below 7 percent must be allotted to the association until the 
association's capital ratio reaches 7 percent or until all of the 
investment is allotted to the association, whichever occurs first. Any 
remaining unallotted allocated investment must be allotted 50 percent to 
the bank and 50 percent to the association.
    (5) If the permanent capital ratio of the System bank calculated in 
accordance with paragraph (b)(2) of this section is less than 7 percent, 
the amount of additional capital needed by the bank to reach a permanent 
capital ratio of 7 percent must be determined, and an amount of the 
allocated investment of each nonagreeing association must be allotted to 
the System bank, as follows:
    (i) If the total of the allocated investments of all nonagreeing 
associations is greater than the additional capital needed by the bank, 
the allocated investment of each nonagreeing association must be 
multiplied by a fraction whose numerator is the amount of capital needed 
by the bank and whose denominator is the total amount of allocated 
investments of the nonagreeing associations, and such amount must be 
allotted to the bank. Next, if the permanent capital ratio of any 
nonagreeing association is less than 7 percent, a sufficient amount of 
unallotted allocated investment must then be allotted to each 
nonagreeing association, as necessary, to increase its permanent capital 
ratio to 7 percent, or until all such remaining investment is allotted 
to the association, whichever occurs first. Any unallotted allocated 
investment still remaining must be allotted 50 percent to the bank and 
50 percent to the nonagreeing association.
    (ii) If the additional capital needed by the bank is greater than 
the total of the allocated investments of the nonagreeing associations, 
all of the remaining allocated investments of the nonagreeing 
associations must be allotted to the bank.

[81 FR 49774, July 28, 2016]



Secs. 615.5209-615.5212  [Reserved]



Sec. 615.5215  Distribution of earnings.

    The boards of directors of System institutions may not reduce the 
permanent capital of the institution through the payment of patronage 
refunds or dividends, or the retirement of stock or allocated equities 
except retirements pursuant to Secs. 615.5280 and 615.5290 if, after or 
due to the action, the permanent capital of the institution would fail 
to meet the minimum permanent capital adequacy standard established 
under Sec. 615.5205 for that period. This limitation shall not apply to 
the payment of noncash patronage refunds by any institution exempt from 
Federal income tax if the entire refund paid qualifies as permanent 
capital at the issuing institution. Any System institution subject to 
Federal income tax may pay patronage refunds partially in cash if the 
cash portion of the refund is the minimum amount required to qualify the 
refund as a deductible patronage distribution for Federal income tax 
purposes and the remaining portion of the refund paid qualifies as 
permanent capital.

[53 FR 39247, Oct. 6, 1988, as amended at 53 FR 40046, Oct. 13, 1988]



Sec. 615.5216  [Reserved]



                     Subpart I_Issuance of Equities

    Source: 53 FR 40046, Oct. 13, 1988, unless otherwise noted.



Sec. 615.5220  Capitalization bylaws.

    (a) The board of directors of each System bank and association 
shall, pursuant to section 4.3A of the Farm Credit Act of 1971 (Act), 
adopt capitalization bylaws, subject to the approval of its voting 
shareholders, that set forth:
    (1) Classes of equities and the manner in which they shall be 
issued, transferred, converted and retired;
    (2) For each class of equities, a description of the class(es) of 
persons to whom such stock may be issued, voting rights, dividend rights 
and preferences, and priority upon liquidation, including rights, if 
any, to share in the distribution of the residual estate;

[[Page 185]]

    (3) The number of shares and par value of equities authorized to be 
issued for each class of equities. However, the bylaws need not state a 
number or value limit for these equities:
    (i) Equities that are required to be purchased as a condition of 
obtaining a loan, lease, or related service.
    (ii) Non-voting stock resulting from the conversion of voting stock 
due to repayment of a loan.
    (iii) Non-voting equities that are issued to an association's 
funding bank in conjunction with any agreement for a transfer of capital 
between the association and the bank.
    (iv) Equities resulting from the distribution of earnings.
    (4) For Farm Credit Banks, agricultural credit banks (with respect 
to loans other than to cooperatives), and associations, the percentage 
or dollar amount of equity investment (which may be expressed as a range 
within which the board of directors may from time to time determine the 
requirement) that will be required to be purchased as a condition for 
obtaining a loan, which amount shall be not less than 2 percent of the 
loan amount or $1,000, whichever is less;
    (5) For banks for cooperatives and agricultural credit banks (with 
respect to loans to cooperatives), the percentage or dollar amount of 
equity or guaranty fund investment (which may be expressed as a range 
within which the board may from time to time determine the requirement) 
that serves as a target level of investment in the bank for patronage-
sourced business, which amount shall not be less than, 2 percent of the 
loan amount or $1,000, whichever is less;
    (6) The manner in which equities will be retired, including a 
provision stating that equities other than those protected under section 
4.9A of the Act are retireable at the sole discretion of the board, 
provided minimum capital adequacy standards established in subpart H of 
this part, part 628 of this chapter, and the capital requirements 
established by the board of directors of the System institution, are 
met;
    (7) The manner in which earnings will be allocated and distributed, 
including the basis on which patronage will be paid, which shall be in 
accord with cooperative principles; and
    (8) For System banks, the manner in which the capitalization 
requirements of the Farm Credit bank shall be allocated and equalized 
from time to time among its owners.
    (b) The board of directors of each service corporation (including 
the Farm Credit Leasing Services Corporation) shall adopt capitalization 
bylaws, subject to the approval of its voting shareholders, that set 
forth the requirements of paragraphs (a)(1), (2), and (3) of this 
section to the extent applicable. Such bylaws shall also set forth the 
manner in which equities will be retired and the manner in which 
earnings will be distributed.

[81 FR 49775, July 28, 2016]



Sec. 615.5230  Implementation of cooperative principles.

    (a) Voting stockholders of Farm Credit banks and associations shall 
be accorded full voting rights in accordance with cooperative 
principles, including those set forth in Sec. 611.350 of this chapter. 
Except as otherwise required by statute or regulation, and except as 
modified by paragraphs (b) and (c) of this section, the voting rights of 
each voting shareholder are as follows:
    (1) Each voting stockholder of a Farm Credit Bank has only one vote 
that is assigned a weight proportional to the number of that 
association's voting stockholders and has the right to vote in the 
election of each stockholder-elected director and to cumulate such votes 
and distribute them among the candidates in the stockholder's 
discretion, except that cumulative voting for directors may be 
eliminated if 75 percent of the associations that are stockholders of 
the Farm Credit Bank vote in favor of elimination. In a vote to 
eliminate cumulative voting, each association shall be accorded one 
vote.
    (2) Each voting stockholder of an agricultural credit bank has only 
one vote, unless another voting scheme has been approved by the Farm 
Credit Administration.
    (3) Each voting stockholder of an association or bank for 
cooperatives has only one vote, regardless of the number of shares owned 
or the number of loans

[[Page 186]]

outstanding. Unless regional election of directors is provided for in 
the bylaws pursuant to Sec. 615.5230(b), each voting stockholder of an 
association or bank for cooperatives has the right to vote in the 
election of each stockholder-elected director. Unless otherwise provided 
in the capitalization bylaws, each voting stockholder of an association 
or bank for cooperatives is allowed to cumulate such votes and 
distribute them among the candidates in the stockholder's discretion. 
Cumulative voting is not allowed in the regional election of 
stockholder-elected directors.
    (b) The regional election of stockholder-elected directors is only 
permitted under the following conditions:
    (1) A bylaw establishing regional elections is approved by a 
majority of voting stockholders, voting in person or by proxy, prior to 
implementation.
    (2) The bylaw provides that the use of regional election of 
stockholder-elected directors does not prevent all voting stockholders 
of the institution, regardless of the region where they reside or 
conduct agricultural or aquatic operations, from voting in any 
stockholder vote to remove a director.
    (3) There are an approximately equal number of voting stockholders 
in each of the institution's voting regions. Regions will have an 
approximately equal number of voting stockholders if the number of 
voting stockholders in any one region does not exceed the number of 
voting stockholders in any other region by more than 25 percent. At 
least once every 3 years, the institution must count the number of 
voting stockholders in each region and, if the regions do not have an 
approximately equal number of stockholders, the regional boundaries must 
be adjusted to achieve such result.
    (4) An institution may provide for more than one director to 
represent a region. Institutions providing for more than one director to 
represent a region will determine the equitability of the regions by 
dividing the number of voting stockholders in that region by the number 
of director positions representing that region, and the resulting 
quotient shall be the number that is compared to the number of voting 
stockholders in other regions.
    (5) Each voting stockholder is accorded the right to vote in the 
election of each stockholder-elected director for his or her region.
    (c) Each equityholder of each institution shall be equitably treated 
in the operation of the institution.
    (1) Each issuance of preferred stock (other than preferred stock 
outstanding on October 5, 1988, and stock into which such outstanding 
stock is converted that has substantially similar preferences) shall be 
approved by a majority of the shares voting of each class of equities 
adversely affected by the preference, voting as a class, whether or not 
such classes are otherwise authorized to vote;
    (2) Any dividends paid to the holders of common stock and 
participation certificates shall be on a per share basis and without 
preference as to rate or priority of payment between classes of common 
stock, between classes of participation certificates, between classes of 
common stock and classes of participation certificates, or between 
holders of the same class of stock or participation certificates, except 
that any class of common stock or participation certificates that result 
from the conversion of allocated surplus may be subordinated to other 
classes of common stock and participation certificates in the payment of 
dividends.
    (3) Any patronage refunds that are paid shall be paid in accordance 
with cooperative principles, on an equitable and nondiscriminatory basis 
determined by the board of directors in accordance with the 
capitalization bylaws, provided that any earning pools that may be 
established for the payment of patronage shall be established on a 
rational and equitable basis that will ensure that each patron of the 
institution receives its fair share of the earnings of the institution 
and bears its fair share of the expenses of the institution.
    (4) All classes of common stock and participation certificates 
(except those resulting from a conversion of allocated surplus) must be 
accorded the same priority with respect to impairment and restoration of 
impairment

[[Page 187]]

and have the same rights and priority upon liquidation.

[53 FR 40046, Oct. 13, 1988, as amended at 54 FR 6118, Feb. 8, 1989; 60 
FR 57921, Nov. 24, 1995; 62 FR 4446, Jan. 30, 1997; 62 FR 49908, Sept. 
24, 1997; 63 FR 39228, July 22, 1998; 70 FR 53908, Sept. 13, 2005; 71 FR 
5763, Feb. 2, 2006; 75 FR 18743, Apr. 12, 2010]



Sec. 615.5240  Regulatory capital requirements.

    (a) The capitalization bylaws shall enable the institution to meet 
the capital adequacy standards established under subpart H of this part, 
part 628 of this chapter, and the capital requirements established by 
the board of directors of the System institution.
    (b) In order to qualify as permanent capital, equities issued under 
the bylaws must meet the following requirements:
    (1) Retirement must be solely at the discretion of the board of 
directors and not upon a date certain (other than the original maturity 
date of preferred stock) or upon the happening of any event, such as 
repayment of the loan, and not pursuant to any automatic retirement or 
revolvement plan;
    (2) Retirement must be at not more than book value;
    (3) The institution must have made the disclosures required by this 
subpart;
    (4) For common stock and participation certificates, dividends must 
be noncumulative and payable only at the discretion of the board; and
    (5) For cumulative preferred stock, the board of directors must have 
discretion to defer payment of dividends.

[81 FR 49776, July 28, 2016]



Sec. 615.5245  Limitations on association preferred stock.

    (a) The board of directors of each association offering preferred 
stock must adopt a policy that addresses the association's conditions or 
limits on the amount of preferred stock that any one holder, or small 
number of holders may acquire.
    (b) Each association offering preferred stock must make the stock 
available for purchase to each of its members on the same basis.
    (c) An association may not extend credit for purchases of preferred 
stock in the association.

[70 FR 53908, Sept. 13, 2005]



Sec. 615.5250  Disclosure requirements for sales of borrower stock.

    (a) For sales of borrower stock, which for this subpart means 
equities purchased as a condition for obtaining a loan, a System 
institution must provide a prospective borrower with the following 
documents prior to loan closing:
    (1) The institution's most recent annual report filed under part 620 
of this chapter;
    (2) The institution's most recent quarterly report filed under part 
620 of this chapter, if more recent than the annual report;
    (3) A copy of the institution's capitalization bylaws; and
    (4) A written description of the terms and conditions under which 
the equity is issued. In addition to specific terms and conditions, the 
description must disclose:
    (i) That the equity is an at-risk investment and not a compensating 
balance;
    (ii) That the equity is retireable only at the discretion of the 
board of directors consistent with the institution's bylaws and only if 
minimum capital standards established under subpart H of this part and 
part 628 of this chapter are met and that such retirement may also 
require the approval of the FCA;
    (iii) Whether the institution presently meets its minimum capital 
standards established under subpart H of this part and part 628 of this 
chapter;
    (iv) Whether the institution knows of any reason the institution may 
not meet its capital standards on the next earnings distribution date; 
and
    (v) The rights, if any, to share in patronage payments.
    (b) Notwithstanding the provisions of paragraph (a) of this section, 
no materials previously provided to a purchaser (except the disclosures 
required by paragraph (a)(4) of this section) need be provided again 
unless the purchaser requests such materials.

[81 FR 49776, July 28, 2016]

[[Page 188]]



Sec. 615.5255  Disclosure and review requirements for sales
of other equities.

    (a) A bank, association, or service corporation must submit a 
proposed disclosure statement to the Farm Credit Administration (FCA) 
for review and clearance prior to the proposed sale of any other 
equities, which for this subpart means equities not purchased as a 
condition for obtaining a loan.
    (b) An institution may not offer to sell other equities until a 
disclosure statement is reviewed and cleared by the FCA.
    (c) A disclosure statement must include:
    (1) All of the information required by parts 620 and 628 of this 
chapter in the annual report to shareholders as of a date within 135 
days of the proposed sale. An institution may satisfy this requirement 
by referring to its most recent annual report to shareholders and the 
most recent quarterly report filed with the FCA, provided such reports 
contain the required information;
    (2) The information required by Sec. 615.5250(a)(3) and (4); and
    (3) A discussion of the intended use of the sale proceeds.
    (d) An institution is not required to provide the materials 
identified in paragraphs (c)(1) and (2) of this section to a purchaser 
who previously received them unless the purchaser requests it.
    (e) For any class of stock where each purchaser and each subsequent 
transferee acquires at least $250,000 of the stock and meets the 
definition of ``accredited investor'' or ``qualified institutional 
buyer'' contained in 17 CFR 230.501 and 230.144A, a disclosure statement 
submitted pursuant to this section is deemed reviewed and cleared by the 
FCA and an institution may treat stock that meets all requirements of 
this part as permanent capital for the purpose of meeting the minimum 
permanent capital standards established under subpart H of this part, 
unless the FCA notifies the institution to the contrary within 30 days 
of receipt of a complete disclosure statement submission. A complete 
disclosure statement submission includes the proposed disclosure 
statement plus any additional materials requested by the FCA.
    (f) For all other issuances, a disclosure statement submitted 
pursuant to this section is deemed cleared by the FCA, and an 
institution may treat stock that meets all requirements of this part as 
permanent capital for the purpose of meeting the minimum permanent 
capital standards established under subpart H unless the FCA notifies 
the institution to the contrary within 60 days of receipt of a complete 
disclosure statement submission. A complete disclosure statement 
submission includes the proposed disclosure statement plus any 
additional materials requested by the FCA.
    (g) Upon request, the FCA will inform the institution how it will 
treat the proposed issuance for other regulatory capital ratios or 
computations.
    (h) No institution, officer, director, employee, or agent shall, in 
connection with the sale of equities, make any disclosure, through a 
disclosure statement or otherwise, that is inaccurate or misleading, or 
omit to make any statement needed to prevent other disclosures from 
being misleading.
    (i) Each bank and association must establish a method to disclose 
and make information on insider preferred stock purchases and 
retirements readily available to the public. At a minimum, each 
institution offering preferred stock must make this information 
available upon request.
    (j) The requirements of this section do not apply to the sale of 
Farm Credit System institution equities to:
    (1) Other Farm Credit System institutions;
    (2) Other financing institutions in connection with a lending or 
discount relationship; or
    (3) Non-Farm Credit System lenders that purchase equities in 
connection with a loan participation transaction.
    (k) In addition to the requirements of this section, each 
institution is responsible for ensuring its compliance with all 
applicable Federal and state securities laws.

[81 FR 49776, July 28, 2016]

[[Page 189]]



        Subpart J_Retirement of Equities and Payment of Dividends



Sec. 615.5260  Retirement of eligible borrower stock.

    (a) Definitions. For the purposes of this subpart the following 
definitions shall apply:
    (1) Eligible borrowers stock means:
    (i) Stock, participation certificates or allocated equities 
outstanding on January 6, 1988, or purchased as a condition of obtaining 
a loan prior to the earlier of the date of shareholder approval of 
capitalization bylaws under section 4.3A of the Act or October 6, 1988; 
and
    (ii) Any stock, participation certificates or allocated equities for 
which such eligible borrower stock is exchanged in connection with a 
merger, consolidation, or other reorganization or a transfer of 
territory. Eligible borrower stock does not include equities for which 
eligible borrower stock is required to be exchanged pursuant to the 
bylaws adopted under section 4.3A or equities for which eligible 
borrower stock is voluntarily exchanged except in connection with a 
merger, consolidation or other reorganization or a transfer of 
territory.
    (2) Retirement in the ordinary course of business means:
    (i) Retirement upon repayment of a loan or under a retirement or 
revolvement plan in effect prior to January 6, 1988, and for eligible 
borrower stock issued after that date, at the time the loan was made; or
    (ii) Retirement pursuant to Secs. 615.5280 and 615.5290.
    (3) Par value means:
    (i) In the case of stock, par value;
    (ii) In the case of participation certificates and other equities, 
face or equivalent value; or
    (iii) In the case of participation certificates and allocated 
surplus subject to retirement under a revolving cycle and retired out or 
order pursuant to Secs. 615.5280 and 615.5290 or otherwise under the 
Act, par or face value discounted at a rate determined by the 
institution to reflect the present value of the equity as of the date of 
such retirement.
    (b) When an institution retires eligible borrower stock in the 
ordinary course of business, such equities shall be retired at par, even 
if book value is less than par.
    (c) When a Farm Credit Bank retires stock for the sole purpose of 
enabling an association to retire eligible borrower stock that was 
issued in connection with a long term real estate loan, such stock shall 
be retired at par even if its book value is less than par.

[53 FR 40048, Oct. 13, 1988; 54 FR 7029, Feb. 16, 1989, as amended at 62 
FR 4447, Jan. 30, 1997; 63 FR 39228, July 22, 1998]



Sec. 615.5270  Retirement of other equities.

    (a) Equities other than eligible borrower stock shall be retired at 
not more than their book value.
    (b) Subject to the redemption restrictions in part 628 of this 
chapter, no equities shall be retired, except pursuant to Secs. 615.5280 
and 615.5290 or term stock at its stated maturity, unless after 
retirement the institution would continue to meet the minimum permanent 
capital standards established under subpart H of this part, part 628 of 
this chapter, and the capital requirements established by the board of 
directors of the System institution.
    (c) A System bank, association, or service corporation board of 
directors may delegate authority to retire at-risk stock to institution 
management if:
    (1) The board has determined that the institution's capital position 
is adequate;
    (2) All retirements are in accordance with applicable provisions of 
part 628 of this chapter and the institution's capital adequacy plan or 
capital restoration plan;
    (3) After any retirements, the institution's permanent capital ratio 
will be in excess of 9 percent, its capital conservation buffer set 
forth in Sec. 628.11 of this chapter will be above 2.5 percent, and its 
leverage buffer set forth in Sec. 628.11 of this chapter will be above 
1.0 percent;
    (4) The institution will continue to satisfy all applicable 
regulatory capital standards after any retirements; and
    (5) Management reports the aggregate amount and net effect of stock

[[Page 190]]

purchases and retirements to the board of directors each quarter.
    (d) Each board of directors of a System bank, association, or 
service corporation that issues preferred stock must adopt a written 
policy covering the retirement of preferred stock that complies with 
this paragraph and part 628 of this chapter. The policy must, at a 
minimum:
    (1) Establish any delegations of authority to retire preferred stock 
and the conditions of delegation, which must meet the requirements of 
paragraph (c) of this section and include minimum levels for regulatory 
capital standards as applicable and commensurate with the volatility of 
the preferred stock.
    (2) Identify limitations on the amount of stock that may be retired 
during a single quarterly (or shorter) time period;
    (3) Ensure that all stockholder requests for retirement are treated 
fairly and equitably;
    (4) Prohibit any insider, including institution officers, directors, 
employees, or agents, from retiring any preferred stock in advance of 
the release of material non-public information concerning the 
institution to other stockholders; and
    (5) Establish when insiders may retire their preferred stock.
    (e) The institution's board must review its policy at least annually 
to ensure that it continues to be appropriate for the institution's 
current financial condition and consistent with its long-term goals 
established in its capital adequacy plan.

[81 FR 49777, July 28, 2016]



Sec. 615.5280  Retirement in event of default.

    (a) When the debt of a holder of eligible borrower stock issued by a 
production credit association, Federal land bank association, Federal 
land credit association or agricultural credit association is in 
default, such institution may, but shall not be required to, retire at 
par eligible borrower stock owned by such borrower on which the 
institution has a lien, in total or partial liquidation of the debt.
    (b) When the debt of a holder of stock, participation certificates 
or other equities issued by a production credit association, Federal 
land bank association, Federal land credit association or agricultural 
credit association is in default, such institution may, but shall not be 
required to, retire at book value not to exceed par all or part of such 
equities, other than eligible borrower stock as defined in 
Sec. 615.5260(a)(1), owned by such borrower on which the institution has 
a lien, in total or partial liquidation of the debt.
    (c) When the debt of a holder of equities or guaranty fund 
certificates issued by a bank for cooperatives or agricultural credit 
bank is in default the bank may, but shall not be required to, retire 
all or part of such equities qualify or guaranty fund investments owned 
by the borrower on which the bank has a lien, in total or partial 
liquidation of the debt. If such investments qualify as eligible 
borrower stock, it shall be retired at par, as defined in 
Sec. 615.5260(a)(3). All other investments shall be retired at a rate 
determined by the institution to reflect its present value on the date 
of retirement.
    (d) When the debt of a holder of the equities of a Farm Credit Bank 
or agricultural credit bank is in default the bank may, but shall not be 
required to, retire all or part of such equities owned by the borrower 
on which the bank has a lien, in total or partial liquidation of the 
debt. If such equities qualify as eligible borrower stock or are retired 
solely to permit a Federal land bank association to retire eligible 
borrower stock under Sec. 615.5280(a), they shall be retired at par. All 
other equities shall be retired at book value not to exceed par.
    (e) Any retirements made under this section by a Federal land bank 
association shall be made only upon the specific approval of, or in 
accordance with, approval procedures issued by the association's funding 
bank.
    (f) Prior to making any retirement pursuant to this section, except 
retirements pursuant to paragraphs (c) and (d) of this section, the 
institution shall provide the borrower with written notice of the 
following matters;
    (1) A statement that the institution has declared the borrower's 
loan to be in default;

[[Page 191]]

    (2) A statement that the institution will retire all or part of the 
equities of the borrower in total or partial liquidation of his or her 
loan;
    (3) A description of the effect of the retirement on the 
relationship of the borrower to the institution;
    (4) A statement of the amount of the outstanding debt that will be 
owed to the institution after the retirement of the borrower's equities; 
and
    (5) The date on which the institution will retire the equities of 
the borrower.
    (g) The notice required by this section shall be provided in person 
at least 10 days prior to the retirement of any equities of a holder, or 
by mailing a copy of the notice by first class mail to the last known 
address of the equity holder at least 13 days prior to the retirement of 
such person's equities.
    (h) The requirements of this section may be satisfied by notices 
given pursuant to Secs. 617.7405, 617.7410, 617.7420, and 617.7425 of 
this chapter that contain the information required by this section.

[53 FR 40048, Oct. 13, 1988; 54 FR 7029, Feb. 16, 1989, as amended at 61 
FR 67187, Dec. 20, 1996; 62 FR 13213, Mar. 19, 1997; 69 FR 10907, Mar. 
9, 2004]



Sec. 615.5290  Retirement of capital stock and participation 
certificates in event of restructuring.

    (a) If a Farm Credit Bank or agricultural credit bank forgives and 
writes off, under Sec. 617.7415 of this chapter, any of the principal 
outstanding on a loan made to any borrower, where appropriate the 
Federal land bank association of which the borrower is a member and 
stockholder shall cancel the same dollar amount of borrower stock held 
by the borrower in respect of the loan, up to the total amount of such 
stock, and to the extent provided for in the bylaws of the Bank relating 
to its capitalization, the Farm Credit Bank or agricultural credit bank 
shall retire an equal amount of stock owned by the Federal land bank 
association.
    (b) If an association forgives and writes off, under Sec. 617.7415 
of this chapter, any of the principal outstanding on a loan made to any 
borrower, the association shall cancel the same dollar amount of 
borrower stock held by the borrower in respect of the loan, up to the 
total amount of such loan.
    (c) Notwithstanding paragraphs (a) and (b) of this section, the 
borrower shall be entitled to retain at least one share of stock to 
maintain the borrower's membership and voting interest.

[81 FR 49777, July 28, 2016]



Sec. 615.5295  Payment of dividends.

    (a) The board of directors of a bank, association, or service 
corporation must declare a dividend on a class of stock before any 
dividends may be paid to stockholders.
    (b) No bank, association, or service corporation may declare or pay 
any dividend unless after declaration or payment of the dividend the 
institution would continue to meet its regulatory capital standards 
under this part.
    (c) Each System bank, association, and service corporation must 
exclude any accrued but unpaid dividends from regulatory capital 
computations under this part and part 628 of this chapter.

[70 FR 53909, Sept. 13, 2005, as amended at 81 FR 49777, July 28, 2016]

Subpart K [Reserved]



  Subpart L_Establishment of Minimum Capital Ratios for an Individual 
                               Institution

    Source: 62 FR 4448, Jan. 30, 1997, unless otherwise noted.



Sec. 615.5350  General--Applicability.

    (a) The rules and procedures specified in this subpart are 
applicable to a proceeding to establish required minimum capital ratios 
that would otherwise be applicable to an institution under 
Secs. 615.5205 and 628.10 of this chapter. The Farm Credit 
Administration is authorized to establish such minimum capital 
requirements for an institution as the Farm Credit Administration, in 
its discretion, deems to be necessary or appropriate in light of the 
particular circumstances of the institution. Proceedings under this 
subpart also may be initiated to require an institution having capital 
ratios greater than

[[Page 192]]

those set forth in Sec. 615.5205 or Sec. 628.10 of this chapter to 
continue to maintain those higher ratios.
    (b) The Farm Credit Administration may require higher minimum 
capital ratios for an individual institution in view of its 
circumstances. For example, higher capital ratios may be appropriate 
for:
    (1) An institution receiving special supervisory attention;
    (2) An institution that has, or is expected to have, losses 
resulting in capital inadequacy;
    (3) An institution with significant exposure due to operational 
risk, interest rate risk, the risks from concentrations of credit, 
certain risks arising from other products, services, or related 
activities, or management's overall inability to monitor and control 
financial risks presented by concentrations of credit and related 
services activities;
    (4) An institution exposed to a high volume of, or particularly 
severe, problem loans;
    (5) An institution that is growing rapidly; or
    (6) An institution that may be adversely affected by the activities 
or condition of System institutions with which it has significant 
business relationships or in which it has significant investments.
    (7) An institution with significant exposures to declines in net 
income or in the market value of its capital due to a change in interest 
rates and/or the exercising of embedded or explicit options.

[62 FR 4448, Jan. 30, 1997, as amended at 63 FR 39229, July 22, 1998; 81 
FR 49777, July 28, 2016]



Sec. 615.5351  Standards for determination of appropriate individual
institution minimum capital ratios.

    The appropriate minimum capital ratios for an individual institution 
cannot be determined solely through the application of a rigid 
mathematical formula or wholly objective criteria. The decision is 
necessarily based in part on subjective judgment grounded in Agency 
expertise. The factors to be considered in the determination will vary 
in each case and may include, for example:
    (a) The conditions or circumstances leading to the Farm Credit 
Administration's determination that higher minimum capital ratios are 
appropriate or necessary for the institution;
    (b) The exigency of those circumstances or potential problems;
    (c) The overall condition, management strength, and future prospects 
of the institution and, if applicable, affiliated institutions;
    (d) The institution's capital, adverse assets (including nonaccrual 
and nonperforming loans), allowance for loss, and other ratios compared 
to the ratios of its peers or industry norms; and
    (e) The views of the institution's directors and senior management.



Sec. 615.5352  Procedures.

    (a) Notice. When the Farm Credit Administration determines that 
minimum capital ratios greater than those set forth in Sec. 615.5205 or 
Sec. 628.10 of this chapter are necessary or appropriate for a 
particular institution, the Farm Credit Administration will notify the 
institution in writing of the proposed minimum capital ratios and the 
date by which they should be reached (if applicable) and will provide an 
explanation of why the ratios proposed are considered necessary or 
appropriate for the institution.
    (b) Response. (1) The institution may respond to any or all of the 
items in the notice. The response should include any matters which the 
institution would have the Farm Credit Administration consider in 
deciding whether individual minimum capital ratios should be established 
for the institution, what those capital ratios should be, and, if 
applicable, when they should be achieved. The response must be in 
writing and delivered to the designated Farm Credit Administration 
official within 30 days after the date on which the institution received 
the notice. In its discretion, the Farm Credit Administration may extend 
the time period for good cause. The Farm Credit Administration may 
shorten the time period with the consent of the institution or when, in 
the opinion of the Farm Credit Administration, the condition of the 
institution so requires, provided that the institution is informed 
promptly of the new time period.

[[Page 193]]

    (2) Failure to respond within 30 days or such other time period as 
may be specified by the Farm Credit Administration shall constitute a 
waiver of any objections to the proposed minimum capital ratios or the 
deadline for their achievement.
    (c) Decision. After the close of the institution's response period, 
the Farm Credit Administration will decide, based on a review of the 
institution's response and other information concerning the institution, 
whether individual minimum capital ratios should be established for the 
institution and, if so, the ratios and the date the requirements will 
become effective. The institution will be notified of the decision in 
writing. The notice will include an explanation of the decision, except 
for a decision not to establish individual minimum capital requirements 
for the institution.
    (d) Submission of plan. The decision may require the institution to 
develop and submit to the Farm Credit Administration, within a time 
period specified, an acceptable plan to reach the minimum capital ratios 
established for the institution by the date required.
    (e) Reconsideration based on change in circumstances. If, after the 
Farm Credit Administration's decision in paragraph (c) of this section, 
there is a change in the circumstances affecting the institution's 
capital adequacy or its ability to reach the required minimum capital 
ratios by the specified date, either the institution or the Farm Credit 
Administration may propose a change in the minimum capital ratios for 
the institution, the date when the minimums must be achieved, or the 
institution's plan (if applicable). The Farm Credit Administration may 
decline to consider proposals that are not based on a significant change 
in circumstances or are repetitive or frivolous. Pending a decision on 
reconsideration, the Farm Credit Administration's original decision and 
any plan required under that decision shall continue in full force and 
effect.

[62 FR 4448, Jan. 30, 1997, as amended at 81 FR 49778, July 28, 2016]



Sec. 615.5353  Relation to other actions.

    In lieu of, or in addition to, the procedures in this subpart, the 
required minimum capital ratios for an institution may be established or 
revised through a written agreement or cease and desist proceedings 
under part C of title V of the Act, or as a condition for approval of an 
application.



Sec. 615.5354  Enforcement.

    An institution that does not have or maintain the minimum capital 
ratios applicable to it, whether required in subpart H of this part or 
part 628 of this chapter, in a decision pursuant to this subpart, in a 
written agreement or temporary or final order under part C of title V of 
the Act, or in a condition for approval of an application, or an 
institution that has failed to submit or comply with an acceptable plan 
to attain those ratios, will be subject to such administrative action or 
sanctions as the Farm Credit Administration considers appropriate. These 
sanctions may include the issuance of a capital directive pursuant to 
subpart M of this part or other enforcement action, assessment of civil 
money penalties, and/or the denial or condition of applications.

[81 FR 49778, July 28, 2016]



                Subpart M_Issuance of a Capital Directive

    Source: 62 FR 4449, Jan. 30, 1997, unless otherwise noted.



Sec. 615.5355  Purpose and scope.

    (a) This subpart is applicable to proceedings by the Farm Credit 
Administration to issue a capital directive under sections 4.3(b) and 
4.3A(e) of the Act. A capital directive is an order issued to an 
institution that does not have or maintain capital at or greater than 
the minimum ratios set forth in Sec. 615.5205 or Sec. 628.10 of this 
chapter; or established for the institution under subpart L of this 
part, by a written agreement under part C of title V of the Act, or as a 
condition for approval of an application. A capital directive may order 
the institution to:
    (1) Achieve the minimum capital ratios applicable to it by a 
specified date;
    (2) Adhere to a previously submitted plan to achieve the applicable 
capital ratios;

[[Page 194]]

    (3) Submit and adhere to a plan acceptable to the Farm Credit 
Administration describing the means and time schedule by which the 
institution shall achieve the applicable capital ratios;
    (4) Take other action, such as reduction of assets or the rate of 
growth of assets, restrictions on the payment of dividends or patronage, 
or restrictions on the retirement of stock, to achieve the applicable 
capital ratios, or reduce levels of interest rate and other risk 
exposures, or strengthen management expertise, or improve management 
information and measurement systems; or
    (5) A combination of any of these or similar actions.
    (b) A capital directive may also be issued to the board of directors 
of an institution, requiring such board to comply with the requirements 
of section 4.3A(d) of the Act prohibiting the reduction of permanent 
capital.
    (c) A capital directive issued under this rule, including a plan 
submitted under a capital directive, is enforceable in the same manner 
and to the same extent as an effective and outstanding cease and desist 
order which has become final as defined in section 5.25 of the Act. 
Violation of a capital directive may result in assessment of civil money 
penalties in accordance with section 5.32 of the Act.

[62 FR 4449, Jan. 30, 1997, as amended at 63 FR 39229, July 22, 1998; 81 
FR 49778, July 28, 2016]



Sec. 615.5356  Notice of intent to issue a capital directive.

    The Farm Credit Administration will notify an institution in writing 
of its intention to issue a capital directive. The notice will state:
    (a) The reasons for issuance of the capital directive;
    (b) The proposed contents of the capital directive, including the 
proposed date for achieving the minimum capital requirement; and
    (c) Any other relevant information concerning the decision to issue 
a capital directive.



Sec. 615.5357  Response to notice.

    (a) An institution may respond to the notice by stating why a 
capital directive should not be issued and/or by proposing alternative 
contents for the capital directive or seeking other appropriate relief. 
The response shall include any information, mitigating circumstances, 
documentation, or other relevant evidence that supports its position. 
The response may include a plan for achieving the minimum capital ratios 
applicable to the institution. The response must be in writing and 
delivered to the Farm Credit Administration within 30 days after the 
date on which the institution received the notice. In its discretion, 
the Farm Credit Administration may extend the time period for good 
cause. The Farm Credit Administration may shorten the 30-day time 
period:
    (1) When, in the opinion of the Farm Credit Administration, the 
condition of the institution so requires, provided that the institution 
shall be informed promptly of the new time period;
    (2) With the consent of the institution; or
    (3) When the institution already has advised the Farm Credit 
Administration that it cannot or will not achieve its applicable minimum 
capital ratios.
    (b) Failure to respond within 30 days or such other time period as 
may be specified by the Farm Credit Administration shall constitute a 
waiver of any objections to the proposed capital directive.



Sec. 615.5358  Decision.

    After the closing date of the institution's response period, or 
receipt of the institution's response, if earlier, the Farm Credit 
Administration may seek additional information or clarification of the 
response. Thereafter, the Farm Credit Administration will determine 
whether or not to issue a capital directive, and if one is to be issued, 
whether it should be as originally proposed or in modified form.



Sec. 615.5359  Issuance of a capital directive.

    (a) A capital directive will be served by delivery to the 
institution. It will include or be accompanied by a statement of reasons 
for its issuance.
    (b) A capital directive is effective immediately upon its receipt by 
the institution, or upon such later date as may be specified therein, 
and shall remain

[[Page 195]]

effective and enforceable until it is stayed, modified, or terminated by 
the Farm Credit Administration.



Sec. 615.5360  Reconsideration based on change in circumstances.

    Upon a change in circumstances, an institution may request the Farm 
Credit Administration to reconsider the terms of its capital directive 
or may propose changes in the plan to achieve the institution's 
applicable minimum capital ratios. The Farm Credit Administration also 
may take such action on its own motion. The Farm Credit Administration 
may decline to consider requests or proposals that are not based on a 
significant change in circumstances or are repetitive or frivolous. 
Pending a decision on reconsideration, the capital directive and plan 
shall continue in full force and effect.



Sec. 615.5361  Relation to other administrative actions.

    A capital directive may be issued in addition to, or in lieu of, any 
other action authorized by law, including cease and desist proceedings, 
civil money penalties, or the conditioning or denial of applications. 
The Farm Credit Administration also may, in its discretion, take any 
action authorized by law, in lieu of a capital directive, in response to 
an institution's failure to achieve or maintain the applicable minimum 
capital ratios.

Subpart N [Reserved]



       Subpart O_Book-Entry Procedures for Farm Credit Securities

    Source: 61 FR 67192, Dec. 20, 1996, unless otherwise noted.



Sec. 615.5450  Definitions.

    In this subpart, unless the context otherwise requires or indicates:
    (a) Adverse claim means a claim that a claimant has a property 
interest in a security and that it is a violation of the rights of the 
claimant for another person to hold, transfer, or deal with the 
security.
    (b) Book-entry security means a Farm Credit security issued or 
maintained in the Book-entry System.
    (c) Book-entry System means the automated book-entry system operated 
by the Federal Reserve Banks, acting as the fiscal agent for the Farm 
Credit banks, through which book-entry securities are issued, recorded, 
transferred and maintained in book-entry form.
    (d) Definitive Farm Credit security means a Farm Credit security in 
engraved or printed form, or that is otherwise represented by a 
certificate.
    (e) Eligible book-entry security means a book-entry security issued 
or maintained in the Book-entry System, which by the terms of its 
securities documentation, is eligible to be converted from book-entry 
into definitive form.
    (f) Entitlement Holder means a person to whose account an interest 
in a book-entry security is credited on the records of a securities 
intermediary.
    (g) Farm Credit banks means one or more Farm Credit Banks, 
agricultural credit banks, and banks for cooperatives.
    (h) Farm Credit securities means consolidated notes, bonds, 
debentures, or other similar obligations of the Farm Credit banks and 
Systemwide notes, bonds, debentures, or similar obligations of the Farm 
Credit banks issued under sections 4.2(c) and 4.2(d), respectively, of 
the Act, or laws repealed thereby.
    (i) Federal Reserve Bank means a Federal Reserve Bank or Branch 
acting as agent for the Farm Credit banks and the Funding Corporation.
    (j) Federal Reserve Bank Operating Circular means the publication 
issued by each Federal Reserve Bank that sets forth the terms and 
conditions under which the Federal Reserve Bank maintains book-entry 
securities accounts and transfers book-entry securities.
    (k) Funding Corporation means the Federal Farm Credit Banks Funding 
Corporation established pursuant to section 4.9 of the Act, which issues 
Farm Credit securities on behalf of the Farm Credit banks.
    (l) Funds Account means a reserve and/or clearing account at a 
Federal

[[Page 196]]

Reserve Bank to which debits or credits are posted for transfers against 
payment, book-entry securities transaction fees, or principal and 
interest payments.
    (m) Participant means a person that maintains a participant's 
securities account with a Federal Reserve Bank.
    (n) Participant's Securities Account means an account in the name of 
a participant at a Federal Reserve Bank to which book-entry securities 
held for a participant are or may be credited.
    (o) Person means an individual, corporation, company, governmental 
entity, association, firm, partnership, trust, estate, representative 
and any other similar organization, but does not mean the United States, 
a Farm Credit bank, the Funding Corporation or a Federal Reserve Bank.
    (p) Revised Article 8 means Uniform Commercial Code, Revised Article 
8, Investment Securities (with Conforming and Miscellaneous Amendments 
to Articles 1, 3, 4, 5, 9, and 10) 1994 Official Text, and has the same 
meaning as in 31 CFR 357.2.
    (q) Securities Documentation means the applicable statement of 
terms, trust indenture, securities agreement, offering circular or other 
documents establishing the terms of a book-entry security.
    (r) Securities Intermediary means:
    (1) A person that is registered as a ``clearing agency'' under the 
Federal securities laws; a Federal Reserve Bank; any other person that 
provides clearance or settlement services with respect to a book-entry 
security that would require it to register as a clearing agency under 
the Federal securities laws but for an exclusion or exemption from the 
registration requirement, if its activities as a clearing corporation, 
including promulgation of rules, are subject to regulation by a Federal 
or State governmental authority; or
    (2) A person (other than an individual, unless such individual is 
registered as a broker or dealer under the Federal securities laws) 
including a bank or broker, that in the ordinary course of its business 
maintains securities accounts for others and is acting in that capacity.
    (s) Security means a Farm Credit security as defined in paragraph 
(h) of this section.
    (t) Security Entitlement means the rights and property interest of 
an entitlement holder with respect to a book-entry security.
    (u) State means any State of the United States, the District of 
Columbia, Puerto Rico, the Virgin Islands, or any other territory or 
possession of the United States.
    (v) Transfer Message means an instruction of a participant to a 
Federal Reserve Bank to effect a transfer of a book-entry security 
maintained in the Book-entry System, as set forth in Federal Reserve 
Bank Operating Circulars.

[61 FR 67192, Dec. 20, 1996, as amended at 62 FR 53229, Oct. 14, 1997]



Sec. 615.5451  Book-entry and definitive securities.

    Subject to subpart C of this part:
    (a) Farm Credit banks operating under the same title of the Act may 
issue consolidated securities in book-entry form.
    (b) Farm Credit banks may issue Systemwide securities in book-entry 
form.
    (c) Consolidated and Systemwide securities also may be issued in 
either registered or bearer definitive form.

[61 FR 67192, Dec. 20, 1996, as amended at 62 FR 53229, Oct. 14, 1997]



Sec. 615.5452  Law governing rights and obligations of Federal Reserve
Banks, Farm Credit banks, and Funding Corporation; rights of any person
against Federal  Reserve Banks, Farm Credit banks, and Funding
Corporation.

    (a) Except as provided in paragraph (b) of this section, the 
following are governed solely by the regulations contained in this 
subpart O, the securities documentation, and Federal Reserve Bank 
Operating Circulars:
    (1) The rights and obligations of the Farm Credit banks, the Funding 
Corporation, and the Federal Reserve Banks with respect to:
    (i) A book-entry security or security entitlement, and
    (ii) The operation of the Book-entry System as it applies to Farm 
Credit securities; and

[[Page 197]]

    (2) The rights of any person, including a participant, against the 
Farm Credit banks, the Funding Corporation, and the Federal Reserve 
Banks with respect to:
    (i) A book-entry security or security entitlement, and
    (ii) The operation of the Book-entry System as it applies to Farm 
Credit securities.
    (b) A security interest in a security entitlement that is in favor 
of a Federal Reserve Bank from a participant and that is not recorded on 
the books of a Federal Reserve Bank pursuant to Sec. 615.5454(c)(1) of 
this subpart, is governed by the law (not including the conflict-of-law 
rules) of the jurisdiction where the head office of the Federal Reserve 
Bank maintaining the participant's securities account is located. A 
security interest in a security entitlement that is in favor of a 
Federal Reserve Bank from a person that is not a participant, and that 
is not recorded on the books of a Federal Reserve Bank pursuant to 
Sec. 615.5454(c)(1)of this subpart, is governed by the law determined in 
the manner specified in Sec. 615.5453 of this subpart.
    (c) If the jurisdiction specified in the first sentence of paragraph 
(b) of this section is a State that has not adopted revised Article 8 
(see 31 CFR 357.2) then the law specified in paragraph (b) of this 
section shall be the law of that State as though revised Article 8 had 
been adopted by that State.

[61 FR 67192, Dec. 20, 1996, as amended at 62 FR 53229, Oct. 14, 1997]



Sec. 615.5453  Law governing other interests.

    (a) To the extent not inconsistent with these regulations, the law 
(not including the conflict-of-law rules) of a securities intermediary's 
jurisdiction governs:
    (1) The acquisition of a security entitlement from the securities 
intermediary;
    (2) The rights and duties of the securities intermediary and 
entitlement holder arising out of a security entitlement;
    (3) Whether the securities intermediary owes any duties to an 
adverse claimant to a security entitlement;
    (4) Whether an adverse claim can be asserted against a person who 
acquires a security entitlement from the securities intermediary or a 
person who purchases a security entitlement or interest therein from an 
entitlement holder; and
    (5) Except as otherwise provided in paragraph (c) of this section, 
the perfection, effect of perfection or non-perfection and priority of a 
security interest in a security entitlement.
    (b) The following rules determine a ``securities intermediary's 
jurisdiction'' for purposes of this section:
    (1) If an agreement between the securities intermediary and its 
entitlement holder specifies that it is governed by the law of a 
particular jurisdiction, that jurisdiction is the securities 
intermediary's jurisdiction.
    (2) If an agreement between the securities intermediary and its 
entitlement holder does not specify the governing law as provided in 
paragraph (b)(1) of this section, but expressly specifies that the 
securities account is maintained at an office in a particular 
jurisdiction, that jurisdiction is the securities intermediary's 
jurisdiction.
    (3) If an agreement between the securities intermediary and its 
entitlement holder does not specify a jurisdiction as provided in 
paragraph (b)(1) or (b)(2) of this section, the securities 
intermediary's jurisdiction is the jurisdiction in which is located the 
office identified in an account statement as the office serving the 
entitlement holder's account.
    (4) If an agreement between the securities intermediary and its 
entitlement holder does not specify a jurisdiction as provided in 
paragraph (b)(1) or (b)(2) of this section and an account statement does 
not identify an office serving the entitlement holder's account as 
provided in paragraph (b)(3) of this section, the securities 
intermediary's jurisdiction is the jurisdiction in which is located the 
chief executive office of the securities intermediary.
    (c) Notwithstanding the general rule in paragraph (a)(5) of this 
section, the law (but not the conflict-of-law rules) of the jurisdiction 
in which the person creating a security interest is located governs 
whether and how the security

[[Page 198]]

interest may be perfected automatically or by filing a financing 
statement.
    (d) If the jurisdiction specified in paragraph (b) of this section 
is a State that has not adopted revised Article 8 (see 31 CFR 357.2), 
then the law for the matters specified in paragraph (a) of this section 
shall be the law of that State as though revised Article 8 had been 
adopted by that State. For purposes of the application of the matters 
specified in paragraph (a) of this section, the Federal Reserve Bank 
maintaining the securities account is a clearing corporation, and the 
participant's interest in a book-entry security is a security 
entitlement.



Sec. 615.5454  Creation of participant's security entitlement;
security interests.

    (a) A participant's security entitlement is created when a Federal 
Reserve Bank indicates by book entry that a book-entry security has been 
credited to a participant's securities account.
    (b) A security interest in a security entitlement of a participant 
in favor of the United States to secure deposits of public money, 
including without limitation deposits to the Treasury tax and loan 
accounts, or other security interest in favor of the United States that 
is required by Federal statute, regulation, or agreement, and that is 
marked on the books of a Federal Reserve Bank is thereby effected and 
perfected, and has priority over any other interest in the securities. 
Where a security interest in favor of the United States in a security 
entitlement of a participant is marked on the books of a Federal Reserve 
Bank, such Federal Reserve Bank may rely, and is protected in relying, 
exclusively on the order of an authorized representative of the United 
States directing the transfer of the security. For purposes of this 
paragraph, an ``authorized representative of the United States'' is the 
official designated in the applicable regulations or agreement to which 
a Federal Reserve Bank is a party, governing the security interest.
    (c)(1) The Farm Credit Banks, the Funding Corporation, and the 
Federal Reserve Banks have no obligation to agree to act on behalf of 
any person or to recognize the interest of any transferee of a security 
interest or other limited interest in favor of any person except to the 
extent of any specific requirement of Federal law or regulation or to 
the extent set forth in any specific agreement with the Federal Reserve 
Bank on whose books the interest of the participant is recorded. To the 
extent required by such law or regulation or set forth in an agreement 
with a Federal Reserve Bank, or the Federal Reserve Bank Operating 
Circular, a security interest in a security entitlement that is in favor 
of a Federal Reserve Bank, a Farm Credit Bank, the Funding Corporation, 
or a person may be created and perfected by a Federal Reserve Bank 
marking its books to record the security interest. Except as provided in 
paragraph (b) of this section, a security interest in a security 
entitlement marked on the books of a Federal Reserve Bank shall have 
priority over any other interest in the securities.
    (2) In addition to the method provided in paragraph (c)(1) of this 
section, a security interest, including a security interest in favor of 
a Federal Reserve Bank, may be perfected by any method by which a 
security interest may be perfected under applicable law as described in 
Sec. 615.5452(b) or Sec. 615.5453 of this subpart. The perfection, 
effect of perfection or non-perfection and priority of a security 
interest are governed by that applicable law. A security interest in 
favor of a Federal Reserve Bank shall be treated as a security interest 
in favor of a clearing corporation in all respects under that law, 
including with respect to the effect of perfection and priority of the 
security interest. A Federal Reserve Bank Operating Circular shall be 
treated as a rule adopted by a clearing corporation for such purposes.

[62 FR 67192, Dec. 20, 1996, as amended at 62 FR 53229, Oct. 14, 1997]



Sec. 615.5455  Obligations of the Farm Credit banks and the Funding 
Corporation; no adverse claims.

    (a) Except in the case of a security interest in favor of the United 
States or a Federal Reserve Bank or otherwise as provided in 
Sec. 615.5454(c)(1), for the

[[Page 199]]

purposes of this subpart O, the Farm Credit banks, the Funding 
Corporation and the Federal Reserve Banks shall treat the participant to 
whose securities account an interest in a book-entry security has been 
credited as the person exclusively entitled to issue a transfer message, 
to receive interest and other payments with respect thereof and 
otherwise to exercise all the rights and powers with respect to such 
security, notwithstanding any information or notice to the contrary. The 
Federal Reserve Banks, the Farm Credit banks, and the Funding 
Corporation are not liable to a person asserting or having an adverse 
claim to a security entitlement or to a book-entry security in a 
participant's securities account, including any such claim arising as a 
result of the transfer or disposition of a book-entry security by a 
Federal Reserve Bank pursuant to a transfer message that the Federal 
Reserve Bank reasonably believes to be genuine.
    (b) The obligation of the Farm Credit banks and the Funding 
Corporation to make payments (including payments of interest and 
principal) with respect to book-entry securities is discharged at the 
time payment in the appropriate amount is made as follows:
    (1) Interest or other payments on book-entry securities are either 
credited by a Federal Reserve Bank to a funds account maintained at the 
Federal Reserve Bank or otherwise paid as directed by the participant.
    (2) Book-entry securities are redeemed in accordance with their 
terms by a Federal Reserve Bank withdrawing the securities from the 
participant's securities account in which they are maintained and by 
either crediting the amount of the redemption proceeds, including both 
principal and interest, where applicable, to a funds account at the 
Federal Reserve Bank or otherwise paying such principal and interest as 
directed by the participant. No action by the participant is required in 
connection with the redemption of a book-entry security.

[61 FR 67192, Dec. 20, 1996, as amended at 62 FR 53229, Oct. 14, 1997]



Sec. 615.5456  Authority of Federal Reserve Banks.

    (a) Each Federal Reserve Bank is hereby authorized as fiscal agent 
of the Farm Credit banks and the Funding Corporation to perform 
functions with respect to the issuance of book-entry securities offered 
and sold by the Farm Credit banks and the Funding Corporation to which 
this subpart applies, in accordance with the terms of the securities 
documentation and the provisions of this subpart:
    (1) To service and maintain book-entry securities in accounts 
established for such purposes;
    (2) To make payments of principal and interest, as directed by the 
Farm Credit banks and the Funding Corporation;
    (3) To effect transfer of book-entry securities between 
participants' securities accounts as directed by the participants;
    (4) To effect conversions between book-entry securities and 
definitive Farm Credit securities with respect to those securities as to 
which conversion rights are available pursuant to the applicable 
securities documentation; and
    (5) To perform such other duties as fiscal agent as may be requested 
by the Farm Credit banks and the Funding Corporation.
    (b) Each Federal Reserve Bank may issue Operating Circulars not 
inconsistent with this subpart, governing the details of its handling of 
book-entry securities, security entitlements, and the operation of the 
Book-entry System under this subpart.



Sec. 615.5457  Withdrawal of eligible book-entry securities for 
conversion to definitive form.

    (a) Eligible book-entry securities may be withdrawn from the Book-
entry System by requesting delivery of like definitive Farm Credit 
securities.
    (b) A Federal Reserve Bank shall, upon receipt of appropriate 
instructions to withdraw eligible book-entry securities from book-entry 
in the Book-entry System, convert such securities into definitive Farm 
Credit securities and deliver them in accordance with such instructions.
    (c) Farm Credit securities which are to be delivered upon withdrawal 
may

[[Page 200]]

be issued in either registered or bearer form, to the extent permitted 
by the applicable securities documentation.
    (d) All requests for withdrawal of eligible book-entry securities 
must be made prior to the maturity or the applicable date of call of the 
Farm Credit securities.

[61 FR 67192, Dec. 20, 1996, as amended at 62 FR 53230, Oct. 14, 1997]



Sec. 615.5458  Waiver of regulations.

    The Farm Credit Administration reserves the right, in the Farm 
Credit Administration's discretion, to waive any provision(s) of the 
regulations in this subpart in any case or class of cases for the 
convenience of the Farm Credit banks and the Funding Corporation or in 
order to relieve any person(s) of unnecessary hardship, if such action 
is not inconsistent with law, does not adversely affect any substantial 
existing rights, and the Farm Credit Administration is satisfied that 
such action will not subject the Farm Credit banks and the Funding 
Corporation to any substantial expense or liability.



Sec. 615.5459  Liability of Farm Credit banks, Funding Corporation
and Federal Reserve Banks.

    The Farm Credit banks, the Funding Corporation, and the Federal 
Reserve Banks may rely on the information provided in a transfer message 
or other transaction documentation, and are not required to verify the 
information. The Farm Credit banks, the Funding Corporation, and the 
Federal Reserve Banks shall not be liable for any action taken in 
accordance with the information set out in the transfer message, other 
transaction documentation, or evidence submitted in support thereof.



Sec. 615.5460  Additional provisions.

    (a) Additional requirements. In any case or any class of cases 
arising under the regulations in this subpart, the Farm Credit banks and 
the Funding Corporation may require such additional evidence and a bond 
of indemnity, with or without surety, as may in the judgment of the Farm 
Credit banks and the Funding Corporation be necessary for the protection 
of the interests of the Farm Credit banks and the Funding Corporation.
    (b) Notice of attachment for Farm Credit securities in the Book-
entry System. The interest of a debtor in a security entitlement may be 
reached by a creditor only by legal process upon the securities 
intermediary with whom the debtor's securities account is maintained, 
except where a security entitlement is maintained in the name of a 
secured party, in which case the debtor's interest may be reached by 
legal process upon the secured party. These regulations do not purport 
to establish whether a Federal Reserve Bank is required to honor an 
order or other notice of attachment in any particular case or class of 
cases.
    (c) Conversion of definitive securities into book-entry securities. 
Definitive Farm Credit securities may be converted to book-entry form in 
accordance with the terms of the applicable securities documentation and 
Federal Reserve Operating Circular.

[61 FR 67192, Dec. 20, 1996, as amended at 62 FR 53230, Oct. 14, 1997]



Sec. 615.5461  Lost, stolen, destroyed, mutilated or defaced Farm 
Credit securities, including coupons.

    (a) Relief on the account of the loss, theft, destruction, 
mutilation, or defacement of any definitive consolidated or Systemwide 
securities of the Farm Credit banks and coupons of such securities may 
be granted on the same basis and to the same extent as relief may be 
granted under the statutes of the United States and the regulations of 
the Department of the Treasury on the account of the loss, theft, 
destruction, mutilation, or defacement of United States securities and 
coupons of such securities.
    (b) Applicants for relief under paragraph (a) of this section, shall 
present claims and proof of loss:
    (1) To the Division of Special Investments, Bureau of the Public 
Debt, P.O. Box 396, Parkersburg, WV 26102-0396, in the case of 
consolidated or Systemwide securities of the Farm Credit banks issued 
prior to May 1, 1978; or
    (2) To the Federal Farm Credit Banks Funding Corporation, 10 
Exchange Place, Suite 1401, Jersey City, NJ 07302, in the case of 
consolidated or Systemwide securities issued on or after May 1, 1978.

[[Page 201]]



Sec. 615.5462  Restrictive endorsement of bearer securities.

    When consolidated and Systemwide bearer securities of the Farm 
Credit banks are being presented to Federal Reserve Banks, for 
redemption, exchange, or conversion to book entry, such securities may 
be restrictively endorsed. The restrictive endorsement shall be placed 
thereon in substantially the same manner and with the same effects as 
prescribed in United States Treasury Department regulations, now or 
hereafter in force, governing like transactions in United States bonds; 
and consolidated or Systemwide securities of the Farm Credit banks so 
endorsed shall be prepared for shipment and shipped in the manner 
prescribed in such regulations for United States bearer securities. (See 
31 CFR part 328.)



                    Subpart P_Global Debt Securities



Sec. 615.5500  Definitions.

    In this subpart, unless the context otherwise requires or indicates:
    (a) Global debt securities means consolidated Systemwide debt 
securities issued by the Funding Corporation on behalf of the Farm 
Credit banks under section 4.2(d) of the Act through a fiscal agent or 
agents and distributed either exclusively outside the United States or 
simultaneously inside and outside the United States.
    (b) Global agent means any fiscal agent, other than the Federal 
Reserve Banks, used by the Funding Corporation to facilitate the sale of 
global debt securities.

[60 FR 57919, Nov. 24, 1995]



Sec. 615.5502  Issuance of global debt securities.

    (a) The Funding Corporation may provide for the sale of global debt 
securities on behalf of the Farm Credit banks through a global agent or 
agents by negotiation, offer, bid, or syndicate sale, and deliver such 
obligations by book-entry, wire transfer, or such other means as may be 
appropriate.
    (b) The Funding Corporation Board of Directors shall establish 
appropriate criteria for the selection of global agents and shall 
approve each global agent.

[60 FR 57919, Nov. 24, 1995]



                     Subpart Q_Bankers' Acceptances



Sec. 615.5550  Bankers' acceptances.

    Banks for cooperatives may rediscount with other purchasers the 
acceptances they have created. The bank for cooperatives' board of 
directors, under established policies, may delegate this authority to 
management.

[71 FR 65387, Nov. 8, 2006]

Subpart R [Reserved]



     Subpart S_Federal Agricultural Mortgage Corporation Securities



Sec. 615.5570  Book-entry procedures for Federal Agricultural 
Mortgage Corporation Securities.

    (a) The Federal Agricultural Mortgage Corporation (Farmer Mac) is a 
Federally chartered instrumentality of the United States and an 
institution of the Farm Credit System, subject to the examination and 
regulation of the Farm Credit Administration.
    (b) Farmer Mac, either in its own name or through an affiliate 
controlled or owned by Farmer Mac, is authorized by section 8.6 of the 
Act:
    (1) To issue and/or guarantee the timely payment of principal and 
interest on securities representing interests in or obligations backed 
by pools of agricultural real estate loans (guaranteed securities); and
    (2) To issue debt obligations (which, together with the guaranteed 
securities described in paragraph (b)(1) of this section, are referred 
to as Farmer Mac securities). Farmer Mac may prescribe the forms, the 
denominations, the rates of interest, the conditions, the manner of 
issuance, and the prices of Farmer Mac securities.
    (c) Farmer Mac securities shall be governed by Secs. 615.5450, and 
615.5452 through 615.5460. In interpreting those sections for purposes 
of this subpart, unless the context requires otherwise, the term 
``Farmer Mac securities''

[[Page 202]]

shall be read for ``Farm Credit securities,'' and ``Farmer Mac'' shall 
be read for ``Farm Credit banks'' and ``Funding Corporation.'' These 
terms shall be read as though modified where necessary to effectuate the 
application of the designated sections of subpart O of this part to 
Farmer Mac.

[61 FR 31394, June 20, 1996, as amended at 61 FR 67195, Dec. 20, 1996]



PART 616_LEASING--Table of Contents



Sec.
616.6000  Definitions.
616.6100  Purchase and sale of interests in leases.
616.6200  Out-of-territory leasing.
616.6300  Leasing policies, procedures, and underwriting standards.
616.6400  Documentation.
616.6500  Investment in leased assets.
616.6600  Leasing limit.
616.6700  Stock purchase requirements.
616.6800  Disclosure requirements.

    Authority: Secs. 1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 2.3, 
2.4, 2.10, 2.12, 2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.9, 3.10, 3.20, 
3.28, 4.3, 4.3A, 4.13, 4.13A, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 
4.18, 4.18A, 4.25, 4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 
7.2, 7.3, 7.6, 7.8, 7.12, 7.13 of the Farm Credit Act (12 U.S.C. 2011, 
2013, 2014, 2015, 2017, 2018, 2019, 2071, 2073, 2074, 2075, 2091, 2093, 
2094, 2097, 2121, 2122, 2124, 2128, 2129, 2130, 2131, 2141, 2149, 2154, 
2154a, 2199, 2200, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2206a, 
2211, 2212, 2213, 2214, 2219a, 2219b, 2243, 2244, 2252, 2279a, 2279a-2, 
2279a-3, 2279b, 2279c-1, 2279f, 2279f-1).

    Source: 64 FR 34518, June 28, 1999, unless otherwise noted.



Sec. 616.600  Definitions.

    For the purposes of this part, the following definitions apply:
    (a) Interests in leases means ownership interests in any aspect of a 
lease transaction, including, but not limited to, servicing rights.
    (b) Lease means any contractual obligation to own and lease, or 
lease with the option to purchase, equipment or facilities used in the 
operations of persons eligible to borrow under part 613 of this chapter.
    (c) Sale with recourse means a sale of a lease or an interest in a 
lease in which the seller:
    (1) Retains some risk of loss from the transferred asset for any 
cause except the seller's breach of usual and customary warranties or 
representations designed to protect the purchaser against fraud or 
misrepresentation; or
    (2) Has an obligation to make payments to any party resulting from:
    (i) Default on the lease by the lessee or guarantor or any other 
deficiencies in the lessee's performance;
    (ii) Changes in the market value of the assets after transfer;
    (iii) Any contractual relationship between the seller and purchaser 
incident to the transfer that, by its terms, could continue even after 
final payment, default, or other termination of the assets transferred; 
or
    (iv) Any other cause, except that the retention of servicing rights 
alone shall not constitute recourse.



Sec. 616.6100  Purchase and sale of interests in leases.

    (a) Authority to buy interests in leases. A Farm Credit System 
institution may buy leases and interests in leases.
    (b) Policies. Each Farm Credit System institution that sells or buys 
interests in leases must do so only under a policy adopted by its board 
of directors that addresses the following:
    (1) The types of leases in which the institution may buy or sell an 
interest and the types of interests which may be bought or sold;
    (2) The underwriting standards for the purchase of interests in 
leases;
    (3) Such limits on the aggregate lease payments and residual amount 
of interests in leases that the institution may buy from a single 
institution as are necessary to diversify risk, and such limits on the 
aggregate amounts the institution may buy from all institutions as are 
necessary to assure that service to the territory is not impeded;
    (4) Identification and reporting of leases in which interests are 
sold or bought;
    (5) Requirements for securing from the selling lessor in a timely 
manner adequate financial and other information about the lessee needed 
to make an independent judgment; and
    (6) Any limits or conditions to which sales or purchases are subject 
that the board considers appropriate, including arbitration.

[[Page 203]]

    (c) Purchase and sale agreements. Each agreement to buy or sell an 
interest in a lease must, at a minimum:
    (1) Identify the particular lease(s) to be covered by the agreement;
    (2) Provide for the transfer of lessee information on a timely and 
continuing basis;
    (3) Identify the nature of the interest(s) sold or bought;
    (4) Specify the rights and obligations of the parties and the terms 
and conditions of the sale;
    (5) Contain any terms necessary for the appropriate administration 
of the lease, including lease servicing and monitoring of the servicer 
and authorization and conditions for action in the event of lessee 
distress or default;
    (6) Provide for a method of resolution of disagreements arising 
under the agreement;
    (7) Specify whether the contract is assignable by either party; and
    (8) In the case of lease transactions through agents, comply with 
Sec. 614.4325(h) of this chapter, reading the term ``lease'' or 
``leases'' in place of the term ``loan'' or ``loans,'' as applicable.
    (d) Independent judgment. Each institution that buys an interest in 
a lease must make a judgment on the payment ability of the lessee that 
is independent of the originating or lead lessor and any intermediary 
seller or broker. This must occur before the purchase of the interest 
and before any servicing action that alters the terms of the original 
agreement. The institution must not delegate such judgment to any 
person(s) not employed by the institution. A Farm Credit System 
institution that buys a lease or any interest in a lease may use 
information, such as appraisals or inspections, provided by the 
originating or lead lessor, or any intermediary seller or broker; 
however, the buying Farm Credit System institution must independently 
evaluate such information when exercising its judgment. The independent 
judgment must be documented by a payment analysis that considers factors 
set forth in Sec. 616.6300. The payment analysis must consider such 
financial and other lessee information as would be required by a prudent 
lessor and must include an evaluation of the capacity and reliability of 
the servicer. Boards of directors of jointly managed institutions must 
adopt procedures to ensure the interests of their respective 
shareholders are protected in participation between such institutions.
    (e) Sales with recourse. When a lease or interest in a lease is sold 
with recourse:
    (1) For the purpose of determining the lending and leasing limit in 
subpart J of part 614 of this chapter, the lease must be considered, to 
the extent of the recourse or guaranty, a lease by the buyer to the 
seller, and in addition, the seller must aggregate the lease with other 
obligations of the lessee; and
    (2) The lease subject to the recourse agreement must be considered 
an asset sold with recourse for the purpose of computing capital ratios.
    (f) Similar entity lease transactions. The provisions of 
Sec. 613.3300 of this chapter that apply to interests in loans made to 
similar entities apply to interests in leases made to similar entities. 
In applying these provisions, the term ``loan'' shall be read to include 
the term ``lease'' and the term ``principal amount'' shall be read to 
include the term ``lease amount.''



Sec. 616.6200  Out-of-territory leasing.

    A System institution may make leases outside its chartered 
territory.



Sec. 616.6300  Leasing policies, procedures, and underwriting standards.

    The board of each institution engaged in lease underwriting must 
adopt a written policy (or policies). Management, at the direction of 
the board, must develop procedures that reflect lease practices that 
control risk and comply with all applicable laws and regulations. Any 
leasing activity must comply with the lending policies and loan 
underwriting requirements in Sec. 614.4150 of this chapter. An 
institution engaged in the making, buying, or syndicating of leases also 
must adopt written policies and procedures that address the additional 
risks associated with leasing. Written policies and procedures must 
address the following, if applicable:

[[Page 204]]

    (a) Appropriateness of the lease amount, purpose, and terms and 
conditions, including the residual value established at the inception of 
the lease;
    (b) Process for estimating the leased asset's market value during 
the lease term;
    (c) Types of equipment and facilities the institution will lease;
    (d) Remarketing of leased property and associated risks;
    (e) Property tax and sales tax reporting;
    (f) Title and ownership of leased assets;
    (g) Title and licensing for motor vehicles;
    (h) Liability associated with ownership, including any environmental 
hazards or risks;
    (i) Insurance requirements for both the lessor and lessee;
    (j) Classification of leases in accordance with generally accepted 
accounting principles; and
    (k) Tax treatment of lease transactions and associated risks.



Sec. 616.6400  Documentation.

    Each institution must document that any asset it leases is within 
its statutory authority.



Sec. 616.6500  Investment in leased assets.

    An institution may acquire property to be leased that is consistent 
with current or planned leasing programs.



Sec. 616.6600  Leasing limit.

    All leases made by Farm Credit System institutions shall be subject 
to the lending and leasing limit in subpart J of part 614 of this 
chapter.



Sec. 616.6700  Stock purchase requirements.

    (a) Each System institution, except the Farm Credit Leasing Services 
Corporation, making an equipment lease under titles II or III of the Act 
must require the lessee to buy or own at least one share of stock or one 
participation certificate in the institution making the lease, in 
accordance with its bylaws.
    (b) The disclosure requirements of Sec. 615.5250(a) and (b) of this 
chapter apply to stock (or participation certificates) bought as a 
condition for obtaining a lease.



Sec. 616.6800  Disclosure requirements.

    (a) Each System institution must give to each lessee a copy of all 
lease documents signed by the lessee within a reasonable time following 
lease closing.
    (b) Each System institution must make its decision on a lease 
application as soon as possible and provide prompt written notice of its 
decision to the applicant.



PART 617_BORROWER RIGHTS--Table of Contents



                            Subpart A_General

Sec.
617.7000  Definitions
617.7005  When may electronic communications be used in the borrower 
          rights process?
617.7010  May borrower rights be waived?
617.7015  What happens to borrower rights when a loan is sold?

            Subpart B_Disclosure of Effective Interest Rates

617.7100  Who must make and who is entitled to receive an effective 
          interest rate disclosure?
617.7105  When must a qualified lender disclose the effective interest 
          rate to a borrower?
617.7110  How should a qualified lender disclose the cost of borrower 
          stock or participation certificates?
617.7115  How should a qualified lender disclose loan origination 
          charges?
617.7120  How should a qualified lender present the disclosures to a 
          borrower?
617.7125  How should a qualified lender determine the effective interest 
          rate?
617.7130  What initial disclosures must a qualified lender make to a 
          borrower?
617.7135  What subsequent disclosures must a qualified lender make to a 
          borrower?

           Subpart C_Disclosure of Differential Interest Rates

617.7200  What disclosures must a qualified lender make to a borrower on 
          loans offered with more than one rate of interest?

      Subpart D_Actions on Applications; Review of Credit Decisions

617.7300  When acting on a loan application, what are the notice 
          requirements and review rights?

[[Page 205]]

617.7305  What is a CRC and who are the members?
617.7310  What is the review process of the CRC?
617.7315  What records must the qualified lender maintain on behalf of 
          the CRC?

    Subpart E_Distressed Loan Restructuring; State Agricultural Loan 
                           Mediation Programs

617.7400  What protections exist for borrowers who meet all loan 
          obligations?
617.7405  On what policies are loan restructurings based?
617.7410  When and how does a qualified lender notify a borrower of the 
          right to seek loan restructuring?
617.7415  How does a qualified lender decide to restructure a loan?
617.7420  How will a decision on an application for restructuring be 
          issued?
617.7425  What type of notice should be given to a borrower before 
          foreclosure?
617.7430  Are institutions required to participate in state agricultural 
          loan mediation programs?

            Subpart F_Distressed Loan Restructuring Directive

617.7500  What is a directive used for and what may it require?
617.7505  How will the qualified lender know when FCA is considering 
          issuing a distressed loan restructuring directive?
617.7510  What should the qualified lender do when it receives notice of 
          a distressed loan restructuring directive?
617.7515  How does the FCA decide whether to issue a directive?
617.7520  How does the FCA issue a directive and when will it be 
          effective?
617.7525  May FCA use other enforcement actions?

                    Subpart G_Right of First Refusal

617.7600  What are the definitions used in this subpart?
617.7605  How should System institutions document whether the borrower 
          had the financial resources to avoid foreclosure?
617.7610  What should the System institution do when it decides to sell 
          acquired agricultural real estate?
617.7615  What should the System institution do when it decides to lease 
          acquired agricultural real estate?
617.7620  What should the System institution do when it decides to sell 
          acquired agricultural real estate at a public auction?
617.7625  Whom should the System institution notify?
617.7630  Does this Federal requirement affect any state property laws?

    Authority: Secs. 4.13, 4.13A, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 
4.14E, 4.36, 5.9, 5.17 of the Farm Credit Act (12 U.S.C. 2199, 2200, 
2201, 2202, 2202a, 2202c, 2202d, 2202e, 2219a, 2243, 2252).

    Source: 69 FR 10907, 10908, Mar. 9, 2004, unless otherwise noted.



                            Subpart A_General



Sec. 617.7000  Definitions.

    For the purposes of this part, the following terms apply:
    Adjustable rate loan means a loan where the interest rate payable 
over the term of the loan may change. This includes adjustable rate, 
variable rate, or other similarly designated loans.
    Adverse credit decision means a credit decision where a qualified 
lender:
    (1) Decides not to make a loan to an applicant;
    (2) Approves a loan in an amount less than the applicant requested; 
or
    (3) Denies an application for restructuring.
    Applicant means any person who completes and executes a loan 
application from a qualified lender.
    Application for restructuring means a written request from a 
borrower to restructure a distressed loan. The request must be submitted 
on the appropriate forms prescribed by the qualified lender and 
accompanied by sufficient financial information and repayment 
projections, where appropriate, as required by the qualified lender to 
support a sound credit decision.
    Distressed loan means a loan that the borrower does not have the 
financial capacity to pay according to its terms, as determined by the 
qualified lender, and exhibits one or more of the following 
characteristics:
    (1) The borrower is demonstrating adverse financial and repayment 
trends.
    (2) The loan is delinquent or past due under the terms of the loan 
contract.
    (3) One or both of the factors listed in paragraphs (1) and (2) of 
this section, together with inadequate collateralization, present a high 
probability of loss to the qualified lender.
    Effective interest rate means a measure of the cost of credit, 
expressed as an annual percentage rate, that shows the effect of the 
following costs, if any, on

[[Page 206]]

the interest rate on a loan charged by a qualified lender to a borrower:
    (1) The amount of any stock or participation certificates that a 
borrower is required to buy to obtain the loan; and
    (2) Any loan origination charges paid by a borrower to a qualified 
lender to obtain the loan.
    Foreclosure proceeding means:
    (1) A foreclosure or similar legal proceeding to enforce a lien on 
property, whether real or personal, that secures a non-interest-earning 
asset or distressed loan; or
    (2) The seizing of and realizing on non-real property collateral, 
other than collateral subject to a statutory lien arising under titles I 
and II of the Act, to effect collection of a nonaccrual or distressed 
loan.
    Independent evaluator means an individual who is a qualified 
evaluator and who satisfies the standards of Sec. 614.4260, subpart F of 
this chapter, and the standards set by the qualified lender for the type 
of property to be evaluated. The independent evaluator may not be an 
employee or agent of a qualified lender or have a relationship with the 
lender or any of its officers or directors in contravention of part 612 
of this chapter.
    Interest rate means the stated contract rate of interest.
    Loan means an extension of credit made to a farmer, rancher, or 
producer or harvester of aquatic products, for any agricultural or 
aquatic purpose and other credit needs of the borrower, including 
financing for basic processing and marketing that directly relates to 
the borrower's operations and those of other eligible farmers, ranchers, 
and producers or harvesters of aquatic products.
    Loan application means a complete oral or written request for an 
extension of credit made in accordance with a qualified lender's 
procedures for the type of credit requested. An application is complete 
when the qualified lender receives all the information normally obtained 
and used in evaluating applications for credit. This information may 
include credit reports, supporting information for the credit requested, 
and reports by governmental agencies or other persons necessary to 
guarantee, insure, or provide security for the credit or collateral.
    Qualified lender means:
    (1) A System institution, except a bank for cooperatives, that makes 
loans as defined in this section; and
    (2) Each bank, institution, corporation, company, credit union, and 
association described in section 1.7(b)(1)(B) of the Act (commonly 
referred to as an other financing institution), but only with respect to 
loans discounted or pledged under section 1.7(b)(1).
    Restructure and restructuring of a loan means a reamortization, 
renewal, deferral of principal or interest, monetary concessions, or the 
taking of any other action to modify the terms of, or forbear on, a 
loan.

[69 FR 10907, 10908, Mar. 9, 2004, as amended at 69 FR 16459, Mar. 30, 
2004]



Sec. 617.7005  When may electronic communications be used in the 
borrower rights process?

    Qualified lenders may use, with the parties' agreement, electronic 
commerce (E-commerce), including electronic communications for borrower 
rights disclosures. Part 609 of this chapter addresses when a qualified 
lender may use E-commerce. Consistent with these rules, a qualified 
lender should interpret part 617 broadly to allow electronic 
transmissions, communications, records, and submissions. However, 
electronic communications may not be used for a notice of default, 
acceleration, repossession, foreclosure, eviction, or the right to cure 
when a borrower's primary residence secures the loan. In these 
instances, a qualified lender must use paper disclosures.



Sec. 617.7010  May borrower rights be waived?

    (a) A qualified lender may not obtain a waiver of borrower rights, 
except as indicated in paragraphs (b) and (c) of this section.
    (b) A borrower may waive rights relating to distressed loan 
restructuring, credit reviews, and the right of first refusal when a 
loan is guaranteed by the Small Business Administration or in connection 
with a loan sale as provided in Sec. 617.7015. Waivers obtained pursuant 
to this paragraph must be voluntary

[[Page 207]]

and in writing. The document evidencing the waiver must clearly explain 
the rights the borrower is being asked to waive.
    (c) A borrower may waive all borrower rights provided for in part 
617 of these regulations in connection with a loan syndication 
transaction with non-System lenders that are otherwise not required by 
section 4.14A(a)(6) of the Act to provide borrower rights. For purposes 
of this paragraph, a ``loan syndication'' is a multi-lender transaction 
in which each member of the lending syndicate has a direct contractual 
relationship with the borrower, but does not include a transaction 
created for the primary purpose of avoiding borrower rights. Waivers 
obtained pursuant to this paragraph must be voluntary and in writing. 
The document evidencing the waiver must clearly disclose the rights the 
borrower is waiving. Additionally, the borrower's written waiver must 
contain a statement that the borrower was represented by legal counsel 
in connection with execution of the waiver.

[69 FR 10907, 10908, Mar. 9, 2004, as amended at 70 FR 18968, Apr. 12, 
2005]



Sec. 617.7015  What happens to borrower rights when a loan is sold?

    (a) What happens when a qualified lender sells a loan to another 
qualified lender? A loan made by a qualified lender and subsequently 
sold, in whole or in part, to another qualified lender is subject to the 
borrower rights provisions of title IV of the Act.
    (b) What happens when a qualified lender sells a loan into the 
secondary market? (1) Except as provided in paragraph (b)(2) of this 
section, the borrower rights provisions of sections 4.14, 4.14A, 4.14B, 
4.14C, 4.14D, and 4.36 of the Act do not apply to a loan made on or 
after February 10, 1996, and designated for sale into a secondary market 
at the time the loan was made.
    (2) Borrower rights apply to a loan designated for sale under 
paragraph (b)(1) of this section but not sold into a secondary market 
during the 180-day period that begins on the date of designation. The 
provisions of paragraph (b)(1) of this section will subsequently apply 
on the date of sale if the loan is later sold into a secondary market.
    (c) What happens when a qualified lender sells a loan to a 
nonqualified lender? (1) Except for loans sold to another qualified 
lender or designated for sale into a secondary market, a qualified 
lender must comply with one of the following requirements before selling 
a loan or interest in a loan subject to borrower rights:
    (i) The qualified lender and borrower must agree to include 
provisions in the loan contract with the borrower, or a written 
modification thereto, that ensure that the buyer of the loan will be 
obligated to provide the borrower the same rights a qualified lender 
must provide; or
    (ii) The qualified lender must obtain from the borrower a signed 
written consent to the sale, which clearly states the borrower waives 
statutory borrower rights.
    (2) Before the qualified lender obtains the borrower's consent to 
the sale of the loan and the waiver of borrower rights under paragraph 
(c)(1)(ii) of this section, the qualified lender must disclose in 
writing to the borrower:
    (i) A complete description of the statutory rights the borrower will 
waive;
    (ii) Any changes in the loan terms or conditions that will occur if 
the qualified lender does not sell the loan;
    (iii) That waiving borrower rights will not become effective unless 
the qualified lender sells the loan; and
    (iv) That borrower rights will become effective again if any 
qualified lender repurchases the loan or any interest in the loan.
    (3) The consent to the loan sale and waiver of borrower rights shall 
have no effect until the qualified lender sells the loan. Borrower 
rights become effective again if any qualified lender repurchases the 
loan or any interest in the loan.
    (4) A qualified lender may not make a loan conditioned on the 
borrower consenting to the loan's sale and a waiver of borrower rights.



            Subpart B_Disclosure of Effective Interest Rates

    Source: 69 FR 16459, Mar. 30, 2004, unless otherwise noted.

[[Page 208]]



Sec. 617.7100  Who must make and who is entitled to receive an 
effective interest rate disclosure?

    (a) A qualified lender must make the disclosures required by 
subparts B and C of this part to borrowers for all loans not subject to 
the Truth in Lending Act.
    (b) For a single loan involving more than one borrower, a qualified 
lender is required to provide only one set of disclosures to borrowers. 
All borrowers may designate, in writing, one person who will receive the 
effective interest rate disclosure. If the borrowers do not designate a 
particular recipient, the lender may provide the disclosure to at least 
one of the borrowers who is primarily liable for repayment of the loan.



Sec. 617.7105  When must a qualified lender disclose the effective
interest rate to a borrower?

    (a) Disclosure to prospective borrowers. A qualified lender must 
provide written effective interest rate disclosure for each loan no 
later than the time of loan closing.
    (b) Disclosure to existing borrowers. (1) A qualified lender must 
provide a new effective interest rate disclosure to an existing borrower 
on or before the date:
    (i) The borrower executes a new promissory note or other comparable 
evidence of indebtedness;
    (ii) The borrower purchases additional stock or participation 
certificates as a condition of obtaining new funds from the qualified 
lender; or
    (iii) The borrower pays an additional loan origination charge to the 
qualified lender as a condition of obtaining new funds.
    (2) A qualified lender is not required to provide a new effective 
interest rate disclosure when it advances new funds to an existing 
borrower if none of the conditions of paragraph (b)(1) of this section 
apply and the advance is made pursuant to a preexisting contract that 
specifically provides for future advances.



Sec. 617.7110  How should a qualified lender disclose the cost of
borrower stock or participation certificates?

    The cost of borrower stock or participation certificates must be 
included in the effective interest rate calculation at the time the 
stock or participation certificate is purchased in connection with a 
loan transaction. For subsequent loans to existing borrowers, only the 
cost of new stock or participation certificates, if any, purchased in 
connection with a new loan or advance of new funds must be included in 
the effective interest rate calculation for the transaction.



Sec. 617.7115  How should a qualified lender disclose loan origination
charges?

    Any one-time charge paid by a borrower to a qualified lender in 
consideration for making a loan must be included in the effective 
interest rate as a loan origination charge. These include, but are not 
limited to, loan origination fees, application fees, and conversion 
fees. Loan origination charges also include any payments made by a 
borrower to a qualified lender to reduce the interest rate that would 
otherwise be charged, including any charges designated as ``points.''



Sec. 617.7120  How should a qualified lender present the disclosures
to a borrower?

    A qualified lender must:
    (a) Disclose the effective interest rate and other information 
required by subparts B and C of this part clearly and conspicuously in 
writing, in a form that is easy to read and understand and that the 
borrower may keep; and
    (b) Not combine the disclosures with any information not directly 
related to the information required by Secs. 617.7130 and 617.7135.



Sec. 617.7125  How should a qualified lender determine the effective
interest rate?

    (a) A qualified lender must calculate the effective interest rate on 
a loan using the discounted cash flow method showing the effect of the 
time value of money.
    (b) For all loans, the cash flow stream used for calculating the 
effective interest rate of a loan must include:
    (1) Principal and interest;
    (2) The cost of stock or participation certificates that a borrower 
is required

[[Page 209]]

to purchase in connection with the loan; and
    (3) Loan origination charges described in Sec. 617.7115.
    (c) A qualified lender must establish policies and procedures for 
EIR disclosures that clearly show the effect of the cost of borrower 
stock (or participation certificates) and loan origination charges on 
the interest rate of a loan. A qualified lender must also establish 
policies and procedures for determining major assumptions used in 
calculating the effective interest rate, e.g., criteria on how the cost 
of borrower stock (or participation certificates) and loan origination 
charges are assigned or allocated among multiple loans obtained by a 
borrower simultaneously.



Sec. 617.7130  What initial disclosures must a qualified lender make
to a borrower?

    (a) Required disclosures--in general. A qualified lender must 
disclose in writing:
    (1) The interest rate on the loan;
    (2) The effective interest rate of the loan;
    (3) The amount of stock or participation certificates that a 
borrower is required to purchase in connection with the loan and 
included in the calculation of the effective interest rate of the loan;
    (4) All loan origination charges included in the effective interest 
rate;
    (5) That stock or participation certificates that borrowers are 
required to purchase are at risk and may only be retired at the 
discretion of the board of the institution; and
    (6) The various types of loan options available to borrowers, with 
an explanation of the terms and borrower rights that apply to each type 
of loan.
    (b) Adjustable rate loans. A qualified lender must provide the 
following information for adjustable rate loans in addition to the 
requirements of paragraph (a) of this section:
    (1) The circumstances under which the rate can be adjusted;
    (2) How much the rate can be adjusted at any one time and how much 
the rate can be adjusted during the term of the loan;
    (3) How often the rate can be adjusted;
    (4) Any limitations on the amount or frequency of adjustments;
    (5) The specific factors that the qualified lender may take into 
account in making adjustments to the interest rate on the loan; and
    (6) If the borrower's interest rate is directly tied to a widely 
publicized external index:
    (i) How and where the borrower may obtain information on changes to 
the index; and
    (ii) When the qualified lender will provide written notice of 
changes to the borrower's interest rate.

[69 FR 16459, Mar. 30, 2004, , as amended at 74 FR 67972, Dec. 22, 2009]



Sec. 617.7135  What subsequent disclosures must a qualified lender 
make to a borrower?

    (a) Notice of interest rate change. (1) A qualified lender must 
provide written notice to a borrower of any change in interest rate on 
the borrower's existing loan, containing the following information:
    (i) The new interest rate on the loan;
    (ii) The date on which the new rate is effective; and
    (iii) The factors used to adjust the interest rate on the loan.
    (2) If the borrower's interest rate is directly tied to a widely 
publicized external index, a qualified lender must provide written 
notice to the borrower of the rate change either:
    (i) Within forty-five (45) days after the effective date of the 
change; or
    (ii) As part of the borrower's first regularly scheduled billing 
statement affected by the rate change.
    (3) If the borrower's interest rate is not directly tied to a widely 
publicized external index, a qualified lender must send written notice 
to the borrower of the rate change within ten (10) days after the 
effective date of the change.
    (b) Notice to adjustable rate loan borrowers with interest rates 
directly tied to a widely publicized external index. A qualified lender 
must provide the written disclosure required by Sec. 617.7130(b)(6) to 
applicable borrowers who were not previously given the disclosure no 
later than the qualified

[[Page 210]]

lender's next regularly scheduled correspondence to those borrowers 
occurring after April 1, 2010.
    (c) Notice of increase in stock purchase requirement. If a qualified 
lender increases the amount of stock (or participation certificates) a 
borrower must own during the term of a loan, the lender must send a 
written notice to the borrower at least ten (10) days prior to the 
effective date of the increase. The notice must state:
    (1) The new effective interest rate on the outstanding balance for 
the remaining term of the borrower's loan;
    (2) The date on which the new rate is effective; and
    (3) The reason for the increase in the borrower stock (or 
participation certificates) purchase requirement.

[69 FR 16459, Mar. 30, 2004, , as amended at 74 FR 67972, Dec. 22, 2009]



           Subpart C_Disclosure of Differential Interest Rates



Sec. 617.7200  What disclosures must a qualified lender make to a
borrower on loans offered with more than one rate of interest?

    A qualified lender that offers more than one rate of interest to 
borrowers must notify each borrower of the right to request a review of 
the interest rate charged on his or her loan no later than the time of 
loan closing. At the request of a borrower, the lender must:
    (a) Provide a review of the loan to determine if the proper interest 
rate has been established;
    (b) Explain to the borrower in writing the basis for the interest 
rate charged; and
    (c) Explain to the borrower in writing how the credit status of the 
borrower may be improved to receive a lower interest rate on the loan.

[69 FR 16459, Mar. 30, 2004]



      Subpart D_Actions on Applications; Review of Credit Decisions



Sec. 617.7300  When acting on a loan application, what are the notice
requirements and review rights?

    Each qualified lender must make its decision on a loan application 
as quickly as possible. The qualified lender must provide prompt written 
notice of its decision to the applicant. The qualified lender is 
required to notify all primary applicants. If a loan application has 
more than one primary applicant, the qualified lender may send the 
original notice to the applicant designated to receive notices and may 
send copies to all other applicants. If the qualified lender makes an 
adverse credit decision on a loan application, the notice must include:
    (a) The specific reasons for the qualified lender's decision;
    (b) A statement that the applicant may request a review of the 
decision;
    (c) A statement that a written request for review must be made 
within 30 days after the applicant receives the qualified lender's 
notice; and
    (d) A brief explanation of the process for seeking review of the 
decision, including the independent collateral evaluation review 
process, whom to contact for access to information, and the applicant's 
right to appear in person before the credit review committee (CRC).



Sec. 617.7305  What is a CRC and who are the members?

    The board of directors of each qualified lender must establish one 
or more CRCs to review adverse credit decisions made by a qualified 
lender. The CRC may only review adverse credit decisions at the request 
of the applicant or borrower. The CRC has the ultimate decision-making 
authority on the loan or application under review. CRC members are 
selected by the board of directors of each qualified lender and must 
include at least one of the qualified lender's farmer-elected board 
members. The loan officer involved in the adverse credit decision being 
reviewed may not serve on the CRC when it reviews that loan.



Sec. 617.7310  What is the review process of the CRC?

    (a) How will an applicant or borrower know when the CRC will 
consider the review request? The qualified lender must inform the 
applicant or borrower 15 days in advance of the CRC meeting where the 
applicant or borrower's request will be reviewed.

[[Page 211]]

    (b) Who may make a personal appearance before the CRC? Each 
applicant or borrower who has requested a review may appear in person 
before the CRC. The applicant or borrower may be accompanied by counsel 
or other representative when seeking a reversal of a decision on a loan 
or an application for restructuring.
    (c) What documents may the CRC consider? An applicant or borrower 
may submit any documents or other evidence to support the information 
contained in the loan or application for restructuring. The documents 
should demonstrate that the application for a loan or restructuring 
satisfies the credit standards of the qualified lender and is an 
eligible loan or application for restructuring. Additionally, the 
applicant or borrower is entitled to a copy of each independent 
collateral evaluation used by the qualified lender.
    (d) May an applicant obtain a new collateral evaluation even if 
collateral was not a reason for the adverse credit decision? As part of 
a CRC review, an applicant may request an independent collateral 
evaluation of the agricultural real estate securing the loan or being 
offered as security, regardless of whether collateral was an identified 
reason for the adverse credit decision. The independent collateral 
evaluation may be for any interest(s) in the property securing the loan, 
except stock or participation certificates issued by the qualified 
lender and held by the applicant or borrower.
    (1) Who may conduct an independent collateral evaluation? The 
independent collateral evaluation must be conducted by an independent 
evaluator. The CRC must provide the applicant or borrower with a list of 
three independent evaluators approved by the qualified lender within 30 
days of the request for an independent collateral evaluation. The 
applicant or borrower must select and engage the services of an 
evaluator from the list. The evaluation must comply with the collateral 
evaluation requirements of part 614, subpart F, of this chapter. The 
qualified lender must provide the applicant or borrower a copy of part 
614, subpart F, for presentation to the selected independent evaluator. 
A copy of part 614, subpart F, signed by the evaluator is a required 
exhibit in the subsequent evaluation report.
    (2) When must an applicant or borrower obtain the independent 
collateral evaluation and who pays for the evaluation? The applicant or 
borrower must enter into a contractual arrangement for evaluation 
services within 30 days of receiving the names of three approved 
independent evaluators. The contractual arrangement must be a written 
contract for services that complies with the lender's appraisal 
standards. The evaluation must be completed within a reasonable period 
of time, taking into consideration any extenuating circumstance. The 
applicant or borrower is responsible for the costs of the independent 
evaluation.
    (3) How does the CRC use an independent collateral evaluation when 
making a decision? The CRC will consider the results of any independent 
collateral evaluation before making a final determination with respect 
to the loan or restructuring, except the CRC is not required to consider 
a collateral evaluation that does not conform to the collateral 
evaluation standards described in part 614, subpart F, of this chapter.
    (e) When must the CRC issue a decision? The CRC must reach a 
decision, and it must be the final decision of the qualified lender, not 
later than 30 days after the meeting on the request under review. The 
CRC must make every reasonable effort to conduct reviews and render 
decisions in as expeditious a manner as possible. After making its 
decision, the committee must promptly notify the applicant or borrower 
in writing of the decision and the reasons for the decision.



Sec. 617.7315  What records must the qualified lender maintain on
behalf of the CRC?

    A qualified lender must maintain a complete file of all requests for 
CRC reviews, including participation in state mediation programs, the 
minutes of each CRC meeting, and the disposition of each review by the 
CRC.

[[Page 212]]



    Subpart E_Distressed Loan Restructuring; State Agricultural Loan 
                           Mediation Programs



Sec. 617.7400  What protections exist for borrowers who meet all
loan obligations?

    (a) A qualified lender may not foreclose on a loan because the 
borrower failed to post additional collateral when the borrower has made 
all accrued payments of principal, interest, and penalties on the loan.
    (b) A qualified lender may not require a borrower to reduce the 
outstanding principal balance of a loan by any amount that exceeds the 
regularly scheduled principal installment when due and payable, unless:
    (1) The borrower sells or otherwise disposes of part, or all, of the 
collateral without the prior approval of the qualified lender and the 
proceeds from the sale or disposition are not applied to the loan; or
    (2) The parties agree otherwise in writing.
    (c) After a borrower has made all accrued payments of principal, 
interest, and penalties on a loan, the qualified lender may not enforce 
acceleration of the borrower's repayment schedule due to the borrower's 
untimely payment of those principal, interest, or penalty payments.
    (d) If a qualified lender places a loan in non-interest-earning 
status and this results in an adverse action being taken against the 
borrower, such as revoking any undisbursed loan commitment, the lender 
must document the change of status and promptly notify the borrower in 
writing of the action and the reasons for taking it. If the borrower was 
not delinquent on any principal, interest, or penalty payment at the 
time of such action and the borrower's request to have the loan placed 
back into accrual status is denied, the borrower may obtain a review of 
the denial before the CRC pursuant to Sec. 617.7310 of this part. The 
borrower must request this review within 30 days after receiving the 
lender's notice.



Sec. 617.7405  On what policies are loan restructurings based?

    Loan restructurings must be made in accordance with the policy 
adopted by the supervising bank board of directors under section 
4.14A(g) of the Act.



Sec. 617.7410  When and how does a qualified lender notify a borrower
of the right to seek loan restructuring?

    (a) What are the notice requirements? When a qualified lender 
determines that a loan is, or has become, distressed, the lender must 
provide one of the following written notices to the borrower stating 
that the loan may be suitable for restructuring.
    (1) A notice stating that the loan has been identified as distressed 
and that the borrower has the right to request a restructuring of the 
loan (nonforeclosure notice).
    (2) A notice that the loan has been identified as distressed, that 
the borrower has the right to request a restructuring of the loan, and 
that the alternative to restructuring may be foreclosure (45-day 
notice). The qualified lender must provide this notice to the borrower 
no later than 45 days before the qualified lender begins foreclosure 
proceedings with respect to any loan outstanding to the borrower. This 
notice must specifically state that if the loan is restructured and the 
borrower does not perform under the restructure agreement (as described 
in Sec. 617.7410(e)), the qualified lender may initiate foreclosure 
proceedings without further notice.
    (b) What should each notice include? (1) A copy of the policy the 
qualified lender established governing the treatment of distressed 
loans; and
    (2) All materials necessary for the borrower to submit an 
application for restructuring.
    (c) What notice should a qualified lender send to a borrower who is 
a debtor in a bankruptcy proceeding? The qualified lender should send a 
notice that identifies the loan as distressed and the statutory right to 
file an application for a restructuring. The notice may also restate the 
language from the automatic stay provision to emphasize that the notice 
is not intended as an attempt to collect, assess, or recover a claim.
    (d) Whom should the qualified lender notify? The qualified lender is 
required to notify all primary obligors. If the obligors identify one 
party to receive notices, the qualified lender should

[[Page 213]]

send the original notice to that person and send copies to the other 
obligors. For borrowers in a bankruptcy proceeding, the qualified lender 
should send the notice to the borrower and, if retained, the borrower's 
counsel.
    (e) When is a qualified lender required to send another restructure 
notice to a borrower whose loan was previously restructured? A qualified 
lender must notify a borrower of the right to file another application 
to restructure the loan if the qualified lender sent the nonforeclosure 
notice to the borrower and the borrower has performed on the previous 
restructure agreement. Performance means that a borrower has made six 
consecutive monthly payments, four consecutive quarterly payments, three 
consecutive semiannual payments, or two consecutive annual payments. 
However, a qualified lender is not required to send another notice if 
they previously sent a 45-day notice, as described in 
Sec. 617.7410(a)(2), and a borrower did not perform under a restructure 
agreement, as described above.
    (f) Does the borrower have the opportunity to meet with the 
qualified lender after receiving the restructure notice? The qualified 
lender must provide any borrower to whom a notice has been sent with a 
reasonable opportunity to meet personally with a representative of the 
lender. The borrower and lender may meet to review the status of the 
loan, the financial condition of the borrower, and the suitability of 
the loan for restructuring. A meeting to discuss a loan that is in a 
non-interest-earning status may also involve developing a plan for 
restructuring, if the qualified lender determines the loan is suitable 
for restructuring.
    (g) May the qualified lender voluntarily consider restructuring for 
a borrower who did not submit a restructuring application? A qualified 
lender may, in the absence of an application for restructuring from a 
borrower, propose restructuring to an individual borrower.



Sec. 617.7415  How does a qualified lender decide to restructure
a loan?

    (a) What criteria does a qualified lender use to evaluate an 
application for restructuring? The qualified lender should consider the 
following:
    (1) Whether the cost to the lender of restructuring the loan is 
equal to or less than the cost of foreclosure, considering all relevant 
criteria. These criteria include:
    (i) The present value of interest and principal foregone by the 
lender in carrying out the application for restructuring;
    (ii) Reasonable and necessary administrative expenses involved in 
working with the borrower to finalize and implement the application for 
restructuring;
    (iii) Whether the borrower's application for restructuring included 
a preliminary restructuring plan and cash flow analysis, taking into 
account income from all sources to be applied to the debt and all assets 
to be pledged, that show a reasonable probability that orderly debt 
retirement will occur as a result of the proposed restructuring; and
    (iv) Whether the borrower has furnished, or is willing to furnish, 
complete and current financial statements in a form acceptable to the 
qualified lender.
    (2) Whether the borrower is applying all income over and above 
necessary and reasonable living and operating expenses to the payment of 
primary obligations;
    (3) Whether the borrower has the financial capacity and the 
management skills to protect the collateral from diversion, dissipation, 
or deterioration;
    (4) Whether the borrower is capable of working out existing 
financial difficulties, taking into consideration any prior 
restructuring of the loan, reestablishing a viable operation, and 
repaying the loan on a rescheduled basis; and
    (5) In the case of a distressed loan that is not delinquent, whether 
restructuring consistent with sound lending practices may be taken to 
reasonably ensure that the loan will not have to be placed into non-
interest-earning status in the future.
    (b) What should be included in determining the cost of foreclosure? 
(1) The difference between the outstanding balance due, as provided by 
the loan documents, and the liquidation value of the loan, taking into 
consideration the borrower's repayment capacity and the

[[Page 214]]

liquidation value of the collateral used to secure the loan;
    (2) The estimated cost of maintaining a loan classified as a high-
risk asset;
    (3) The estimated cost of administrative and legal actions necessary 
to foreclose a loan and dispose of property acquired as the result of 
the foreclosure, including attorneys' fees and court costs;
    (4) The estimated cost of value changes in collateral used to secure 
a loan during the period beginning on the date of the initiation of an 
action to foreclose or liquidate the loan and ending on the date of the 
disposition of the collateral; and
    (5) All other costs incurred as the result of the foreclosure or 
liquidation of a loan.
    (c) What should the qualified lender do if the borrower and the 
qualified lender cannot agree on the financial projections used in the 
application for restructuring? If the borrower and lender are not able 
to agree on supportable or realistic financial projections, the lender 
may use benchmarks to determine the operational input costs and chattel 
security values. These benchmarks may include, but are not limited to, 
the borrower's 5-year production average; averages in the county where 
the farming operation is located, based on data from United States 
Department of Agriculture, local colleges or universities, or other 
recognized authority; and other such reasonable sources.
    (d) How does the qualified lender decide whether to restructure or 
foreclose? If a qualified lender determines the potential cost to the 
lender of restructuring the loan as proposed in the application for 
restructuring is less than or equal to the potential cost of 
foreclosure, the qualified lender must restructure the loan. If two or 
more restructuring alternatives are available, the qualified lender must 
restructure the loan using the alternative that results in the least 
cost to the lender.
    (e) What documentation should the qualified lender retain? In the 
event that an application for restructuring is denied, a qualified 
lender must maintain sufficient documentation to demonstrate compliance 
with paragraphs (a), (b), and (c) of this section, as applicable.



Sec. 617.7420  How will a decision on an application for restructuring
be issued?

    (a) When must a qualified lender make a decision on an application 
for restructuring? Each qualified lender must provide a written decision 
on an application for restructuring and provide this decision to the 
borrower within 15 days from the conclusion of the negotiations used to 
develop the application for restructuring.
    (b) How does a qualified lender notify the borrower of the decision? 
On reaching a decision on an application for restructuring, the 
qualified lender must provide written notice in any manner that requires 
a primary obligor to acknowledge receipt of the lender's decision. In 
the case of a loan involving one or more primary obligors, the original 
notice may be provided to the primary obligor identified to receive such 
notice, with copies provided by regular mail to the other obligors.
    (c) What notice is required if the restructuring request is denied? 
When an application for restructuring is denied, the notice must 
include:
    (1) The specific reason(s) for the denial and any critical 
assumptions and relevant information on which the specific reasons are 
based, except that any confidential information shall not be disclosed;
    (2) A statement that the borrower may request a review of the 
denial;
    (3) A statement that any request for review must be made in writing 
within 7 days after receiving such notice.
    (4) A brief explanation of the process for seeking review of the 
denial, including the appraisal review process and the right to appear 
before the CRC, pursuant to Sec. 617.7310 of this part, accompanied by 
counsel or any other representative, if the borrower chooses.



Sec. 617.7425  What type of notice should be given to a borrower 
before foreclosure?

    The qualified lender must send the 45-day notice, as described in 
Sec. 617.7410(a)(2), no later than 45 days before any qualified lender 
begins foreclosure proceedings. The notice informs the borrower in 
writing that the loan may be suitable for restructuring

[[Page 215]]

and that the qualified lender will review any suitable loan for possible 
restructuring. The 45-day notice must include a copy of the policy and 
the materials described in Sec. 617.7410(b). The notice must also state 
that if the loan is restructured, the borrower must perform under this 
restructure agreement. If the borrower does not perform, the qualified 
lender may initiate foreclosure.
    (a) Does the notice have to inform the borrower that foreclosure is 
possible? The notice must inform the borrower that the alternative to 
restructuring may be foreclosure. If the notice does not inform the 
borrower of potential foreclosure, then the qualified lender must send a 
second notice at least 45 days before foreclosure is initiated.
    (b) How are borrowers who are debtors in a bankruptcy proceeding 
notified? A qualified lender must restate the language from the 
automatic stay provision to emphasize that the notice is not intended to 
be an attempt to collect, assess, or recover a claim. The qualified 
lender should send the notice to the borrower and, if retained, the 
borrower's counsel.
    (c) May a qualified lender foreclose on a loan when there is a 
restructuring application on file? No qualified lender may foreclose or 
continue any foreclosure proceeding with respect to a distressed loan 
before the lender has completed consideration of any pending application 
for restructuring and CRC consideration, if applicable. This section 
does not prevent a lender from taking any action necessary to avoid the 
dissipation of assets or the diversion, dissipation, or deterioration of 
collateral if the lender has reasonable grounds to believe that such 
diversion, dissipation, or deterioration may occur.



Sec. 617.7430  Are institutions required to participate in state
agricultural loan mediation programs?

    (a) If initiated by a borrower, System institutions must participate 
in state mediation programs certified under section 501 of the 
Agricultural Credit Act of 1987 and present and explore debt 
restructuring proposals advanced in the course of such mediation. If 
provided in the certified program, System institutions may initiate 
mediation at any time.
    (b) System institutions must cooperate in good faith with requests 
for information or analysis of information made in the course of 
mediation under any loan mediation program.
    (c) No System institution may make a loan secured by a mortgage or 
lien on agricultural property to a borrower on the condition that the 
borrower waive any right under the agricultural loan mediation program 
of any state.
    (d) A state mediation may proceed at the same time as the loan 
restructuring process of Sec. 617.7415 or at any other appropriate time.



            Subpart F_Distressed Loan Restructuring Directive



Sec. 617.7500  What is a directive used for and what may it require?

    (a) A distressed loan restructuring directive is an order issued to 
a qualified lender when FCA has determined that the lender has violated 
section 4.14A of the Act.
    (b) A distressed loan restructuring directive requires the qualified 
lender to comply with the specific distressed loan restructuring 
requirements in the Act.
    (c) A distressed loan restructuring directive is enforceable in the 
same manner and to the same extent as an effective and outstanding cease 
and desist order that has become final. Any violation of a distressed 
loan restructuring directive may result in FCA assessing civil money 
penalties or seeking a court order pursuant to section 5.31 or 5.32 of 
the Act.



Sec. 617.7505  How will the qualified lender know when FCA is 
considering issuing a distressed loan restructuring directive?

    When FCA intends to issue a distressed loan restructuring directive, 
it will notify the qualified lender in writing. The notice will state:
    (a) The reasons FCA intends to issue a distressed loan restructuring 
directive;
    (b) The proposed contents of the distressed loan restructuring 
directive; and
    (c) Any other relevant information.

[[Page 216]]



Sec. 617.7510  What should the qualified lender do when it receives 
notice of a distressed loan restructuring directive?

    (a) A qualified lender should respond to the notice by stating why 
FCA should not issue a distressed loan restructuring directive, by 
proposing changes to the directive, or by seeking other suitable relief. 
The response must include any information, documentation, or other 
relevant evidence that supports the qualified lender's position. The 
response may include a plan for achieving compliance with the distressed 
loan restructuring requirements of the Act. The response must be in 
writing and delivered to FCA within 30 days after the date on which the 
qualified lender received the notice. In its discretion, FCA may extend 
the time period for good cause. FCA may shorten the 30-day period with 
the consent of the qualified lender or when FCA determines that 
providing the full 30 days would result in a borrower not receiving 
distressed loan restructuring rights.
    (b) If the qualified lender fails to respond within 30 days or such 
other time period specified by FCA, this failure will constitute a 
waiver of any objections to the proposed distressed loan restructuring 
directive.



Sec. 617.7515  How does the FCA decide whether to issue a directive?

    After the closing date of the qualified lender's response period, or 
following receipt of the qualified lender's response, FCA must decide if 
there is sufficient information to support the issuance of a directive 
or if additional information is necessary. Once FCA has received 
sufficient information, it must decide whether to issue a directive as 
originally proposed or as modified.



Sec. 617.7520  How does the FCA issue a directive and when will it be
effective?

    A distressed loan restructuring directive is effective immediately 
on receipt by the qualified lender, or on such later date as may be 
specified by FCA, and will remain effective and enforceable until it is 
stayed, modified, or terminated by FCA.



Sec. 617.7525  May FCA use other enforcement actions?

    FCA may issue a distressed loan restructuring directive in addition 
to, or instead of, any other action allowed by law, including cease and 
desist proceedings, civil money penalties, or the granting or 
conditioning of any application or other requests by the System 
institution.



                    Subpart G_Right of First Refusal



Sec. 617.7600  What are the definitions used in this subpart?

    In addition to the definitions in Sec. 617.7000, the following 
definitions apply to this subpart.
    Acquired agricultural real estate or property means agricultural 
real estate acquired by a System institution as a result of a loan 
foreclosure or a voluntary conveyance by a borrower who, as determined 
by the institution, does not have the financial resources to avoid 
foreclosure.
    Previous owner means:
    (1) The prior record owner who was a borrower from a System 
institution and did not have the financial resources, as determined by 
the institution, to avoid foreclosure on acquired agricultural real 
estate; or
    (2) The prior record owner who is not a borrower and whose acquired 
agricultural real estate was used as collateral for a loan to a System 
borrower.
    System institution means a Farm Credit System institution, except a 
bank for cooperatives, which makes loans as defined in Sec. 617.7000.



Sec. 617.7605  How should System institutions document whether the
borrower had the financial resources to avoid foreclosure?

    The right of first refusal applies only to borrowers who did not 
have the financial resources to avoid foreclosure or voluntary 
conveyance. A System institution must clearly document in its files 
whether the borrower had the resources to avoid foreclosure or voluntary 
conveyance.



Sec. 617.7610  What should the System institution do when it decides
to sell acquired agricultural real estate?

    (a) Notify the previous owner,

[[Page 217]]

    (1) Within 15 days of the System institution's decision to sell 
acquired agricultural real estate, it must notify the previous owner, by 
certified mail, of the property's appraised fair market value as 
established by an accredited appraiser and of the previous owner's right 
to:
    (i) Buy the property at the appraised fair market value, or
    (ii) Offer to buy the property at a price less than the appraised 
value.
    (2) That any offer must be received within 30 days of receipt of the 
notice.
    (b) Act on an offer to buy the acquired agricultural real estate at 
the appraised value. Within 15 days after the receipt of the previous 
owner's offer to buy the acquired agricultural real estate at the 
appraised value, the System institution must accept the offer and sell 
the property to the previous owner if the offer was received within 30 
days of the notice required in paragraph (a)(2) of this section.
    (c) Act on an offer to buy the acquired agricultural real estate at 
less than the appraised value.
    (1) The System institution must consider the offer if it was 
received within 30 days of the notice required in paragraph (a)(2) of 
this section.
    (2) If the System institution accepts this offer, it must notify the 
previous owner of the decision and sell the acquired agricultural real 
estate to the previous owner within 15 days of receiving the offer to 
buy the acquired agricultural real estate at a value less than the 
appraised value.
    (3) If the System institution rejects this offer, it must notify the 
previous owner of the decision within 15 days of receiving the offer to 
buy the acquired agricultural real estate at a value less than the 
appraised value. The previous owner has 15 days from receipt of the 
notice to submit an offer to buy at such price or under such terms and 
conditions. The System institution may not sell the acquired 
agricultural real estate to any other person:
    (i) At a price equal to, or less than, that offered by the previous 
owner; or
    (ii) On different terms or conditions than those extended to the 
previous owner without first notifying the previous owner by certified 
mail and providing an opportunity to buy the property at such price or 
under such terms and conditions.
    (d) For purposes of this section, financing by the System 
institution is not a term or condition of the sale of acquired 
agricultural real estate. A System institution is not required to 
provide financing to the previous owner for purchase of acquired 
agricultural real estate.



Sec. 617.7615  What should the System institution do when it decides
to lease acquired agricultural real estate?

    (a) Notify the previous owner,
    (1) Within 15 days of the System institution's decision to lease 
acquired agricultural real estate, it must notify the previous owner, by 
certified mail, of the property's appraised rental value, as established 
by an accredited appraiser, and of the previous owner's right to:
    (i) Lease the property at a rate equivalent to the appraised rental 
value of the property, or
    (ii) Offer to lease the property at rate that is less than the 
appraised rental value of the property.
    (2) That any offer must be received within 15 days of receipt of the 
notice.
    (b) Act on an offer to lease the acquired agricultural real estate 
at a rate equivalent to the appraised rental value of the property.
    (1) Within 15 days after receipt of such offer, the System 
institution may accept the offer to lease the property at the appraised 
rental value and lease the property to the previous owner, or
    (2) Within 15 days after receipt of such offer, the System 
institution may reject the offer to lease the property at the appraised 
rental value when the institution determines that the previous owner:
    (i) Does not have the resources available to conduct a successful 
farming or ranching operation; or
    (ii) Cannot meet all the payments, terms, and conditions of such 
lease.
    (c) Act on an offer to lease the acquired agricultural real estate 
at a rate that is less than the appraised rental value of the property.
    (1) The System institution must consider the offer to lease the 
property at a rate that is less than the appraised rental value of the 
property. Notice of

[[Page 218]]

the decision to accept or reject such offer must be provided to the 
previous owner within 15 days of receipt of the offer.
    (2) If the System institution accepts the offer to lease the 
property at less than the appraised rental value, it must notify the 
previous owner and lease the property to the previous owner.
    (3) If the institution rejects the offer, the System institution 
must notify the previous owner of this decision. The previous owner has 
15 days after receipt of the notice in which to agree to lease the 
property at such rate or under such terms and conditions. The System 
institution may not lease the property to any other person:
    (i) At a rate equal to or less than that offered by the previous 
owner; or
    (ii) On different terms and conditions than those that were extended 
to the previous owner without first informing the previous owner by 
certified mail and providing an opportunity to lease the property at 
such rate or under such terms and conditions.



Sec. 617.7620  What should the System institution do when it decides
to sell acquired agricultural real estate at a public auction?

    System institutions electing to sell or lease acquired agricultural 
real estate or a portion of it through a public auction, competitive 
bidding process, or other similar public offering must:
    (a) Notify the previous owner, by certified mail, of the 
availability of such property. The notice must contain the minimum 
amount, if any, required to qualify a bid as acceptable to the 
institution and any terms or conditions to which such sale or lease will 
be subject;
    (b) Accept the offer by the previous owner if the System institution 
receives two or more qualified bids in the same amount, the bids are the 
highest received, and one of the qualified bids is from the previous 
owner; and
    (c) Not discriminate against a previous owner in these proceedings.



Sec. 617.7625  Whom should the System institution notify?

    Each certified mail notice requirement in this section is fully 
satisfied by mailing one certified mail notice to the last known address 
of the previous owner or owners.



Sec. 617.7630  Does this Federal requirement affect any state property
laws?

    The rights provided under section 4.36 of the Act and this section 
do not affect any right of first refusal under the law of the state in 
which the property is located.



PART 618_GENERAL PROVISIONS--Table of Contents



                       Subpart A_Related Services

Sec.
618.8000  Definitions.
618.8005  Eligibility.
618.8010  Related services authorization process.
618.8015  Policy guidelines.
618.8020  Feasibility requirements.
618.8025  Feasibility reviews.
618.8030  Out-of-territory related services.

                       Subpart B_Member Insurance

618.8040  Authorized insurance services.

Subparts C-F [Reserved]

                     Subpart G_Releasing Information

618.8300  General regulation.
618.8310  Lists of borrowers and stockholders.
618.8320  Data regarding borrowers and loan applicants.
618.8325  Disclosure of loan documents.
618.8330  Production of documents and testimony during litigation.
618.8340  [Reserved]

                Subpart H_Disposition of Obsolete Records

618.8360  [Reserved]
618.8370  [Reserved]

Subpart I [Reserved]

                       Subpart J_Internal Controls

618.8430  Internal controls.
618.8440  Planning.

    Authority: Secs. 1.5, 1.11, 1.12, 2.2, 2.4, 2.5, 2.12, 3.1, 3.7, 
4.12, 4.13A, 4.25, 4.29, 5.9, 5.10, 5.17 of the Farm Credit Act (12 
U.S.C. 2013, 2019, 2020, 2073, 2075, 2076, 2093, 2122, 2128, 2183, 2200, 
2211, 2218, 2243, 2244, 2252).

[[Page 219]]



                       Subpart A_Related Services

    Source: 60 FR 34099, June 30, 1995, unless otherwise noted.



Sec. 618.8000  Definitions.

    For the purposes of this subpart, the following definitions shall 
apply:
    (a) Program means the method or procedures used to deliver a related 
service. This distinguishes the particulars of how a related service 
will be provided from the type of activity or concept.
    (b) Related service means any service or type of activity provided 
by a System bank or association that is appropriate to the recipient's 
operations, including control of related financial matters. The term 
``related service'' includes, but is not limited to, technical 
assistance, financial assistance, financially related services and 
insurance, but does not include lending or leasing activities.
    (c) System banks and associations means Farm Credit Banks, 
agricultural credit banks, banks for cooperatives, agricultural credit 
associations, production credit associations, Federal land bank 
associations, Federal land credit associations, and service corporations 
formed pursuant to section 4.25 of the Act.

[60 FR 34099, June 30, 1995, as amended at 69 FR 43514, July 21, 2004]



Sec. 618.8005  Eligibility.

    (a) Farm Credit Banks and associations may offer related services 
appropriate to on-farm and aquatic operations to persons eligible to 
borrow as defined in Secs. 613.3000 (a) and (b), 613.3010, and 613.3300 
of this chapter.
    (b) Banks for cooperatives may offer related services to entities 
eligible to borrow as defined in Secs. 613.3100, 613.3200, and 613.3300 
of this chapter.
    (c) Agricultural credit banks may offer related services appropriate 
to on-farm and aquatic operations of persons eligible to borrow 
specified in paragraph (a) of this section and may offer related 
services to entities eligible to borrow as specified in paragraph (b) of 
this section.
    (d) Service corporations formed pursuant to section 4.25 of the Act 
may offer related services to persons eligible to borrow from the owners 
of the service corporation, pursuant to paragraphs (a), (b), (c), and 
(e) of this section.
    (e) System banks and associations may provide related services to 
recipients that do not otherwise meet the requirements of this section 
in connection with loan applications, loan servicing, and other 
transactions between these recipients and persons eligible to borrow as 
defined in paragraphs (a), (b), or (c) of this section, as long as the 
service provided is requested by an eligible borrower or necessary to 
the transaction between the parties. Such services include, but are not 
limited to, fee appraisals of agricultural assets provided to any 
Federal agency, commercial banks, and other lenders.

[60 FR 34099, June 30, 1995, as amended at 62 FR 4450, Jan. 30, 1997; 69 
FR 43514, July 21, 2004]



Sec. 618.8010  Related services authorization process.

    (a) Authorities. System banks and associations may only offer 
related services that meet the criteria specified in this regulation and 
are authorized by the FCA.
    (b) New service proposals. (1) A System bank or association that 
proposes or intends to offer a related service that the FCA has not 
previously authorized must submit to the FCA, in writing, a proposal 
that includes a description of the service, a statement of how it meets 
the regulatory definition of ``related services'' in Sec. 618.8000(b), 
and the risk analysis cited in Sec. 618.8020(b)(3). The FCA will 
evaluate the proposed service based on the information submitted, and 
may also consider whether there are extenuating circumstances or other 
compelling reasons that justify the proposed service or support a 
determination that the service is not authorized. This evaluation will 
focus primarily on Systemwide issues rather than on institution or 
program-specific factors.
    (2) When authorizing a proposed related service, at its discretion, 
the FCA may impose special conditions or limitations on any related 
service or program to offer a related service.

[[Page 220]]

    (3) At its discretion the FCA may, at any time during its evaluation 
of a proposed related service, publish the proposed related service in 
the Federal Register for public comment.
    (4) Within 60 days of the FCA receiving a completed proposal, 
including any additional information the FCA may require, the FCA will 
act on the request to authorize a new service. The FCA shall approve the 
request, deny the request, or publish the service for public comment in 
the Federal Register. For good cause and prior to the expiration of the 
60 days, the FCA may extend this period for an additional 60 days.
    (5) Within the time period established in paragraph (b)(4) of this 
section, the FCA shall notify the requesting institution of its actions. 
Following notification of the requesting institution, the FCA will 
notify all System banks and associations of its determination on the 
proposed service by bookletter or other means. If a service is not 
authorized, the reasons for denial will be included in the notifications 
to the System and the requesting institution.
    (c) Previously authorized services. (1) For related services that 
have been authorized by the FCA, any System bank or association may 
develop a program and subsequently offer the related service to eligible 
recipients, subject to any special conditions or institutional limits 
placed by the FCA. These programs will be subject to review and 
evaluation during the examination and enforcement process.
    (2) The FCA shall make available to all System banks and 
associations a list of such related services (``related services list'' 
or ``list'') and will update the list in accordance with paragraph 
(b)(5) of this section. The list will contain the following:
    (i) A description of each related service; and
    (ii) The types of institutions authorized to offer each type of 
related service;
    (iii) Identification of any special conditions on how the related 
service may be offered. The special conditions and description of the 
service will be fully detailed in FCA's notice to System institutions 
under paragraph (b)(5) of this section.
    (3) At least 10 business days prior to implementing a related 
service program already on the list, the System bank or association must 
notify the FCA Office of Examination field office responsible for 
examining that institution in writing and provide it with a description 
of the proposed related service program.



Sec. 618.8015  Policy guidelines.

    (a) The board of directors of each System bank or association 
providing related services must adopt a policy addressing related 
services. The policy shall include clearly stated purposes, objectives, 
and operating parameters for offering related services and a requirement 
that each service offered be consistent with the institution's business 
plan and long-term strategic goals. Such policy shall also be subject to 
review under an appropriate internal control policy.
    (b) All related services must be offered to recipients on an 
optional basis. If the institution requires a related service as a 
condition to borrow, it must inform the recipient that the related 
service can be obtained from the institution or from any other person or 
entity offering the same or similar related services.
    (c) All fees for related services must be separately identified from 
loan interest charges and disclosed to the recipient of the service 
prior to providing or implementing the service.



Sec. 618.8020  Feasibility requirements.

    For every related service program a System bank or association 
provides, it must document program feasibility. The feasibility analysis 
shall include the following:
    (a) Support for the determination that the related service is 
authorized; and
    (b) An overall cost-benefit analysis that demonstrates program 
feasibility, taking into consideration the following items:
    (1) An analysis of how the program relates to or promotes the 
institution's business plan and strategic goals, and

[[Page 221]]

whether offering the service is consistent with the long-term goals 
described in its capital plan;
    (2) An analysis of the expected financial returns of the program 
which, at a minimum, must include an evaluation of market, pricing, 
competition issues, and expected profitability. This analysis should 
include an explanation of how the program will contribute to the overall 
financial health of the institution; and
    (3) An analysis of the risk in the program, including:
    (i) An evaluation of the operational costs and risks involved in 
offering the program, such as management and personnel requirements, 
training requirements, and capital outlays;
    (ii) An evaluation of the financial liability that may be incurred 
as a result of offering the program and any insurance or other measures 
that are necessary to minimize these risks; and
    (iii) An evaluation of the conflicts of interest, whether real or 
perceived, that may arise as a result of offering the program and any 
steps that are necessary to eliminate or appropriately manage these 
conflicts.



Sec. 618.8025  Feasibility reviews.

    (a) Prior to an association offering a related service program for 
the first time or offering a service that it did not offer during the 
most recently completed business cycle (generally 1 year), the board of 
directors of the funding bank must verify that the association has 
performed a feasibility analysis pursuant to Sec. 618.8020. The bank 
review is limited to a determination that the feasibility analysis is 
complete and that the analysis establishes that it is feasible for the 
association to provide the program. Any conclusion by the bank that the 
feasibility analysis is incomplete or fails to demonstrate program 
feasibility must be fully supported and communicated to the association 
in writing within 60 days of its submission to the bank.
    (b) Prior to a service corporation offering a service for the first 
time or offering a service that it did not offer during the most 
recently completed business cycle (generally 1 year), the owners of the 
service corporation must verify that the service corporation has 
performed a feasibility analysis pursuant to Sec. 618.8020. If the 
owners all agree, one bank with a significant ownership interest can be 
delegated this responsibility.

[60 FR 34099, June 30, 1995; 60 FR 42029, Aug. 15, 1995]



Sec. 618.8030  Out-of-territory related services.

    (a) System banks and associations may offer related services outside 
their chartered territories subject to the following conditions:
    (1) The System bank or association obtains consent from all 
chartered institutions currently offering the same type of service in 
the territory in which the service is to be provided; or
    (2) If no System bank or association is currently offering the same 
type of service in the territory, then the out-of-territory institution 
must obtain the consent of at least one direct lender institution 
chartered in the territory in which the related service is to be 
provided.
    (3) The consent obtained pursuant to paragraphs (a)(1) and (a)(2) of 
this section shall be in the form of a written agreement with specific 
terms and conditions including timeframes.
    (b) System banks and associations providing out-of-territory 
services must fulfill all requirements of subparts A and B of this part 
618.
    (c) An institution that consents to another bank or association 
providing a related service in its chartered territory must meet the 
requirements of this section, but need not comply with the other 
requirements of subparts A and B of this part 618, unless the program 
consented to imposes a financial obligation on the consenting 
institution. If a financial obligation exists, then the consenting 
institution must comply with Secs. 618.8015, 618.8020 and 618.8025.
    (d) Service corporations must follow the requirements of this 
section in offering related services out-of-territory. A service 
corporation cannot consent to an out-of-territory institution providing 
services in its chartered territory.

[[Page 222]]



                       Subpart B_Member Insurance



Sec. 618.8040  Authorized insurance services.

    (a) Farm Credit System banks (excluding banks for cooperatives) 
(hereinafter banks) and associations may sell to their members and 
borrowers, on an optional basis, credit or term life and credit 
disability insurance appropriate to protect the loan commitment in the 
event of death or disability of the debtors. The sale of other insurance 
necessary to protect a member's or borrower's farm or aquatic unit is 
permitted, but limited to hail and multiple-peril crop insurance, title 
insurance, and insurance necessary to protect the facilities and 
equipment of aquatic members and borrowers. A member or borrower shall 
have the option, without coercion from the bank or association, to 
accept or reject such insurance.
    (b) Bank and association board policies governing the provision of 
member insurance programs shall be established within the following 
general guidelines:
    (1) A System bank or association may provide credit or term-life or 
credit-disability insurance only to persons who have a loan or lease 
with any System bank or association, without regard to whether such 
institution is the provider. Term-life insurance coverage may continue 
after the loan has been repaid or the lease terminated, provided the 
member can reasonably be expected to borrow again within 2 years, and 
provided the continuation of insurance is not contrary to state law.
    (2) A debtor-creditor relationship is not required for the sale of 
other insurance specified in paragraph (a) of this section, as long as 
purchasers are members of a System bank or association. For the purposes 
of this section, ``member'' means someone eligible to borrow who is a 
stockholder or participation certificate holder and who acquired stock 
or participation certificates to obtain a loan, for investment purposes, 
or to qualify for other services of the association or bank.
    (3) In making insurance available through private insurers, each 
bank shall approve the programs of more than two insurers for each type 
of insurance offered in the bank's chartered territory, provided that 
more than two insurers for each type of insurance have proposed programs 
to the bank that will, in all likelihood, have long-term viability, and 
meet the requirements of Sec. 618.8040(b)(4)(i) of this section. The 
banks shall make a reasonable and good faith effort to attract more than 
two qualified insurers for each insurance program offered to borrowers 
in all States of the bank's chartered territory. Where the bank is 
unable to approve more than two insurers, the bank shall document its 
efforts to attract additional qualified insurers for the affected 
insurance program and State. The banks may provide comparative 
information relating to costs and quality of approved programs and the 
financial condition of approved companies.
    (4) Member insurance services may be offered only if:
    (i) The insurance program has been approved by the bank or 
association from among eligible programs made available to it by 
insurers--
    (A) Meeting reasonable financial and quality of service standards 
prescribed by the bank; and
    (B) Licensed under State law to do business in the State(s) in which 
the insurance is offered:
    (ii) The bank or association has the capacity to render authorized 
insurance services in an effective and efficient manner;
    (iii) There exists the probability that the service will generate 
sufficient revenue to cover all costs;
    (iv) Rendering the insurance service will not have an adverse effect 
on the credit or other operations of the bank or association; and
    (v) In making insurance available through approved insurers, the 
board of directors of the bank or association shall make a reasonable 
and good faith effort to select and offer at least two approved insurers 
for each type of insurance made available to the members and borrowers. 
In the event that the bank or association has selected less than two 
insurers for any insurance program, such bank or association shall 
document the reasons why it is unable to offer members and borrowers

[[Page 223]]

additional insurers for the affected insurance program.
    (5) All costs to members and borrowers for insurance services 
provided shall be disclosed separately from interest charges.
    (6) Bank and association personnel shall not benefit from insurance 
sales by receipt of commissions or gifts from underwriting insurance 
companies. However, employees may participate in an incentive plan under 
which incentive compensation is provided based on the sale of insurance.
    (i) In any single year, for all employees except full-time insurance 
personnel or full-time supervisors or managers of insurance departments, 
incentive compensation attributable to sales of all types of insurance 
cannot exceed an amount equivalent to 5 percent of the recipient's 
annual base salary.
    (ii) In any single year, for full-time insurance personnel and full-
time supervisors and managers of insurance departments, incentive 
compensation for sales of credit life and similar types of insurance 
(i.e. insurance that pays on a loan or mortgage upon the death or 
disability of the debtor) cannot exceed an amount equivalent to 5 
percent of the recipient's annual base salary.
    (iii) No incentive compensation limit applies to sales of other 
insurance (crop, title, etc.) by full-time insurance personnel or full-
time supervisors or managers of insurance departments.
    (7) Term insurance may be written for the amount of coverage desired 
by the member or borrower, but in no case may the amount of term 
insurance, credit life insurance, or a combination of the two with an 
institution of the System, be in excess of total loan commitments to the 
member or borrower by the institution writing the insurance.
    (8) The banks may, only by agreement with an insurer, offer services 
traditionally furnished by insurers to the Farm Credit System. This 
shall include master marketers when considering the sale of Federal crop 
insurance. The banks shall not underwrite insurance, adjust claim 
payments or settlements, or train and school or service adjustors or 
insurance agents.
    (9) No bank or association shall, directly or indirectly, condition 
the extension of credit or provision of other service on the purchase of 
insurance sold or endorsed by a bank or association. At the time 
insurance sold or endorsed by a bank or association is offered to a 
member or borrower, a bank or association shall present a written notice 
that the service is optional. The notice shall be in prominent type and 
separately signed by the member or borrower. The bank or association 
shall explain to the member or borrower that purchase of insurance from 
the association is optional and that the member or borrower will not be 
discriminated against for obtaining the insurance elsewhere.
    (10) No bank or association shall, directly or indirectly, 
discriminate in any manner against any agent, broker, or insurer that is 
not affiliated with such bank or association, or against any party who 
purchases insurance through any such nonaffiliated insurance agent, 
broker, or insurer.
    (11) Bank supervision shall ensure that insurance services offered 
by approved insurers consistently provide members or borrowers with a 
high quality and cost-effective service as prescribed by policies of the 
bank's board of directors, but such supervision shall be without any 
coercion or suasion from any bank in favor of any agent or insurer.
    (12) Records must be maintained by banks and associations in 
sufficient detail to facilitate the review and supervision required 
herein.

[47 FR 38867, Sept. 3, 1982, as amended at 53 FR 35305, Sept. 13, 1988; 
56 FR 65990, Dec. 20, 1991. Redesignated and amended at 60 FR 34099, 
34101, June 30, 1995]

Subparts C-F [Reserved]



                     Subpart G_Releasing Information



Sec. 618.8300  General regulation.

    Except as necessary in performing official duties or as authorized 
by Farm Credit Administration regulations (Secs. 618.8300 through 
618.8330), no director or employee of a bank, association, or agency 
thereof shall disclose information of a type not ordinarily contained in 
published reports or press releases

[[Page 224]]

regarding any such banks or associations or their borrowers or members.

[37 FR 11442, June 7, 1972. Redesignated at 47 FR 12151, Mar. 22, 1982; 
78 FR 77562, Dec. 24, 2013]



Sec. 618.8310  Lists of borrowers and stockholders.

    (a) Any System institution, for the purpose of protecting the 
security position of the institution, may provide lists of borrowers to 
buyers, warehousemen, and others who deal in produce or livestock of the 
kind that secures such loans, except to the extent such actions are 
prohibited by State laws adopted in accordance with the Food Security 
Act of 1985, Pub. L. 99-198, 99 Stat. 1354. Lists of borrowers or 
stockholders shall not otherwise be released by any bank or association 
except in accordance with paragraph (b) of this section.
    (b)(1) Within 7 days after receipt of a written request by a 
stockholder, each Farm Credit bank or association must provide a current 
list of its stockholders' names, addresses, and classes of stock held to 
such requesting stockholder. As a condition to providing the list, the 
bank or association may only require that the stockholder agree and 
certify in writing that the stockholder will:
    (i) Utilize the list exclusively for communicating with stockholders 
for permissible purposes; and
    (ii) Not make the list available to any person, other than the 
stockholder's attorney or accountant, without first obtaining the 
written consent of the institution.
    (2) As an alternative to receiving a list of stockholders, a 
stockholder may request the institution mail or otherwise furnish to 
each stockholder a communication for a permissible purpose on behalf of 
the requesting stockholder. This alternative may be used at the 
discretion of the requesting stockholder, provided that the requester 
agrees to defray the reasonable costs of the communication. In the event 
the requester decides to exercise this option, the institution must 
provide the requester with a written estimate of the costs of handling 
and mailing the communication as soon as practicable after receipt of 
the stockholder's request to furnish a communication. However, a 
stockholder may not exercise this option when requesting the list to 
distribute campaign material for election to the institution board or 
board committees. Farm Credit banks and associations are prohibited from 
distributing or mailing campaign material under Sec. 611.320(e) of this 
chapter.
    (3) For purposes of paragraph (b) of this section ``permissible 
purpose'' is defined to mean matters relating to the business operations 
of the institutions. This includes matters relating to the effectiveness 
of management, the use of institution assets, the distribution by 
stockholder candidates of campaign material for election to the 
institution board or board committees, and the performance of directors 
and officers. This does not include communications involving commercial, 
social, political, or charitable causes, communications relating to the 
enforcement of a personal claim or the redress of a personal grievance, 
or proposals advocating that the bank or association violate any 
Federal, State, or local law or regulation.
    (c) In connection with preparing and submitting an electronic report 
of all System accounts and exposures to the Farm Credit Administration 
in accordance with the requirements of Sec. 621.15 of this chapter, each 
bank and association may provide information from its lists of borrowers 
and stockholders to the Reporting Entity as defined in Sec. 621.2 of 
this chapter.

[51 FR 39503, Oct. 28, 1986, as amended at 53 FR 35457, Sept. 14, 1988; 
61 FR 67188, Dec. 20, 1996; 71 FR 5763, Feb. 2, 2006; 78 FR 77561, Dec. 
24, 2013]



Sec. 618.8320  Data regarding borrowers and loan applicants.

    (a) Except as provided in paragraph (b) of this section, the 
directors, officers, and employees of every bank and association shall 
hold in strict confidence all information regarding the character, 
credit standing, and property of borrowers and applicants for loans. 
They shall not exhibit or quote the following documents: Loan 
applications; supplementary statements by applicants; letters and 
statements relative to the character, credit standing,

[[Page 225]]

and property of borrowers and applicants; recommendations of loan 
committees; and reports of inspectors, fieldmen, investigators, and 
appraisers.
    (b) The requirements of paragraph (a) of this section are subject to 
the following exceptions.
    (1) Examiners and other authorized representatives of the Farm 
Credit Administration and the bank concerned shall have free access to 
all information, records, and files.
    (2) In connection with a legitimate law enforcement inquiry, 
accredited representatives of any agency or department of the United 
States may be given access to information upon presentation of official 
identification and a written request specifying:
    (i) The particular information desired; and
    (ii) That the information is relevant to the law enforcement inquiry 
and will be used only for the purpose for which it is sought.
    (3) The chairman of the presidents committees and the presidents of 
the banks may supply statistical and other impersonal information 
pertaining to groups of borrowers, applicants, and loans, in response to 
requests from any department or independent office of the Government of 
the United States, or responsible private organizations, with the 
understanding that the information will not be published.
    (4) Information concerning borrowers may be given for the 
confidential use of any Farm Credit institution in contemplation of the 
extension of credit, administration of credit, or the collection of 
loans.
    (5) Impersonal information based solely on transactions or 
experience with a borrower, such as amounts of loans, terms, and payment 
records, may be given by a bank or association to any reliable 
organization for its confidential use in contemplation of the extension 
of credit or to a consumer reporting agency.
    (6) Credit information concerning any borrower may be given when 
such borrower consents thereto in writing.
    (7) An unsuccessful applicant for credit which primarily is for 
personal, family, or household purposes, if his application was rejected 
either wholly or partly because of information contained in a consumer 
report from a consumer reporting agency shall be advised as required in 
section 615(a) of the Fair Credit Reporting Act (84 Stat. 1133), and if 
his application was rejected either wholly or partly because of 
information obtained from a person other than a consumer reporting 
agency shall be advised as required in section 615(b) thereof.
    (8)(i) Any information or analysis of information requested during 
the course of mediation by a State agency, governor's office or mediator 
under any State mediation program certified under section 501 of the 
Agricultural Credit Act of 1987, may be provided to the State agency, 
governor's office or mediator, with the approval of the borrower.
    (ii) Information concerning borrowers contained in an appraisal 
report may be given by a Farm Credit institution to any State agency 
certifying and licensing real estate appraisers provided that the Farm 
Credit institution:
    (A) Certifies that the information is required in connection with an 
employee's application for certification and licensure and that the 
institution has taken appropriate steps to protect the confidentiality 
of any borrower information that is not essential to the State's 
evaluation of the application; and
    (B) Determines that the State certification and licensing program 
makes reasonable provisions for protecting the confidentiality of the 
borrower information contained in the appraisal report.
    (9) Collateral evaluation reports may be released to a loan 
applicant, when required by the Equal Credit Opportunity Act or related 
regulations.
    (10) In connection with preparing and submitting an electronic 
report of all System accounts and exposures to the Farm Credit 
Administration in accordance with the requirements of Sec. 621.15 of 
this chapter, each bank and association may provide data on its accounts 
and exposures to the Reporting Entity as defined in Sec. 621.2 of this 
chapter.
    (c) The exceptions in paragraph (b) of this section shall be 
exercised by Farm Credit institutions with full awareness

[[Page 226]]

of the requirements of the Fair Credit Reporting Act.

[37 FR 11442, June 7, 1972. Redesignated at 47 FR 12151, Mar. 22, 1982, 
and amended at 53 FR 35457, Sept. 14, 1988; 56 FR 2675, Jan. 24, 1991; 
58 FR 51994, Oct. 6, 1993; 59 FR 46734, Sept. 12, 1994; 61 FR 67188, 
Dec. 20, 1996; 62 FR 25831, May 12, 1997; 64 FR 43049, Aug. 9, 1999; 75 
FR 35968, June 24, 2010; 78 FR 77562, Dec. 24, 2013]



Sec. 618.8325  Disclosure of loan documents.

    (a) For purposes of this section, the following definitions shall 
apply:
    (1) Borrower means any signatory to a loan contract who is either 
primarily or secondarily liable on such contract, including guarantors, 
endorsers, cosigners or the like.
    (2) Execution of the loan means the time at which the borrower and 
the qualified lender have entered into a legal, binding, and enforceable 
loan contract and any subsequent amendment or modification of such 
contract.
    (3) Loan means a loan made to a farmer, rancher, or producer or 
harvester of aquatic products, for any agricultural or aquatic purpose 
and other credit needs of the borrower, including financing for basic 
processing and marketing directly related to the borrower's operations 
and those of other eligible farmers, ranchers, and producers or 
harvesters of aquatic products.
    (4) Loan contract means any written agreement under which a 
qualified lender lends or agrees to lend funds to a borrower in 
consideration for, among other things, the borrower's promise to repay 
the loaned funds at an agreed-upon rate of interest.
    (5) Loan document means any form, application, agreement, contract, 
instrument, or other writing to which a borrower affixes his signature 
or seal and which the qualified lender intends to retain in its files as 
evidence relating to the loan contract entered into between it and the 
borrower, but shall not include any document related to a loan which the 
borrower has not signed.
    (6) Qualified lender means:
    (i) A System institution that makes loans (as defined in paragraph 
(a)(3) of this section) except a bank for cooperatives; and
    (ii) Each bank, institution, corporation, company, union, and 
association described in section 1.7(b)(1)(B) of the Act, but only with 
respect to loans discounted or pledged under section 1.7(b)(1) of the 
Act.
    (b) Each qualified lender shall provide a copy of all loan documents 
to the borrower or the borrower's legal representative at the execution 
of the loan. Subsequently, upon written request of a borrower or a 
borrower's legal representative, a qualified lender shall provide, as 
soon as practicable, a copy of any loan documents signed by the 
borrower, a copy of other documents delivered by such borrower to that 
qualified lender, and a copy of each collateral evaluation of the 
borrower's assets made or used by the qualified lender. To the extent 
that a collateral evaluation may contain confidential third party 
information, the lender may protect such confidential third party 
information by withholding any information that would disclose 
identifying characteristics of the third party or his property. One copy 
shall be furnished free of charge. The lender may assess reasonable 
copying charges for any additional copies requested by the borrower.
    (c) Each System bank and association shall have available in its 
offices copies of the institution's articles of incorporation or charter 
and bylaws for inspection and shall furnish a copy of such documents to 
any owner of stock or participation certificates upon request.

[51 FR 39504, Oct. 28, 1986, as amended at 53 FR 35458, Sept. 14, 1988; 
56 FR 2675, Jan. 24, 1991; 59 FR 46734, Sept. 12, 1994; 61 FR 67188, 
Dec. 20, 1996]



Sec. 618.8330  Production of documents and testimony during litigation.

    (a) If your bank or association is a party to litigation with a 
borrower or a successor in interest, you or your directors, officers, or 
employees may disclose confidential information about that borrower or 
the successor in interest during the litigation.
    (b) If the Government or your bank or association is not a party to 
litigation, you or your directors, officers, or employees may produce 
confidential documents or testimony only if a court

[[Page 227]]

of competent jurisdiction issues a lawful order signed by a judge.

[64 FR 43049, Aug. 9, 1999]



Sec. 618.8340  [Reserved]



                Subpart H_Disposition of Obsolete Records



Sec. 618.8360  [Reserved]



Sec. 618.8370  [Reserved]

Subpart I [Reserved]



                       Subpart J_Internal Controls



Sec. 618.8430  Internal controls.

    Each Farm Credit institution's board of directors must adopt an 
internal control policy, providing adequate direction to the institution 
in establishing effective control over, and accountability for, 
operations, programs, and resources. The policy must include, at a 
minimum, the following:
    (a) Direction to management which assigns responsibility for the 
internal control function (financial, credit, credit review, collateral, 
and administrative) to an officer (or officers) of the institution.
    (b) Adoption of internal audit and control procedures that evidence 
responsibility for review and maintenance of comprehensive and effective 
internal controls.
    (c) Direction for the operation of a program to review and assess 
its assets. These policies shall include standards which address the 
administration of this program, described in the list which follows:
    (1) Loan, loan-related assets, and appraisal review standards, 
including standards for scope of review selection and standards for 
workpapers and supporting documentation.
    (2) Asset quality classification standards to be utilized in 
accordance with a standardized classification system consistent among 
associations within a district and their funding Farm Credit Bank or 
agricultural credit bank.
    (3) Standards for assessing credit administration, including the 
appraisal of collateral.
    (4) Standards for the training required to initiate the program.
    (d) The role of the audit committee in providing oversight and 
review of the institution's internal controls.

[55 FR 24888, June 19, 1990, as amended at 71 FR 5763, Feb. 2, 2006]



Sec. 618.8440  Planning.

    (a) Business plan requirement. No later than 30 days after the 
commencement of each calendar year, the board of directors of each Farm 
Credit System institution must adopt an operational and strategic 
business plan for at least the succeeding 3 years.
    (b) Content of business plan. The plan must include, at a minimum, 
the following:
    (1) A mission statement.
    (2) An annual review of the internal and external factors likely to 
affect the institution during the planning period. The review must:
    (i) Incorporate the description and assessment of workforce and 
management strengths and weaknesses required by paragraph (b)(7)(i) of 
this section;
    (ii) Include an assessment of the needs of the board, including 
skills and diversity, based on the annual self-evaluation of the board's 
performance; and
    (iii) Include strategies for correcting identified weaknesses.
    (3) Quantifiable goals and objectives.
    (4) Pro forma financial statements for each year of the plan.
    (5) A detailed operating budget for the first year of the plan.
    (6) The capital adequacy plan adopted pursuant to Sec. 615.5200(b) 
of this chapter.
    (7) A human capital plan that includes, at a minimum, the items 
specified in this paragraph (b)(7). These items may be contained in 
other board-approved documents that are adopted annually, provided the 
items are summarized in, and incorporated by reference into, the human 
capital plan.
    (i) A description of the institution's workforce and management and 
an assessment of their strengths and weaknesses;
    (ii) A description of the institution's workforce and management 
succession programs; and
    (iii) Strategies and actions to strive for diversity and inclusion 
within the

[[Page 228]]

institution's workforce and management.
    (8) For each Farm Credit System institution in its exercise of title 
III lending authorities and direct lender association, a marketing plan 
that strategically addresses how the institution will further the 
objective of the Act, set forth in section 1.1(b) of the Act, that the 
System be responsive to the credit needs of all types of agricultural 
producers having a basis for credit. The marketing plan must include, at 
a minimum, the items specified in this paragraph (b)(8). These items may 
be contained in other board-approved documents that are adopted 
annually, provided the items are summarized in, and incorporated by 
reference into, the marketing plan.
    (i) A description of the institution's chartered territory by market 
segment, including the characteristics of demography, geography, and 
types of agriculture practiced; and
    (ii) Strategies and actions to market the institution's products and 
services to all eligible and creditworthy persons, with specific 
outreach toward diversity and inclusion within each market segment.
    (c) Board reporting requirements. (1) Each institution must report 
annually to its board of directors on the progress the institution has 
made in accomplishing the strategies and actions required by paragraph 
(b)(7)(iii) of this section.
    (2) Each institution subject to paragraph (b)(8) of this section 
must report annually to its board of directors on the progress the 
institution has made in accomplishing the strategies and actions 
required by paragraph (b)(8)(ii) of this section.

[77 FR 25587, May 1, 2012]



PART 619_DEFINITIONS--Table of Contents



Sec.
619.9000  The Act.
619.9010  Additional security.
619.9015  Agricultural credit associations.
619.9020  Agricultural credit banks.
619.9025  Agricultural land.
619.9050  Associations.
619.9060  Bank for cooperatives.
619.9110  Consolidation.
619.9130  Differential interest rates.
619.9135  Direct lender.
619.9140  Farm Credit bank(s).
619.9145  Farm Credit Bank.
619.9146  Farm Credit institutions.
619.9155  Federal land credit association.
619.9170  Fixed interest rate.
619.9180  Fixed interest spread.
619.9185  Funding Corporation.
619.9195  [Reserved]
619.9200  Loss-sharing agreements.
619.9210  Merger.
619.9230  Open-end mortgage loan plans.
619.9235  Outside director.
619.9240  Participation agreement.
619.9250  Participation certificates.
619.9260  Primary security.
619.9270  Qualified Public Accountant or External Auditor.
619.9310  Senior officer.
619.9320  Shareholder or stockholder.
619.9330  Speculative purposes.
619.9335  Supplemental retirement plan or supplemental executive 
          retirement plan.
619.9338  Unincorporated business entities.
619.9340  Variable interest rate.

    Authority: Secs. 1.4, 1.5, 1.7, 2.1, 2.2, 2.4, 2.11, 2.12, 3.1, 3.2, 
3.21, 4.9, 5.9, 5.17, 5.19, 7.0, 7.1, 7.6, 7.8 and 7.12 of the Farm 
Credit Act (12 U.S.C. 2012, 2013, 2015, 2072, 2073, 2075, 2092, 2093, 
2122, 2123, 2142, 2160, 2243, 2252, 2254, 2279a, 2279a-1, 2279b, 2279c-
1, 2279f); sec. 514 of Pub. L. 102-552, 106 Stat. 4102.

    Source: 37 FR 11446, June 7, 1972, unless otherwise noted.



Sec. 619.9000  The Act.

    The Farm Credit Act of 1971; Pub. L. 92-181 and amendments.



Sec. 619.9010  Additional security.

    Supplementary collateral to the primary security taken in connection 
with the loan.



Sec. 619.9015  Agricultural credit associations.

    Agricultural credit associations are associations created by the 
merger of one or more Federal land bank associations or Federal land 
credit associations and one or more production credit associations and 
which have received a transfer of authority to make and participate in 
long-term real estate mortgage loans pursuant to section 7.6 of the Act.

[55 FR 24888, June 19, 1990]



Sec. 619.9020  Agricultural credit banks.

    Agricultural credit banks are those banks created by the merger of a 
Farm

[[Page 229]]

Credit Bank and a bank for cooperatives pursuant to section 7.0 of the 
Act.

[55 FR 24888, June 19, 1990]



Sec. 619.9025  Agricultural land.

    Land improved or unimproved which is devoted to or available for the 
production of crops and other products such as but not limited to fruits 
and timber or for the raising of livestock.

[37 FR 11446, June 7, 1972. Redesignated at 55 FR 24888, June 19, 1990]



Sec. 619.9050  Associations.

    The term associations includes (individually or collectively) 
Federal land bank associations, Federal land credit associations, 
production credit associations, and agricultural credit associations.

[55 FR 24888, June 19, 1990]



Sec. 619.9060  Bank for cooperatives.

    A bank for cooperatives is a bank that is operating under section 
3.0 of the Act.

[61 FR 67188, Dec. 20, 1996]



Sec. 619.9110  Consolidation.

    Creation of one new organizational entity from two or more existing 
entities or parts thereof.



Sec. 619.9130  Differential interest rates.

    An interest rate program under which different rates of interest may 
be made applicable to individual or classes of loans on the basis of 
type, purpose, amount, quality of loan, or a combination of these 
factors.



Sec. 619.9135  Direct lender.

    The term direct lender refers to Farm Credit banks and associations 
(production credit associations, agricultural credit associations, and 
Federal land credit associations) authorized to lend to eligible 
borrowers identified in Sec. 613.3000.

[55 FR 24889, June 19, 1990]



Sec. 619.9140  Farm Credit bank(s).

    Except as otherwise defined, the term Farm Credit bank(s) includes 
Farm Credit Banks, agricultural credit banks, and banks for 
cooperatives.

[55 FR 24889, June 19, 1990]



Sec. 619.9145  Farm Credit Bank.

    The term Farm Credit Bank refers to a bank resulting from the 
mandatory merger of the Federal land bank and the Federal intermediate 
credit bank in each Farm Credit district pursuant to section 410 of the 
Agricultural Credit Act of 1987, Pub. L. 100-233, or any bank resulting 
from a merger of two or more Farm Credit Banks.

[55 FR 24889, June 19, 1990]



Sec. 619.9146  Farm Credit institutions.

    Except as otherwise defined, the term Farm Credit institutions 
refers to all institutions chartered and regulated by the Farm Credit 
Administration as described in section 1.2 of the Act, and to the 
Funding Corporation.

[55 FR 24889, June 19, 1990, as amended at 56 FR 2675, Jan. 24, 1991]



Sec. 619.9155  Federal land credit association.

    The term Federal land credit association refers to a Federal land 
bank association that has received a transfer of direct long-term real 
estate lending authority pursuant to section 7.6 of the Act.

[55 FR 24889, June 19, 1990]



Sec. 619.9170  Fixed interest rate.

    The rate of interest specified in the note or loan document which 
will prevail as the maximum rate chargeable to the borrower during the 
period of the loan.



Sec. 619.9180  Fixed interest spread.

    A percentage to be added to the cost of money to the bank or 
association as the means of establishing a lending rate.



Sec. 619.9185  Funding Corporation.

    The term Funding Corporation refers to the Federal Farm Credit Banks 
Funding Corporation established pursuant to section 4.9 of the Act.

[55 FR 24889, June 19, 1990]

[[Page 230]]



Sec. 619.9195  [Reserved]



Sec. 619.9200  Loss-sharing agreements.

    A contractual arrangement under which the parties agree to share 
losses associated with loans or otherwise, as may be provided for in the 
agreement.

[42 FR 20457, Apr. 20, 1977]



Sec. 619.9210  Merger.

    Combining of one or more organizational entities into another 
similar entity.



Sec. 619.9230  Open-end mortgage loan plans.

    A mortgage loan which permits the borrower to obtain additional sums 
during the term of the loan.



Sec. 619.9235  Outside director.

    A member of a board of directors selected or appointed by the board, 
who is not a director, officer, employee, agent, or stockholder of any 
Farm Credit System institution.

[71 FR 5764, Feb. 2, 2006]



Sec. 619.9240  Participation agreement.

    A contract under which a lender agrees to sell a portion of a loan 
to one or more purchasers under specific terms set forth in the 
agreement.



Sec. 619.9250  Participation certificates.

    Evidence of investment in a bank or association to which all the 
rights and obligations of stock attach with the exception of the right 
to vote in the affairs of the institution.



Sec. 619.9260  Primary security.

    The basic collateral securing the loan.



Sec. 619.9270  Qualified Public Accountant or External Auditor.

    A qualified public accountant or external auditor is a person who:
    (a) Holds a valid and unrevoked certificate, issued to such person 
by a legally constituted State authority, identifying such person as a 
certified public accountant;
    (b) Is licensed to practice as a public accountant by an appropriate 
regulatory authority of a State or other political subdivision of the 
United States;
    (c) Is in good standing as a certified and licensed public 
accountant under the laws of the State or other political subdivision of 
the United States in which is located the home office or corporate 
office of the institution that is to be audited;
    (d) Is not suspended or otherwise barred from practice as an 
accountant or public accountant before the Securities and Exchange 
Commission (SEC) or any other appropriate Federal or State regulatory 
authority; and
    (e) Is independent of the institution that is to be audited. For the 
purposes of this definition, the term ``independent'' has the same 
meaning as under the rules and interpretations of the authoritative body 
governing overall audit performance. At a minimum, an accountant hired 
to audit a System institution is not independent if he or she functions 
in the role of management, audits his or her own work, or serves in an 
advocacy role for the institution.

[71 FR 76119, Dec. 20, 2006, as amended at 74 FR 28599, June 17, 2009]



Sec. 619.9310  Senior officer.

    The Chief Executive Officer, the Chief Operations Officer, the Chief 
Financial Officer, the Chief Credit Officer, and the General Counsel, or 
persons in similar positions; and any other person responsible for a 
major policy-making function.

[71 FR 5764, Feb. 2, 2006]



Sec. 619.9320  Shareholder or stockholder.

    A holder of any equity interest in a Farm Credit institution.

[75 FR 18744, Apr. 12, 2010]



Sec. 619.9330  Speculative purposes.

    To buy or sell with the expectation of profiting by fluctuations in 
price.

[40 FR 49078, Oct. 21, 1975]



Sec. 619.9335  Supplemental retirement plan or supplemental executive 
retirement plan.

    A nonqualified retirement plan that provides benefits in addition to 
those covered by other retirement plans for

[[Page 231]]

all employees and funded in whole or part by a Farm Credit institution.

[77 FR 60596, Oct. 3, 2012]



Sec. 619.9338  Unincorporated business entities.

    An Unincorporated Business Entity means a Limited Partnership (LP), 
Limited Liability Partnership (LLP), Limited Liability Limited 
Partnership (LLLP), Limited Liability Company (LLC), Business or other 
Trust Entity (TE), or other business entity established and maintained 
under State law that is not incorporated under any law or chartered 
under Federal law.

[78 FR 31834, May 28, 2013]



Sec. 619.9340  Variable interest rate.

    An interest rate on the outstanding loan balances, which may be 
changed from time to time during the period of the loan, if provision is 
made in the note or loan document.



PART 620_DISCLOSURE TO SHAREHOLDERS--Table of Contents



                            Subpart A_General

Sec.
620.1  Definitions.
620.2  Preparing and filing reports.
620.3  Accuracy of reports and assessment of internal control over 
          financial reporting.

                 Subpart B_Annual Report to Shareholders

620.4  Disclosures in the annual report to shareholders relating to 
          directors and senior officers.
620.5  Contents of the annual report to shareholders.
620.6  Disclosures in the annual report to shareholders relating to 
          directors and senior officers.

                       Subpart C_Quarterly Report

620.10  Preparing the quarterly report.
620.11  Content of quarterly report to shareholders.

                    Subpart D_Notice to Shareholders

620.15  Notice of significant or material events.
620.17  Special notice provisions for events related to noncompliance 
          with minimum regulatory capital ratios.

  Subpart E_Subpart E_Annual Meeting Information Statements and Other 
   Information To Be Furnished in Connection with Annual Meetings and 
                           Director Elections

620.20  Preparing and distributing the information statement.
620.21  Contents of the information statement and other information to 
          be furnished in connection with the annual meeting or director 
          elections.

    Subpart F_Bank and Association Audit and Compensation Committees

620.30  Audit committees.
620.31  Compensation committees.

    Authority: Secs. 4.3, 4.3A, 4.19, 5.9, 5.17, 5.19 of the Farm Credit 
Act (12 U.S.C. 2154, 2154a, 2207, 2243, 2252, 2254); sec. 424 of Pub. L. 
100-233, 101 Stat. 1568, 1656; sec. 514 of Pub. L. 102-552, 106 Stat. 
4102.



                            Subpart A_General



Sec. 620.1  Definitions.

    For the purpose of this part, the following definitions shall apply:
    (a) Affiliated organization means any organization, other than a 
Farm Credit organization, of which a director, senior officer or nominee 
for director of the reporting institution is a partner, director, 
officer, or majority shareholder.
    (b) Association means any of the associations as described in 
Sec. 619.9050 of this chapter.
    (c) Bank means any of the Farm Credit banks as described in 
Sec. 619.9140 of this chapter.
    (d) Direct lender association means any association that is a direct 
lender as described in Sec. 619.9135 of this chapter.
    (e) Immediate family means spouse, parents, siblings, children, 
mothers- and fathers-in-law, brothers- and sisters-in-law, and sons- and 
daughters-in-law.
    (f) Institution means any bank or association chartered by the Act.
    (g) Loan means any extension of credit or lease that is recorded as 
an asset of a reporting institution, whether

[[Page 232]]

made directly or purchased from another lender. The term ``loan'' 
includes, but is not limited to, loans originated through direct 
negotiations between the reporting institution and a borrower; purchased 
loans or interests in loans, including participation interests, retained 
subordinated participation interests in loans sold, interests in pools 
of subordinated participation interests that are held in lieu of 
retaining a subordinated participation interest in loans sold; contracts 
of sale; notes receivable; and other similar obligations and lease 
financings.
    (h) Material. The term material, when used to qualify a requirement 
to furnish information as to any subject, limits the information 
required to those matters to which there is a substantial likelihood 
that a reasonable person would attach importance in making shareholder 
decisions or determining the financial condition of the institution.
    (i) Normal risk of collectibility means the ordinary risk inherent 
in the lending operation. Loans that are deemed to have more than a 
normal risk of collectibility include, but are not limited to, any 
adversely classified loans.
    (j) Permanent capital shall have the same meaning as set forth in 
Sec. 615.5201 of this chapter.
    (k) Protected borrower capital means eligible borrower stock as 
defined in Sec. 615.5260 of this chapter.
    (l) Related association means an association within the reporting 
bank's chartered territory that generates loans for the bank or whose 
operations the bank funds.
    (m) Related bank means a reporting association's funding bank or the 
bank for which it generates loans.
    (n) Related organization means any Farm Credit institution that is a 
shareholder of the reporting institution or in which the reporting 
institution has an ownership interest.
    (o) Report refers to the annual report, quarterly report, notice, or 
information statement, regardless of form, required by this part unless 
otherwise specified.
    (p) Signed, when referring to paper form, means a manual signature, 
and, when referring to electronic form, means marked in a manner that 
authenticates each signer's identity.
    (q) Significant event means any event that is likely to have a 
material impact on the reporting institution's financial condition, 
results of operations, cost of funds, or reliability of sources of 
funds. The term ``significant event'' includes, but is not limited to, 
actual or probable noncompliance with the regulatory minimum permanent 
capital standards or capital adequacy requirements, stock impairment, 
the imposition of or entering into enforcement actions, execution of 
financial assistance agreements with other institutions, collateral 
deficiencies that impact a bank's ability to obtain loan funds, or 
defaults on debt obligations.

[51 FR 8656, Mar. 13, 1986, as amended at 51 FR 42086, Nov. 21, 1986; 53 
FR 3337, Feb. 5, 1988; 56 FR 29421, June 27, 1991; 56 FR 42649, Aug. 28, 
1991; 58 FR 48791, Sept. 20, 1993; 59 FR 37406, July 22, 1994; 62 FR 
15092, Mar. 31, 1997; 63 FR 39229, July 22, 1998; 67 FR 16633, Apr. 8, 
2002; 70 FR 35357, June 17, 2005; 71 FR 5764, Feb. 2, 2006; 75 FR 18744, 
Apr. 12, 2010]



Sec. 620.2  Preparing and filing reports.

    For the purposes of this part, the following shall apply:
    (a) Copies of each report required by this part, including financial 
statements and related schedules, exhibits, and all other papers and 
documents that are a part of the report, must be sent to the Farm Credit 
Administration according to our instructions. Submissions must comply 
with the requirements of Sec. 620.3 of this part. The Farm Credit 
Administration must receive the report within the period prescribed 
under applicable subpart sections.
    (b) The reports must be available for public inspection at the 
issuing institution and the Farm Credit Administration office with which 
the reports are filed. Farm Credit bank reports must also be available 
for public inspection at each related association's office(s).
    (c) The reports sent to shareholders must comply with the 
requirements of Sec. 620.3 and electronic delivery of those reports 
requires shareholder agreement.
    (d) Information in any part of a report may be incorporated by 
reference in answer or partial answer to any

[[Page 233]]

other item of the report, unless instructions for the report state 
otherwise.
    (e) All items of essentially the same character as items required to 
be reported in the reports of condition and performance pursuant to part 
621 of this chapter shall be prepared in accordance with the rules set 
forth in part 621.
    (f) No disclosure required by subparts B and E of this part shall be 
deemed to violate any regulation of the Farm Credit Administration.
    (g) Each Farm Credit institution shall present its reports in 
accordance with generally accepted accounting principles and in a manner 
that provides the most meaningful disclosure to shareholders.
    (1) Any Farm Credit institution that presents its annual and 
quarterly financial statements on a combined or consolidated basis shall 
also include in the report the statement of condition and statement of 
income of the institution on a stand-alone basis. The stand-alone 
statements may be in summary form and shall disclose the basis of 
presentation if different from accounting policies of the combined or 
consolidated statements.
    (2) Any bank that prepares its financial statements on a stand-alone 
basis shall provide in the footnotes accompanying its annual report 
supplemental information containing a condensed statement of condition 
and statement of income for the bank's related associations on a 
combined basis. The condensed statements may be unaudited and shall 
disclose the basis of presentation if different from accounting policies 
of the bank-only statements.
    (h)(1) Each institution's annual report or notice must state, in a 
prominent location within the report or notice:
    (i) That the institution's quarterly reports are available free of 
charge on request;
    (ii) The approximate dates the quarterly reports will be available; 
and
    (iii) The telephone numbers and addresses (including information on 
any other distribution method the institution makes available) where 
shareholders can request or obtain copies of the quarterly reports.
    (2) Each association must state, in a prominent location within each 
report:
    (i) That the shareholders' investment in the association may be 
materially affected by the financial condition and results of operations 
of the related bank;
    (ii) That (if not otherwise provided) a copy of the bank's financial 
reports to shareholders will be made available free of charge on 
request; and
    (iii) The telephone numbers and addresses (including information on 
any other distribution method the association makes available) where 
shareholders can request or obtain copies of the related bank's 
financial reports.
    (3) Each institution shall, after receiving a request for a report, 
provide the report to the requestor. The first copy of the requested 
report shall be provided to the requestor free of charge.
    (i) Any events that have affected one or more related organizations 
of the reporting institution that are likely to have a material effect 
on the financial condition, results of operations, cost of funds, or 
reliability of sources of funds of the reporting institution shall be 
considered significant events for the reporting institution and shall be 
disclosed in the reports. Any significant event affecting the reporting 
institution that occurred during the preceding fiscal quarters that 
continues to have a material effect on the reporting institution shall 
be considered significant events of the current fiscal quarter and shall 
be disclosed in the reports.

[51 FR 8656, Mar. 13, 1986, as amended at 51 FR 21340, June 12, 1986; 56 
FR 29421, June 27, 1991; 58 FR 27923, May 12, 1993; 58 FR 48791, Sept. 
20, 1993; 62 FR 15092, Mar. 31, 1997; 66 FR 14301, Mar. 12, 2001; 67 FR 
16633, Apr. 8, 2002; 71 FR 76119, Dec. 20, 2006; 77 FR 60597, Oct. 3, 
2012]



Sec. 620.3  Accuracy of reports and assessment of internal control 
over financial reporting.

    (a) Prohibition against incomplete, inaccurate, or misleading 
disclosures. No institution and no employee, officer, director, or 
nominee for director of the institution shall make any disclosure to 
shareholders or the general public concerning any matter required to be 
disclosed by this part that is incomplete, inaccurate, or misleading. 
When

[[Page 234]]

any such person makes disclosure that, in the judgment of the Farm 
Credit Administration, is incomplete, inaccurate, or misleading, whether 
or not such disclosure is made in disclosure statements required by this 
part, such institution or person shall make such additional or 
corrective disclosure as is necessary to provide shareholders and the 
general public with a full and fair disclosure.
    (b) Signatures. The name and position title of each person signing 
the report must be printed beneath his or her signature. If any person 
required to sign the report has not signed the report, the name and 
position title of the individual and the reason(s) such individual is 
unable or refuses to sign must be disclosed in the report. All reports 
must be dated and signed on behalf of the institution by:
    (1) The chief executive officer (CEO);
    (2) The chief financial officer (CFO), or if the institution has no 
CFO, the officer responsible for preparing financial reports; and
    (3) A board member formally designated by action of the board to 
certify reports on behalf of individual board members.
    (c) Certification of financial accuracy. The report must be 
certified as financially accurate by the signatories to the report. If 
any signatory is unable to, or refuses to, certify the report, the 
institution must disclose the individual's name and position title and 
the reason(s) such individual is unable or refuses to certify the 
report. At a minimum, the certification must include a statement that:
    (1) The signatories have reviewed the report,
    (2) The report has been prepared in accordance with all applicable 
statutory or regulatory requirements, and
    (3) The information is true, accurate, and complete to the best of 
signatories' knowledge and belief.
    (d) Management assessment of internal control over financial 
reporting. Annual reports of those institutions with over $1 billion in 
total assets (as of the end of the prior fiscal year) must include a 
report by management assessing the effectiveness of the institution's 
internal control over financial reporting. The assessment must be 
conducted during the reporting period and be reported to the 
institution's board of directors. Quarterly and annual reports for those 
institutions with over $1 billion in total assets (as of the end of the 
prior fiscal year) must disclose any material change(s) in the internal 
control over financial reporting occurring during the reporting period.

[71 FR 76119, Dec. 20, 2006, as amended at 74 FR 28599, June 17, 2009]



                 Subpart B_Annual Report to Shareholders



Sec. 620.4  Preparing and providing the annual report.

    (a) Each institution of the Farm Credit System must:
    (1) Prepare and send to the Farm Credit Administration an electronic 
copy of its annual report within 75 calendar days of the end of its 
fiscal year;
    (2) Publish a copy of its annual report on its Web site when it 
sends the report electronically to the Farm Credit Administration;
    (3) Provide prior written notification to its shareholders that the 
institution will publish its annual report on the institution's Web site 
when the report is sent electronically to the Farm Credit 
Administration; and
    (4) Within 90 calendar days of the end of its fiscal year, prepare 
and provide to its shareholders an annual report substantively identical 
to the copy of the report sent to the Farm Credit Administration under 
paragraph (a)(1) of this section.
    (b)(1) A bank must provide its annual report to the shareholders of 
all related associations if the bank experiences a significant event 
that has a material effect on those associations.
    (2) Any bank that is required by paragraph (b)(1) of this section to 
provide its annual report must coordinate its distribution with its 
related associations.
    (c) The report must contain, at a minimum, the information required 
by Secs. 620.5 and 620.6. In addition, the report must contain such 
other information as is necessary to make the required

[[Page 235]]

statements, in light of the circumstances under which they are made, not 
misleading.

[51 FR 8656, Mar. 13, 1986. Redesignated and amended at 56 FR 29421, 
29422, June 27, 1991; 62 FR 15093, Mar. 31, 1997; 66 FR 14301, Mar. 12, 
2001; 67 FR 16633, Apr. 8, 2002; 71 FR 76119, Dec. 20, 2006; 72 FR 
68061, Dec. 4, 2007; 77 FR 60597, Oct. 3, 2012]



Sec. 620.5  Contents of the annual report to shareholders.

    The report must contain the following items in substantially the 
same order:
    (a) Description of business. The description must include a brief 
discussion of the following items:
    (1) The territory served;
    (2) The persons eligible to borrow;
    (3) The types of lending activities engaged in and related services 
offered. Each bank shall also briefly describe the lending and related 
services offered by its related associations, as well as related 
services offered to the borrowers in the bank's chartered territory by 
any service corporation chartered under the Act in which it has an 
ownership interest. Each association shall briefly describe the lending 
and related services offered by its related organizations or incorporate 
by reference relevant portions of the related bank's report, if such 
report is provided to association shareholders;
    (4) Any significant developments within the last 5 years that had or 
could have a material impact on earnings, interest rates to borrowers, 
patronage, or dividends, including, but not limited to, changes in the 
reporting entity, changes in patronage policies and practices, and 
financial assistance provided by or to the institution through loss-
sharing or capital preservation agreements or from any other source;
    (5) Any acquisition or disposition of material assets during the 
last fiscal year, other than in the ordinary course of business;
    (6) Any material change during the last fiscal year in the manner of 
conducting the business;
    (7) Any seasonal characteristics of the institution's business;
    (8) Any concentrations of more than 10 percent of its assets in 
particular commodities or particular types of agricultural activity or 
business, and the institution's dependence, if any, upon a single 
customer, or a few customers, including other financing institutions 
(OFIs), the loss of any one of which would have a material effect on the 
institution; and
    (9) A brief description of the business of any related Farm Credit 
institution, as described in Sec. 619.9146 of this chapter, and the 
nature of the institution's relationship with such organization.
    (10) For associations, in a separate section of the annual report, 
discuss the interdependent relationship between the association and its 
funding bank, including, but not limited to, the financial relationship, 
a service provider relationship, other material operational 
relationships, and other specific issues or areas that create a material 
interdependent relationship between the association and its funding 
bank. This separate section may incorporate by reference information 
from other sections of the annual report. At a minimum, the separate 
section must include the statement required by Sec. 620.2(h)(2)(i) of 
this part and the following information required elsewhere in this 
section, if applicable:
    (i) The association's obligation to borrow only from the bank unless 
the bank gives the association approval to borrow elsewhere;
    (ii) The major terms of any capital preservation, loss sharing, or 
financial assistance agreements between the association and the bank;
    (iii) Any statutory or bank bylaw provisions authorizing bank access 
to the capital of the association; and
    (iv) The extent the bank assumed the association's exposure to 
interest rate risk.
    (11) For banks and associations, business relationships with 
unincorporated business entities (UBEs).
    (i) Except as provided in paragraph (a)(12)(ii) of this section, 
describe the business relationship with any UBE, as defined in 
Sec. 611.1151 of this chapter, that was organized by the bank or 
association or in which the bank or association has an equity interest. 
Include in the description the name of the UBE, the type of business 
entity, the

[[Page 236]]

purpose for which the UBE was organized, the scope of its activities, 
and the level of ownership. If the bank or association does not have an 
equity interest, but manages the operations of a UBE that is controlled 
by a System institution, describe this business relationship and any 
fees received.
    (ii) If the UBE is organized for the purpose of acquiring and 
managing unusual or complex collateral associated with loans, the bank 
or association need only disclose the name of the UBE, the type of 
business entity, and the purpose for which the UBE was organized.
    (b) Description of property. State the location of and briefly 
describe the principal offices, i.e., headquarters, and major facilities 
where the institution makes and services its loans, and other materially 
important physical properties (other than property acquired in the 
course of collecting a loan) of the institution.
    (c) Legal proceedings and enforcement actions. (1) Describe briefly 
any material pending legal proceedings, other than ordinary routine 
litigation incidental to the business, to which the institution is a 
party, of which any of its property is the subject, or which involved 
claims that the institution may be required by contract or operation of 
law, to satisfy.
    (2) Describe the type of and reason for each enforcement action in 
effect, i.e., agreements, cease and desist orders, temporary cease and 
desist orders, prohibitions and removals of officers or directors, or 
civil money penalties, if any, imposed or assessed on the institution or 
its officers or directors and the amount of any civil money penalties 
assessed.
    (d) Description of capital structure. (1) Describe each class of 
stock and participation certificates the institution is authorized to 
issue and the rights, duties, and liabilities of each class. The 
description shall include:
    (i) The number of shares of each class outstanding;
    (ii) The par or face value;
    (iii) The voting and dividend rights;
    (iv) The order of priority upon impairment or liquidation;
    (v) The institution's retirement policies and restrictions on 
transfer;
    (vi) The statutory requirement that a borrower purchase stock as a 
condition to obtaining a loan;
    (vii) The manner in which the stock is purchased (i.e., promissory 
note to the issuer, or cash not advanced by issuing institution);
    (viii) The statutory authority of the institution to require 
additional capital contributions, if any; and
    (ix) The statutory and regulatory restrictions regarding retirement 
of stock and distribution of earnings pursuant to Sec. 615.5215 of this 
chapter, and any requirements to add capital under a plan approved by 
the Farm Credit Administration pursuant to Sec. 615.5350, Sec. 615.5351, 
Sec. 615.5353, Sec. 615.5357, or Sec. 628.301 of this chapter.
    (2) Describe regulatory minimum capital standards, and the 
institution's compliance with such standards. For banks, also discuss 
any related associations that are not currently in compliance with the 
standards.
    (3) State whether the institution is currently prohibited from 
retiring stock or distributing earnings by the statutory and regulatory 
restrictions described in paragraph (d)(1)(ix) of this section, or knows 
of any reason such prohibitions may apply during the fiscal year 
subsequent to the fiscal year just ended.
    (4) Describe the institution's capital adequacy requirements and the 
minimum stock purchase requirement in effect.
    (e) Description of liabilities. (1) Describe separately the 
institution's insured and uninsured debt, indicating the type, amount, 
maturity, and interest rates of each category of obligations outstanding 
at the end of the fiscal year just ended. Describe the nature of the 
insurance provided under part E of title V of the Act. Describe any 
applicable statutory and regulatory restrictions on the institution's 
ability to incur debt.
    (2) Describe fully the institution's rights and obligations under 
any agreement, formal or informal, between the institution and any other 
person or entity having to do with capital preservation, loss sharing, 
or any other form of financial assistance.
    (3) Describe any statutory authorities or obligations to contribute 
to or

[[Page 237]]

on behalf of another institution of the Farm Credit System.
    (4) Describe supplemental retirement plans funded by the institution 
on behalf of senior officers and employees. The description for each 
plan must include the:
    (i) Plan name;
    (ii) Present value of accumulated benefits;
    (iii) Payments made during the reporting period;
    (iv) Funded and unfunded obligations; and
    (v) Off-balance sheet amounts, including benefits earned but not 
vested.
    (f) Selected financial data. Furnish in comparative columnar form 
for each of the last 5 fiscal years the following financial data, if 
material:
    (1) For banks and direct lender associations--(i) Balance sheet.
    (A) Total assets.
    (B) Investments.
    (C) Loans.
    (D) Allowance for losses.
    (E) Net loans.
    (F) Other property owned.
    (G) Total liabilities.
    (H) Obligations with maturities less than 1 year.
    (I) Obligations with maturities longer than 1 year.
    (J) Protected borrower capital.
    (K) At-risk capital.
    (1) Stock and participation certificates.
    (2) Allocated surplus.
    (3) Unallocated surplus.
    (ii) Statement of income. (A) Net interest income.
    (B) Provision for loan losses.
    (C) Extraordinary items.
    (D) Net income.
    (iii) Key financial ratios. (A) Return on average assets.
    (B) Return on average protected borrower capital and at-risk 
capital.
    (C) Net interest margin as a percentage of average earning assets.
    (D) Protected and at-risk capital-to-total assets.
    (E) Net chargeoffs-to-average loans.
    (F) Allowance for loan losses-to-loans.
    (iv) Net income distributed. (A) Dividends.
    (B) Patronage refunds.
    (1) Cash.
    (2) Stock.
    (3) Allocated surplus.
    (2) For all banks (on a bank-only basis):
    (i) Permanent capital ratio.
    (ii) CET1 capital ratio.
    (iii) Tier 1 capital ratio.
    (iv) Total capital ratio.
    (v) Tier 1 leverage ratio.
    (3) For all associations:
    (i) Permanent capital ratio.
    (ii) CET1 capital ratio.
    (iii) Tier 1 capital ratio.
    (iv) Total capital ratio.
    (4) The annual report for each fiscal year ending in 2017 through 
2021 shall also include in comparative columnar form for each fiscal 
year ending in 2012 through 2016, the following ratios:
    (i) Core surplus ratio.
    (ii) Total surplus ratio.
    (iii) For banks only, net collateral ratio.
    (iv) Tier 1 leverage ratio.
    (g) Management's discussion and analysis of financial condition and 
results of operations. Fully discuss any material aspects of the 
institution's financial condition, changes in financial condition, and 
results of operations during the last 2 fiscal years, identifying 
favorable and unfavorable trends, and significant events or 
uncertainties. In addition to the items enumerated below, the discussion 
shall provide such other information as is necessary to an understanding 
of the institution's financial condition, changes in financial 
condition, and results of operations.
    (1) Loan portfolio. (i) Describe the types of loans in the portfolio 
by major category (e.g., agricultural real estate mortgage loans, rural 
home loans, agricultural production loans, processing and marketing 
loans, farm business loans, and international loans), indicating the 
approximate percentage of the total dollar portfolio represented by each 
major category. Associations that make agricultural production loans 
shall provide the information required for such loans by major 
subcategory (e.g., cash grains, field crops, livestock, dairy, poultry, 
and timber). For each category and subcategory, discuss any special 
features of the loans that may be material to the evaluation of risk and 
any economic or business conditions that have had or

[[Page 238]]

are likely to have a material impact on their collectibility. For banks, 
also disclose separately the aggregate amount of loans outstanding to 
related associations and other financial institutions.
    (ii) Describe the geographic distribution of the loan portfolio by 
State or other significant geographic division, if any.
    (iii) Purchases and sales of loans. (A) Describe any material 
participation in the Federal Agricultural Mortgage Corporation program 
or origination of loans for resale.
    (B) Disclose the amount of purchased loans, loans sold with 
recourse, retained subordinated participation interests in loans sold, 
and interests in pools of subordinated participation interests that are 
held in lieu of retaining a subordinated participation interest in the 
loans sold.
    (iv) Risk exposure. For the periods covered by the financial 
statements provide:
    (A) An analysis of high-risk assets and loan performance categories, 
to include, but not limited to, a discussion of the nature and extent of 
significant potential credit risks within the loan portfolio, or other 
information that could adversely impact performance of the loan 
portfolio in the near future;
    (B) An analysis of the allowance for loan losses that includes the 
ratios of the allowance to loans and net chargeoffs to average loans, 
and a discussion of the adequacy of the allowance for losses;
    (C) Financial assistance given or received under districtwide or 
Systemwide loss-sharing or capital preservation agreements or otherwise;
    (D) For banks, a description in the aggregate of the recent loss 
experience of related associations that are its shareholders, including 
the items enumerated in paragraphs (g)(1)(iv) (A), (B), and (C) of this 
section.
    (E) Describe any material obligations with respect to loans sold and 
the amount of any material contributions made in connection with loans 
sold into the secondary market. Further disclose the amount of risk of 
loss associated with such obligations and the amount included in the 
allowance for losses to provide for such risk.
    (2) Results of operations. (i) Describe, on a comparative basis, 
changes in the major components of net interest income during the last 2 
fiscal years, describing significant factors that contributed to the 
changes and quantifying the amount of change(s) due to an increase in 
volume or the introduction of new services and the amount due to changes 
in interest rates earned and paid, based on averages for each period.
    (ii) Describe any unusual or infrequent events or transactions or 
any significant economic changes, including, but not limited to, 
financial assistance received or paid that materially affected reported 
income. In each case, indicate the extent to which income was so 
affected.
    (iii) Discuss the factors underlying the material changes, if any, 
in the return on average assets, the return on average protected 
borrower capital and at-risk capital, and the permanent capital ratio as 
determined in accordance with part 615, subpart H of this chapter. An 
explanation of the basis of the calculation of ratios relating to 
permanent capital and at-risk capital shall be included.
    (iv) Describe, on a comparative basis, the major components of 
operating expense, indicating the reasons for significant increases or 
decreases.
    (v) Describe any other significant components of income or expense, 
including, but not limited to, income from investments, that should be 
described in order to understand the institution's results of 
operations.
    (vi) Discuss any events affecting a related organization that are 
likely to have a material effect on the reporting institution's 
financial condition, results of operations, cost of funds, or 
reliability of sources of funds.
    (vii) Describe any known trends or uncertainties that have had, or 
that the institution reasonably expects will have, a material impact on 
net interest income or net income. Disclose any events known to 
management that will cause a material change in the relationship between 
costs and revenues.
    (3) Liquidity and funding sources--(i) Funding sources. (A) Describe 
the average and year end amounts, maturities,

[[Page 239]]

and interest rates on outstanding consolidated System-wide debt 
obligations, bond obligations, or any other obligations used to fund the 
institution's lending operations.
    (B) Describe existing lines of credit and their terms.
    (C) Describe the institution's capital accounts and other sources of 
lendable funds.
    (ii) Liquidity. (A) Discuss the institution's liquidity policy and 
the components of asset liquidity, including, but not limited to, cash, 
investment securities, and maturing loan repayments. Assess the ability 
of the institution to generate adequate amounts of cash to fund its 
operations and meet its obligations.
    (B) Discuss any known trends that are likely to result in a 
liquidity deficiency and the course of action management intends to take 
to resolve it. Discuss any material increase or decrease in liquidity 
that is likely to occur.
    (C) Discuss the institution's participation in the Federal 
Agricultural Mortgage Corporation secondary market programs authorized 
by title VIII of the Act and the origination of loans for resale under 
other authorities, if any.
    (iii) Funds management. (A) Discuss the institution's interest rate 
programs and the institution's ability to control interest rate margins.
    (B) Discuss changes in net interest margin (net interest income as a 
percentage of average earning assets), explaining the reasons therefor.
    (4) Capital resources. (i) Describe any material commitments to 
purchase capital assets and the anticipated sources of funding.
    (ii) Describe any material trends or changes in the mix and cost of 
debt and capital resources. The discussion shall consider changes in 
permanent capital, CET1 capital, tier 1 capital, total capital, the tier 
1 leverage ratio, debt, and any off-balance-sheet financial 
arrangements.
    (iii) Describe any favorable or unfavorable trends in the 
institution's capital resources.
    (iv) Discuss and explain any material changes in capital ratios, 
noting any material adverse variances from regulatory guidelines.
    (v) Discuss the adequacy of the current capital position and any 
material changes in the capital plan adopted pursuant to Sec. 615.5200 
of this chapter, to the extent that such changes may have an effect on 
the institution's minimum stock purchase requirements and its ability to 
retire stock and distribute earnings.
    (vi) Discuss any trends, commitments, contingencies, or events that 
are reasonably likely to have a materially adverse effect upon the 
institution's ability to meet the regulatory minimum capital standards 
and capital adequacy requirements.
    (h) Directors and senior officers. In a separate section of the 
annual report, make the disclosures required in Sec. 620.6 of this part.
    (i) Relationship with qualified public accountant. (1) If a change 
or changes in qualified public accountants have taken place since the 
last annual report to shareholders or if a disagreement with a qualified 
public accountant has occurred that the institution would be required to 
report to the Farm Credit Administration under part 621 of this chapter, 
the information required by Sec. 621.4(c) and (d) of this chapter must 
be disclosed.
    (2) Disclose the total fees, by the category of services provided, 
paid during the reporting period to the qualified public accountant 
engaged to conduct the institution's financial statement audit. At a 
minimum, identify fees paid for audit services, tax services, and non-
audit related services. The types of non-audit services must be 
identified and indicate audit committee approval of the services.
    (j) Financial statements. (1) Furnish financial statements and 
related footnotes that have been prepared in accordance with generally 
accepted accounting principles and instructions and other requirements 
of the Farm Credit Administration and that have been audited in 
accordance with generally accepted auditing standards by a qualified 
public accountant and an opinion expressed thereon. The statements shall 
include the following statements and related footnotes for the last 3 
fiscal years: balance sheet,

[[Page 240]]

statement of income, statement of changes in protected borrower capital 
and at-risk capital, and statement of cash flows.
    (2) State that the financial statements were prepared under the 
oversight of the audit committee, identifying the members of the audit 
committee.
    (k) Credit and services to young, beginning, and small farmers and 
ranchers and producers or harvesters of aquatic products. (1) Each 
direct lender association must describe the YBS demographics in its 
territory and the source of the demographic data. If there are 
differences in the methods by which the demographic and YBS data are 
presented, these differences must be described.
    (2) Each direct lender association must provide a description of its 
YBS program, including a status report on each program component as set 
forth in Sec. 614.4165(c) of this chapter and the definitions of 
``young,'' ``beginning,'' and ``small'' farmers and ranchers. The 
discussion must provide such other information necessary for a 
comprehensive understanding of the direct lender association's YBS 
program and its results.
    (3) Each Farm Credit bank must include a summary report of the 
quantitative YBS data from its affiliated direct lender associations as 
described in FCA's instructions for the annual YBS yearend report. The 
report must include the definitions of ``young,'' ``beginning,'' and 
``small'' farmers and ranchers. A narrative report may be necessary for 
an ample understanding of the YBS mission results.

[51 FR 8656, Mar. 13, 1986, as amended at 69 FR 16471, Mar. 30, 2004; 70 
FR 53909, Sept. 13, 2005; 71 FR 5764, Feb. 2, 2006; 71 FR 76119, Dec. 
20, 2006; 72 FR 4414, Jan. 31, 2007; 74 FR 28599, June 17, 2009; 75 FR 
18744, Apr. 12, 2010; 77 FR 60597, Oct. 3, 2012; 78 FR 31834, May 28, 
2013; 79 FR 17856, Mar. 31, 2014; 81 FR 49778, July 28, 2016]



Sec. 620.6  Disclosures in the annual report to shareholders relating
to directors and senior officers.

    (a) General. (1) List the names of all directors and senior officers 
of the institution, indicating the position title and term of office of 
each director, and the position, title, and date each senior officer 
commenced employment in his or her current position.
    (2) Briefly describe the business experience during the past 5 years 
of each director and senior officer, including each person's principal 
occupation and employment during the past 5 years.
    (3) For each director and senior officer, list any other business 
interest where the director or senior officer serves on the board of 
directors or as a senior officer. Name the position held and state the 
principal business in which the business is engaged.
    (b) Compensation of directors. Describe the arrangements under which 
directors of the institution are compensated for all services as a 
director (including total cash compensation and noncash compensation). 
Noncash compensation with an annual aggregate value of less than $5,000 
does not have to be reported. State the total cash and reportable 
noncash compensation paid to all directors as a group during the last 
fiscal year. For the purposes of this paragraph, disclosure of 
compensation paid to and days served by directors applies to any 
director who served in that capacity at any time during the reporting 
period. If applicable, describe any exceptional circumstances justifying 
the additional director compensation as authorized by Sec. 611.400(c) of 
this chapter. For each director, state:
    (1) The number of days served at board meetings;
    (2) The total number of days served in other official activities, 
including any board committee(s);
    (3) Any additional compensation paid for service on a board 
committee, naming the committee; and
    (4) The total cash and noncash compensation paid to each director 
during the last fiscal year. Reportable compensation includes cash and 
the value of noncash items provided by a third party to a director for 
services rendered by the director on behalf of the reporting Farm Credit 
institution. Noncash compensation with an annual aggregate value of less 
than $5,000 does not have to be reported.
    (c) Compensation of senior officers. Disclose the information on 
senior officer compensation and compensation plans as required by this 
paragraph. The institution must disclose the total

[[Page 241]]

amount of compensation paid to senior officers in substantially the same 
manner as the tabular form specified in the Summary Compensation Table 
(Compensation Table), located in paragraph (c)(3) of this section.
    (1) For each of the last 3 completed fiscal years, report the total 
amount of compensation paid and the amount of each component of 
compensation paid to the institution's chief executive officer (CEO), 
naming the individual. If more than one person served in the capacity of 
CEO during any given fiscal year, individual compensation disclosures 
must be provided for each CEO.
    (2) For each of the last 3 completed fiscal years, report the 
aggregate amount of compensation paid, and the components of 
compensation paid, to all senior officers as a group, stating the number 
of officers in the group without naming them.
    (i) If applicable, when any employee who is not a senior officer has 
annual compensation at a level that is among the five highest paid by 
the institution during the reporting period, include the highly 
compensated employee(s) in the aggregate number and amount of 
compensation reported in the Compensation Table. However, exclude any 
such employee from the Compensation Table if the employee would be 
considered highly compensated solely because of payments related to or 
change(s) in value of the employee's qualified pension plan provided 
that the plan was available to all similarly situated employees on the 
same basis at the time the employee joined the plan.
    (ii) The report containing the aggregate compensation disclosure 
must include a statement that disclosure of information on the total 
compensation paid during the last fiscal year to any senior officer, or 
to any other employee included in the aggregate, is available and will 
be disclosed to shareholders of the institution and shareholders of 
related associations (if applicable) upon request. This statement must 
be located directly beneath the Compensation Table.
    (3) The institution must complete the Compensation Table, or 
something substantially similar, according to the following 
instructions:

                                                               Summary Compensation Table
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         Annual
---------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          Deferred/
       Name of individual or number in group              Year            Salary           Bonus          perquisite         Other            Total
(a)                                                            (b)              (c)              (d)              (e)              (f)              (g)
--------------------------------------------------------------------------------------------------------------------------------------------------------
CEO...............................................            20XX                $                $                $                $                $
                                                              20XX
                                                              20XX
Aggregate No. of Senior Officers (& other highly
 compensated employees, if applicable):
    (X)...........................................            20XX
    (X)...........................................            20XX
    (X)...........................................            20XX
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (i) Amounts shown as ``Salary'' (column (c)) and ``Bonus'' (column 
(d)) must reflect the dollar value of salary and bonus earned by the 
senior officer during the fiscal year. Amounts contributed during the 
fiscal year by the senior officer pursuant to a plan established under 
section 401(k) of the Internal Revenue Code, or similar plan, must be 
included in the salary column or bonus column, as appropriate. If the 
amount of salary or bonus earned during the fiscal year is not 
calculable by the time the report is prepared, the reporting institution 
must provide its best estimate of the compensation amount(s) and 
disclose that fact in a footnote to the table.
    (ii) Amounts shown as ``deferred/perquisites'' (column (e)) must 
reflect the dollar value of other annual compensation not properly 
categorized as salary or bonus, including but not limited to:

[[Page 242]]

    (A) Deferred compensation earned during the fiscal year, whether or 
not paid in cash; or
    (B) Perquisites and other personal benefits, including the value of 
noncash items, unless the annual aggregate value of such perquisites is 
less than $5,000. Reportable perquisites include cash and the value of 
noncash items provided by a third party to a senior officer for services 
rendered by the officer on behalf of the reporting institution.
    (iii) Compensation amounts reported under the category ``Other'' 
(column (f)) must reflect the dollar value of all other compensation not 
properly reportable in any other column. Items reported in this column 
must be specifically identified and described in a footnote to the 
table. ``Other'' compensation includes, but is not limited to:
    (A) The amount paid to the senior officer pursuant to a plan or 
arrangement in connection with the resignation, retirement, or 
termination of such officer's employment with the institution.
    (B) The amount of contributions by the institution on behalf of the 
senior officer to a vested or unvested defined contribution plan unless 
the plan is made available to all employees on the same basis.
    (C) The dollar value of any tax reimbursement provided by the 
institution.
    (D) Any changes in the value of pension benefits.
    (iv) Amounts displayed under ``Total'' (column (g)) shall reflect 
the sum total of amounts reported in columns (c), (d), (e), and (f).
    (4) If the institution provides a defined benefit plan or a 
supplemental executive retirement plan (SERP) to its senior officers, 
the institution must complete the following Pension Benefits Table, or 
something substantially similar, for each plan according to the 
following instructions:

                                             Pension Benefits Table
----------------------------------------------------------------------------------------------------------------
                                        As of most recent fiscal year-end
-----------------------------------------------------------------------------------------------------------------
                                                                             Present value of    Payments made
                   Name of individual                    Years of credited     accumulated      during reporting
                                                              service            benefits            period
----------------------------------------------------------------------------------------------------------------
CEO....................................................  .................                 $                  $
Senior Officers as a Group (& other highly compensated
 employees, if applicable).
----------------------------------------------------------------------------------------------------------------

    (i) Report the credited years of service for the CEO and the average 
credited years of service for the senior officer group under the plan.
    (ii) Report the present value of accumulated benefits for the CEO 
and the senior officer group under the plan.
    (iii) Report payments made during the reporting period under the 
plan for the CEO and the senior officer group.
    (5) Provide a description of all compensation, retirement, 
incentive, and performance plans (plans) pursuant to which cash or 
noncash compensation was paid or distributed during the last fiscal 
year, or is proposed to be paid or distributed in the future for 
performance during the last fiscal year, to those individuals included 
in the Compensation Table. Provide the information individually for the 
chief executive officer and as a group for the senior officers. 
Information provided for the senior officer group includes any highly 
compensated employees whose compensation is reported in the Compensation 
Table. The description of each plan must include, but not be limited to:
    (i) A summary of how each plan operates and who is covered by the 
plan. The summary must include the criteria used to determine amounts 
payable, including any performance formula or measure, as well as the 
time period over which the measurement of compensation will be 
determined, payment schedules, and any material amendments to the plan 
during the last fiscal year.
    (ii) The overall risk and reward structure of the plan as it relates 
to senior officers' compensation. The description must include, at a 
minimum, how each plan is compatible with and promotes the institution's 
goals and

[[Page 243]]

business strategy and the mission as a Government-sponsored enterprise.
    (iii) A discussion of the relationship between the CEO and senior 
officers' compensation to the reporting institution's overall 
performance. The disclosure must also discuss the relationship between 
the CEO's and senior officers' compensation to their performance.
    (6) Associations may disclose the information required by paragraph 
(c) of this section in the Annual Meeting Information Statement (AMIS) 
pursuant to subpart E of this part. Associations exercising this option 
must include a reference in the annual report stating that the senior 
officer compensation information is included in the AMIS and that the 
AMIS is available for public inspection at the reporting association 
offices pursuant to Sec. 620.2(b).
    (d) Travel, subsistence, and other related expenses. (1) Briefly 
describe your policy addressing reimbursements for travel, subsistence, 
and other related expenses as it applies to directors and senior 
officers. The report shall include a statement that a copy of the policy 
is available to shareholders of the institution and shareholders of 
related associations (if applicable) upon request.
    (2) For each of the last 3 fiscal years, state the aggregate amount 
of reimbursement for travel, subsistence, and other related expenses for 
all directors as a group.
    (e) Transactions with senior officers and directors. (1) State the 
institution's policies, if any, on loans to and transactions with 
officers and directors of the institution.
    (2) Transactions other than loans. For each person who served as a 
senior officer or director on January 1 of the year following the fiscal 
year of which the report is filed, or at any time during the fiscal year 
just ended, describe briefly any transaction or series of transactions 
other than loans that occurred at any time since the last annual meeting 
between the institution and such person, any member of the immediate 
family of such person, or any organization with which such person is 
affiliated.
    (i) For transactions relating to the purchase or retirement of 
preferred stock issued by the institution, state the name of each senior 
officer or director that held preferred stock issued by the institution 
during the reporting period, the current amount of preferred stock held 
by the senior officer or director, the average dividend rate on the 
preferred stock currently held, and the amount of purchases and 
retirements by the individual during the reporting period.
    (ii) For all other transactions, state the name of the senior 
officer or director who entered into the transaction or whose immediate 
family member or affiliated organization entered into the transaction, 
the nature of the person's interest in the transaction, and the terms of 
the transaction. No information need be given where the purchase price, 
fees, or charges involved were determined by competitive bidding or 
where the amount involved in the transaction (including the total of all 
periodic payments) does not exceed $5,000, or the interest of the person 
arises solely as a result of his or her status as a stockholder of the 
institution and the benefit received is not a special or extra benefit 
not available to all stockholders.
    (3) Loans to senior officers and directors. (i) To the extent 
applicable, state that the institution (or in the case of an association 
that does not carry loans to its senior officers and directors on its 
books, its related bank) has had loans outstanding during the last full 
fiscal year to date to its senior officers and directors, their 
immediate family members, and any organizations with which such senior 
officers or directors are affiliated that:
    (A) Were made in the ordinary course of business; and
    (B) Were made on the same terms, including interest rate, 
amortization schedule, and collateral, as those prevailing at the time 
for comparable transactions with other persons.
    (ii) To the extent applicable, state that no loan to a senior 
officer or director, or to any organization affiliated with such person, 
or to any immediate family member who resides in the same household as 
such person or in whose loan or business operation such person has a 
material financial or legal interest, involved more than the normal risk 
of collectability; provided that no

[[Page 244]]

such statement need be made with respect to any director or senior 
officer who has resigned before the time for filing the applicable 
report with the Farm Credit Administration (but in no case later than 
the actual filing), or whose term of office will expire or terminate no 
later than the date of the meeting of stockholders to which the report 
relates.
    (iii) If the conditions stated in paragraphs (e)(3)(i) and (ii) of 
this section do not apply to the loans of the persons or organizations 
specified therein, with respect to such loans state:
    (A) The name of the officer or director to whom the loan was made or 
to whose relative or affiliated organization the loan was made.
    (B) The largest aggregate amount of each indebtedness outstanding at 
any time during the last fiscal year.
    (C) The nature of the loan(s);
    (D) The amount outstanding as of the latest practicable date.
    (E) The reasons the loan does not comply with the criteria contained 
in paragraphs (e)(3)(i) and (e)(3)(ii) of this section.
    (F) If the loan does not comply with paragraph (e)(3)(i)(B) of this 
section, the rate of interest payable on the loan and the repayment 
terms.
    (G) If the loan does not comply with paragraph (e)(3)(ii) of this 
section, the amount past due, if any, and the reason the loan is deemed 
to involve more than a normal risk of collectability.
    (f) Involvement in certain legal proceedings. Describe any of the 
following events that occurred during the past 5 years and that are 
material to an evaluation of the ability or integrity of any person who 
served as director or senior officer on January 1 of the year following 
the fiscal year for which the report is filed or at any time during the 
fiscal year just ended:
    (1) A petition under the Federal bankruptcy laws or any State 
insolvency law was filed by or against, or a receiver, fiscal agent, or 
similar officer was appointed by a court for the business or property of 
such person, or any partnership in which such person was a general 
partner at or within 2 years before the time of such filing, or any 
corporation or business association of which such person was a senior 
officer at or within 2 years before the time of such filing;
    (2) Such person was convicted in a criminal proceeding or is a named 
party in a pending criminal proceeding (excluding traffic violations and 
other misdemeanors);
    (3) Such person was the subject of any order, judgment, or decree, 
not subsequently reversed, suspended, or vacated, by any court of 
competent jurisdiction, permanently or temporarily enjoining or 
otherwise limiting such person from engaging in any type of business 
practice.

[77 FR 60597, Oct. 3, 2012, as amended at 79 FR 17856, Mar. 31, 2014; 80 
FR 10326, Feb. 26, 2015]



                       Subpart C_Quarterly Report



Sec. 620.10  Preparing the quarterly report.

    (a) Each institution of the Farm Credit System must:
    (1) Prepare and send to the Farm Credit Administration an electronic 
copy of its quarterly report within 40 calendar days after the end of 
each fiscal quarter, except that no report need be prepared for the 
fiscal quarter that coincides with the end of the fiscal year of the 
institution;
    (2) Publish a copy of its quarterly report on its Web site when it 
electronically sends the report to the Farm Credit Administration; and
    (3) Ensure the report complies with the applicable provisions of 
Secs. 620.2 and 620.3.
    (b) The report shall contain, at a minimum, the information 
specified in Sec. 620.11 and, in addition, such other material 
information (including significant events) as is necessary to make the 
required disclosures, in light of the circumstances under which they are 
made, not misleading.
    (c) Institutions may use the quarterly report to deliver any notice 
required under Sec. 620.15. Notices required under Sec. 620.17 must be 
issued separately from the quarterly report, unless otherwise authorized 
by the Farm Credit Administration.

[62 FR 15093, Mar. 31, 1997, as amended at 71 FR 76120, Dec. 20, 2006; 
74 FR 28600, June 17, 2009; 77 FR 60600, Oct. 3, 2012]

[[Page 245]]



Sec. 620.11  Content of quarterly report to shareholders.

    (a) General. The information required to be included in the 
quarterly report may be presented in any format deemed suitable by the 
institution, except as otherwise required by this section. The report 
must be organized in an easily understandable format and not presented 
in a manner that is misleading.
    (b) Rules for condensation. For purposes of this section, major 
captions to be provided in the financial statements are the same as 
those provided in the financial statements contained in the 
institution's annual report to shareholders, except that the financial 
statements included in the quarterly report may be condensed into major 
captions in accordance with the rules prescribed under this paragraph. 
If any amount that would otherwise be required to be shown by this 
subpart with respect to any item is not material, it need not be 
separately shown. The combination of insignificant items is permitted.
    (1) Interim balance sheets. When any major balance sheet caption is 
less than 10 percent of total assets and the amount in the caption has 
not increased or decreased by more than 25 percent since the end of the 
preceding fiscal year, the caption may be combined with others.
    (2) Interim statements of income. When any major income statement 
caption is less than 15 percent of average net income for the 3 most 
recent fiscal years and the amount in the caption has not increased or 
decreased by more than 20 percent since the corresponding interim period 
of the preceding fiscal year, the caption may be combined with others. 
In calculating average net income, loss years should be excluded. If 
losses were incurred in each of the 3 most recent fiscal years, the 
average loss shall be used for purposes of this test.
    (3) The interim financial information shall include disclosure 
either on the face of the financial statements or in accompanying 
footnotes sufficient to make the interim information presented not 
misleading. Institutions may presume that users of the interim financial 
information have read or have access to the audited financial statements 
for the preceding fiscal year and the adequacy of additional disclosure 
needed for a fair presentation may be determined in that context. 
Accordingly, footnote disclosure that would substantially duplicate the 
disclosure contained in the most recent audited financial statements 
(such as a statement of significant accounting policies and practices), 
and details of accounts that have not changed significantly in amount or 
composition since the end of the most recent completed fiscal year may 
be omitted. However, disclosure shall be provided of events occurring 
subsequent to the end of the most recent fiscal year that have a 
material impact on the institution. Disclosures should encompass, for 
example, significant changes since the end of the most recently 
completed fiscal year in such items as accounting principles and 
practices; estimates inherent in the preparation of financial 
statements; status of long-term contracts; capitalization, including 
significant new indebtedness or modification of existing financing 
agreements; and the reporting entity resulting from business 
combinations or dispositions.
    (4) The interim financial statements furnished shall reflect all 
adjustments that are, necessary to a fair statement of the results for 
the interim periods presented. A statement to that effect shall be 
included. Furnish any material information necessary to make the 
information called for not misleading, such as a statement that the 
results for interim periods are not necessarily indicative of results to 
be expected for the year.
    (c) Required content. A quarterly report must, at a minimum, contain 
the following items:
    (1) Management's discussion and analysis of financial condition and 
results of operations. Discuss material changes, if any, to the 
information provided to shareholders pursuant to Sec. 620.5(g) that have 
occurred during the periods specified in paragraphs (c)(2)(i) and (ii) 
of this section. Such additional information as is needed to enable the 
reader to assess material changes in financial

[[Page 246]]

condition and results of operations between the periods specified in 
paragraphs (c)(2)(i) and (ii) of this section shall be provided.
    (i) Material changes in financial condition. Discuss any material 
changes in financial condition from the end of the preceding fiscal year 
to the date of the most recent interim balance sheet provided. If the 
interim financial statements include an interim balance sheet as of the 
corresponding interim date of the preceding fiscal year, any material 
changes in financial conditions from that date to the date of the most 
recent interim balance sheet provided also shall be discussed. If 
discussions of changes from both the end and the corresponding interim 
date of the preceding fiscal year are required, the discussions may be 
combined at the discretion of the institution.
    (ii) Material changes in results of operations. Discuss any material 
changes in the institution's results of operations with respect to the 
most recent fiscal year-to-date period for which an income statement is 
provided and the corresponding year-to-date period of the preceding 
fiscal year. Such discussion also shall cover material changes with 
respect to that fiscal quarter and the corresponding fiscal quarter in 
the preceding fiscal year. In addition, if the institution has elected 
to provide an income statement for the 12-month period ended as of the 
date of the most recent interim balance sheet provided, the discussion 
also shall cover material changes with respect to that 12-month period 
and the 12-month period ended as of the corresponding interim balance 
sheet date of the preceding fiscal year.
    (2) Interim financial statements. The following financial statements 
must be provided:
    (i) An interim balance sheet as of the end of the most recent fiscal 
quarter and as of the end of the preceding fiscal year. A balance sheet 
for the comparable quarter of the preceding fiscal year is optional.
    (ii) Interim statements of income for the most recent fiscal 
quarter, for the period between the end of the preceding fiscal year and 
the end of the most recent fiscal quarter, and for the comparable 
periods for the previous fiscal year.
    (iii) Interim statements of changes in protected borrower capital 
and at-risk capital for the period between the end of the preceding 
fiscal year and the end of the most recent fiscal quarter, and for the 
comparable period for the preceding fiscal year.
    (iv) For banks, interim statements of cash flows for the period 
between the end of the preceding fiscal year and the end of the most 
recent fiscal quarter, and for the comparable period for the preceding 
fiscal year. For associations, interim statements of cash flows are 
optional.
    (3) Other related financial items. State that the financial 
statements were prepared under the oversight of the audit committee. The 
interim financial information need not be audited or reviewed by a 
qualified public accountant or external auditor prior to filing. If, 
however, a review of the data is made in accordance with the established 
professional standards and procedures for such a review, the institution 
may state that a qualified public accountant or external auditor has 
performed such a review under the supervision of the institution's audit 
committee. If such a statement is made, the report of a qualified public 
accountant or external auditor on such review must accompany the interim 
financial information.
    (d) Notices. Institutions using the quarterly report to deliver any 
notice required under Sec. 620.15 must put the notice information at the 
beginning of the quarterly report. The notice must be conspicuous and 
may not be part of any footnotes to the quarterly report.

[51 FR 21341, June 12, 1986, as amended at 53 FR 3337, Feb. 5, 1988. 
Redesignated and amended at 56 FR 29421, 29424, June 27, 1991; 67 FR 
16633, Apr. 8, 2002; 71 FR 5765, Feb. 2, 2006; 74 FR 28600, June 17, 
2009; 77 FR 60600, Oct. 3, 2012]



                    Subpart D_Notice to Shareholders

    Source: 62 FR 15093, Mar. 31, 1997, unless otherwise noted.

[[Page 247]]



Sec. 620.15  Notice of significant or material events.

    When a Farm Credit bank or association determines that it has a 
significant or material event, the institution must prepare and provide 
to its shareholders and the Farm Credit Administration a notice 
disclosing the event(s).
    (a) Each bank and association board of directors must establish and 
maintain a policy identifying the categories and types of events that 
may result in a notice under this section. At a minimum, events covered 
under this provision include significant events defined in Sec. 620.1(q) 
and material events defined in Sec. 620.1(h). The policy must identify 
how the significance or materiality of an event will be determined.
    (b) A notice issued under this section must be made as soon as 
possible, but not later than 90 days after occurrence of the event.
    (1) Each institution must electronically provide the notice to the 
Farm Credit Administration at the same time as distribution of the 
notice to shareholders.
    (2) Delivery of the notice to shareholders may be accomplished by 
direct communications with the shareholders, posting the notice on the 
institution's Web site, as part of the quarterly report to shareholders, 
or by publishing the notice in any publication with circulation wide 
enough to reasonably assure that all of the institution's shareholders 
have access to the information in a timely manner. No matter how the 
notice is distributed, it must comply with all the provisions of this 
section.
    (c) Every notice must be dated and signed in a manner similar to the 
requirements of Sec. 620.3(b).
    (d) The information required to be included in a notice issued under 
this section must be conspicuous, easily understandable, complete, 
accurate, and not misleading.
    (e) A Farm Credit System institution may be required to issue a 
notice under this section at the direction of the Farm Credit 
Administration.

[77 FR 60600, Oct. 3, 2012]



Sec. 620.17  Special notice provisions for events related to
noncompliance with minimum regulatory capital ratios.

    (a) For purposes of this section, ``regulatory capital ratios'' 
include the capital ratios specified in Sec. 628.10 of this chapter and 
the permanent capital standard prescribed under Sec. 615.5205 of this 
chapter.
    (b) When a Farm Credit bank or association determines that it is not 
in compliance with one or more applicable minimum regulatory capital 
ratios, that institution must prepare and provide to its shareholders 
and the FCA a notice stating that the institution has initially 
determined it is not in compliance with the minimum regulatory capital 
ratio or ratios. Such notice must be given within 30 days following the 
month end.
    (c) When notice is given under paragraph (b) of this section, the 
institution must also notify its shareholders and the FCA when the 
regulatory capital ratio or ratios that are the subject of such notice 
decrease by one half of 1 percent or more from the level reported in the 
original notice, or from that reported in a subsequent notice provided 
under this paragraph (c). This notice must be given within 45 days 
following the end of every quarter at which the institution's regulatory 
capital ratio or ratios decrease as specified.
    (d) Each institution required to prepare a notice under paragraph 
(b) or (c) of this section shall provide the notice to shareholders or 
publish it in any publication with circulation wide enough to be 
reasonably assured that all of the institution's shareholders have 
access to the information in a timely manner. The information required 
to be included in this notice must be conspicuous, easily 
understandable, and not misleading.
    (e) A notice, at a minimum, shall include:
    (1) A statement that:
    (i) Briefly describes the minimum regulatory capital ratios 
established by the FCA and the notice requirement of paragraph (b) of 
this section;
    (ii) Indicates the institution's current level of capital; and

[[Page 248]]

    (iii) Notifies shareholders that the institution's capital is below 
the FCA minimum regulatory capital ratio or ratios.
    (2) A statement of the effect that noncompliance has had on the 
institution and its shareholders, including whether the institution is 
currently prohibited by statute or regulation from retiring stock or 
distributing earnings or whether the FCA has issued a capital directive 
or other enforcement action to the institution.
    (3) A complete description of any event(s) that may have 
significantly contributed to the institution's noncompliance with the 
minimum regulatory capital ratio or ratios.
    (4) A statement that the institution is required by regulation to 
provide another notice to shareholders within 45 days following the end 
of any subsequent quarter at which the regulatory capital ratio or 
ratios decrease by one half of 1 percent or more from the level reported 
in the notice.

[81 FR 49778, July 28, 2016]



Subpart E_Annual Meeting Information Statements and Other Information To 
 Be Furnished in Connection with Annual Meetings and Director Elections



Sec. 620.20  Preparing and distributing the information statement.

    (a)(1) Each Farm Credit bank and association must prepare and 
provide an information statement (``statement'' or ``AMIS'') to its 
shareholders at least 10 business days, but not more than 30 business 
days, before any annual meeting or any director elections.
    (2) Each Farm Credit bank and association must provide the Farm 
Credit Administration an electronic copy of the AMIS when issued.
    (3) In addition to the mailed AMIS, each Farm Credit bank and 
association may post its AMIS on its Web site. Any AMIS posted on an 
institution's Web site must remain on the Web site for a reasonable 
period of time, but not less than 30 calendar days.
    (b) Every AMIS must be dated and signed in accordance with the 
requirements of Sec. 620.3(b) of this part.
    (c) Every AMIS must be available for public inspection at all 
offices of the issuing institution pursuant to Sec. 620.2(b) of this 
part.

[75 FR 18744, Apr. 12, 2010]



Sec. 620.21  Contents of the information statement.

    (a) An AMIS must, at a minimum, address the following items:
    (1) Date, time, and place of the meeting(s). Notice of the date, 
time, and meeting location(s) must be provided at least 10 business 
days, but no more than 30 business days, before the meeting. If the Farm 
Credit bank or association will use an online meeting space as part of 
its meeting, the notice must also specify the date, time, and means of 
accessing the online meeting space. This information does not need to be 
part of an AMIS issued by a Farm Credit bank if no meeting is held.
    (2) Voting shareholders. For each class of stock entitled to vote at 
the meeting, state the number of shareholders entitled to vote and, when 
shareholders are asked to vote on preferred stock, the number of shares 
entitled to vote. State the record date as of which the shareholders 
entitled to vote will be determined and the voting requirements for each 
matter to be voted upon. If association directors are nominated or 
elected by region, describe the regions and state the number of voting 
shareholders entitled to vote in each region.
    (3) Financial updates. Each AMIS must reference the most recently 
issued annual report required by subpart B of this part. The AMIS must 
also include such other information considered material and necessary to 
make the required contents of the AMIS, in light of the circumstances 
under which it is made, not misleading.
    (i) If any transactions between the institution and its senior 
officers and directors of the type required to be disclosed in the 
annual report to shareholders under Sec. 620.6(e), or any of the events 
required to be disclosed in the annual report to shareholders under 
Sec. 620.6(f) have occurred since the end of the last fiscal year and 
were not disclosed in the annual report to shareholders, the disclosures 
required by

[[Page 249]]

Sec. 620.6(e) and (f) shall be made with respect to such transactions or 
events in the information statement. If any material change in the 
matters disclosed in the annual report to shareholders pursuant to 
Sec. 620.6(e) and (f) has occurred since the annual report to 
shareholders was prepared, disclosure shall be made of such change in 
the information statement.
    (ii) If a Farm Credit institution has had a change or changes in its 
external auditor(s) since the last annual report to shareholders, or if 
a disagreement with an external auditor has occurred, the institution 
shall disclose the information required by Sec. 621.4(c) and (d) of this 
chapter.
    (4) Directors. State the names and ages of persons currently serving 
as directors of the institution, their terms of office, and the periods 
during which such persons have served. Institutions must also state the 
type or types of agriculture or aquaculture engaged in by each director. 
No information need be given with respect to any director whose term of 
office as a director will not continue after any meeting to which the 
statement relates.
    (i) Identify by name any incumbent director who attended fewer than 
75 percent of the board meetings or any meetings of board committees on 
which he or she served during the last fiscal year.
    (ii) If any director resigned or declined to stand for reelection 
since the last annual meeting because of a policy disagreement with the 
board, and if the director has provided a notice requesting disclosure 
of the nature of the disagreement, state the date of the director's 
resignation and summarize the director's description of the 
disagreement. If the institution holds a different view of the 
disagreement, the institution's view may be summarized as well.
    (b) An AMIS issued for director elections must also include the 
information required by this paragraph.
    (1) Provide the nominating committee's slate of director-nominees. 
If fewer than two director-nominees for each position are named, 
describe the efforts of the nominating committee to locate two willing 
nominees.
    (2) Provide, as part of the AMIS, the director-nominee disclosure 
information collected under Sec. 611.330 of this chapter. Institutions 
may either restate such information in a standard format or provide 
complete copies of each nominee's disclosure statement.
    (3) State whether nominations will be accepted from the floor and 
explain the procedures for making floor nominations.
    (c) When the nominating committee will be elected during director 
elections, notice to voting shareholders of this event must be included 
in the AMIS. The AMIS must describe the balloting procedures that will 
be used to elect the nominating committee, including whether floor 
nominations for committee members will be permitted. The AMIS must state 
the number of committee positions to be filled and the names of the 
nominees for the committee.
    (d) If shareholders are asked to vote on matters not normally 
required to be submitted to shareholders for approval, the AMIS must 
describe fully the material circumstances surrounding the matter, the 
reason shareholders are asked to vote, and the vote required for 
approval of the proposition. The AMIS must describe any other matter 
that will be discussed at the meeting upon which shareholder vote is not 
required.

[75 FR 18744, Apr. 12, 2010, as amended at 77 FR 60601, Oct. 3, 2012]



    Subpart F_Bank and Association Audit and Compensation Committees

    Source: 71 FR 5766, Feb. 2, 2006, unless otherwise noted.



Sec. 620.30  Audit committees.

    Each Farm Credit bank and association must establish and maintain an 
audit committee. An audit committee is established by adopting a written 
charter describing the committee's composition, authorities, and 
responsibilities in accordance with this section. All audit committees 
must maintain records of meetings, including attendance, for at least 3 
fiscal years.
    (a) Composition. Each member of an audit committee must be a member 
of

[[Page 250]]

the Farm Credit institution's board of directors. An audit committee may 
not consist of less than three members and must include any director 
designated as a financial expert under Sec. 611.210(a)(2) of this 
chapter. All audit committee members should be knowledgeable in at least 
one of the following: Public and corporate finance, financial reporting 
and disclosure, or accounting procedures.
    (b) Independence. Every audit committee member must be free from any 
relationship that, in the opinion of the board, would interfere with the 
exercise of independent judgment as a committee member.
    (c) Resources. Farm Credit institutions must permit their audit 
committees to contract for independent legal counsel and expert 
advisors. If an institution hires a financial expert advisor pursuant to 
Sec. 611.210(a)(2), that advisor will also serve as an advisor to the 
audit committee. Each institution is responsible for providing monetary 
and nonmonetary resources to enable its audit committee to contract for 
external auditors, outside advisors, and ordinary administrative 
expenses. A two-thirds majority vote of the full board of directors is 
required to deny an audit committee's request for resources.
    (d) Duties. Each audit committee must report only to the board of 
directors. In its capacity as a committee of the board, the audit 
committee is responsible for the following:
    (1) Financial reports. Each audit committee must oversee 
management's preparation of the report to shareholders; review the 
impact of any significant accounting and auditing developments; review 
accounting policy changes relating to preparation of financial 
statements; and review annual and quarterly reports prior to release. 
After the audit committee reviews a financial policy, procedure, or 
report, it must record in its minutes its agreement or disagreement with 
the item(s) under review.
    (2) External auditors. The external auditor must report directly to 
the audit committee. Each audit committee must:
    (i) Determine the appointment, compensation, and retention of 
external auditors issuing audit reports of the institution;
    (ii) Review the external auditor's work;
    (iii) Give prior approval for any non-audit services performed by 
the external auditor, except the audit committee may not approve those 
non-audit services specifically prohibited by FCA regulation; and
    (iv) Comply with the auditor independence provisions of part 621 of 
this chapter.
    (3) Internal controls. Each audit committee must oversee the 
institution's system of internal controls relating to preparation of 
financial reports, including controls relating to the institution's 
compliance with applicable laws and regulations. Any internal audit 
functions of the institution must also be subject to audit committee 
review and supervision.

[53 FR 50339, Dec. 15, 1988, as amended at 71 FR 76120, Dec. 20, 2006]



Sec. 620.31  Compensation committees.

    Each Farm Credit bank and association must establish and maintain a 
compensation committee by adopting a written charter describing the 
committee's composition, authorities, and responsibilities in accordance 
with this section. The compensation committee must report only to the 
board of directors. All compensation committees are required to maintain 
records of meetings, including attendance, for at least 3 fiscal years.
    (a) Composition. Each compensation committee must consist of at 
least three members and all committee members must be members of the 
institution's board of directors. Every member must be free from any 
relationship that, in the opinion of the board, would interfere with the 
exercise of independent judgment as a committee member.
    (b) Responsibilities. It is the responsibility of each compensation 
committee to review the compensation policies and plans for senior 
officers and employees and to approve the overall compensation program 
for senior officers. In fulfilling its responsibilities, the 
compensation committee must document that it determined the:

[[Page 251]]

    (1) Institution's projected long-term compensation and retirement 
benefit obligations are appropriate to the services performed and not 
excessive;
    (2) Incentive-based compensation programs and payments are 
reasonable and proportionate to the services performed and structured so 
the payout schedule considers the potential for future losses or undue 
risks to the institution;
    (3) Senior officer compensation, incentive, and benefit programs 
support the institution's long-term business strategy and mission, as 
well as promote safe and sound business practices; and
    (4) Compensation programs designed for specific groups of employees, 
other than senior officers, pose no imprudent risks to the institution.
    (c) Resources. Each institution must provide monetary and 
nonmonetary resources to enable its compensation committee to perform 
its duties.

[77 FR 60601, Oct. 3, 2012]



PART 621_ACCOUNTING AND REPORTING REQUIREMENTS--Table of Contents



                    Subpart A_Purpose and Definitions

Sec.
621.1  Purpose and applicability.
621.2  Definitions.

                         Subpart B_General Rules

621.3  Application of generally accepted accounting principles.
621.4  Audit by qualified public accountant.
621.5  Accounting for the allowance for loan losses and chargeoffs.

           Subpart C_Loan Performance and Valuation Assessment

621.6  Performance categories and other property owned.
621.7  Rule of aggregation.
621.8  Application of payments and income recognition on nonaccrual 
          loans.
621.9  Reinstatement to accrual status.
621.10  Monitoring of performance categories and other property owned.

    Subpart D_-Reports of Condition and Performance and Accounts and 
                                Exposures

621.12  Reports of condition and performance.
621.13  Content and standards--general rules.
621.14  Certification of correctness.
621.15  Reports of accounts and exposures.

                     Subpart E_Auditor Independence

621.30  General.
621.31  Non-audit services.
621.32  Conflicts of interest and rotation.

    Authority: Secs. 4.12(b)(5), 5.17, 5.22A, 8.11 of the Farm Credit 
Act (12 U.S.C. 2183, 2252, 2257a, 2279aa-11); sec. 514 of Pub. L. 102-
552.

    Source: 58 FR 48786, Sept. 20, 1993, unless otherwise noted.



                    Subpart A_Purpose and Definitions



Sec. 621.1  Purpose and applicability.

    This part sets forth accounting and reporting requirements to be 
followed by all banks, associations, and service corporations chartered 
under the Act; the Federal Farm Credit Banks Funding Corporation; and, 
where specifically indicated, the Federal Agricultural Mortgage 
Corporation. The requirements set forth in this part are of both general 
and specific applicability. Certain requirements focus on areas of 
financial condition and operating performance that are of special 
importance for generating, presenting, and disclosing accurate and 
reliable information.

[58 FR 48786, Sept. 20, 1993, as amended at 78 FR 31835, May 28, 2013]



Sec. 621.2  Definitions.

    For the purposes of this part, the following definitions shall 
apply:
    (a) Accounts and exposures means data related to any loan, lease, 
letter of credit, derivative, or, any other asset, liability, other 
balance sheet account, or off-balance-sheet exposure of a System 
institution.
    (b) Accrual basis of accounting means the accounting method in which 
expenses are recorded when incurred, whether paid or unpaid, and income 
is reported when earned, whether received or not received.
    (c) Banks and associations mean all Farm Credit Banks, Agricultural 
credit banks, and associations.
    (d) Borrowing entity means the individual(s), partnership, joint 
venture, trust, corporation, or other business entity, or any 
combination thereof,

[[Page 252]]

that is primarily obligated on the loan instrument.
    (e) Central data repository means a central data warehouse that 
electronically collects and stores current and historical data and is 
created by integrating data from one or more disparate sources.
    (f) Generally accepted accounting principles means that body of 
conventions, rules, and procedures necessary to define accepted 
accounting practices at a particular time, as promulgated by the 
Financial Accounting Standards Board (FASB) and other authoritative 
sources recognized as setting standards for the accounting profession in 
the United States. Generally accepted accounting principles include not 
only broad guidelines of general application but also detailed practices 
and procedures that constitute standards by which financial 
presentations are evaluated.
    (g) Generally accepted auditing standards means the standards and 
guidelines that are generally accepted in the United States of America 
and that are adopted by the authoritative body that governs the overall 
quality of audit performance.
    (h) Institution means any bank, association, or service corporation 
chartered under the Act; the Federal Farm Credit Banks Funding 
Corporation, and where specifically noted, the Federal Agricultural 
Mortgage Corporation.
    (i) Loan means any extension of credit or lease that is recorded as 
an asset of a reporting institution, whether made directly or purchased 
from another lender. The term ``loan'' includes, but is not limited to:
    (1) Loans originated through direct negotiations between the 
reporting institution and a borrower;
    (2) Purchased loans or interests in loans, including participation 
interests, retained subordinated participation interests in loans sold, 
and interests in pools of subordinated participation interests that are 
held in lieu of retaining a subordinated participation interest in loans 
sold;
    (3) Contracts of sale; notes receivable; and
    (4) Other similar obligations and lease financing.
    (j) Material means the magnitude of an omission or misstatement of 
accounting information that, in light of surrounding circumstances, 
makes it probable that the judgment of a reasonable person relying on 
the information would have been changed or influenced by the omission or 
misstatement.
    (k) Net realizable value means the net amount the lender would 
expect to be realized from the acquisition and subsequent sale or 
disposition of a loan's underlying collateral. Generally, net realizable 
value is equal to the estimated selling price in the ordinary course of 
business, less estimated costs of acquisition, completion, and disposal.
    (l) Recorded investment means the face amount of the loan increased 
or decreased by applicable accrued interest and unamortized premium, 
discount, finance charges, or acquisition costs, and may also reflect a 
previous direct write-down of the investment.
    (m) Reporting entity means the Federal Farm Credit Banks Funding 
Corporation, or other entity approved by the Farm Credit Administration.
    (n) Shared asset means any account or exposure where two or more 
Farm Credit institutions have assumed a portion of the asset's benefits 
or risks. An institution's share in the asset may be established through 
means such as syndications, participation agreements, assignments, or 
other arrangements with System entities.

[58 FR 48786, Sept. 20, 1993, as amended at 71 FR 76120, Dec. 20, 2006; 
74 FR 28600, June 17, 2009; 78 FR 31835, May 28, 2013; 78 FR 77562, Dec. 
24, 2013]



                         Subpart B_General Rules



Sec. 621.3  Application of generally accepted accounting principles.

    Each institution shall:
    (a) Prepare and maintain, on an accrual basis, accurate and complete 
records of its business transactions as necessary to prepare financial 
statements and reports, including reports to the Farm Credit 
Administration, in accordance with generally accepted accounting 
principles, except as otherwise directed by statutory and regulatory 
requirements;

[[Page 253]]

    (b) Prepare its financial statements and reports, including reports 
to the shareholders, investors, boards of directors, institution 
management and the Farm Credit Administration, in accordance with 
generally accepted accounting principles, except as otherwise directed 
by statutory and regulatory requirements; and
    (c) Prepare and maintain its books and records in such a manner as 
to facilitate reconciliation with financial statements and reports 
prepared from them.



Sec. 621.4  Audit by qualified public accountant.

    (a) Each institution shall, at least annually, have its financial 
statements audited by a qualified public accountant in accordance with 
generally accepted auditing standards.
    (b) The qualified public accountant's opinion of each institution's 
financial statements must be included as a part of each annual report to 
shareholders. The accountant must comply with the auditor independence 
provisions of subpart E of this part.
    (c) If an institution disagrees with the opinion of a qualified 
public accountant required by paragraph (b) of this section, the 
following actions shall be taken immediately:
    (1) The institution shall prepare a brief but thorough written 
description of the scope and content of the disagreement, noting each 
point of disagreement and citing, in all cases, the specific provisions 
of generally accepted accounting principles and generally accepted 
auditing standards upon which the institution's position in the 
disagreement is based;
    (2) A copy of the institution's final description of the 
disagreement shall be given to the accountant who provided the opinion 
with which the institution disagrees;
    (3) The accountant shall have 10 business days to develop and 
provide a brief but thorough final response to the institution's 
description of the disagreement, including all items believed to be 
incorrect or incomplete, and citing, in all cases, the specific 
provisions of generally accepted accounting principles and generally 
accepted auditing standards upon which the accountant's position in the 
disagreement is based;
    (4) Both the institution's final description of the disagreement and 
the accountant's final response to it shall be included in the 
institution's annual report to shareholders directly following the 
accountant's opinion of the institution's financial statements; and
    (5) The institution shall immediately notify the Chief Examiner, 
Farm Credit Administration, of any disagreement with its accountant and 
shall furnish the Farm Credit Administration with the written 
documentation required by paragraphs (c) (1) through (4) of this 
section.
    (d) If an institution selects a qualified public accountant to audit 
its financial statements and provide an opinion thereon for its annual 
report who is different from the accountant whose opinion appeared in 
the institution's most recent annual report, the following items shall 
be sent to the Farm Credit Administration no later than 15 days after 
the end of the month in which the change took place and shall be 
included in the institution's annual meeting information statement and 
annual report to shareholders for the year in which the change of 
accountants took place:
    (1) The name and address of the accountant whose opinion appeared in 
the institution's most recent annual report to shareholders;
    (2) A brief but thorough statement of the reasons the accountant 
selected for the most recent annual report was not selected for the 
current annual report. If the change resulted from a disagreement with 
the accountant, the statement shall describe the institution's 
disagreement with the accountant's opinion and the accountant's final 
response to the institution's disagreement prepared pursuant to 
paragraph (c) of this section; and
    (3) The identification of the highest ranking officer, committee of 
officers, or board of directors, as appropriate, that recommended, 
approved, or otherwise made the decision to change qualified public 
accountants.

[58 FR 48786, Sept. 20, 1993, as amended at 71 FR 76120, Dec. 20, 2006]

[[Page 254]]



Sec. 621.5  Accounting for the allowance for loan losses and chargeoffs.

    Each institution shall:
    (a) Maintain at all times an allowance for loan losses that is 
determined according to generally accepted accounting principles.
    (b) Develop, adopt, and consistently apply policies and procedures 
governing the establishment and maintenance of the allowance for loan 
losses which, at a minimum, conform to the rules, definitions, and 
standards set forth in this part and any other applicable requirements.
    (c) Charge-off loans, wholly or partially, as appropriate, at the 
time they are determined to be uncollectible.
    (d) Ensure that when an institution or the Farm Credit 
Administration determines that the value of a loan or other asset 
recorded on its books and records exceeds the amount that can reasonably 
be expected to be collectible, or when the documentation supporting the 
recorded asset value is inadequate, the institution shall immediately 
charge off the asset in the amount determined to be uncollectible. If 
the amount determined to be uncollectible by the institution is 
different from the amount determined to be uncollectible by the Farm 
Credit Administration, the institution shall charge off such amount as 
the Farm Credit Administration shall direct.

[58 FR 48786, Sept. 20, 1993, as amended at 74 FR 28600, June 17, 2009]



           Subpart C_Loan Performance and Valuation Assessment



Sec. 621.6  Performance categories and other property owned.

    Each institution shall employ the following practices with respect 
to categorizing high-risk loans and loan-related assets. No loan shall 
be put into more than one performance category. At a minimum, loans 
meeting the criteria for both nonaccrual and another performance 
category shall be classified as nonaccrual.
    (a) Nonaccrual loans. A loan shall be considered nonaccrual if it 
meets any of the following conditions:
    (1) Collection of any amount of outstanding principal and all past 
and future interest accruals, considered over the full term of the 
asset, is not expected;
    (2) Any portion of the loan has been charged off, except in cases 
where the prior chargeoff was taken as part of a formal restructuring of 
the loan; or
    (3) The loan is 90 days past due and is not both adequately secured 
and in process of collection.
    (i) A loan is considered adequately secured only if:
    (A) It is secured by real or personal property having a net 
realizable value sufficient to discharge the debt in full; or
    (B) It is guaranteed by a financially responsible party in an amount 
sufficient to discharge the debt in full.
    (ii) A loan is considered in process of collection only if 
collection efforts are proceeding in due course and, based on a probable 
and specific event, are expected to result in the prompt repayment of 
the debt or its restoration to current status. There must be documented 
evidence that collection in full of amounts due and unpaid is expected 
to occur within a reasonable time period, not to exceed 180 days from 
the date that payment was due. The commencement of collection efforts 
through legal action, including bankruptcy or foreclosure, or through 
collection efforts not involving legal action, including ongoing 
workouts and reamortizations, do not, in and of themselves, provide 
sufficient cause to keep a loan out of nonaccrual status. If full 
collection of the debt or its restoration to current status is dependent 
upon completion of any action by the borrower, the institution must 
obtain the borrower's written agreement to complete all such actions by 
the specific dates set forth in agreement.
    (b) Formally restructured loans. A loan is considered formally 
restructured if it meets the ``troubled debt restructuring'' definition 
set forth in Financial Accounting Standards Board Accounting Standards 
Codification Subtopic 310--40, Receivables--Troubled Debt Restructurings 
by Creditors.
    (c) Loans 90 days past due still accruing interest. (1) Loans 90 
days past due still accruing interest means loans that are 90 days or 
more contractually past due, and that are both adequately secured

[[Page 255]]

and in process of collection, as described in this section.
    (2) A loan shall be considered contractually past due when any 
principal repayment or interest payment required by the loan instrument 
is not received on or before the due date. A loan shall remain 
contractually past due until it is formally restructured or until the 
entire amount past due, including principal, accrued interest, and 
penalty interest incurred as the result of past due status, is collected 
or otherwise discharged in full.
    (d) Other property owned means any real or personal property, other 
than an interest-earning asset, that has been acquired as a result of 
full or partial liquidation of a loan, through foreclosure, deed in lieu 
of foreclosure, or other means.

[58 FR 48786, Sept. 20, 1993, as amended at 78 FR 21037, Apr. 9, 2013]



Sec. 621.7  Rule of aggregation.

    (a) When one loan to a borrower is placed in nonaccrual, an 
institution must immediately evaluate whether its other loans to that 
borrower, or related borrowers, should also be placed in nonaccrual. All 
loans on which a borrowing entity, or a component of a borrowing entity, 
is primarily obligated to the reporting institution shall be considered 
as one loan unless a review of all pertinent facts supports a reasonable 
determination that a particular loan constitutes an independent credit 
risk and such determination is adequately documented in the loan file.
    (1) A loan shall be considered an independent credit risk if a 
substantial portion of the loan is guaranteed as to principal and 
interest by a government agency.
    (2) Other loans shall be considered independent credit risks if and 
so long as:
    (i) The primary sources of repayment are independent for each loan;
    (ii) The loans are not cross-collateralized; and
    (iii) The principal obligors are different person(s) and/or 
entity(ies). Related loans will not be considered independent credit 
risks if the operations of a related borrower are so financially 
interdependent with the borrower's operations that the economic survival 
of one will materially affect the economic survival of the other, 
determined in accordance with Sec. 614.4359(a)(2) of this chapter.
    (b) If the evaluation required by paragraph (a) of this section 
results in a determination that the borrower's other loans with the 
institution do not represent an independent credit risk, and full 
collection of such loans is not expected, then all of the borrower's 
loans must be aggregated and classified as nonaccrual. If such other 
loans represent an independent credit risk and are fully collectible, 
then they may remain in their current performance category.
    (c) When an institution becomes aware that a borrower has a loan 
that has been classified nonaccrual by any other lender, the institution 
must re-evaluate the credit risk in its loan to the borrower and then 
determine whether an independent credit risk exists.

[58 FR 48786, Sept. 20, 1993, as amended at 64 FR 34519, June 28, 1999]



Sec. 621.8  Application of payments and income recognition on
nonaccrual loans.

    Each institution shall employ the following practices with respect 
to application of cash payments on nonaccrual loans:
    (a) If the ultimate collectibility of the recorded investment, in 
whole or in part, is in doubt, any payment received on such loan shall 
be applied to reduce the recorded investment to the extent necessary to 
eliminate such doubt.
    (b) Once the ultimate collectibility of the recorded investment is 
no longer in doubt, payments received in cash on such loan may qualify 
for recognition as interest income if all of the following 
characteristics are met at the time the payment is received:
    (1) The loan does not have a remaining unrecovered prior chargeoff 
associated with it, except in cases where the prior chargeoff was taken 
as part of a formal restructuring of the loan;
    (2) The payment received has come from a source of repayment 
detailed in the plan of collection;
    (3) The loan, after considering the payment, is not contractually 
past due more than 90 days and is not expected

[[Page 256]]

to become 90 days past due, or a repayment pattern has been established 
that reasonably demonstrates future repayment capacity.
    (c) The institution shall employ the following practices with 
respect to earned but uncollected interest income on loans, leases, 
contracts, and similar assets that are determined not to be fully 
collectible:
    (1) Earned but uncollected interest income that was accrued in the 
current fiscal year and is determined to be uncollectible shall be 
reversed from interest income; and
    (2) Earned but uncollected interest income that was accrued in prior 
fiscal years and is determined to be uncollectible shall be charged off 
against the allowance for loan losses.



Sec. 621.9  Reinstatement to accrual status.

    A loan may be reinstated to accrual status, when each of the 
following criteria are met:
    (a) All contractual principal and interest due on the loan is paid 
and the loan is current;
    (b) Prior chargeoffs are recovered, except for troubled debt 
restructures;
    (c) No reasonable doubt remains regarding the willingness and 
ability of the borrower to perform in accordance with the contractual 
terms of the loan agreement; and
    (d) Reinstatement is supported by a period of sustained performance 
in accordance with the contractual terms of the note and/or loan 
agreement. Sustained performance will generally be demonstrated by 6 
consecutive monthly payments, 4 consecutive quarterly payments, 3 
consecutive semi-annual payments, or 2 consecutive annual payments.



Sec. 621.10  Monitoring of performance categories and other property
owned.

    (a) Each institution shall:
    (1) Account for, report, and disclose to shareholders, investors, 
boards of directors, and the Farm Credit Administration all material 
items with respect to performance categories and other property owned in 
accordance with the rules and definitions set forth in this part and any 
other applicable requirements;
    (2) In accordance with Sec. 620.5(g)(1)(iv)(A) of this chapter, 
disclose to shareholders, investors, boards of directors, and the Farm 
Credit Administration the nature and extent of significant potential 
credit risks within the loan portfolio, or other information that could 
adversely impact performance of the loan portfolio in the near future;
    (3) Develop, adopt, and consistently apply policies and procedures 
governing performance categories and other property owned, which, at a 
minimum, conform to the definitions, rules, and standards set forth in 
this part and such other requirements and procedures as may be required 
by the Farm Credit Administration;
    (4) Review the loan portfolio at least quarterly to ensure that all 
high-risk loans have been assigned the appropriate performance category; 
and
    (5) Review all high-risk loans in the loan portfolio at least 
quarterly to determine the collectibility of accrued but uncollected 
income, if any.
    (b) Measures taken to enhance the collectibility of a loan shall not 
be deemed to relieve an institution of the requirement to monitor and 
evaluate the loan for the purpose of determining its performance status.



    Subpart D_-Reports of Condition and Performance and Accounts and 
                                Exposures



Sec. 621.12  Reports of condition and performance.

    (a) Each institution, including the Federal Agricultural Mortgage 
Corporation, shall prepare and file such reports of condition and 
performance as may be required by the Farm Credit Administration.
    (b) Reports of condition and performance shall be filed four times 
each year, and at such other times as the Farm Credit Administration may 
require. The reports shall be prepared on the accrual basis of 
accounting and shall fairly represent the financial condition and 
performance of each institution at the end of, and over the period of, 
each calendar quarter, provided that such additional reports as may be

[[Page 257]]

necessary to ensure timely, complete, and accurate monitoring and 
evaluation of the affairs, condition, and performance of Farm Credit 
institutions may be required, as determined by the Chief Examiner, Farm 
Credit Administration.
    (c) All reports of condition and performance shall be submitted 
electronically in accordance with the instructions prescribed by the 
Farm Credit Administration and located on its Web site.

[58 FR 48786, Sept. 20, 1993, as amended at 74 FR 28600, June 17, 2009]



Sec. 621.13  Content and standards--general rules.

    Each institution, including the Federal Agricultural Mortgage 
Corporation, shall prepare reports of condition and performance:
    (a) In accordance with all applicable laws, regulations, standards, 
and such instructions and specifications and on such media as may be 
prescribed by the Farm Credit Administration;
    (b) In accordance with generally accepted accounting principles and 
such other accounting requirements, standards, and procedures as may be 
prescribed by the Farm Credit Administration; and
    (c) In such manner as to facilitate their reconciliation with the 
books and records of reporting institutions.



Sec. 621.14  Certification of correctness.

    Each report of financial condition and performance filed with the 
Farm Credit Administration shall be certified as having been prepared in 
accordance with all applicable regulations and instructions and to be a 
true and accurate representation of the financial condition and 
performance of the institution to which it applies. The reports shall be 
certified by the officer of the reporting institution named for that 
purpose by action of the reporting institution's board of directors. If 
the board of directors of the institution has not acted to name an 
officer to certify the correctness of its reports of condition and 
performance, then the reports shall be certified by the president or 
chief executive officer of the reporting institution.



Sec. 621.15  Reports of accounts and exposures.

    (a) Responsibilities of banks and associations for preparing and 
submitting reports. The banks and associations must prepare and submit 
an accurate and complete report of all bank and association accounts and 
exposures electronically to the Farm Credit Administration pursuant to 
the requirements of this part. In order to accomplish such submission, 
each bank and association must:
    (1) Prepare and submit an accurate and complete report of its 
accounts and exposures electronically to the Reporting Entity:
    (i) In accordance with the instructions prescribed by the Farm 
Credit Administration, or as may be required by the Farm Credit 
Administration; and
    (ii) Within 20 calendar days after each quarter-end date, and at 
such other times as the Farm Credit Administration may require.
    (2) Submit to the Farm Credit Administration and the Reporting 
Entity a written certification that the information provided in the 
report of accounts and exposures has been prepared in accordance with 
all applicable regulations and instructions, and is a true and accurate 
record of the data maintained by the bank or association, to the best of 
its knowledge and belief. The reports shall be certified by the officer 
of the reporting bank or association named for that purpose by action of 
the reporting bank's or association's board of directors. If the board 
of directors of the bank or association has not acted to name an officer 
to certify to the accuracy of its reports of accounts and exposures, 
then the reports shall be certified by the president or chief executive 
officer of the reporting bank or association. In the event the bank or 
association learns of a material error or misstatement in the 
information submitted to the Reporting Entity, it must notify the 
Reporting Entity and the Farm Credit Administration immediately of the 
error or misstatement and prepare and submit corrected information as 
soon as practicable.
    (3) Respond promptly to any questions by the Reporting Entity 
related

[[Page 258]]

to information provided under this section in connection with the 
preparation of a report of accounts and exposures, including any data 
required to establish, implement and maintain consistent, accurate, and 
complete shared asset identification and reporting of shared asset 
exposures to the Farm Credit Administration.
    (4) Develop, implement, and maintain an effective system of internal 
controls over the data included in the report of accounts and exposures, 
including controls for maintaining the confidentiality of borrower 
information. The system of internal controls, at a minimum, must comply 
with the requirements of applicable Farm Credit Administration 
regulations, including Sec. 618.8430 of this chapter.
    (b) Responsibilities of the Reporting Entity for preparing and 
submitting reports. The Reporting Entity must:
    (1) Collect, store, and manage the information submitted to it by 
each bank and association under the requirements of this section in a 
central data repository in accordance with Farm Credit Administration 
regulations and prescribed instructions.
    (2) Prepare and submit an electronic quarterly report of the 
accounts and exposures of all banks and associations to the Farm Credit 
Administration in accordance with the instructions prescribed by the 
Farm Credit Administration or as may be required by the Farm Credit 
Administration.
    (3) Establish, implement, and maintain an automated mechanism to 
ensure the reliable, timely, accurate and consistent identification of 
the banks' and associations' shared asset exposures, and report these 
exposures and the shared asset identifiers in the electronic quarterly 
report of accounts and exposures to the Farm Credit Administration. In 
connection with establishing and implementing the automated shared asset 
identification mechanism, the Reporting Entity may provide the banks and 
associations information from the central data repository to identify 
and report shared asset exposures.
    (4) Submit to the Farm Credit Administration a written certification 
that the information provided to the Farm Credit Administration in the 
report of accounts and exposures of all banks and associations 
accurately represents the information provided to it by the banks and 
associations and that the Reporting Entity has complied with the 
requirements of Sec. 621.15(b). The reports shall be certified by the 
president or chief executive officer of the Reporting Entity. In the 
event the Reporting Entity learns of a material error or misstatement in 
the information submitted to the Farm Credit Administration, it must 
notify the Farm Credit Administration immediately of the error or 
misstatement and prepare and submit corrected information as soon as 
practicable.
    (5) Develop, implement, and maintain an effective system of internal 
controls over the central data repository, including controls for 
maintaining the confidentiality of borrower information. The system of 
internal controls, at a minimum, must comply with the requirements of 
applicable Farm Credit Administration regulations, including 
Sec. 618.8430 of this chapter and require that the Reporting Entity:
    (i) Develop policies and procedures to ensure that the information 
submitted in the report of accounts and exposures to the Farm Credit 
Administration is complete and consistent with the information submitted 
to the Reporting Entity from the banks and associations under 
Sec. 621.15(a); and
    (ii) Specify procedures for monitoring any material corrections or 
adjustments, in a timely manner, and provide timely notification and 
resubmission of the report of accounts and exposures to the Farm Credit 
Administration.
    (6) Notify the Farm Credit Administration if it is unable to prepare 
and submit the quarterly report of accounts and exposures in compliance 
with the requirements of Sec. 621.15(b)(1) through (b)(3). The 
notification:
    (i) Must be signed by the chief executive officer, or person in an 
equivalent position, and submitted to the Farm Credit Administration as 
soon as the Reporting Entity becomes aware of its inability to comply;
    (ii) Must explain the reasons for its inability to prepare and 
submit the report; and

[[Page 259]]

    (iii) May include a request that the Farm Credit Administration 
extend the due date for the quarterly report of accounts and exposures.
    (7) In the event there is a breach of information, immediately 
provide written notice of the breach to:
    (i) The Farm Credit Administration; and
    (ii) Each bank and association concerned;
    (iii) For the purposes of this section, ``breach of information'' 
means any actual or attempted unauthorized access, possession, use, 
disclosure, disruption, modification, or destruction of information in 
the central data repository, any reports of accounts and exposures, or 
any other information received pursuant to Sec. 621.15(a)(1).
    (8) Notify the Farm Credit Administration in writing of any request 
for data contained in the reports of accounts and exposures that are not 
explicitly allowed for in Sec. 618.8320(b) of this chapter.

[78 FR 77562, Dec. 24, 2013]



                     Subpart E_Auditor Independence

    Source: 71 FR 76120, Dec. 20, 2006, unless otherwise noted.



Sec. 621.30  General.

    Each Farm Credit institution must ensure the independence of all 
qualified public accountants conducting the institution's audit by 
establishing and maintaining policies and procedures governing the 
engagement of external auditors. The policies and procedures must 
incorporate the provisions of this subpart and Sec. 612.2260 of this 
chapter.



Sec. 621.31  Non-audit services.

    Non-audit services are any professional services provided by a 
qualified public accountant during the period of an audit engagement 
which are not connected to an audit or review of an institution's 
financial statements.
    (a) A qualified public accountant engaged to conduct a Farm Credit 
institution's audit may not perform the following non-audit services for 
that institution:
    (1) Bookkeeping,
    (2) Financial information systems design,
    (3) Appraisal and valuation services,
    (4) Actuarial services,
    (5) Internal audit outsourcing services,
    (6) Management or human resources functions,
    (7) Legal and expert services unrelated to the audit, and
    (8) Advocating an institution's interests in litigation, regulatory 
or administrative investigations and proceedings unrelated to external 
audit work.
    (b) A qualified public accountant engaged to conduct a Farm Credit 
institution's audit may only perform non-audit services, not otherwise 
prohibited in this section, if the institution's audit committee pre-
approves the services and the services are fully disclosed in the annual 
report.



Sec. 621.32  Conflicts of interest and rotation.

    (a) Conflicts of interest. (1) A Farm Credit institution may not 
engage a qualified public accountant to conduct the institution's audit 
if the accountant uses a partner, concurring partner, or lead member in 
the audit engagement team who was a director, officer or employee of the 
Farm Credit institution within the past year.
    (2) A Farm Credit institution may not make an employment offer to a 
partner, concurring partner, or lead member serving on the institution's 
audit engagement team during the audit or within 1 year of the 
conclusion of the audit engagement.
    (b) Rotation. Each institution may engage the same lead and 
reviewing audit partners of a qualified public accountant to conduct the 
institution's audit for no more than 5 consecutive years. The 
institution must then require the lead and reviewing audit partners 
assigned to the institution's audit team to rotate out of the audit team 
for 5 years. At the end of 5 years, the institution may again engage the 
audit services of those lead and reviewing audit partners.

[[Page 260]]



PART 622_RULES OF PRACTICE AND PROCEDURE--Table of Contents



              Subpart A_Rules Applicable to Formal Hearings

Sec.
622.1  Scope of regulations.
622.2  Definitions.
622.3  Appearance and practice.
622.4  Commencement of proceedings.
622.5  Answer.
622.6  Opportunity for informal settlement.
622.7  Conduct of hearings.
622.8  Rules of evidence.
622.9  Subpoenas.
622.10  Depositions.
622.11  Motions.
622.12  Proposed findings and conclusions; recommended decision.
622.13  Exceptions.
622.14  Briefs.
622.15  Oral argument before the Board.
622.16  Notice of submission to the Board.
622.17  Decision of the Board.
622.18  Filing.
622.19  Service.
622.20  Documents in proceedings confidential.
622.21  Computing time.
622.22  Retained authority.
622.23-622.50  [Reserved]

 Subpart B_Rules and Procedures for Assessment and Collection of Civil 
                             Money Penalties

622.51  Definitions.
622.52  Purpose and scope.
622.53-622.54  [Reserved]
622.55  Notice of assessment of civil money penalty.
622.56  Request for formal hearing on assessment.
622.57  Waiver of hearing; consent.
622.58  Hearing on assessment.
622.59  Assessment order.
622.60  Payment of civil money penalty.
622.61  Adjustment of civil money penalties by the rate of inflation 
          under the Federal Civil Penalties Inflation Adjustment Act of 
          1990, as amended.
622.62-622.75  [Reserved]

Subpart C_Rules and Procedures Applicable to Suspension or Removal of an 
          Individual Where Certain Crimes are Charged or Proven

622.76  Definitions.
622.77  Purpose and scope.
622.78  Suspension, prohibition or removal.
622.79  Petition for informal hearing.
622.80  Informal hearing.
622.81  Default.
622.82  Decision of the Board.
622.83-622.100  [Reserved]

   Subpart D_Rules and Procedures Applicable to Formal Investigations

622.101  Definitions.
622.102  Scope.
622.103  Formal investigations are confidential.
622.104  Order to conduct formal investigation.
622.105  Conduct of investigation.
622.106  Service of subpoena and payment of witness fees.
622.107  Transcripts.

    Authority: Secs. 5.9, 5.10, 5.17, 5.25-5.37 of the Farm Credit Act 
(12 U.S.C. 2243, 2244, 2252, 2261-2273); 28 U.S.C. 2461 note; and 42 
U.S.C. 4012a(f).

    Source: 51 FR 21139, June 11, 1986, unless otherwise noted.



              Subpart A_Rules Applicable to Formal Hearings



Sec. 622.1  Scope of regulations.

    This subpart prescribes rules of practice and procedure in 
connection with any formal hearing before the Farm Credit Administration 
(FCA) that is required by the Farm Credit Act of 1971, as amended (Act) 
or is ordered for other reasons by the FCA. In connection with any 
particular matter, reference should also be made to any special 
requirements of practice and procedure that may be contained in 
applicable provisions of the Act or the rules adopted by the FCA in 
subpart B of this part, which special requirements are controlling. The 
rules in subpart A do not apply to the informal hearings described in 
subpart C of this part, to any other informal hearing that may be 
ordered by the FCA, or to formal investigations described in subpart D 
of this part.



Sec. 622.2  Definitions.

    As used in this part:
    (a) Act means the Farm Credit Act of 1971, as amended. 12 U.S.C. 
2001, et seq.
    (b) FCA means the Farm Credit Administration.
    (c) Board means the Farm Credit Administration Board.
    (d) The terms institution in the System, System institution and 
institution mean all institutions enumerated in section

[[Page 261]]

1.2 of the Act, any institution chartered pursuant to or established by 
the Act, except for the Farm Credit System Assistance Board and the Farm 
Credit System Insurance Corporation, and any service corporation 
chartered under the Act.
    (e) Party means the FCA or a person or institution named as a party 
in any notice that commences a proceeding, or any person or institution 
who is admitted as a party or who has filed a written request and is 
entitled as of right to be a party.
    (f) Presiding officer means an administrative law judge or any FCA 
employee or other person designated by the Board to conduct a hearing.
    (g) Ex parte communication means an oral or written communication 
not on the record with respect to which reasonable prior notice to all 
parties is not given. It does not include requests for status reports.

[51 FR 21139, June 11, 1986, as amended at 53 FR 27284, July 19, 1988; 
78 FR 31835, May 28, 2013]



Sec. 622.3  Appearance and practice.

    (a) Appearance before the Board or a presiding officer--(1) By 
nonattorneys. An individual may appear in his or her own behalf; a 
member of a partnership may represent the partnership; a duly authorized 
officer or other agent of a corporation, trust association or other 
entity not specifically listed herein may represent the corporation, 
trust association, or other entity; and a duly authorized officer or 
employee of any government unit, agency or authority may represent that 
unit, agency or authority. Any person appearing in a representative 
capacity shall file a written notice of appearance with the Board which 
shall contain evidence of his or her authority to act in such capacity.
    (2) By attorneys. A party may be represented by an attorney who is a 
member in good standing of the bar of the highest court of any State, 
possession, territory, Commonwealth or the District of Columbia, and who 
has not been suspended or debarred from practice before the FCA in 
accordance with the provisions of part 623 of this chapter. Prior to 
appearing, an attorney representing a person in a proceeding shall file 
a written notice of appearance with the Board, which shall contain a 
declaration that he or she is currently qualified as provided by 
paragraph (a)(2) of this section and is authorized to represent the 
party on whose behalf he or she acts.
    (3) Representation of multiple interests. A person shall not 
represent more than one party without informing each party of any actual 
or potential conflict of interest that may be involved in such 
representation. Such person shall file a statement with the Board 
indicating that such disclosure has been made. The presiding officer has 
authority to take protective measures at any stage of a proceeding, 
including the authority to prohibit multiple representation when deemed 
appropriate.
    (b) Summary suspension. Dilatory, obstructionist, egregious, 
contemptuous, contumacious, or other unethical or improper conduct at 
any proceeding before the Board or a presiding officer shall be grounds 
for exclusion therefrom and suspension for the duration of the 
proceeding, or other appropriate action by the Board or presiding 
officer.



Sec. 622.4  Commencement of proceedings.

    Proceedings under this subpart are commenced by the issuance of a 
notice by the Board. Such notice shall state the time, place, and nature 
of the hearing, the name and address of the presiding officer if one has 
been designated, and a statement of the matters of fact and law 
constituting the grounds for the hearing. The matters of fact and law 
alleged in a notice may be amended by the Board at any stage of the 
proceeding and such amended notice may require an answer from the party 
or parties served and may set a new hearing date. A copy of any notice 
served by the FCA on any System association, director, officer or other 
person participating in the conduct of the affairs of the association 
will also be sent to the supervisory bank.



Sec. 622.5  Answer.

    (a) Answer is required. Unless a different period is specified by 
the Board, a party who does not wish to consent to a final order must 
file an answer within 20 days after being served with

[[Page 262]]

a notice that commences the proceeding. Any subsequent notice which 
contains amended allegations and by its terms requires an answer must 
similarly be answered within 20 days after service.
    (b) Requirements of answer; effect of failure to deny. An answer 
filed under this section shall concisely state any defenses and 
specifically admit or deny each allegation in the notice. A party who 
lacks information or knowledge sufficient to form a belief as to the 
truth of any particular allegation shall so state and this shall have 
the effect of a denial. Any allegation not denied shall be deemed to be 
admitted. A party who intends in good faith to deny only a part of or to 
qualify an allegation shall specify so much of it as is true and shall 
deny only the remainder.
    (c) Admitted allegations. If a party filing an answer under this 
section elects not to contest any of the allegations of fact set forth 
in the notice, the answer shall consist of a statement admitting all of 
the allegations to be true. Such answer constitutes a waiver of hearing 
as to the facts alleged in the notice, and together with the notice will 
provide a record basis on which the presiding officer shall file with 
the Board a recommended decision in accordance with 5 U.S.C. 557. The 
recommended decision shall be served on the party, who may file 
exceptions thereto within the time provided in Sec. 622.13.
    (d) Effect of failure to answer. Failure of a party to file an 
answer required by this section within the time provided constitutes a 
waiver of the party's right to appear and contest the allegations in the 
notice and authorizes the presiding officer, without further notice to 
the party, to find the facts to be as alleged in the notice and to file 
with the Board a recommended decision containing such findings and 
appropriate conclusions. The Board or the presiding officer may, for 
good cause shown, permit the filing of a delayed answer after the time 
for filing and the answer has expired.



Sec. 622.6  Opportunity for informal settlement.

    Any interested party may at any time submit to the Board for 
consideration written offers or proposals for settlement of a 
proceeding, without prejudice to the rights of the parties. No offer or 
proposal shall be admissible into evidence over the objection of any 
party in any hearing in connection with such proceeding. The foregoing 
provisions of this section shall not preclude settlement of any 
proceeding through the regular adjudicatory process by the filing of an 
answer as provided in Sec. 622.5(c), or by submission of the case to the 
presiding officer on a stipulation of facts and an agreed order.



Sec. 622.7  Conduct of hearings.

    (a) Authority of presiding officer. All hearings governed by this 
subpart shall be conducted in accordance with the provisions of chapter 
5 of title 5 of the United States Code. The presiding officer designated 
by the Board to preside at any such hearing shall have complete charge 
of the hearing, shall have the duty to conduct it in a fair and 
impartial manner and shall take all necessary action to avoid delay in 
the disposition of the proceeding. Such officer shall have all powers 
necessary to that end, including the following:
    (1) To administer oaths and affirmations;
    (2) To issue subpoenas and subpoenas duces tecum, as authorized by 
law, and to revoke, quash, or modify any such subpoena;
    (3) To receive relevant evidence and to rule upon the admission of 
evidence and offers of proof;
    (4) To take or cause depositions to be taken;
    (5) To regulate the course of the hearing and the conduct of the 
parties and their counsel;
    (6) To hold conferences for the settlement or simplification of 
issues or for any proper purpose; and
    (7) To consider and rule upon, as justice may require, all 
procedural and other motions appropriate in a proceeding under this 
subpart, except that a presiding officer shall not have power to decide 
any motion to dismiss the proceeding or other motion which results in a 
final determination of the merits of the proceeding. This power rests 
only with the Board. Without

[[Page 263]]

limitation on the foregoing, the presiding officer shall, subject to the 
provisions of this subpart, have all the authority set forth in 5 U.S.C. 
556(c).
    (b) Prehearing conference. The presiding officer may, on his or her 
own initiative or at the request of any party, direct counsel for all 
parties to meet with him or her at a specified time and place prior to 
the hearing, or to submit suggestions to him or her in writing, for the 
purpose of considering any or all of the following:
    (1) Simplification and clarification of the issues;
    (2) Stipulations, admissions of fact and of the contents and 
authenticity of documents;
    (3) Matters of which official notice will be taken; and
    (4) Such other matters as may aid in the orderly disposition of the 
proceeding.

At the conclusion of such conference(s) the presiding officer shall 
enter an order which recites the results of the conference. Such order 
shall include the presiding officer's rulings upon matters considered at 
the conference, together with appropriate directions, if any, to the 
parties. Such order shall control the subsequent course of the 
proceeding, unless modified at the hearing for good cause shown.
    (c) Exchange of information. Thirty (30) days prior to the hearing, 
parties shall exchange a list of the names of witnesses with a general 
description of their expected testimony, and a list and one copy of all 
documents or other physical exhibits which will be introduced in 
evidence in the course of the proceeding.
    (d) Attendance at hearings. All hearings shall be private and shall 
be attended only by the parties, their counsel or authorized 
representatives, witnesses while testifying, and other persons having an 
official interest in the proceeding. However, if the Board, in its 
discretion, after fully considering the views of the party afforded the 
hearing, determines that a public hearing is necessary to protect the 
public interest, the Board may in its sole discretion order that the 
hearing be public.
    (e) Transcript of testimony. Hearings shall be recorded. A copy of 
the transcript of the testimony taken at any hearing, duly certified by 
the reporter, together with all exhibits accepted into evidence shall be 
filed with the presiding officer. The presiding officer shall promptly 
serve notice upon all parties of such filing. The parties shall make 
their own arrangements with the person recording the testimony for 
copies of the testimony and exhibits. The presiding officer shall have 
authority to correct the record sua sponte with notice to all parties 
and to rule upon motions to correct the record. In the event the hearing 
is public, transcripts will be furnished to interested persons upon 
payment of the cost thereof.
    (f) Continuances and changes or extensions of time and changes of 
place of hearing. Except as otherwise provided by law, the presiding 
officer may extend time limits prescribed by these rules or by any 
notice or order issued in the proceedings, may change the time for 
beginning any hearing, continue or adjourn a hearing from time to time, 
and/or change the location of the hearing. Prior to the appointment of a 
presiding officer and after the filing of a recommended decision 
pursuant to Sec. 622.12, the Board may grant such extensions or changes. 
Subject to the approval of the presiding officer, the parties may by 
stipulation change the time limits specified by these rules or any 
notice or order issued hereunder.
    (g) Closing of hearing. The record of the hearing shall be closed by 
an announcement to that effect by the presiding officer when the taking 
of evidence has been concluded. In the discretion of the presiding 
officer, the record may be closed as of a future date in order to permit 
the admission into the record, under circumstances determined by the 
presiding officer, of exhibits to be prepared.
    (h) Call for further evidence, oral arguments, briefs, reopening of 
hearing. The presiding officer may call for the production of further 
evidence upon any issue, may permit oral argument and submission of 
briefs at the hearing and, upon appropriate notice, may reopen any 
hearing at any time prior to the filing of his or her recommended 
decision. The Board may reopen the record at anytime permitted by law.

[[Page 264]]

    (i) Order of procedure. The FCA shall open and close.
    (j) Ex parte communications. (1) No person shall make or knowingly 
cause to be made an ex parte communication relevant to the merits of the 
proceeding to the presiding officer or anyone who is or may reasonably 
be expected to be involved in the decisional process.
    (2) No person who is or may reasonably be expected to be involved in 
the decisional process shall make or knowingly cause to be made an ex 
parte communication relevant to the merits of the proceeding to any 
person.
    (3) Except as authorized by law, the presiding officer shall not 
consult anyone on any fact in issue, unless upon notice and opportunity 
for all parties to participate. The presiding officer shall not be 
responsible to, or subject to the supervision or direction of, any 
officer, employee, or agent of the FCA engaged in the performance of 
investigative or prosecuting functions. An officer, employee or agent 
engaged in the performance of such functions in any case shall not, in 
that case or a factually related case, participate or advise in the 
decision of the presiding officer, except as a witness or counsel in the 
proceedings, or as otherwise authorized by law.
    (4) If an ex parte communication is made or knowingly caused to be 
made, all such communications, and any responses, shall be placed in the 
record.
    (5) Upon receipt of a communication knowingly made or caused to be 
made in violation of paragraph (j) of this section, the responsible 
party may be required to show cause why such party's claim or interest 
should not be dismissed, denied, or otherwise adversely affected. To the 
extent consistent with the interests of justice, a knowing violation of 
paragraph (j) of this section may be grounds for a decision adverse to a 
party in violation.
    (6) The prohibitions against ex parte communications apply from the 
time a proceeding is noticed for hearing. However, when the person 
responsible for the communication has knowledge that the proceeding will 
be noticed, the prohibitions apply from the time such knowledge is 
acquired.



Sec. 622.8  Rules of evidence.

    (a) Evidence. Every party shall have the right to present a case or 
defense by oral and documentary evidence, to submit rebuttal evidence, 
and to conduct such cross-examination as may be required for a full and 
true disclosure of the facts. Irrelevant, immaterial or unduly 
repetitious evidence shall be excluded.
    (b) Objections. Objections to the admission or exclusion of evidence 
shall be in short form, stating the grounds of objection relied upon but 
no argument thereon shall be permitted, except as ordered, allowed, or 
requested by the presiding officer. Rulings on such objections and all 
other matters shall be part of the transcript. Failure to object timely 
to the admission or exclusion of evidence or to any ruling constitutes a 
waiver of such objection.
    (c) Stipulations. Independently of the orders or rulings issued as 
provided by Sec. 622.7(b), the parties may stipulate as to any relevant 
matters of fact or the authenticity of any relevant documents. Such 
stipulations may be received in evidence at the hearing, and when so 
received shall be binding on the parties with respect to the matters 
therein stipulated.
    (d) Official notice. All matters officially noticed by the presiding 
officer shall appear on the record.



Sec. 622.9  Subpoenas.

    (a) Issuance. The presiding officer or, in the event he or she is 
unavailable, the Board may issue subpoenas and subpoena duces tecum at 
the request of any party requiring the attendance of witnesses or the 
production of documents at a designated place. The person seeking the 
subpoena may be required, as a condition precedent to the issuance of 
the subpoena, to show the general relevance and reasonable scope of the 
testimony or other evidence sought. Where it appears to the presiding 
officer that a subpoena may be unreasonable, oppressive, excessive in 
scope, unduly burdensome, or delay the proceeding, the presiding officer 
has discretion to refuse to issue a subpoena or to issue it only upon 
such conditions as fairness requires.
    (b) Motions to quash. Any person to whom a subpoena is directed may,

[[Page 265]]

prior to the time specified therein for compliance but in no event more 
than 10 days after the date the subpoena was served, with notice to the 
party requesting the subpoena, apply to the presiding officer, or in the 
event he or she is unavailable to the Board, to quash or modify the 
subpoena, accompanying such application with a brief statement of the 
reasons therefor. The presiding officer may deny the application or, 
upon notice to the party on whose behalf the subpoena was issued and 
after affording that party an opportunity to reply, may quash or modify 
the subpoena or impose reasonable conditions including, in the case of a 
subpoena duces tecum, a requirement that the party on whose behalf the 
subpoena was issued pay in advance the reasonable cost of copying and 
transporting the documentary evidence to the designated place.
    (c) Service of subpoena. A subpoena may be served upon the person 
named therein by personal service or certified mail with a return 
receipt to the last known address of the person. The fees for one day's 
attendance and mileage as specified in paragraph (d) of this section 
must be tendered at the time of service unless the subpoena is issued on 
behalf of the FCA. If personal service is made by a U.S. marshal, a 
deputy U.S. marshal, or an employee of the FCA, such service shall be 
evidenced by the return thereon. If personal service is made by any 
other person, such person shall sign an affidavit describing the manner 
in which service is made, and return such affidavit with a copy of the 
subpoena. In case of failure to make service, reasons for the failure 
shall be stated on the original subpoena. The original or a copy of the 
subpoena, bearing or accompanied by the required return, affidavit, 
statement or return receipt, shall be returned without delay to the 
presiding officer.
    (d) Attendance of witnesses. The attendance of witnesses at a 
designated place may be required from any place in any State or 
territory subject to the jurisdiction of the United States. Witnesses 
who are subpoenaed shall be paid the same fees and mileage that are paid 
witnesses in the district courts of the United States. Fees required by 
this paragraph shall be paid by the party upon whose application the 
subpoena is issued.
    (e) Production of documents. The production of documents at a 
designated place may be required from any place in any State or 
territory subject to the jurisdiction of the United States. In lieu of 
an original document, a certified or authenticated copy may be produced. 
However, any party has the right to inspect the original document.



Sec. 622.10  Depositions.

    (a) Application to take deposition. Any party desiring to take the 
deposition of any person shall make written application to the presiding 
officer setting forth the name and address of the witness, the subject 
matter concerning which the witness is expected to testify, its 
relevance, the time and place of the deposition, and the reasons why 
such deposition should be taken. The application may include a request 
that specified documents be produced at the deposition. A copy of the 
application shall be served on the other parties at the same time the 
application is filed with the presiding officer.
    (b) Subpoena; notice to other parties. Upon a showing that the 
testimony or other evidence sought will be material, and the taking of 
the deposition will not result in any undue burden to the witness or any 
party or undue delay of the proceedings, the presiding officer may issue 
a subpoena or subpoena duces tecum. Notice of the issuance of such 
subpoena shall be served upon all parties at least 10 days in advance of 
the date set for deposition.
    (c) Deposition by notice. The requirements of paragraphs (a) and (b) 
of this section may be waived by agreement of the parties and the 
witness whose testimony or documentary evidence is sought. Such 
agreement shall be embodied in a stipulation which becomes part of the 
record and may provide for the taking of depositions upon notice without 
leave of the presiding officer.
    (d) Procedure on deposition. Depositions may be taken before any 
person having the power to administer oaths. Each witness whose 
testimony is taken by deposition shall be duly sworn before any question 
is propounded. Examination and cross-examination of deponents may 
proceed as permitted at the

[[Page 266]]

hearing. Objections to questions or documents shall be in short form, 
stating the grounds relief upon for the objection. Failure to object to 
questions or evidence is deemed a waiver if the ground of the objection 
is one which might have been obviated or removed if presented at that 
time. The questions propounded and the answers thereto, together with 
all objections made (but not including argument or debate) shall be 
recorded by or under the direction of the person before whom the 
deposition is taken. The deposition shall be signed by the witness, 
unless the parties by stipulation waive the signing or the witness is 
physically unable to sign, cannot be found, or refuses to sign. The 
deposition shall also be certified as a true and complete transcript by 
the person recording the testimony. If the deposition is not signed by 
the witness, the person recording the testimony shall state this fact 
and the reason therefor on the record. The person before whom the 
deposition is taken shall promptly file the transcript and all exhibits 
with the presiding officer. Interested parties shall make their own 
arrangements with the person recording the testimony for copies of the 
testimony and exhibits.
    (e) Introduction as evidence. Subject to appropriate rulings by the 
presiding officer on such objections and answers as were noted at the 
time the deposition was taken or as would be valid were the witness 
personally present and testifying at the hearing, the deposition or any 
part thereof may be received in evidence by the presiding officer in his 
or her discretion. Only such part of a deposition as is received in 
evidence at a hearing shall constitute a part of the record upon which a 
decision may be based.
    (f) Payment of fees. Deponents whose depositions are taken and the 
reporter taking the same shall be entitled to the same fees as are paid 
for like services in the district courts of the United States, which 
fees shall be paid by the party upon whose application the deposition is 
taken.



Sec. 622.11  Motions.

    (a) How made. An application or request for an order or ruling not 
otherwise specifically provided for in this subpart, unless made during 
a hearing, shall be made by written motion supported by a memorandum 
which concisely states the grounds therefor.
    (b) Opposition. Within 10 days after service of any written motion, 
or within such other period of time as may be fixed by the presiding 
officer, any party may file a memorandum in opposition thereto. The 
moving party has no right to reply except as permitted by the presiding 
officer. The presiding officer has discretion to waive the requirements 
of this section as to motions for extension of time and may rule upon 
such motions ex parte.
    (c) Oral argument. No oral argument will be heard on motions except 
as otherwise directed by the presiding officer or the Board.
    (d) Rulings and orders. Except as otherwise provided in this 
subpart, the presiding officer shall rule on all motions and may issue 
appropriate orders, except that motions may be referred to the Board if 
the presiding officer is unavailable or determines that such motion 
should be referred to the Board. Prior to the appointment of a presiding 
officer and after a recommended decision is filed pursuant to 
Sec. 622.12, the Board shall rule on motions filed by the parties.
    (e) Appeal from rulings on motions. All answers, motions, objections 
and rulings shall become part of the record. Rulings of a presiding 
officer on any motion may not be appealed to the Board prior to its 
consideration of the presiding officer's recommended decision, except by 
special permission of the Board. However, such rulings shall be 
considered by the Board in reviewing the record. Requests to the Board 
for special permission to appeal from a ruling of the presiding officer 
shall be filed in writing within 5 days of the ruling, and shall briefly 
state the grounds relied on. The moving party shall immediately serve a 
copy thereof on every other party to the proceeding who may then respond 
to such request within 5 days after service.
    (f) Continuation of hearing. Unless otherwise ordered by the 
presiding officer or the Board, the hearing shall continue pending the 
determination of any request or motion by the Board.

[[Page 267]]



Sec. 622.12  Proposed findings and conclusions; recommended decision.

    (a) Proposed findings and conclusions by parties. Within 30 days 
after the hearing transcript has been filed, any party may file proposed 
findings of fact and conclusions of law. Such proposals shall be 
supported by citation of such statutes, decisions, and other 
authorities, and by specific page references to such portions of the 
record as may be relevant. All such proposals shall become a part of the 
record.
    (b) Recommended decision by presiding officer. Within 30 days after 
the expiration of time allowed under paragraph (a) of this section, or 
within such further time as the Board for good cause allows, the 
presiding officer shall file the entire hearing record, including a 
recommended decision and findings and conclusions, the transcript, 
exhibits (including on request of any of the parties any exhibits 
excluded from evidence or tender of proof), exceptions, rulings and all 
briefs and memoranda filed in connection with the hearing. Promptly upon 
such filing, the presiding officer shall serve a copy of the recommended 
decision, findings and conclusions upon each party to the proceeding.
    (c) Board as presiding officer. In proceedings in which the Board or 
one or more of its members has presided at the reception of evidence, 
the presiding officer's recommended decision, findings of fact, and 
conclusions of law will be omitted. In such proceedings the proposed 
findings and conclusions, briefs, and other submissions permitted under 
paragraph (a) of this section shall be filed with the Board for 
consideration.



Sec. 622.13  Exceptions.

    (a) Filing. Within 15 days after service of the recommended decision 
of the presiding officer, any party may file exceptions thereto or to 
any portion thereof, or to the failure of the presiding officer to make 
any recommendation, finding, or conclusion, or to the admission or 
exclusion of evidence, or to any other ruling of the presiding officer.
    (b) Contents. Each exception shall be supported by a concise 
argument and by citation of such statutes, decisions and other 
authorities, and by page references to such portions of the record as 
may be relevant. If the exception relates to the admission or exclusion 
of evidence, the substance of the evidence admitted or excluded shall be 
set forth in the brief with appropriate references to the transcript.
    (c) Waiver. Failure of a party to file exceptions to those matters 
specified in paragraph (a) of this section within the time prescribed 
shall be a waiver of objection thereto.



Sec. 622.14  Briefs.

    (a) Contents. Any brief filed in a proceeding shall be confined to 
the particular matters in issue, citing statutes, decisions, and other 
authorities, and page references to such portions of the record or the 
recommended decision of the presiding officer as may be relevant.
    (b) Reply briefs. Reply briefs may be filed within 10 days after 
service of original briefs of opposing parties, and shall be confined to 
matters in such briefs. Further briefs may be filed only with permission 
of the presiding officer or the Board with respect to a matter before 
the Board.
    (c) Delayed filing. Briefs not filed on or before the time fixed in 
this subpart or by the presiding officer will be received only upon 
special permission of the Board.



Sec. 622.15  Oral argument before the Board.

    Upon its own initiative or upon written request by any party, the 
Board, in its discretion, may order the matter to be set down for oral 
argument before the Board or one or more members thereof. Any request 
for oral argument by a party filing exceptions shall be made within the 
time prescribed for filing such exceptions, or by any other party, 
within the time prescribed for the filing of a reply brief. Oral 
argument before the Board shall be recorded unless otherwise ordered by 
the Board.



Sec. 622.16  Notice of submission to the Board.

    Upon the filing of the record with the Board, and upon the 
expiration of the time for the filing of exceptions and all

[[Page 268]]

briefs, including reply briefs or any further briefs permitted by the 
presiding officer or the Board, and upon the hearing of oral argument by 
the Board, if ordered by the Board, the Board shall notify the parties 
in writing that the case has been submitted for final decision.



Sec. 622.17  Decision of the Board.

    Any person who has not engaged in the performance of investigative 
or prosecuting functions in the case, or in a factually related case, 
may advise and assist the Board in the consideration of the case. Copies 
of the decision and order of the Board shall be served upon the parties. 
A copy of the order will also be sent to the supervisory bank if the 
order relates to a System association, director, officer, or other 
person participating in the conduct of the affairs of the association.



Sec. 622.18  Filing.

    (a) Filing. Papers required or permitted to be filed with the Board 
shall be filed with the Chairman of the Board, FCA, 1501 Farm Credit 
Drive, McLean, VA 22102-5090 or with the person designated to receive 
papers for the agency in a proceeding. Papers sent by mail must be 
postmarked or received within the prescribed time limit for filing. 
Papers sent by any other means must be received within the prescribed 
time limit for filing.
    (b) Formal requirements. All filed papers shall be printed, 
typewritten, or otherwise reproduced, and copies shall be clear and 
legible. The original of all papers filed by a party shall be signed and 
dated as of the date of execution by the party filing the same, or a 
duly authorized agent or attorney. The signer's address and telephone 
number must appear on the original. Counsel for the FCA shall sign the 
original of all papers filed on behalf of the FCA. All papers filed must 
name in the heading or on a title page, the parties, the docket number 
and the subject of the papers.
    (c) Copies. Parties shall file an original and three copies of all 
documents and papers required or permitted to be filed under this 
subpart (except the transcript of testimony and exhibits), unless 
otherwise specifically provided by the Board.



Sec. 622.19  Service.

    (a) Service. Except as otherwise provided in these rules, each party 
who files papers is responsible for serving a copy thereof upon the 
presiding officer and upon every other party or the attorney or 
representative of record of that party. A copy of all papers filed by 
the presiding officer or the Board, except for the transcript of 
testimony and exhibits, shall be served upon each of the parties. 
Service may be by personal service, private delivery service, or by 
express, certified or regular first-class mail. If a party is not 
represented, service shall be made at the last known address of the 
party or an officer thereof as shown on the records of the FCA.
    (b) Proof of service. Proof of service of papers filed by a party 
shall be filed before action is to be taken thereon. The proof shall 
show the date and manner of service, and may be by written 
acknowledgment of service, by declaration of the person making service, 
or by certificate of an attorney or other representative of record. 
Failure to make proof of service shall not affect the validity of 
service. The presiding officer may allow the proof to be amended or 
supplied, unless to do so would result in material prejudice to a party.



Sec. 622.20  Documents in proceedings confidential.

    Unless otherwise ordered by the Board or required by law, the entire 
record in any proceeding under this subpart, including the notice of 
hearing, transcript, exhibits, proposed findings and conclusions, 
recommended decision of the presiding officer, exceptions thereto, 
decision and order of the Board, and any other papers which are filed in 
connection with the proceeding shall not be made public, and shall be 
for the confidential use only of the FCA and its staff, the presiding 
officer, the parties, and other appropriate supervisory authorities.



Sec. 622.21  Computing time.

    (a) General rule. In computing any period of time prescribed or 
allowed by

[[Page 269]]

this subpart, the date of the act or event from which the designated 
period of time begins to run is not to be included. The last day so 
computed shall be included, unless it is a Saturday, Sunday or Federal 
holiday, in which event the period shall run until the end of the next 
day which is not a Saturday, Sunday, or Federal holiday. When the period 
of time prescribed or allowed is 10 days or less, intermediate 
Saturdays, Sundays, and Federal holidays shall not be included in the 
computation.
    (b) Service by mail. Whenever any party has the right or is required 
to do some act within the period of time prescribed in this subpart 
after the service upon the party of any document or other paper of any 
kind, and such service is made by mail, three days shall be added to the 
prescribed period from the date when the matter served is deposited in 
the United States mail.



Sec. 622.22  Retained authority.

    Nothing is this part is in derogation of powers of examination and 
investigation conferred on the FCA by any provision of law.



Secs. 622.23-622.50  [Reserved]



 Subpart B_Rules and Procedures for Assessment and Collection of Civil 
                             Money Penalties

    Source: 53 FR 27284, July 19, 1988, unless otherwise noted.



Sec. 622.51  Definitions.

    Unless noted otherwise, the definitions set forth in Sec. 622.2 of 
subpart A shall apply to this subpart.



Sec. 622.52  Purpose and scope.

    The rules and procedures specified in this subpart and in subpart A 
are applicable to proceedings by the FCA to assess and collect civil 
money penalties:
    (a) For violations of the terms of a final cease and desist order 
issued under section 5.25 or 5.26 of the Act;
    (b) For violations of any provision of the Act or any regulation 
issued under the Act; or
    (c) For violations of the National Flood Insurance Reform Act 
(Reform Act) as set forth in 42 U.S.C. 4012a(f) or any regulation issued 
under the Reform Act.

[51 FR 21139, June 11, 1986, as amended at 70 FR 12584, Mar. 15, 2005]



Secs. 622.53-622.54  [Reserved]



Sec. 622.55  Notice of assessment of civil money penalty.

    (a) Notice of assessment. The notice of assessment for a civil money 
penalty will state:
    (1) The legal authority for the assessment;
    (2) The amount of the civil money penalty being assessed;
    (3) The date by which the civil money penalty must be paid;
    (4) The matter of fact or law constituting the grounds for 
assessment of the civil money penalty;
    (5) The right of the institution or person being assessed to a 
formal hearing to challenge the assessment;
    (6) That failure to request a hearing constitutes a waiver of the 
opportunity for a hearing and the notice of assessment will constitute a 
final and unappealable order; and
    (7) The time limit to request such a formal hearing.
    (b) Service. The notice of assessment may be served upon the 
institution or person being assessed by personal service or by certified 
mail with a return receipt to the institution's or the person's last 
known address. Such service constitutes issuance of the notice.

[51 FR 21139, June 11, 1986, as amended at 70 FR 12585, Mar. 15, 2005]



Sec. 622.56  Request for formal hearing on assessment.

    An institution or person being assessed may request a formal hearing 
to challenge the assessment of a civil money penalty. The request must 
be filed in writing, within 10 days of the issuance of the notice of 
assessment, with the Chairman of the Board, FCA, 1501 Farm Credit Drive, 
McLean, VA 22102-5090.



Sec. 622.57  Waiver of hearing; consent.

    (a) Waiver. Failure to request a hearing pursuant to Sec. 622.56 
constitutes a waiver of the opportunity for a hearing and the notice of 
assessment issued

[[Page 270]]

pursuant to Sec. 622.55 will constitute a final and unappealable order.
    (b) Consent. Any party afforded a hearing who does not appear at the 
hearing personally or by a duly authorized representative is deemed to 
have consented to the issuance of an assessment order.

[51 FR 21139, June 11, 1986, as amended at 70 FR 12585, Mar. 15, 2005]



Sec. 622.58  Hearing on assessment.

    (a) Time and place. An institution or person requesting a hearing 
will be informed by order of the Board of the time and place set for 
hearing.
    (b) Answer; procedures. The hearing order may require the 
institution or person requesting the hearing to file an answer as 
prescribed in Sec. 622.5 of subpart A. The procedures of the 
Administrative Procedure Act (5 U.S.C. 554-557) and subpart A of these 
rules will apply to the hearing.

[51 FR 21139, June 11, 1986, as amended at 70 FR 12585, Mar. 15, 2005]



Sec. 622.59  Assessment order.

    (a) Consent. In the event of consent of the parties concerned to an 
assessment, or if, upon the record made at a hearing ordered under this 
subpart, the Board finds that the grounds for having assessed the 
penalty have been established, the Board may issue an order of 
assessment of civil money penalty. In its assessment order, the Board 
may reduce the amount of the penalty specified in the notice of 
assessment.
    (b) Effective date and period. An assessment order is effective 
immediately upon issuance, or upon such other date as may be specified 
therein, and will remain effective and enforceable unless it is stayed, 
modified, terminated, or set aside by action of the board or a reviewing 
court.
    (c) Service. An assessment order may be served by personal service 
or by certified mail with a return receipt to the last known address of 
the institution or person being assessed. Such service constitutes 
issuance of the order.

[51 FR 21139, June 11, 1986, as amended at 70 FR 12585, Mar. 15, 2005]



Sec. 622.60  Payment of civil money penalty.

    (a) Payment date. Generally, the date designated in the notice of 
assessment for payment of the civil money penalty will be 60 days from 
the issuance of the notice. If, however, the Board finds, in a specific 
case, that the purposes of the relevant statutes would be better served 
if the 60-day period were changed, the Board may shorten or lengthen the 
period or make the civil money penalty payable immediately upon receipt 
of the notice of assessment. If a timely request for a formal hearing to 
challenge an assessment of a civil money penalty is filed, payment of 
the penalty will not be required unless and until the Board issues a 
final order of assessment following the hearing. If an assessment order 
is issued, it will specify the date by which the civil money penalty is 
to be paid or collected.
    (b) Method of payment. Checks in payment of civil money penalties 
must be made payable to the ``Farm Credit Administration.'' Upon 
collection, the FCA will forward payment for penalties described in 
Sec. 622.52(a) and (b) to the United States Department of Treasury. The 
FCA will forward payment for penalties described in Sec. 622.52(c) to 
the National Flood Mitigation Fund as required by 42 U.S.C. 4012a(f)(8).

[70 FR 12585, Mar. 15, 2005]



Sec. 622.61  Adjustment of civil money penalties by the rate of 
inflation under the Federal Civil Penalties Inflation Adjustment
Act of 1990, as amended.

    (a) The maximum amount of each civil money penalty within FCA's 
jurisdiction is adjusted in accordance with the Federal Civil Penalties 
Inflation Adjustment Act of 1990, as amended (28 U.S.C. 2461 note), as 
follows:
    (1) Amount of civil money penalty imposed under section 5.32 of the 
Act for violation of a final order issued under section 5.25 or 5.26 of 
the Act: The maximum daily amount is $2,188 for violations that occur on 
or after August 1, 2016.
    (2) Amount of civil money penalty for violation of the Act or 
regulations: The maximum daily amount is $989 for each

[[Page 271]]

violation that occurs on or after August 1, 2016.
    (b) The maximum civil money penalty amount assessed under 42 U.S.C. 
4012a(f) is: $385 for each violation that occurs on or after January 16, 
2009, but before July 1, 2013, with total penalties under such statute 
not to exceed $120,000 for any single institution during any calendar 
year; $2,000 for each violation that occurs on or after July 1, 2013, 
but before August 1, 2016, with no cap on the total amount of penalties 
that can be assessed against any single institution during any calendar 
year; and $2,056 for each violation that occurs on or after August 1, 
2016, with no cap on the total amount of penalties that can be assessed 
against any single institution during any calendar year.

[81 FR 32635, May 24, 2016]



Secs. 622.62-622.75  [Reserved]



Subpart C_Rules and Procedures Applicable to Suspension or Removal of an 
          Individual Where Certain Crimes Are Charged or Proven



Sec. 622.76  Definitions.

    Unless noted otherwise, the definitions set forth in Sec. 622.2 of 
subpart A shall apply to this subpart.



Sec. 622.77  Purpose and scope.

    The rules and procedures set forth in this subpart apply to informal 
hearings afforded to any officer, director, or other person 
participating in the conduct of the affairs of a System institution who 
has been suspended or removed from office or prohibited from further 
participation in any manner in the conduct of the institution's affairs 
by a notice or order issued by the Board upon the grounds set forth in 
section 5.29 of the Act.



Sec. 622.78  Suspension, prohibition or removal.

    (a) Content. The Board may serve a notice of suspension or 
prohibition or order of removal upon a director, officer or other person 
participating in the conduct of the affairs of an institution. A copy of 
such notice or order shall also be served upon the institution, 
whereupon the individual concerned shall immediately cease service to 
the institution or participation in the affairs of the institution. Any 
notice or order shall indicate the basis for the suspension, 
prohibition, or removal and shall inform the individual of the right to 
request in writing, within 30 days of being served with such notice or 
order, an opportunity to show at an informal hearing that continued 
service to or participation in the conduct of the affairs of the 
institution does not, or is not likely to, pose a threat to the 
interests of the institution's shareholders or the investors in Farm 
Credit System obligations or threaten to impair public confidence in the 
institution or the Farm Credit System.
    (b) Service. A notice or order of suspension, removal or prohibition 
may be served by personal service or by certified mail with a return 
receipt to the last known address of the person being served.



Sec. 622.79  Petition for informal hearing.

    (a) Filing. To obtain a hearing, the subject individual must file an 
original and three copies of a petition with the Board within 30 days of 
being served with the notice or order.
    (b) Content. The petition shall:
    (1) State whether the petitioner is requesting termination or 
modification of the notice or order;
    (2) State with particularity how the petitioner intends to show that 
his or her continued service to or participation in the conduct of the 
affairs of the institution would not, or is not likely to, pose a threat 
to the interests of the institution's shareholders or the investors in 
Farm Credit System obligations or threaten to impair public confidence 
in the institution or the Farm Credit System;
    (3) Include a request to present oral testimony or witnesses at the 
hearing, if the petitioner desires to do so. The request should specify 
the names of the witnesses and a summary of their expected testimony; 
and
    (4) Indicate whether the petitioner desires oral argument or elects 
to have the matter determined solely on the basis of written 
submissions.

[[Page 272]]



Sec. 622.80  Informal hearing.

    (a) Time and place. Upon receipt of a timely petition for a hearing, 
the Board shall notify the petitioner of the time and place fixed for 
the hearing and shall designate one or more Board members or FCA 
employees to preside (``designated FCA representative''). The hearing 
shall be scheduled to be held no later than 30 days from the date a 
petition for hearing is received unless the time is extended at the 
request of the petitioner. Notice of the hearing shall also be sent to 
the FCA's Office of General Counsel.
    (b) Appearance. A petitioner may appear personally or through 
counsel to submit relevant written materials and oral argument. An 
attorney is subject to all the requirements and limitations imposed on 
attorneys in Sec. 622.3 of subpart A. A representative(s) of the FCA's 
Office of General Counsel may participate in the hearing to the extent 
such representative deems appropriate.
    (c) Written material. Any written material the petitioner wishes to 
have considered must be submitted to the designated FCA representative 
and the FCA's Office of General Counsel at least 10 days prior to the 
date of the hearing.
    (d) Oral testimony. Oral testimony may be presented only if 
expressly permitted by the Board in the notice of hearing. The 
designated FCA representative may ask questions of any witness.
    (e) Transcripts. Oral testimony, if any, and oral argument shall be 
recorded. A copy of the transcript shall be filed with the designated 
FCA representative, who shall have authority to correct the record sua 
sponte upon notice, or upon the motion of the petitioner or the 
representative of the FCA's Office of General Counsel. The designated 
FCA representative shall promptly serve notice upon the petitioner and 
the FCA's Office of General Counsel of such filing. Such parties shall 
make arrangements with the person recording the testimony or argument 
for copies of the transcript.
    (f) Closing of record. Upon the request of the petitioner or 
representative of the FCA's Office of General Counsel, the record shall 
remain open for a period of 5 business days following the hearing, 
during which time additional submissions for the record may be made. 
Thereafter, the record shall be closed.
    (g) Rules of evidence and procedure. Neither the formal rules of 
evidence nor the adjudicative procedures of the Administrative Procedure 
Act (5 U.S.C. 554-557) or subpart A of these rules shall apply to the 
informal hearing ordered under this subpart unless the Board orders that 
they apply in whole or in part.



Sec. 622.81  Default.

    If the subject individual fails to file a petition for a hearing, or 
fails to appear at a hearing, either in person or by an attorney, or 
fails to submit a written argument where oral argument has been waived, 
the notice shall remain in effect until the information, indictment, or 
complaint is finally disposed of and the order shall remain in effect 
until terminated by the Board.



Sec. 622.82  Decision of the Board.

    (a) Recommended decision. Within 30 days of the hearing, the 
designated FCA representative shall make a recommendation with findings 
and conclusions to the Board concerning the notice or order of 
suspension, removal, or prohibition.
    (b) Final decision. Within 60 days of the hearing, the Board shall 
notify the subject individual and the FCA's Office of General Counsel 
whether the suspension or removal from office, or prohibition from 
participation in any manner in the affairs of the institution, will be 
continued, terminated, or otherwise modified. The Board's final 
decision, if adverse to the individual, shall contain a statement of the 
basis thereof. The Board may satisfy this requirement where it adopts 
the recommended decision of the designated FCA representative.
    (c) Guilt not an issue. In deciding upon any suspension of 
prohibition by notice, the ultimate question of the guilt or innocence 
of the individual with respect to the criminal charge that is 
outstanding will not be considered. A finding of not guilty or other 
disposition of the charge shall not preclude the Board from thereafter 
instituting

[[Page 273]]

removal proceedings pursuant to section 5.28 of the Act.
    (d) Effective period. A removal or prohibition by order remains in 
effect until terminated by the Board. A suspension or prohibition by 
notice remains in effect until the criminal charge is finally disposed 
of or until terminated by the Board.
    (e) Reconsideration. A suspended or removed individual may petition 
the Board to reconsider the decision any time after the expiration of a 
12-month period from the date of the decision, but no petition for 
reconsideration may be made within 12 months of a previous petition. A 
petition shall state with particularity the relief sought and the 
grounds therefor and may be accompanied by a supporting memorandum and 
any other documentation the petitioner wishes to have considered. No 
hearing need be granted on the petition for reconsideration.



Secs. 622.83-622.100  [Reserved]



   Subpart D_Rules and Procedures Applicable to Formal Investigations



Sec. 622.101  Definitions.

    Unless noted otherwise, the definitions set forth in Sec. 622.2 of 
subpart A shall apply to this subpart.



Sec. 622.102  Scope.

    The rules in this subpart apply to formal investigations initiated 
by order of the Board and pertain to the exercise of powers specified in 
section 5.37 of the Act. These rules do not restrict or in any way 
affect the authority of the FCA, including but not limited to the powers 
enumerated in section 5.37 of the Act, to conduct examinations of System 
institutions.



Sec. 622.103  Formal investigations are confidential.

    Information or documents obtained or testimony recorded in the 
course of a formal investigation shall be confidential and shall be 
disclosed only in accordance with the provisions of 12 CFR part 602.



Sec. 622.104  Order to conduct formal investigation.

    A formal investigation begins with the issuance of an order by the 
Board. The order shall designate the person or persons who will conduct 
the investigation, issue, revoke, quash or modify subpoenas and 
subpoenas duces tecum, take or cause to be taken depositions, administer 
oaths, and receive affirmations as to any matter under investigation by 
the FCA. Upon application and for good cause shown, the Board may limit, 
modify, or withdraw the order at any stage of the proceeding.



Sec. 622.105  Conduct of investigation.

    (a) Review of order. Any person who is compelled or requested to 
furnish testimony, documentary evidence, or other information with 
respect to any matter under formal investigation shall upon request be 
shown the order initiating such investigation.
    (b) Right to counsel. Any person who, in a formal investigation, is 
compelled to appear and testify or who appears and testifies by request 
or permission of the Board may be accompanied, represented, and advised 
by counsel. The right to be accompanied, represented, and advised by 
counsel shall mean the right of a person testifying to have an attorney 
present at all times while testifying and to have this attorney:
    (1) Advise such person before, during and after the conclusion of 
testimony;
    (2) Question such person briefly at the conclusion of testimony to 
clarify any of the answers given; and
    (3) Make summary notes during the testimony solely for the use of 
such person.
    (c) Appearance. The provisions of Sec. 622.3 are applicable to this 
subpart.
    (d) Exclusion. (1) Any person who has given or will give testimony, 
and counsel representing such person, may be excluded from the taking of 
testimony of any other witness in the discretion of the designated FCA 
representative conducting the investigation.
    (2) The designated FCA representative conducting the investigation 
shall report to the Board any instances where any person has been guilty 
of dilatory, obstructionist, egregious, contemptuous, contumacious or 
other unethical or improper conduct during

[[Page 274]]

the course of the proceeding or any other instance involving a violation 
of these rules. The Board may thereupon take such action as the 
circumstances may warrant, including exclusion of the offending 
individual or individual from participation in the proceeding.



Sec. 622.106  Service of subpoena and payment of witness fees.

    (a) Service. A subpoena may be served upon the person named therein 
by personal service or certified mail with a return receipt to the last 
known address of the person. Witnesses who are subpoenaed shall be paid 
the same fees and mileage that are paid witnesses in the district courts 
of the United States. The fees and mileage need not be tendered at the 
time a subpoena is served.
    (b) Motions to quash. Any person to whom a subpoena is directed may, 
prior to the time specified therein for compliance, but in no event more 
than 5 days after the date of service of such subpoena, apply to the FCA 
representative authorized in the order, or if unavailable to the Board, 
to quash or modify such subpoena, accompanying such application with a 
brief statement of the reasons therefor. The FCA representative, or the 
Board, may:
    (1) Deny the application;
    (2) Quash or revoke the subpoena;
    (3) Modify the subpoena; or
    (4) Condition the granting of the application on such terms as the 
FCA representative or the Board, determines in his, her, or its 
discretion, to be just, reasonable, and proper.



Sec. 622.107  Transcripts.

    Transcripts, if any, of an investigative proceeding shall be 
recorded by any means authorized by the designated FCA representative 
conducting the investigation. A person who has given testimony in an 
investigative proceeding (or counsel for such person) upon proper 
identification shall have the right to inspect the transcript of the 
person's testimony but may not obtain a copy if the FCA's representative 
conducting the investigation has cause to believe that the contents 
should not be disclosed.



PART 623_PRACTICE BEFORE THE FARM CREDIT ADMINISTRATION--
Table of Contents



Sec.
623.1  Scope of part.
623.2  Definitions.
623.3  Who may practice.
623.4  Suspension and debarment.
623.5  Reinstatement.
623.6  Duty to file information concerning adverse judicial or 
          administrative action.
623.7  Proceeding under this part.

    Authority: Secs. 5.9, 5.10, 5.17, 5.25-5.37 of the Farm Credit Act 
(12 U.S.C. 2243, 2244, 2252, 2261-2273).

    Source: 51 FR 21147, June 11, 1986, unless otherwise noted.



Sec. 623.1  Scope of part.

    This part prescribes rules with regard to persons who may practice 
before the Farm Credit Administration and the circumstances under which 
attorneys, accountants, appraisers, or other persons may be suspended or 
debarred, either temporarily or permanently, from practicing before the 
Farm Credit Administration. In connection with any particular matter, 
reference also should be made to any special requirements of procedure 
and practice that may be contained in the particular statute involved or 
the rules and forms adopted by the Farm Credit Administration 
thereunder, which special requirements are controlling. In addition to 
any suspension hereunder, a person may be excluded from further 
participation in a particular adjudicative proceeding in accordance with 
Sec. 622.3 or in a formal investigation in accordance with Sec. 622.105.



Sec. 623.2  Definitions.

    As used in this part:
    (a) FCA means the Farm Credit Administration.
    (b) Board means the Farm Credit Administration Board.
    (c) Act means the Farm Credit Act of 1971, as amended. 12 U.S.C. 
2001, et seq.
    (d) The terms institution in the System, System institution and 
institution mean all institutions enumerated in section 1.2 of the Act, 
any institution chartered pursuant to or established by the Act, except 
for the Farm Credit System Assistance Board and the Farm

[[Page 275]]

Credit System Insurance Corporation and any service corporation 
chartered under the Act.
    (e) The term presiding officer includes the Board, one or more 
members thereof, FCA employees, or an administrative law judge. As used 
in this part, the term shall be construed to refer to whichever of the 
above-identified individuals presides at a hearing or other proceeding, 
except as otherwise specified in the text;
    (f) The term attorney means any person who is a member in good 
standing of the bar of the highest court of any State, possession, 
territory, Commonwealth or the District of Columbia;
    (g) The term practice means transacting any business with the FCA, 
including but not limited to:
    (1) The representation of another person at any adjudicatory, 
investigatory, removal or rulemaking proceeding conducted before the FCA 
or a presiding officer;
    (2) The preparation or certification of any statement, opinion, 
report of financial condition and performance, financial statement, 
appraisal report, audit report, or other document or report by any 
attorney, accountant, appraiser or other person which is filed with or 
submitted to the FCA, with such person's consent or knowledge in 
connection with any filing with the FCA;
    (3) A presentation to the FCA or a presiding officer at a conference 
or meeting relating to an institution's or person's rights, privileges 
or liabilities under the laws administered by the FCA and rules and 
regulations promulgated thereunder;
    (4) Any business correspondence or communication with the FCA or a 
presiding officer; and
    (5) The transaction of any other business with the FCA on behalf of 
another, in the capacity of an attorney, accountant, appraiser, licensed 
expert or any other capacity.

[51 FR 21147, June 11, 1986, as amended at 53 FR 27285, July 19, 1988; 
78 FR 31835, May 28, 2013]



Sec. 623.3  Who may practice.

    (a) By nonattorneys. (1) An individual may appear on his or her own 
behalf; a member of a partnership may represent the partnership; a bona 
fide and duly authorized officer or other designated representative of a 
corporation, trust, association or other entity not specifically listed 
herein may represent the corporation, trust, association or other 
entity; and an authorized officer or other designated representative of 
any government unit, agency or authority may represent that unit, agency 
or authority.
    (2) Any accountant, appraiser or licensed expert may practice before 
the FCA in a professional capacity.
    (b) By attorneys. Any entity noted in paragraph (a) of this section 
may be represented in any proceeding or other matter before the FCA by 
an attorney.
    (c) Any person transacting business with the FCA in a representative 
capacity may be required to show evidence of his or her authority to act 
in such capacity and certification of credentials.



Sec. 623.4  Suspension and debarment.

    (a) Grounds. The Board may censure any person practicing before the 
FCA or may deny, temporarily or permanently, the privilege of any person 
to practice before the FCA if such person is found by the Board, after 
notice of and opportunity for hearing in the matter:
    (1) Not to possess the requisite qualifications to represent others;
    (2) To be lacking in character or professional integrity;
    (3) To have engaged in any dilatory, obstructionist, egregious, 
contemptuous, contumacious or other unethical or improper conduct before 
FCA; or
    (4) To have willfully violated, or willfully aided and abetted the 
violation of, any provision of the laws administered by the FCA or the 
rules and regulations promulgated thereunder.
    (b) Automatic suspension. (1) Any person who, after being licensed 
as a professional or expert by any competent authority, has been 
convicted by a Federal or State court of a felony, or of a misdemeanor 
involving moral turpitude, personal dishonesty or breach of trust, shall 
be suspended automatically from practicing before the FCA without a 
hearing.
    (2) Any accountant, appraiser or licensed expert whose license to 
practice

[[Page 276]]

has been revoked in any State, possession, territory, Commonwealth or 
the District of Columbia, or who has been suspended or otherwise barred 
from practice before any Federal or State regulatory authority, shall be 
suspended automatically from practicing before the FCA without a 
hearing.
    (3) Any attorney who has been suspended or disbarred by a court of 
the United States or in any State, possession, territory, Commonwealth 
or the District of Columbia, shall be suspended automatically from 
practicing before the FCA without a hearing.
    (4) A conviction (including a judgment or order on a plea of nolo 
contendere), revocation, suspension or disbarment under paragraphs 
(b)(1), (2) and (3) of this section shall be deemed to have occurred 
when the convicting, revoking, suspending or disbarring agency or 
tribunal enters its judgment or order, regardless of whether an appeal 
is pending or could be taken.
    (5) For purposes of this section, it shall be irrelevant that any 
attorney, accountant, appraiser or licensed expert who has been 
suspended, disbarred or otherwise disqualified from practice before a 
court, regulatory authority, or in a jurisdiction continues in 
professional good standing before other courts, regulatory authorities, 
or in other jurisdictions.
    (c) Temporary suspension. (1) The Board, with due regard to the 
public interest and without preliminary hearing, by order, may 
temporarily suspend any person from appearing or practicing before it 
who by name, has been:
    (i) Permanently enjoined (whether by consent, default or summary 
judgment or after trial) by any court of competent jurisdiction or by 
the Board in a final administrative order, by reason of his or her 
misconduct in any action brought by the FCA based upon violations of, or 
aiding and abetting the violation of any provision of any law that is 
administered by the FCA or of any rule or regulation promulgated 
thereunder; or
    (ii) Found by any court of competent jurisdiction (whether by 
consent, default, upon summary judgment or after hearing) or in any 
administrative proceeding in which the FCA is a complainant and he or 
she is a party, to have willfully committed, caused, aided or abetted a 
violation of any provision of any law that is administered by the FCA, 
or of any rule or regulation promulgated thereunder.
    (2) An order of temporary suspension shall become effective when 
served by certified mail with a return receipt directed to the last 
known business or residential address of the person involved. No order 
of temporary suspension shall be entered by the Board pursuant to 
paragraph (c)(1) of this section more than 3 months after the final 
judgment or order entered in a judicial or administrative proceeding 
described in paragraph (c)(1) (i) or (ii) of this section has become 
effective and all review or appeal procedures have been completed or are 
no longer available.
    (3) Any person temporarily suspended from appearing and practicing 
before the FCA in accordance with paragraph (c)(1) of this section may, 
within 30 days after service of the order of temporary suspension, 
petition the Board to lift such suspension. If no petition is received 
by the Board within 30 days, the suspension shall become permanent.
    (4) Within 30 days after the filing of a petition in accordance with 
paragraph (c)(3) of this section, the Board shall either lift the 
temporary suspension or set the matter down for hearing at a time and 
place to be designated by the Board, or both. After opportunity for 
hearing, the Board may censure the petitioner or may suspend the 
petitioner from appearing or practicing before the FCA temporarily or 
permanently. In any case in which the temporary suspension has not been 
lifted, the hearing and any other action taken pursuant to this 
paragraph shall be expedited by the Board in order to ensure the 
petitioner's right to address the allegations.
    (5) In any hearing held on a petition filed in accordance with 
paragraph (c)(3) of this section, a showing that the petitioner has been 
enjoined or has been found to have committed, caused, aided or abetted 
violations as described in paragraph (c)(1) of this section, without 
more, may be a basis for suspension or debarment; that showing having 
been made, the burden shall then be on the petitioner to show why

[[Page 277]]

the petitioner should not be censured or be temporarily or permanently 
suspended or debarred. A petitioner will not be permitted to contest any 
findings against the petitioner or any admissions made by the petitioner 
in the judicial or administrative proceedings upon which the proposed 
censure, suspension or debarment is based. A petitioner who has 
consented to the entry of a permanent injunction or order as described 
in paragraph (c)(1)(i) of this section, without admitting the facts set 
forth in the complaint, shall nevertheless be presumed for all purposes 
under this section to have been enjoined or ordered by reason of the 
misconduct alleged in the complaint.



Sec. 623.5  Reinstatement.

    (a) Any person who is suspended from practicing before the FCA under 
Sec. 623.4 (a) or (c) of this part may file an application for 
reinstatement at any time. Denial of the privilege of practicing before 
the FCA shall continue unless and until the applicant has been 
reinstated by order of the Board for good cause shown.
    (b) Any person suspended under Sec. 623.4(b) shall be reinstated by 
the Board, upon appropriate application, if all of the grounds for 
application of the provisions of that paragraph are removed subsequently 
by a reversal of the conviction or termination of the suspension, 
disbarment of revocation. An application for reinstatement on any other 
grounds by any person suspended under Sec. 623.4(b) may be filed at any 
time. Such application shall state with particularity the relief 
requested and the grounds therefor and shall include supporting 
evidence, when available. The applicant shall be accorded an opportunity 
for an informal hearing in the matter, unless the applicant has waived a 
hearing in the application and, instead, has elected to have the matter 
determined on the basis of written submissions. Such hearing shall 
utilize the procedures established in part 622, subpart C. However, such 
suspension shall continue unless and until the applicant has been 
reinstated by order of the Board for good cause shown.



Sec. 623.6  Duty to file information concerning adverse judicial 
or administrative action.

    Any person appearing or practicing before the FCA who has been or is 
the subject of a conviction, suspension, debarment, license revocation, 
injunction or other finding of the kind described in Sec. 623.4 (b) or 
(c) of this part is an action not instituted by the FCA shall promptly 
file a copy of the relevant order, judgment or decree with the Board 
together with any related opinion or statement of the agency or tribunal 
involved. Any person who fails to file a copy of such an order, judgment 
or decree within 30 days after the later of the entry of the order, 
judgment or decree, or the date such person initiates practice before 
the FCA, for that reason alone may be disqualified from practicing 
before the FCA until such time as the appropriate filing shall be made, 
but neither the filing of these documents nor the failure of a person to 
file them shall in any way impair the operation of any other provision 
of this part.



Sec. 623.7  Proceeding under this part.

    (a) Rules. All hearings required or permitted to be held under 
paragraphs (a) and (c) of Sec. 623.4 of this part shall be held before a 
presiding officer utilizing the procedures established in the rules of 
practice and procedure under part 622, subpart A.
    (b) Closed hearings. All hearings held under this part shall be 
closed to the public unless the Board directs otherwise on its own 
motion or upon the request of a party.
    (c) Collateral proceedings. Any proceeding brought under any section 
of this part shall not preclude a proceeding under any other section of 
this part or any other part of the FCA's regulations.



PART 624_MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES
--Table of Contents



Sec.
624.1  Authority, purpose, scope, exemptions and compliance dates.
624.2  Definitions.
624.3  Initial margin.
624.4  Variation margin.

[[Page 278]]

624.5  Netting arrangements, minimum transfer amount and satisfaction of 
          collecting and posting requirements.
624.6  Eligible collateral.
624.7  Segregation of collateral.
624.8  Initial margin models and standardized amounts.
624.9  Cross-border application of margin requirements.
624.10  Documentation of margin matters.
624.11  Special rules for affiliates.
624.12  Capital.

Appendix A to Part 624--Standardized Minimum Initial Margin Requirements 
          for Non-Cleared Swaps and Non-Cleared Security-Based Swaps
Appendix B to Part 624--Margin Values for Eligible Noncash Margin 
          Collateral

    Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), 12 U.S.C. 2154, 12 
U.S.C. 2243, 12 U.S.C. 2252, and 12 U.S.C. 2279bb-1.

    Source: 80 FR 74898, 74913, Nov. 30, 2015, unless otherwise noted.



Sec. 624.1  Authority, purpose, scope, exemptions and compliance dates.

    (a) Authority. This part is issued by the Farm Credit Administration 
(FCA) under section 4s(e) of the Commodity Exchange Act (7 U.S.C. 
6s(e)), section 15F(e) of the Securities Exchange Act of 1934 (15 U.S.C. 
78o-10(e)), and sections 4.3, 5.9, 5.17, and 8.32 of the Farm Credit Act 
(12 U.S.C. 2154, 12 U.S.C. 2243, 12 U.S.C. 2252, and 12 U.S.C. 2279bb-
1).
    (b) Purpose. Section 4s of the Commodity Exchange Act (7 U.S.C. 6s) 
and section 15F of the Securities Exchange Act of 1934 (15 U.S.C. 78o-
10) require the FCA to establish capital and margin requirements for any 
System institution, including the Federal Agricultural Mortgage 
Corporation, chartered under the Farm Credit Act of 1971, as amended (12 
U.S.C. 2001 et seq.) that is registered as a swap dealer, major swap 
participant, security-based swap dealer, or major security-based swap 
participant with respect to all non-cleared swaps and non-cleared 
security-based swaps. This regulation implements section 4s of the 
Commodity Exchange Act and section 15F of the Securities Exchange Act of 
1934 by defining terms used in the statute and related terms, 
establishing capital and margin requirements, and explaining the 
statutes' requirements.
    (c) Scope. This part establishes minimum capital and margin 
requirements for each covered swap entity subject to this part with 
respect to all non-cleared swaps and non-cleared security-based swaps. 
This part applies to any non-cleared swap or non-cleared security-based 
swap entered into by a covered swap entity on or after the relevant 
compliance date set forth in paragraph (e) of this section. Nothing in 
this part is intended to prevent a covered swap entity from collecting 
margin in amounts greater than are required under this part.
    (d) Exemptions--(1) Swaps. The requirements of this part (except for 
Sec. 624.12) shall not apply to a non-cleared swap if the counterparty:
    (i) Qualifies for an exception from clearing under section 
2(h)(7)(A) of the Commodity Exchange Act of 1936 (7 U.S.C. 2(h)(7)(A)) 
and implementing regulations;
    (ii) Qualifies for an exemption from clearing under a rule, 
regulation, or order that the Commodity Futures Trading Commission 
issued pursuant to its authority under section 4(c)(1) of the Commodity 
Exchange Act of 1936 (7 U.S.C. 6(c)(1)) concerning cooperative entities 
that would otherwise be subject to the requirements of section 
2(h)(1)(A) of the Commodity Exchange Act of 1936 (7 U.S.C. 2(h)(1)(A)); 
or
    (iii) Satisfies the criteria in section 2(h)(7)(D) of the Commodity 
Exchange Act of 1936 (7 U.S.C. 2(h)(7)(D)) and implementing regulations.
    (2) Security-based swaps. The requirements of this part (except for 
Sec. 624.12) shall not apply to a non-cleared security-based swap if the 
counterparty:
    (i) Qualifies for an exception from clearing under section 3C(g)(1) 
of the Securities Exchange Act of 1934 (15 U.S.C. 78c-3(g)(1)) and 
implementing regulations; or
    (ii) Satisfies the criteria in section 3C(g)(4) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78c-3(g)(4)) and implementing 
regulations.
    (e) Compliance dates. Covered swap entities shall comply with the 
minimum margin requirements of this part on or before the following 
dates for non-cleared swaps and non-cleared security-based swaps entered 
into on or after the following dates:

[[Page 279]]

    (1) September 1, 2016 with respect to the requirements in Sec. 624.3 
for initial margin and Sec. 624.4 for variation margin for any non-
cleared swaps and non-cleared security-based swaps, where both:
    (i) The covered swap entity combined with all its affiliates; and
    (ii) Its counterparty combined with all its affiliates, have an 
average daily aggregate notional amount of non-cleared swaps, non-
cleared security-based swaps, foreign exchange forwards and foreign 
exchange swaps for March, April and May 2016 that exceeds $3 trillion, 
where such amounts are calculated only for business days; and
    (iii) In calculating the amounts in paragraphs (e)(1)(i) and (ii) of 
this section, an entity shall count the average daily aggregate notional 
amount of a non-cleared swap, a non-cleared security-based swap, a 
foreign exchange forward or a foreign exchange swap between the entity 
and an affiliate only one time, and shall not count a swap or security-
based swap that is exempt pursuant to paragraph (d) of this section.
    (2) March 1, 2017 with respect to the requirements in Sec. 624.4 for 
variation margin for any other covered swap entity with respect to non-
cleared swaps and non-cleared security-based swaps entered into with any 
other counterparty.
    (3) September 1, 2017 with respect to the requirements in Sec. 624.3 
for initial margin for any non-cleared swaps and non-cleared security-
based swaps, where both:
    (i) The covered swap entity combined with all its affiliates; and
    (ii) Its counterparty combined with all its affiliates, have an 
average daily aggregate notional amount of non-cleared swaps, non-
cleared security-based swaps, foreign exchange forwards and foreign 
exchange swaps for March, April and May 2017 that exceeds $2.25 
trillion, where such amounts are calculated only for business days; and
    (iii) In calculating the amounts in paragraphs (e)(3)(i) and (ii) of 
this section, an entity shall count the average daily aggregate notional 
amount of a non-cleared swap, a non-cleared security-based swap, a 
foreign exchange forward or a foreign exchange swap between the entity 
and an affiliate only one time, and shall not count a swap or security-
based swap that is exempt pursuant to paragraph (d) of this section.
    (4) September 1, 2018 with respect to the requirements in Sec. 624.3 
for initial margin for any non-cleared swaps and non-cleared security-
based swaps, where both:
    (i) The covered swap entity combined with all its affiliates; and
    (ii) Its counterparty combined with all its affiliates, have an 
average daily aggregate notional amount of non-cleared swaps, non-
cleared security-based swaps, foreign exchange forwards and foreign 
exchange swaps for March, April and May 2018 that exceeds $1.5 trillion, 
where such amounts are calculated only for business days; and
    (iii) In calculating the amounts in paragraphs (e)(4)(i) and (ii) of 
this section, an entity shall count the average daily aggregate notional 
amount of a non-cleared swap, a non-cleared security-based swap, a 
foreign exchange forward or a foreign exchange swap between the entity 
and an affiliate only one time, and shall not count a swap or security-
based swap that is exempt pursuant to paragraph (d) of this section.
    (5) September 1, 2019 with respect to the requirements in Sec. 624.3 
for initial margin for any non-cleared swaps and non-cleared security-
based swaps, where both:
    (i) The covered swap entity combined with all its affiliates; and
    (ii) Its counterparty combined with all its affiliates, have an 
average daily aggregate notional amount of non-cleared swaps, non-
cleared security-based swaps, foreign exchange forwards and foreign 
exchange swaps for March, April and May 2019 that exceeds $0.75 
trillion, where such amounts are calculated only for business days; and
    (iii) In calculating the amounts in paragraphs (e)(5)(i) and (ii) of 
this section, an entity shall count the average daily aggregate notional 
amount of a non-cleared swap, a non-cleared security-based swap, a 
foreign exchange forward or a foreign exchange swap between the entity 
and an affiliate only one time, and shall not count a swap or security-
based swap that is exempt

[[Page 280]]

pursuant to paragraph (d) of this section.
    (6) September 1, 2020 with respect to the requirements in Sec. 624.3 
for initial margin for any other covered swap entity with respect to 
non-cleared swaps and non-cleared security-based swaps entered into with 
any other counterparty.
    (f) Once a covered swap entity must comply with the margin 
requirements for non-cleared swaps and non-cleared security-based swaps 
with respect to a particular counterparty based on the compliance dates 
in paragraph (e) of this section, the covered swap entity shall remain 
subject to the requirements of this part with respect to that 
counterparty.
    (g)(1) If a covered swap entity's counterparty changes its status 
such that a non-cleared swap or non-cleared security-based swap with 
that counterparty becomes subject to stricter margin requirements under 
this part (such as if the counterparty's status changes from a financial 
end user without material swaps exposure to a financial end user with 
material swaps exposure), then the covered swap entity shall comply with 
the stricter margin requirements for any non-cleared swap or non-cleared 
security-based swap entered into with that counterparty after the 
counterparty changes its status.
    (2) If a covered swap entity's counterparty changes its status such 
that a non-cleared swap or non-cleared security-based swap with that 
counterparty becomes subject to less strict margin requirements under 
this part (such as if the counterparty's status changes from a financial 
end user with material swaps exposure to a financial end user without 
material swaps exposure), then the covered swap entity may comply with 
the less strict margin requirements for any non-cleared swap or non-
cleared security-based swap entered into with that counterparty after 
the counterparty changes its status as well as for any outstanding non-
cleared swap or non-cleared security-based swap entered into after the 
applicable compliance date in paragraph (e) of this section and before 
the counterparty changed its status.

[80 FR 74898, 74913, Nov. 30, 2015, as amended at 80 FR 74913, 74924, 
Nov. 30, 2015]



Sec. 624.2  Definitions.

    Affiliate. A company is an affiliate of another company if:
    (1) Either company consolidates the other on financial statements 
prepared in accordance with U.S. Generally Accepted Accounting 
Principles, the International Financial Reporting Standards, or other 
similar standards;
    (2) Both companies are consolidated with a third company on a 
financial statement prepared in accordance with such principles or 
standards;
    (3) For a company that is not subject to such principles or 
standards, if consolidation as described in paragraph (1) or (2) of this 
definition would have occurred if such principles or standards had 
applied; or
    (4) The FCA has determined that a company is an affiliate of another 
company, based on FCA's conclusion that either company provides 
significant support to, or is materially subject to the risks or losses 
of, the other company.
    Bank holding company has the meaning specified in section 2 of the 
Bank Holding Company Act of 1956 (12 U.S.C. 1841).
    Broker has the meaning specified in section 3(a)(4) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)).
    Business day means any day other than a Saturday, Sunday, or legal 
holiday.
    Clearing agency has the meaning specified in section 3(a)(23) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(23)).
    Company means a corporation, partnership, limited liability company, 
business trust, special purpose entity, association, or similar 
organization.
    Counterparty means, with respect to any non-cleared swap or non-
cleared security-based swap to which a person is a party, each other 
party to such non-cleared swap or non-cleared security-based swap.
    Covered swap entity means any institution chartered under the Farm 
Credit Act of 1971, as amended (12 U.S.C. 2001 et seq.) that is a swap 
entity, or

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any other entity that the FCA determines.
    Cross-currency swap means a swap in which one party exchanges with 
another party principal and interest rate payments in one currency for 
principal and interest rate payments in another currency, and the 
exchange of principal occurs on the date the swap is entered into, with 
a reversal of the exchange of principal at a later date that is agreed 
upon when the swap is entered into.
    Currency of settlement means a currency in which a party has agreed 
to discharge payment obligations related to a non-cleared swap, a non-
cleared security-based swap, a group of non-cleared swaps, or a group of 
non-cleared security-based swaps subject to a master agreement at the 
regularly occurring dates on which such payments are due in the ordinary 
course.
    Day of execution means the calendar day at the time the parties 
enter into a non-cleared swap or non-cleared security-based swap, 
provided:
    (1) If each party is in a different calendar day at the time the 
parties enter into the non-cleared swap or non-cleared security-based 
swap, the day of execution is deemed the latter of the two dates; and
    (2) If a non-cleared swap or non-cleared security-based swap is:
    (i) Entered into after 4:00 p.m. in the location of a party; or
    (ii) Entered into on a day that is not a business day in the 
location of a party, then the non-cleared swap or non-cleared security-
based swap is deemed to have been entered into on the immediately 
succeeding day that is a business day for both parties, and both parties 
shall determine the day of execution with reference to that business 
day.
    Dealer has the meaning specified in section 3(a)(5) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(5)).
    Depository institution has the meaning specified in section 3(c) of 
the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
    Derivatives clearing organization has the meaning specified in 
section 1a(15) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(15)).
    Eligible collateral means collateral described in Sec. 624.6.
    Eligible master netting agreement means a written, legally 
enforceable agreement provided that:
    (1) The agreement creates a single legal obligation for all 
individual transactions covered by the agreement upon an event of 
default following any stay permitted by paragraph (2) of this 
definition, including upon an event of receivership, conservatorship, 
insolvency, liquidation, or similar proceeding, of the counterparty;
    (2) The agreement provides the covered swap entity the right to 
accelerate, terminate, and close-out on a net basis all transactions 
under the agreement and to liquidate or set-off collateral promptly upon 
an event of default, including upon an event of receivership, 
conservatorship, insolvency, liquidation, or similar proceeding, of the 
counterparty, provided that, in any such case, any exercise of rights 
under the agreement will not be stayed or avoided under applicable law 
in the relevant jurisdictions, other than:
    (i) In receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.), Title II of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 
5381 et seq.), the Federal Housing Enterprises Financial Safety and 
Soundness Act of 1992, as amended (12 U.S.C. 4617), or the Farm Credit 
Act of 1971, as amended (12 U.S.C. 2183 and 2279cc), or laws of foreign 
jurisdictions that are substantially similar to the U.S. laws referenced 
in this paragraph (2)(i) in order to facilitate the orderly resolution 
of the defaulting counterparty; or
    (ii) Where the agreement is subject by its terms to, or 
incorporates, any of the laws referenced in paragraph (2)(i) of this 
definition;
    (3) The agreement does not contain a walkaway clause (that is, a 
provision that permits a non-defaulting counterparty to make a lower 
payment than it otherwise would make under the agreement, or no payment 
at all, to a defaulter or the estate of a defaulter, even if the 
defaulter or the estate of the defaulter is a net creditor under the 
agreement); and

[[Page 282]]

    (4) A covered swap entity that relies on the agreement for purposes 
of calculating the margin required by this part must:
    (i) Conduct sufficient legal review to conclude with a well-founded 
basis (and maintain sufficient written documentation of that legal 
review) that:
    (A) The agreement meets the requirements of paragraph (2) of this 
definition; and
    (B) In the event of a legal challenge (including one resulting from 
default or from receivership, conservatorship, insolvency, liquidation, 
or similar proceeding), the relevant court and administrative 
authorities would find the agreement to be legal, valid, binding, and 
enforceable under the law of the relevant jurisdictions; and
    (ii) Establish and maintain written procedures to monitor possible 
changes in relevant law and to ensure that the agreement continues to 
satisfy the requirements of this definition.
    Financial end user means:
    (1) Any counterparty that is not a swap entity and that is:
    (i) A bank holding company or an affiliate thereof; a savings and 
loan holding company; a U.S. intermediate holding company established or 
designated for purposes of compliance with 12 CFR 252.153; or a nonbank 
financial institution supervised by the Board of Governors of the 
Federal Reserve System under Title I of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (12 U.S.C. 5323);
    (ii) A depository institution; a foreign bank; a Federal credit 
union or State credit union as defined in section 2 of the Federal 
Credit Union Act (12 U.S.C. 1752(1) & (6)); an institution that 
functions solely in a trust or fiduciary capacity as described in 
section 2(c)(2)(D) of the Bank Holding Company Act (12 U.S.C. 
1841(c)(2)(D)); an industrial loan company, an industrial bank, or other 
similar institution described in section 2(c)(2)(H) of the Bank Holding 
Company Act (12 U.S.C. 1841(c)(2)(H));
    (iii) An entity that is state-licensed or registered as:
    (A) A credit or lending entity, including a finance company; money 
lender; installment lender; consumer lender or lending company; mortgage 
lender, broker, or bank; motor vehicle title pledge lender; payday or 
deferred deposit lender; premium finance company; commercial finance or 
lending company; or commercial mortgage company; except entities 
registered or licensed solely on account of financing the entity's 
direct sales of goods or services to customers;
    (B) A money services business, including a check casher; money 
transmitter; currency dealer or exchange; or money order or traveler's 
check issuer;
    (iv) A regulated entity as defined in section 1303(20) of the 
Federal Housing Enterprises Financial Safety and Soundness Act of 1992, 
as amended (12 U.S.C. 4502(20)) or any entity for which the Federal 
Housing Finance Agency or its successor is the primary federal 
regulator;
    (v) Any institution chartered in accordance with the Farm Credit Act 
of 1971, as amended, 12 U.S.C. 2001 et seq., that is regulated by the 
Farm Credit Administration;
    (vi) A securities holding company; a broker or dealer; an investment 
adviser as defined in section 202(a) of the Investment Advisers Act of 
1940 (15 U.S.C. 80b-2(a)); an investment company registered with the 
U.S. Securities and Exchange Commission under the Investment Company Act 
of 1940 (15 U.S.C. 80a-1 et seq.); or a company that has elected to be 
regulated as a business development company pursuant to section 54(a) of 
the Investment Company Act of 1940 (15 U.S.C. 80a-53(a));
    (vii) A private fund as defined in section 202(a) of the Investment 
Advisers Act of 1940 (15 U.S.C. 80-b-2(a)); an entity that would be an 
investment company under section 3 of the Investment Company Act of 1940 
(15 U.S.C. 80a-3) but for section 3(c)(5)(C); or an entity that is 
deemed not to be an investment company under section 3 of the Investment 
Company Act of 1940 pursuant to Investment Company Act Rule 3a-7 (17 CFR 
270.3a-7) of the U.S. Securities and Exchange Commission;
    (viii) A commodity pool, a commodity pool operator, or a commodity 
trading advisor as defined, respectively, in section 1a(10), 1a(11), and 
1a(12) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(10), 1a(11), 
and 1a(12)); a floor broker, a floor trader, or

[[Page 283]]

introducing broker as defined, respectively, in 1a(22), 1a(23) and 
1a(31) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(22), 1a(23), 
and 1a(31)); or a futures commission merchant as defined in 1a(28) of 
the Commodity Exchange Act of 1936 (7 U.S.C. 1a(28));
    (ix) An employee benefit plan as defined in paragraphs (3) and (32) 
of section 3 of the Employee Retirement Income and Security Act of 1974 
(29 U.S.C. 1002);
    (x) An entity that is organized as an insurance company, primarily 
engaged in writing insurance or reinsuring risks underwritten by 
insurance companies, or is subject to supervision as such by a State 
insurance regulator or foreign insurance regulator;
    (xi) An entity, person or arrangement that is, or holds itself out 
as being, an entity, person, or arrangement that raises money from 
investors, accepts money from clients, or uses its own money primarily 
for the purpose of investing or trading or facilitating the investing or 
trading in loans, securities, swaps, funds or other assets for resale or 
other disposition or otherwise trading in loans, securities, swaps, 
funds or other assets; or
    (xii) An entity that would be a financial end user described in 
paragraph (1) of this definition or a swap entity, if it were organized 
under the laws of the United States or any State thereof.
    (2) The term ``financial end user'' does not include any 
counterparty that is:
    (i) A sovereign entity;
    (ii) A multilateral development bank;
    (iii) The Bank for International Settlements;
    (iv) An entity that is exempt from the definition of financial 
entity pursuant to section 2(h)(7)(C)(iii) of the Commodity Exchange Act 
of 1936 (7 U.S.C. 2(h)(7)(C)(iii)) and implementing regulations; or
    (v) An affiliate that qualifies for the exemption from clearing 
pursuant to section 2(h)(7)(D) of the Commodity Exchange Act of 1936 (7 
U.S.C. 2(h)(7)(D)) or section 3C(g)(4) of the Securities Exchange Act of 
1934 (15 U.S.C. 78c-3(g)(4)) and implementing regulations.
    Foreign bank means an organization that is organized under the laws 
of a foreign country and that engages directly in the business of 
banking outside the United States.
    Foreign exchange forward has the meaning specified in section 1a(24) 
of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(24)).
    Foreign exchange swap has the meaning specified in section 1a(25) of 
the Commodity Exchange Act of 1936 (7 U.S.C. 1a(25)).
    Initial margin means the collateral as calculated in accordance with 
Sec. 624.8 that is posted or collected in connection with a non-cleared 
swap or non-cleared security-based swap.
    Initial margin collection amount means:
    (1) In the case of a covered swap entity that does not use an 
initial margin model, the amount of initial margin with respect to a 
non-cleared swap or non-cleared security-based swap that is required 
under appendix A of this part; and
    (2) In the case of a covered swap entity that uses an initial margin 
model pursuant to Sec. 624.8, the amount of initial margin with respect 
to a non-cleared swap or non-cleared security-based swap that is 
required under the initial margin model.
    Initial margin model means an internal risk management model that:
    (1) Has been developed and designed to identify an appropriate, 
risk-based amount of initial margin that the covered swap entity must 
collect with respect to one or more non-cleared swaps or non-cleared 
security-based swaps to which the covered swap entity is a party; and
    (2) Has been approved by the FCA pursuant to Sec. 624.8.
    Initial margin threshold amount means an aggregate credit exposure 
of $50 million resulting from all non-cleared swaps and non-cleared 
security-based swaps between a covered swap entity and its affiliates, 
and a counterparty and its affiliates. For purposes of this calculation, 
an entity shall not count a swap or security-based swap that is exempt 
pursuant to Sec. 624.1(d).
    Investment grade means the issuer of a security has an adequate 
capacity to meet financial commitments under the security for the 
projected life of the

[[Page 284]]

asset or exposure. An issuer has an adequate capacity to meet financial 
commitments if the risk of default by the obligor is low and the full 
and timely repayment of principal and interest is expected.
    Major currency means:
    (1) United States Dollar (USD);
    (2) Canadian Dollar (CAD);
    (3) Euro (EUR);
    (4) United Kingdom Pound (GBP);
    (5) Japanese Yen (JPY);
    (6) Swiss Franc (CHF);
    (7) New Zealand Dollar (NZD);
    (8) Australian Dollar (AUD);
    (9) Swedish Kronor (SEK);
    (10) Danish Kroner (DKK);
    (11) Norwegian Krone (NOK); or
    (12) Any other currency as determined by the FCA.
    Margin means initial margin and variation margin.
    Market intermediary means a securities holding company; a broker or 
dealer; a futures commission merchant as defined in 1a(28) of the 
Commodity Exchange Act of 1936 (7 U.S.C. 1a(28)); a swap dealer as 
defined in section 1a(49) of the Commodity Exchange Act of 1936 (7 
U.S.C. 1a(49)); or a security-based swap dealer as defined in section 
3(a)(71) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(71)).
    Material swaps exposure for an entity means that an entity and its 
affiliates have an average daily aggregate notional amount of non-
cleared swaps, non-cleared security-based swaps, foreign exchange 
forwards, and foreign exchange swaps with all counterparties for June, 
July, and August of the previous calendar year that exceeds $8 billion, 
where such amount is calculated only for business days. An entity shall 
count the average daily aggregate notional amount of a non-cleared swap, 
a non-cleared security-based swap, a foreign exchange forward or a 
foreign exchange swap between the entity and an affiliate only one time. 
For purposes of this calculation, an entity shall not count a swap or 
security-based swap that is exempt pursuant to Sec. 624.1(d).
    Multilateral development bank means the International Bank for 
Reconstruction and Development, the Multilateral Investment Guarantee 
Agency, the International Finance Corporation, the Inter-American 
Development Bank, the Asian Development Bank, the African Development 
Bank, the European Bank for Reconstruction and Development, the European 
Investment Bank, the European Investment Fund, the Nordic Investment 
Bank, the Caribbean Development Bank, the Islamic Development Bank, the 
Council of Europe Development Bank, and any other entity that provides 
financing for national or regional development in which the U.S. 
government is a shareholder or contributing member or which the FCA 
determines poses comparable credit risk.
    Non-cleared security-based swap means a security-based swap that is 
not, directly or indirectly, submitted to and cleared by a clearing 
agency registered with the U.S. Securities and Exchange Commission 
pursuant to section 17A of the Securities Exchange Act of 1934 (15 
U.S.C. 78q-1) or by a clearing agency that the U.S. Securities and 
Exchange Commission has exempted from registration by rule or order 
pursuant to section 17A of the Securities Exchange Act of 1934 (15 
U.S.C. 78q-1).
    Non-cleared swap means a swap that is not cleared by a derivatives 
clearing organization registered with the Commodity Futures Trading 
Commission pursuant to section 5b(a) of the Commodity Exchange Act of 
1936 (7 U.S.C. 7a-1(a)) or by a clearing organization that the Commodity 
Futures Trading Commission has exempted from registration by rule or 
order pursuant to section 5b(h) of the Commodity Exchange Act of 1936 (7 
U.S.C. 7a-1(h)).
    Prudential regulator has the meaning specified in section 1a(39) of 
the Commodity Exchange Act of 1936 (7 U.S.C. 1a(39)).
    Savings and loan holding company has the meaning specified in 
section 10(n) of the Home Owners' Loan Act (12 U.S.C. 1467a(n)).
    Securities holding company has the meaning specified in section 618 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 
U.S.C. 1850a).
    Security-based swap has the meaning specified in section 3(a)(68) of 
the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(68)).

[[Page 285]]

    Sovereign entity means a central government (including the U.S. 
government) or an agency, department, ministry, or central bank of a 
central government.
    State means any State, commonwealth, territory, or possession of the 
United States, the District of Columbia, the Commonwealth of Puerto 
Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, 
Guam, or the United States Virgin Islands.
    Subsidiary. A company is a subsidiary of another company if:
    (1) The company is consolidated by the other company on financial 
statements prepared in accordance with U.S. Generally Accepted 
Accounting Principles, the International Financial Reporting Standards, 
or other similar standards;
    (2) For a company that is not subject to such principles or 
standards, if consolidation as described in paragraph (1) of this 
definition would have occurred if such principles or standards had 
applied; or
    (3) The FCA has determined that the company is a subsidiary of 
another company, based on FCA's conclusion that either company provides 
significant support to, or is materially subject to the risks of loss 
of, the other company.
    Swap has the meaning specified in section 1a(47) of the Commodity 
Exchange Act of 1936 (7 U.S.C. 1a(47)).
    Swap entity means a person that is registered with the Commodity 
Futures Trading Commission as a swap dealer or major swap participant 
pursuant to the Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq.), or 
a person that is registered with the U.S. Securities and Exchange 
Commission as a security-based swap dealer or a major security-based 
swap participant pursuant to the Securities Exchange Act of 1934 (15 
U.S.C. 78a et seq.).
    U.S. Government-sponsored enterprise means an entity established or 
chartered by the U.S. government to serve public purposes specified by 
federal statute but whose debt obligations are not explicitly guaranteed 
by the full faith and credit of the U.S. government.
    Variation margin means collateral provided by one party to its 
counterparty to meet the performance of its obligations under one or 
more non-cleared swaps or non-cleared security-based swaps between the 
parties as a result of a change in value of such obligations since the 
last time such collateral was provided.
    Variation margin amount means the cumulative mark-to-market change 
in value to a covered swap entity of a non-cleared swap or non-cleared 
security-based swap, as measured from the date it is entered into (or, 
in the case of a non-cleared swap or non-cleared security-based swap 
that has a positive or negative value to a covered swap entity on the 
date it is entered into, such positive or negative value plus any 
cumulative mark-to-market change in value to the covered swap entity of 
a non-cleared swap or non-cleared security-based swap after such date), 
less the value of all variation margin previously collected, plus the 
value of all variation margin previously posted with respect to such 
non-cleared swap or non-cleared security-based swap.

[80 FR 74898, 74913, Nov. 30, 2015, as amended at 80 FR 74913, Nov. 30, 
2015]



Sec. 624.3  Initial margin.

    (a) Collection of margin. A covered swap entity shall collect 
initial margin with respect to any non-cleared swap or non-cleared 
security-based swap from a counterparty that is a financial end user 
with material swaps exposure or that is a swap entity in an amount that 
is no less than the greater of:
    (1) Zero; or
    (2) The initial margin collection amount for such non-cleared swap 
or non-cleared security-based swap less the initial margin threshold 
amount (not including any portion of the initial margin threshold amount 
already applied by the covered swap entity or its affiliates to other 
non-cleared swaps or non-cleared security-based swaps with the 
counterparty or its affiliates), as applicable.
    (b) Posting of margin. A covered swap entity shall post initial 
margin with respect to any non-cleared swap or non-cleared security-
based swap to a counterparty that is a financial end user with material 
swaps exposure.

[[Page 286]]

Such initial margin shall be in an amount at least as large as the 
covered swap entity would be required to collect under paragraph (a) of 
this section if it were in the place of the counterparty.
    (c) Timing. A covered swap entity shall comply with the initial 
margin requirements described in paragraphs (a) and (b) of this section 
on each business day, for a period beginning on or before the business 
day following the day of execution and ending on the date the non-
cleared swap or non-cleared security-based swap terminates or expires.
    (d) Other counterparties. A covered swap entity is not required to 
collect or post initial margin with respect to any non-cleared swap or 
non-cleared security-based swap described in Sec. 624.1(d). For any 
other non-cleared swap or non-cleared security-based swap between a 
covered swap entity and a counterparty that is neither a financial end 
user with a material swaps exposure nor a swap entity, the covered swap 
entity shall collect initial margin at such times and in such forms and 
such amounts (if any), that the covered swap entity determines 
appropriately addresses the credit risk posed by the counterparty and 
the risks of such non-cleared swap or non-cleared security-based swap.



Sec. 624.4  Variation margin.

    (a) General. After the date on which a covered swap entity enters 
into a non-cleared swap or non-cleared security-based swap with a swap 
entity or financial end user, the covered swap entity shall collect 
variation margin equal to the variation margin amount from the 
counterparty to such non-cleared swap or non-cleared security-based swap 
when the amount is positive and post variation margin equal to the 
variation margin amount to the counterparty to such non-cleared swap or 
non-cleared security-based swap when the amount is negative.
    (b) Timing. A covered swap entity shall comply with the variation 
margin requirements described in paragraph (a) of this section on each 
business day, for a period beginning on or before the business day 
following the day of execution and ending on the date the non-cleared 
swap or non-cleared security based swap terminates or expires.
    (c) Other counterparties. A covered swap entity is not required to 
collect or post variation margin with respect to any non-cleared swap or 
non-cleared security-based swap described in Sec. 624.1(d). For any 
other non-cleared swap or non-cleared security-based swap between a 
covered swap entity and a counterparty that is neither a financial end 
user nor a swap entity, the covered swap entity shall collect variation 
margin at such times and in such forms and such amounts (if any), that 
the covered swap entity determines appropriately addresses the credit 
risk posed by the counterparty and the risks of such non-cleared swap or 
non-cleared security-based swap.



Sec. 624.5  Netting arrangements, minimum transfer amount and 
satisfaction of collecting and posting requirements.

    (a) Netting arrangements. (1) For purposes of calculating and 
complying with the initial margin requirements of Sec. 624.3 using an 
initial margin model as described in Sec. 624.8, or with the variation 
margin requirements of Sec. 624.4, a covered swap entity may net non-
cleared swaps or non-cleared security-based swaps in accordance with 
this subsection.
    (2) To the extent that one or more non-cleared swaps or non-cleared 
security-based swaps are executed pursuant to an eligible master netting 
agreement between a covered swap entity and its counterparty that is a 
swap entity or financial end user, a covered swap entity may calculate 
and comply with the applicable requirements of this part on an aggregate 
net basis with respect to all non-cleared swaps and non-cleared 
security-based swaps governed by such agreement, subject to paragraph 
(a)(3) of this section.
    (3)(i) Except as permitted in paragraph (a)(3)(ii) of this section, 
if an eligible master netting agreement covers non-cleared swaps and 
non-cleared security-based swaps entered into on or after the applicable 
compliance date set forth in Sec. 624.1(e) or (g), all the non-cleared 
swaps and non-cleared security-based swaps covered by that agreement are 
subject to the requirements

[[Page 287]]

of this part and included in the aggregate netting portfolio for the 
purposes of calculating and complying with the margin requirements of 
this part.
    (ii) An eligible master netting agreement may identify one or more 
separate netting portfolios that independently meet the requirements in 
paragraph (1) of the definition of ``Eligible master netting agreement'' 
in Sec. 624.2 and to which collection and posting of margin applies on 
an aggregate net basis separate from and exclusive of any other non-
cleared swaps or non-cleared security-based swaps covered by the 
eligible master netting agreement. Any such netting portfolio that 
contains any non-cleared swap or non-cleared security-based swap entered 
into on or after the applicable compliance date set forth in 
Sec. 624.1(e) or (g) is subject to the requirements of this part. Any 
such netting portfolio that contains only non-cleared swaps or non-
cleared security-based swaps entered into before the applicable 
compliance date is not subject to the requirements of this part.
    (4) If a covered swap entity cannot conclude after sufficient legal 
review with a well-founded basis that the netting agreement described in 
this section meets the definition of eligible master netting agreement 
set forth in Sec. 624.2, the covered swap entity must treat the non-
cleared swaps and non-cleared security based swaps covered by the 
agreement on a gross basis for the purposes of calculating and complying 
with the requirements of this part to collect margin, but the covered 
swap entity may net those non-cleared swaps and non-cleared security-
based swaps in accordance with paragraphs (a)(1) through (3) of this 
section for the purposes of calculating and complying with the 
requirements of this part to post margin.
    (b) Minimum transfer amount. Notwithstanding Sec. 624.3 or 
Sec. 624.4, a covered swap entity is not required to collect or post 
margin pursuant to this part with respect to a particular counterparty 
unless and until the combined amount of initial margin and variation 
margin that is required pursuant to this part to be collected or posted 
and that has not yet been collected or posted with respect to the 
counterparty is greater than $500,000.
    (c) Satisfaction of collecting and posting requirements. A covered 
swap entity shall not be deemed to have violated its obligation to 
collect or post margin from or to a counterparty under Sec. 624.3, 
Sec. 624.4, or Sec. 624.6(e) if:
    (1) The counterparty has refused or otherwise failed to provide or 
accept the required margin to or from the covered swap entity; and
    (2) The covered swap entity has:
    (i) Made the necessary efforts to collect or post the required 
margin, including the timely initiation and continued pursuit of formal 
dispute resolution mechanisms, or has otherwise demonstrated upon 
request to the satisfaction of the FCA that it has made appropriate 
efforts to collect or post the required margin; or
    (ii) Commenced termination of the non-cleared swap or non-cleared 
security-based swap with the counterparty promptly following the 
applicable cure period and notification requirements.



Sec. 624.6  Eligible collateral.

    (a) Non-cleared swaps and non-cleared security-based swaps with a 
swap entity. For a non-cleared swap or non-cleared security-based swap 
with a swap entity, a covered swap entity shall collect initial margin 
and variation margin required pursuant to this part solely in the form 
of the following types of collateral:
    (1) Immediately available cash funds that are denominated in:
    (i) U.S. dollars or another major currency; or
    (ii) The currency of settlement for the non-cleared swap or non-
cleared security-based swap;
    (2) With respect to initial margin only:
    (i) A security that is issued by, or unconditionally guaranteed as 
to the timely payment of principal and interest by, the U.S. Department 
of the Treasury;
    (ii) A security that is issued by, or unconditionally guaranteed as 
to the timely payment of principal and interest by, a U.S. government 
agency (other than the U.S. Department of Treasury) whose obligations 
are fully

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guaranteed by the full faith and credit of the United States government;
    (iii) A security that is issued by, or fully guaranteed as to the 
payment of principal and interest by, the European Central Bank or a 
sovereign entity that is assigned no higher than a 20 percent risk 
weight under the capital rules applicable to the covered swap entity as 
set forth in Sec. 624.12;
    (iv) A publicly traded debt security issued by, or an asset-backed 
security fully guaranteed as to the payment of principal and interest 
by, a U.S. Government-sponsored enterprise that is operating with 
capital support or another form of direct financial assistance received 
from the U.S. government that enables the repayments of the U.S. 
Government-sponsored enterprise's eligible securities;
    (v) A publicly traded debt security that meets the terms of 
investment grade as defined in Sec. 624.2 and is issued by a U.S. 
Government-sponsored enterprise not operating with capital support or 
another form of direct financial assistance from the U.S. government, 
and is not an asset-backed security;
    (vi) A security that is issued by, or fully guaranteed as to the 
payment of principal and interest by, the Bank for International 
Settlements, the International Monetary Fund, or a multilateral 
development bank;
    (vii) A security solely in the form of:
    (A) Publicly traded debt not otherwise described in paragraph (a)(2) 
of this section that meets the terms of investment grade as defined in 
Sec. 624.2 and is not an asset-backed security;
    (B) Publicly traded common equity that is included in:
    (1) The Standard & Poor's Composite 1500 Index or any other similar 
index of liquid and readily marketable equity securities as determined 
by the FCA; or
    (2) An index that a covered swap entity's supervisor in a foreign 
jurisdiction recognizes for purposes of including publicly traded common 
equity as initial margin under applicable regulatory policy, if held in 
that foreign jurisdiction;
    (viii) Securities in the form of redeemable securities in a pooled 
investment fund representing the security-holder's proportional interest 
in the fund's net assets and that are issued and redeemed only on the 
basis of the market value of the fund's net assets prepared each 
business day after the security-holder makes its investment commitment 
or redemption request to the fund, if:
    (A) The fund's investments are limited to the following:
    (1) Securities that are issued by, or unconditionally guaranteed as 
to the timely payment of principal and interest by, the U.S. Department 
of the Treasury, and immediately-available cash funds denominated in 
U.S. dollars; or
    (2) Securities denominated in a common currency and issued by, or 
fully guaranteed as to the payment of principal and interest by, the 
European Central Bank or a sovereign entity that is assigned no higher 
than a 20 percent risk weight under the capital rules applicable to the 
covered swap entity as set forth in Sec. 624.12, and immediately-
available cash funds denominated in the same currency; and
    (B) Assets of the fund may not be transferred through securities 
lending, securities borrowing, repurchase agreements, reverse repurchase 
agreements, or other means that involve the fund having rights to 
acquire the same or similar assets from the transferee; or
    (ix) Gold.
    (b) Non-cleared swaps and non-cleared security-based swaps with a 
financial end user. For a non-cleared swap or non-cleared security-based 
swap with a financial end user, a covered swap entity shall collect and 
post initial margin and variation margin required pursuant to this part 
solely in the form of the following types of collateral:
    (1) Immediately available cash funds that are denominated in:
    (i) U.S. dollars or another major currency; or
    (ii) The currency of settlement for the non-cleared swap or non-
cleared security-based swap;
    (2) A security that is issued by, or unconditionally guaranteed as 
to the timely payment of principal and interest by, the U.S. Department 
of the Treasury;
    (3) A security that is issued by, or unconditionally guaranteed as 
to the

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timely payment of principal and interest by, a U.S. government agency 
(other than the U.S. Department of Treasury) whose obligations are fully 
guaranteed by the full faith and credit of the United States government;
    (4) A security that is issued by, or fully guaranteed as to the 
payment of principal and interest by, the European Central Bank or a 
sovereign entity that is assigned no higher than a 20 percent risk 
weight under the capital rules applicable to the covered swap entity as 
set forth in Sec. 624.12;
    (5) A publicly traded debt security issued by, or an asset-backed 
security fully guaranteed as to the payment of principal and interest 
by, a U.S. Government-sponsored enterprise that is operating with 
capital support or another form of direct financial assistance received 
from the U.S. government that enables the repayments of the U.S. 
Government-sponsored enterprise's eligible securities;
    (6) A publicly traded debt security that meets the terms of 
investment grade as defined in Sec. 624.2 and is issued by a U.S. 
Government-sponsored enterprise not operating with capital support or 
another form of direct financial assistance from the U.S. government, 
and is not an asset-backed security;
    (7) A security that is issued by, or fully guaranteed as to the 
payment of principal and interest by, the Bank for International 
Settlements, the International Monetary Fund, or a multilateral 
development bank;
    (8) A security solely in the form of:
    (i) Publicly traded debt not otherwise described in this paragraph 
(b) that meets the terms of investment grade as defined in Sec. 624.2 
and is not an asset-backed security;
    (ii) Publicly traded common equity that is included in:
    (A) The Standard & Poor's Composite 1500 Index or any other similar 
index of liquid and readily marketable equity securities as determined 
by the FCA; or
    (B) An index that a covered swap entity's supervisor in a foreign 
jurisdiction recognizes for purposes of including publicly traded common 
equity as initial margin under applicable regulatory policy, if held in 
that foreign jurisdiction;
    (9) Securities in the form of redeemable securities in a pooled 
investment fund representing the security-holder's proportional interest 
in the fund's net assets and that are issued and redeemed only on the 
basis of the market value of the fund's net assets prepared each 
business day after the security-holder makes its investment commitment 
or redemption request to the fund, if:
    (i) The fund's investments are limited to the following:
    (A) Securities that are issued by, or unconditionally guaranteed as 
to the timely payment of principal and interest by, the U.S. Department 
of the Treasury, and immediately-available cash funds denominated in 
U.S. dollars; or
    (B) Securities denominated in a common currency and issued by, or 
fully guaranteed as to the payment of principal and interest by, the 
European Central Bank or a sovereign entity that is assigned no higher 
than a 20 percent risk weight under the capital rules applicable to the 
covered swap entity as set forth in Sec. 624.12, and immediately-
available cash funds denominated in the same currency; and
    (ii) Assets of the fund may not be transferred through securities 
lending, securities borrowing, repurchase agreements, reverse repurchase 
agreements, or other means that involve the fund having rights to 
acquire the same or similar assets from the transferee; or
    (10) Gold.
    (c)(1) The value of any eligible collateral collected or posted to 
satisfy margin requirements pursuant to this part is subject to the sum 
of the following discounts, as applicable:
    (i) An 8 percent discount for variation margin collateral 
denominated in a currency that is not the currency of settlement for the 
non-cleared swap or non-cleared security-based swap, except for 
immediately available cash funds denominated in U.S. dollars or another 
major currency;
    (ii) An 8 percent discount for initial margin collateral denominated 
in a currency that is not the currency of settlement for the non-cleared 
swap or

[[Page 290]]

non-cleared security-based swap, except for eligible types of collateral 
denominated in a single termination currency designated as payable to 
the non-posting counterparty as part of the eligible master netting 
agreement; and
    (iii) For variation and initial margin non-cash collateral, the 
discounts described in appendix B of this part.
    (2) The value of variation margin or initial margin collateral is 
computed as the product of the cash or market value of the eligible 
collateral asset times one minus the applicable discounts pursuant to 
paragraph (c)(1) of this section expressed in percentage terms. The 
total value of all variation margin or initial margin collateral is 
calculated as the sum of those values for each eligible collateral 
asset.
    (d) Notwithstanding paragraphs (a) and (b) of this section, eligible 
collateral for initial margin and variation margin required by this part 
does not include a security issued by:
    (1) The party or an affiliate of the party pledging such collateral;
    (2) A bank holding company, a savings and loan holding company, a 
U.S. intermediate holding company established or designated for purposes 
of compliance with 12 CFR 252.153, a foreign bank, a depository 
institution, a market intermediary, a company that would be any of the 
foregoing if it were organized under the laws of the United States or 
any State, or an affiliate of any of the foregoing institutions; or
    (3) A nonbank financial institution supervised by the Board of 
Governors of the Federal Reserve System under Title I of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (12 U.S.C. 5323).
    (e) A covered swap entity shall monitor the market value and 
eligibility of all collateral collected and posted to satisfy the 
minimum initial margin and minimum variation margin requirements of this 
part. To the extent that the market value of such collateral has 
declined, the covered swap entity shall promptly collect or post such 
additional eligible collateral as is necessary to maintain compliance 
with the margin requirements of this part. To the extent that the 
collateral is no longer eligible, the covered swap entity shall promptly 
collect or post sufficient eligible replacement collateral to comply 
with the margin requirements of this part.
    (f) A covered swap entity may collect or post initial margin and 
variation margin that is required by Sec. 624.3(d) or Sec. 624.4(c) or 
that is not required pursuant to this part in any form of collateral.

[80 FR 74898, 74913, Nov. 30, 2015, as amended at 80 FR 74913, Nov. 30, 
2015]



Sec. 624.7  Segregation of collateral.

    (a) A covered swap entity that posts any collateral other than for 
variation margin with respect to a non-cleared swap or a non-cleared 
security-based swap shall require that all funds or other property other 
than variation margin provided by the covered swap entity be held by one 
or more custodians that are not the covered swap entity or counterparty 
and not affiliates of the covered swap entity or the counterparty.
    (b) A covered swap entity that collects initial margin required by 
Sec. 624.3(a) with respect to a non-cleared swap or a non-cleared 
security-based swap shall require that such initial margin be held by 
one or more custodians that are not the covered swap entity or 
counterparty and not affiliates of the covered swap entity or the 
counterparty.
    (c) For purposes of paragraphs (a) and (b) of this section, the 
custodian must act pursuant to a custody agreement that:
    (1) Prohibits the custodian from rehypothecating, repledging, 
reusing, or otherwise transferring (through securities lending, 
securities borrowing, repurchase agreement, reverse repurchase agreement 
or other means) the collateral held by the custodian, except that cash 
collateral may be held in a general deposit account with the custodian 
if the funds in the account are used to purchase an asset described in 
Sec. 624.6(a)(2) or (b), such asset is held in compliance with this 
Sec. 624.7, and such purchase takes place within a time period 
reasonably necessary to consummate such purchase after the cash 
collateral is posted as initial margin; and
    (2) Is a legal, valid, binding, and enforceable agreement under the 
laws of all relevant jurisdictions, including in

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the event of bankruptcy, insolvency, or a similar proceeding.
    (d) Notwithstanding paragraph (c)(1) of this section, a custody 
agreement may permit the posting party to substitute or direct any 
reinvestment of posted collateral held by the custodian, provided that, 
with respect to collateral collected by a covered swap entity pursuant 
to Sec. 624.3(a) or posted by a covered swap entity pursuant to 
Sec. 624.3(b), the agreement requires the posting party to:
    (1) Substitute only funds or other property that would qualify as 
eligible collateral under Sec. 624.6, and for which the amount net of 
applicable discounts described in appendix B of this part would be 
sufficient to meet the requirements of Sec. 624.3; and
    (2) Direct reinvestment of funds only in assets that would qualify 
as eligible collateral under Sec. 624.6, and for which the amount net of 
applicable discounts described in appendix B of this part would be 
sufficient to meet the requirements of Sec. 624.3.



Sec. 624.8  Initial margin models and standardized amounts.

    (a) Standardized amounts. Unless a covered swap entity's initial 
margin model conforms to the requirements of this section, the covered 
swap entity shall calculate the amount of initial margin required to be 
collected or posted for one or more non-cleared swaps or non-cleared 
security-based swaps with a given counterparty pursuant to Sec. 624.3 on 
a daily basis pursuant to appendix A of this part.
    (b) Use of initial margin models. A covered swap entity may 
calculate the amount of initial margin required to be collected or 
posted for one or more non-cleared swaps or non-cleared security-based 
swaps with a given counterparty pursuant to Sec. 624.3 on a daily basis 
using an initial margin model only if the initial margin model meets the 
requirements of this section.
    (c) Requirements for initial margin model. (1) A covered swap entity 
must obtain the prior written approval of the FCA before using any 
initial margin model to calculate the initial margin required in this 
part.
    (2) A covered swap entity must demonstrate that the initial margin 
model satisfies all of the requirements of this section on an ongoing 
basis.
    (3) A covered swap entity must notify the FCA in writing 60 days 
prior to:
    (i) Extending the use of an initial margin model that the FCA has 
approved under this section to an additional product type;
    (ii) Making any change to any initial margin model approved by the 
FCA under this section that would result in a material change in the 
covered swap entity's assessment of initial margin requirements; or
    (iii) Making any material change to modeling assumptions used by the 
initial margin model.
    (4) The FCA may rescind its approval of the use of any initial 
margin model, in whole or in part, or may impose additional conditions 
or requirements if the FCA determines, in its sole discretion, that the 
initial margin model no longer complies with this section.
    (d) Quantitative requirements. (1) The covered swap entity's initial 
margin model must calculate an amount of initial margin that is equal to 
the potential future exposure of the non-cleared swap, non-cleared 
security-based swap or netting portfolio of non-cleared swaps or non-
cleared security-based swaps covered by an eligible master netting 
agreement. Potential future exposure is an estimate of the one-tailed 99 
percent confidence interval for an increase in the value of the non-
cleared swap, non-cleared security-based swap or netting portfolio of 
non-cleared swaps or non-cleared security-based swaps due to an 
instantaneous price shock that is equivalent to a movement in all 
material underlying risk factors, including prices, rates, and spreads, 
over a holding period equal to the shorter of ten business days or the 
maturity of the non-cleared swap, non-cleared security-based swap or 
netting portfolio.
    (2) All data used to calibrate the initial margin model must be 
based on an equally weighted historical observation period of at least 
one year and not more than five years and must incorporate a period of 
significant financial stress for each broad asset class that is 
appropriate to the non-cleared swaps and non-cleared security-based 
swaps

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to which the initial margin model is applied.
    (3) The covered swap entity's initial margin model must use risk 
factors sufficient to measure all material price risks inherent in the 
transactions for which initial margin is being calculated. The risk 
categories must include, but should not be limited to, foreign exchange 
or interest rate risk, credit risk, equity risk, and commodity risk, as 
appropriate. For material exposures in significant currencies and 
markets, modeling techniques must capture spread and basis risk and must 
incorporate a sufficient number of segments of the yield curve to 
capture differences in volatility and imperfect correlation of rates 
along the yield curve.
    (4) In the case of a non-cleared cross-currency swap, the covered 
swap entity's initial margin model need not recognize any risks or risk 
factors associated with the fixed, physically-settled foreign exchange 
transaction associated with the exchange of principal embedded in the 
non-cleared cross-currency swap. The initial margin model must recognize 
all material risks and risk factors associated with all other payments 
and cash flows that occur during the life of the non-cleared cross-
currency swap.
    (5) The initial margin model may calculate initial margin for a non-
cleared swap or non-cleared security-based swap or a netting portfolio 
of non-cleared swaps or non-cleared security-based swaps covered by an 
eligible master netting agreement. It may reflect offsetting exposures, 
diversification, and other hedging benefits for non-cleared swaps and 
non-cleared security-based swaps that are governed by the same eligible 
master netting agreement by incorporating empirical correlations within 
the following broad risk categories, provided the covered swap entity 
validates and demonstrates the reasonableness of its process for 
modeling and measuring hedging benefits: Commodity, credit, equity, and 
foreign exchange or interest rate. Empirical correlations under an 
eligible master netting agreement may be recognized by the initial 
margin model within each broad risk category, but not across broad risk 
categories.
    (6) If the initial margin model does not explicitly reflect 
offsetting exposures, diversification, and hedging benefits between 
subsets of non-cleared swaps or non-cleared security-based swaps within 
a broad risk category, the covered swap entity must calculate an amount 
of initial margin separately for each subset within which such 
relationships are explicitly recognized by the initial margin model. The 
sum of the initial margin amounts calculated for each subset of non-
cleared swaps and non-cleared security-based swaps within a broad risk 
category will be used to determine the aggregate initial margin due from 
the counterparty for the portfolio of non-cleared swaps and non-cleared 
security-based swaps within the broad risk category.
    (7) The sum of the initial margin amounts calculated for each broad 
risk category will be used to determine the aggregate initial margin due 
from the counterparty.
    (8) The initial margin model may not permit the calculation of any 
initial margin collection amount to be offset by, or otherwise take into 
account, any initial margin that may be owed or otherwise payable by the 
covered swap entity to the counterparty.
    (9) The initial margin model must include all material risks arising 
from the nonlinear price characteristics of option positions or 
positions with embedded optionality and the sensitivity of the market 
value of the positions to changes in the volatility of the underlying 
rates, prices, or other material risk factors.
    (10) The covered swap entity may not omit any risk factor from the 
calculation of its initial margin that the covered swap entity uses in 
its initial margin model unless it has first demonstrated to the 
satisfaction of the FCA that such omission is appropriate.
    (11) The covered swap entity may not incorporate any proxy or 
approximation used to capture the risks of the covered swap entity's 
non-cleared swaps or non-cleared security-based swaps unless it has 
first demonstrated to the satisfaction of the FCA that such proxy or 
approximation is appropriate.

[[Page 293]]

    (12) The covered swap entity must have a rigorous and well-defined 
process for re-estimating, re-evaluating, and updating its internal 
margin model to ensure continued applicability and relevance.
    (13) The covered swap entity must review and, as necessary, revise 
the data used to calibrate the initial margin model at least annually, 
and more frequently as market conditions warrant, to ensure that the 
data incorporate a period of significant financial stress appropriate to 
the non-cleared swaps and non-cleared security-based swaps to which the 
initial margin model is applied.
    (14) The level of sophistication of the initial margin model must be 
commensurate with the complexity of the non-cleared swaps and non-
cleared security-based swaps to which it is applied. In calculating an 
initial margin collection amount, the initial margin model may make use 
of any of the generally accepted approaches for modeling the risk of a 
single instrument or portfolio of instruments.
    (15) The FCA may in its sole discretion require a covered swap 
entity using an initial margin model to collect a greater amount of 
initial margin than that determined by the covered swap entity's initial 
margin model if the FCA determines that the additional collateral is 
appropriate due to the nature, structure, or characteristics of the 
covered swap entity's transaction(s), or is commensurate with the risks 
associated with the transaction(s).
    (e) Periodic review. A covered swap entity must periodically, but no 
less frequently than annually, review its initial margin model in light 
of developments in financial markets and modeling technologies, and 
enhance the initial margin model as appropriate to ensure that the 
initial margin model continues to meet the requirements for approval in 
this section.
    (f) Control, oversight, and validation mechanisms. (1) The covered 
swap entity must maintain a risk control unit that reports directly to 
senior management and is independent from the business trading units.
    (2) The covered swap entity's risk control unit must validate its 
initial margin model prior to implementation and on an ongoing basis. 
The covered swap entity's validation process must be independent of the 
development, implementation, and operation of the initial margin model, 
or the validation process must be subject to an independent review of 
its adequacy and effectiveness. The validation process must include:
    (i) An evaluation of the conceptual soundness of (including 
developmental evidence supporting) the initial margin model;
    (ii) An ongoing monitoring process that includes verification of 
processes and benchmarking by comparing the covered swap entity's 
initial margin model outputs (estimation of initial margin) with 
relevant alternative internal and external data sources or estimation 
techniques. The benchmark(s) must address the chosen model's 
limitations. When applicable, the covered swap entity should consider 
benchmarks that allow for non-normal distributions such as historical 
and Monte Carlo simulations. When applicable, validation shall include 
benchmarking against observable margin standards to ensure that the 
initial margin required is not less than what a derivatives clearing 
organization or a clearing agency would require for similar cleared 
transactions; and
    (iii) An outcomes analysis process that includes backtesting the 
initial margin model. This analysis must recognize and compensate for 
the challenges inherent in back-testing over periods that do not contain 
significant financial stress.
    (3) If the validation process reveals any material problems with the 
initial margin model, the covered swap entity must promptly notify the 
FCA of the problems, describe to the FCA any remedial actions being 
taken, and adjust the initial margin model to ensure an appropriately 
conservative amount of required initial margin is being calculated.
    (4) The covered swap entity must have an internal audit function 
independent of business-line management and the risk control unit that 
at least annually assesses the effectiveness of the controls supporting 
the covered swap entity's initial margin model

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measurement systems, including the activities of the business trading 
units and risk control unit, compliance with policies and procedures, 
and calculation of the covered swap entity's initial margin requirements 
under this part. At least annually, the internal audit function must 
report its findings to the covered swap entity's board of directors or a 
committee thereof.
    (g) Documentation. The covered swap entity must adequately document 
all material aspects of its initial margin model, including the 
management and valuation of the non-cleared swaps and non-cleared 
security-based swaps to which it applies, the control, oversight, and 
validation of the initial margin model, any review processes and the 
results of such processes.
    (h) Escalation procedures. The covered swap entity must adequately 
document internal authorization procedures, including escalation 
procedures, that require review and approval of any change to the 
initial margin calculation under the initial margin model, demonstrable 
analysis that any basis for any such change is consistent with the 
requirements of this section, and independent review of such 
demonstrable analysis and approval.



Sec. 624.9  Cross-border application of margin requirements.

    (a) Transactions to which this rule does not apply. The requirements 
of Secs. 624.3 through 624.8 and Secs. 624.10 through 624.12 shall not 
apply to any foreign non-cleared swap or foreign non-cleared security-
based swap of a foreign covered swap entity.
    (b) For purposes of this section, a foreign non-cleared swap or 
foreign non-cleared security-based swap is any non-cleared swap or non-
cleared security-based swap with respect to which neither the 
counterparty to the foreign covered swap entity nor any party that 
provides a guarantee of either party's obligations under the non-cleared 
swap or non-cleared security-based swap is:
    (1) An entity organized under the laws of the United States or any 
State (including a U.S. branch, agency, or subsidiary of a foreign bank) 
or a natural person who is a resident of the United States;
    (2) A branch or office of an entity organized under the laws of the 
United States or any State; or
    (3) A swap entity that is a subsidiary of an entity that is 
organized under the laws of the United States or any State.
    (c) For purposes of this section, a foreign covered swap entity is 
any covered swap entity that is not:
    (1) An entity organized under the laws of the United States or any 
State, including a U.S. branch, agency, or subsidiary of a foreign bank;
    (2) A branch or office of an entity organized under the laws of the 
United States or any State; or
    (3) An entity that is a subsidiary of an entity that is organized 
under the laws of the United States or any State.
    (d) Transactions for which substituted compliance determination may 
apply--(1) Determinations and reliance. For non-cleared swaps and non-
cleared security-based swaps entered into by covered swap entities 
described in paragraph (d)(3) of this section, a covered swap entity may 
satisfy the provisions of this part by complying with the foreign 
regulatory framework for non-cleared swaps and non-cleared security-
based swaps that the prudential regulators jointly, conditionally or 
unconditionally, determine by public order satisfy the corresponding 
requirements of Secs. 624.3 through 624.8 and Secs. 624.10 through 
624.12.
    (2) Standard. In determining whether to make a determination under 
paragraph (d)(1) of this section, the prudential regulators will 
consider whether the requirements of such foreign regulatory framework 
for non-cleared swaps and non-cleared security-based swaps applicable to 
such covered swap entities are comparable to the otherwise applicable 
requirements of this part and appropriate for the safe and sound 
operation of the covered swap entity, taking into account the risks 
associated with non-cleared swaps and non-cleared security-based swaps.
    (3) Covered swap entities eligible for substituted compliance. A 
covered swap entity may rely on a determination under paragraph (d)(1) 
of this section only if:
    (i) The covered swap entity's obligations under the non-cleared swap 
or

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non-cleared security-based swap do not have a guarantee from:
    (A) An entity organized under the laws of the United States or any 
State (other than a U.S. branch or agency of a foreign bank) or a 
natural person who is a resident of the United States; or
    (B) A branch or office of an entity organized under the laws of the 
United States or any State; and
    (ii) The covered swap entity is:
    (A) A foreign covered swap entity;
    (B) A U.S. branch or agency of a foreign bank; or
    (C) An entity that is not organized under the laws of the United 
States or any State and is a subsidiary of a depository institution, 
Edge corporation, or agreement corporation.
    (4) Compliance with foreign margin collection requirement. A covered 
swap entity satisfies its requirement to post initial margin under 
Sec. 624.3(b) by posting to its counterparty initial margin in the form 
and amount, and at such times, that its counterparty is required to 
collect pursuant to a foreign regulatory framework, provided that the 
counterparty is subject to the foreign regulatory framework and the 
prudential regulators have made a determination under paragraph (d)(1) 
of this section, unless otherwise stated in that determination, and the 
counterparty's obligations under the non-cleared swap or non-cleared 
security-based swap do not have a guarantee from:
    (i) An entity organized under the laws of the United States or any 
State (including a U.S. branch, agency, or subsidiary of a foreign bank) 
or a natural person who is a resident of the United States; or
    (ii) A branch or office of an entity organized under the laws of the 
United States or any State.
    (e) Requests for determinations. (1) A covered swap entity described 
in paragraph (d)(3) of this section may request that the prudential 
regulators make a determination pursuant to this section. A request for 
a determination must include a description of:
    (i) The scope and objectives of the foreign regulatory framework for 
non-cleared swaps and non-cleared security-based swaps;
    (ii) The specific provisions of the foreign regulatory framework for 
non-cleared swaps and non-cleared security-based swaps that govern:
    (A) The scope of transactions covered;
    (B) The determination of the amount of initial margin and variation 
margin required and how that amount is calculated;
    (C) The timing of margin requirements;
    (D) Any documentation requirements;
    (E) The forms of eligible collateral;
    (F) Any segregation and rehypothecation requirements; and
    (G) The approval process and standards for models used in 
calculating initial margin and variation margin;
    (iii) The supervisory compliance program and enforcement authority 
exercised by a foreign financial regulatory authority or authorities in 
such system to support its oversight of the application of the non-
cleared swap or non-cleared security-based swap regulatory framework and 
how that framework applies to the non-cleared swaps or non-cleared 
security-based swaps of the covered swap entity; and
    (iv) Any other descriptions and documentation that the prudential 
regulators determine are appropriate.
    (2) A covered swap entity described in paragraph (d)(3) of this 
section may make a request under this section only if the non-cleared 
swap or non-cleared security-based swap activities of the covered swap 
entity are directly supervised by the authorities administering the 
foreign regulatory framework for non-cleared swaps and non-cleared 
security-based swaps.
    (f) Segregation unavailable. Sections 624.3(b) and 624.7 do not 
apply to a non-cleared swap or non-cleared security-based swap entered 
into by:
    (1) A foreign branch of a covered swap entity that is a depository 
institution; or
    (2) A covered swap entity that is not organized under the laws of 
the United States or any State and is a subsidiary of a depository 
institution, Edge corporation, or agreement corporation, if:
    (i) Inherent limitations in the legal or operational infrastructure 
in the foreign jurisdiction make it impracticable for the covered swap 
entity and the counterparty to post any form of

[[Page 296]]

eligible initial margin collateral recognized pursuant to Sec. 624.6(b) 
in compliance with the segregation requirements of Sec. 624.7;
    (ii) The covered swap entity is subject to foreign regulatory 
restrictions that require the covered swap entity to transact in the 
non-cleared swap or non-cleared security-based swap with the 
counterparty through an establishment within the foreign jurisdiction 
and do not accommodate the posting of collateral for the non-cleared 
swap or non-cleared security-based swap outside the jurisdiction;
    (iii) The counterparty to the non-cleared swap or non-cleared 
security-based swap is not, and the counterparty's obligations under the 
non-cleared swap or non-cleared security-based swap do not have a 
guarantee from:
    (A) An entity organized under the laws of the United States or any 
State (including a U.S. branch, agency, or subsidiary of a foreign bank) 
or a natural person who is a resident of the United States; or
    (B) A branch or office of an entity organized under the laws of the 
United States or any State;
    (iv) The covered swap entity collects initial margin for the non-
cleared swap or non-cleared security-based swap in accordance with 
Sec. 624.3(a) in the form of cash pursuant to Sec. 624.6(b)(1), and 
posts and collects variation margin in accordance with Sec. 624.4(a) in 
the form of cash pursuant to Sec. 624.6(b)(1); and
    (v) The FCA provides the covered swap entity with prior written 
approval for the covered swap entity's reliance on this paragraph (f) 
for the foreign jurisdiction.
    (g) Guarantee means an arrangement pursuant to which one party to a 
non-cleared swap or non-cleared security-based swap has rights of 
recourse against a third-party guarantor, with respect to its 
counterparty's obligations under the non-cleared swap or non-cleared 
security-based swap. For these purposes, a party to a non-cleared swap 
or non-cleared security-based swap has rights of recourse against a 
guarantor if the party has a conditional or unconditional legally 
enforceable right to receive or otherwise collect, in whole or in part, 
payments from the guarantor with respect to its counterparty's 
obligations under the non-cleared swap or non-cleared security-based 
swap. In addition, any arrangement pursuant to which the guarantor has a 
conditional or unconditional legally enforceable right to receive or 
otherwise collect, in whole or in part, payments from any other third 
party guarantor with respect to the counterparty's obligations under the 
non-cleared swap or non-cleared security-based swap, such arrangement 
will be deemed a guarantee of the counterparty's obligations under the 
non-cleared swap or non-cleared security-based swap by the other 
guarantor.



Sec. 624.10  Documentation of margin matters.

    A covered swap entity shall execute trading documentation with each 
counterparty that is either a swap entity or financial end user 
regarding credit support arrangements that:
    (a) Provides the covered swap entity and its counterparty with the 
contractual right to collect and post initial margin and variation 
margin in such amounts, in such form, and under such circumstances as 
are required by this part; and
    (b) Specifies:
    (1) The methods, procedures, rules, and inputs for determining the 
value of each non-cleared swap or non-cleared security-based swap for 
purposes of calculating variation margin requirements; and
    (2) The procedures by which any disputes concerning the valuation of 
non-cleared swaps or non-cleared security-based swaps, or the valuation 
of assets collected or posted as initial margin or variation margin, may 
be resolved; and
    (c) Describes the methods, procedures, rules, and inputs used to 
calculate initial margin for non-cleared swaps and non-cleared security 
based swaps entered into between the covered swap entity and the 
counterparty.



Sec. 624.11  Special rules for affiliates.

    (a) Affiliates. This part applies to a non-cleared swap or non-
cleared security-based swap of a covered swap entity with its affiliate, 
unless the swap or security-based swap is excluded from

[[Page 297]]

coverage under Sec. 624.1(d) or as otherwise provided in this section. 
To the extent of any inconsistency between this section and any other 
provision of this part, this section will apply.
    (b) Initial margin--(1) Posting of initial margin. The requirement 
for a covered swap entity to post initial margin under Sec. 624.3(b) 
does not apply with respect to any non-cleared swap or non-cleared 
security-based swap with a counterparty that is an affiliate. A covered 
swap entity shall calculate the amount of initial margin that would be 
required to be posted to an affiliate that is a financial end user with 
material swaps exposure pursuant to Sec. 624.3(b) and provide 
documentation of such amount to each affiliate on a daily basis.
    (2) Initial margin threshold amount. For purposes of calculating the 
amount of initial margin to be collected from an affiliate counterparty 
in accordance with Sec. 624.3(a) or calculating the amount of initial 
margin that would have been posted to an affiliate counterparty in 
accordance with paragraph (b)(1) of this section, the initial margin 
threshold amount is an aggregate credit exposure of $20 million 
resulting from all non-cleared swaps and non-cleared security-based 
swaps between the covered swap entity and that affiliate. For purposes 
of this calculation, an entity shall not count a non-cleared swap or 
non-cleared security-based swap that is exempt pursuant to 
Sec. 624.1(d).
    (c) Variation margin. A covered swap entity shall collect and post 
variation margin with respect to a non-cleared swap or non-cleared 
security-based swap with any counterparty that is an affiliate as 
provided in Sec. 624.4.
    (d) Custodian for non-cash collateral. To the extent that a covered 
swap entity collects initial margin required by Sec. 624.3(a) from an 
affiliate with respect to any non-cleared swap or non-cleared security-
based swap in the form of collateral other than cash collateral, the 
custodian for such collateral may be the covered swap entity or an 
affiliate of the covered swap entity.
    (e) Model holding period and netting--(1) Model holding period. For 
any non-cleared swap or non-cleared security-based swap (or netting 
portfolio) between a covered swap entity and an affiliate that would be 
subject to the clearing requirements of section 2(h)(1)(A) of the 
Commodity Exchange Act of 1936 or section 3C(a)(1) of the Securities 
Exchange Act of 1934 but for an exemption under section 2(h)(7)(C)(iii) 
or (D) or section 4(c)(1) of the Commodity Exchange Act of 1936 or 
regulations of the Commodity Futures Trading Commission or section 
3C(g)(4) of the Securities Exchange Act of 1934 or regulations of the 
U.S. Securities and Exchange Commission, the covered swap entity's 
initial margin model calculation as described in Sec. 624.8(d)(1) may 
use a holding period equal to the shorter of five business days or the 
maturity of the non-cleared swap or non-cleared security-based swap (or 
netting portfolio).
    (2) Netting arrangements. Any netting portfolio that contains any 
non-cleared swap or non-cleared security-based swap with a model holding 
period equal to the shorter of five business days or the maturity of the 
non-cleared swap or non-cleared security-based swap pursuant to 
paragraph (e)(1) of this section must be identified and separate from 
any other netting portfolio for purposes of calculating and complying 
with the initial margin requirements of this part.
    (f) Standardized amounts. If a covered swap entity's initial margin 
model does not conform to the requirements of Sec. 624.8, the covered 
swap entity shall calculate the amount of initial margin required to be 
collected for one or more non-cleared swaps or non-cleared security-
based swaps with a given affiliate counterparty pursuant to section 
Sec. 624.3 on a daily basis pursuant to appendix A with the gross 
initial margin multiplied by 0.7.



Sec. 624.12  Capital.

    A covered swap entity shall comply with:
    (a) In the case of the Federal Agricultural Mortgage Corporation, 
the capital adequacy regulations set forth in part 652 of this chapter; 
and

[[Page 298]]

    (b) In the case of any Farm Credit System institution other than the 
Federal Agricultural Mortgage Corporation, the capital regulations set 
forth in parts 615 and 628 of this chapter.

[80 FR 74913, Nov. 30, 2015, as amended at 81 FR 49779, July 28, 2016]



    Sec. Appendix A to Part 624--Standardized Minimum Initial Margin 
Requirements for Non-Cleared Swaps and Non--Cleared Security-Based Swaps

Table A--Standardized Minimum Gross Initial Margin Requirements for Non-
          cleared Swaps and Non-cleared Security-Based Swaps\1\
------------------------------------------------------------------------
                                                           Gross initial
                                                           margin (% of
                       Asset Class                           notional
                                                             exposure)
------------------------------------------------------------------------
Credit: 0-2 year duration...............................               2
Credit: 2-5 year duration...............................               5
Credit: 5+ year duration................................              10
Commodity...............................................              15
Equity..................................................              15
Foreign Exchange/Currency...............................               6
Cross Currency Swaps: 0-2 year duration.................               1
Cross-Currency Swaps: 2-5 year duration.................               2
Cross-Currency Swaps: 5+ year duration..................               4
Interest Rate: 0-2 year duration........................               1
Interest Rate: 2-5 year duration........................               2
Interest Rate: 5+ year duration.........................               4
Other...................................................              15
------------------------------------------------------------------------
\1\ The initial margin amount applicable to multiple non-cleared swaps
  or non-cleared security-based swaps subject to an eligible master
  netting agreement that is calculated according to Appendix A will be
  computed as follows:
Initial Margin=0.4xGross Initial Margin +0.6x NGRxGross Initial Margin
where;
Gross Initial Margin = the sum of the product of each non-cleared swap's
  or non-cleared security-based swap's effective notional amount and the
  gross initial margin requirement for all non-cleared swaps and non-
  cleared security-based swaps subject to the eligible master netting
  agreement;
and
NGR = the net-to-gross ratio (that is, the ratio of the net current
  replacement cost to the gross current replacement cost). In
  calculating NGR, the gross current replacement cost equals the sum of
  the replacement cost for each non-cleared swap and non-cleared
  security-based swap subject to the eligible master netting agreement
  for which the cost is positive. The net current replacement cost
  equals the total replacement cost for all non-cleared swaps and non-
  cleared security-based swaps subject to the eligible master netting
  agreement. In cases where the gross replacement cost is zero, the NGR
  should be set to 1.0.



 Sec. Appendix B to Part 624--Margin Values for Eligible Noncash Margin 
                               Collateral

      Table B--Margin Values for Eligible Noncash Margin Collateral
------------------------------------------------------------------------
                       Asset class                         Discount (%)
------------------------------------------------------------------------
Eligible government and related (e.g., central bank,                 0.5
 multilateral development bank, GSE securities
 identified in Sec. 624.6(a)(2)(iv) or (b)(5) debt:
 residual maturity less than one-year...................
Eligible government and related (e.g., central bank,                 2.0
 multilateral development bank, GSE securities
 identified in Sec. 624.6(a)(2)(iv) or (b)(5) debt:
 residual maturity between one and five years...........
Eligible government and related (e.g., central bank,                 4.0
 multilateral development bank, GSE securities
 identified in Sec. 624.6(a)(2)(iv) or (b)(5) debt:
 residual maturity greater than five years..............
Eligible GSE debt securities not identified in Sec. 1.0
 624.6(a)(2)(iv) or (b)(5): residual maturity less than
 one-year...............................................
Eligible GSE debt securities not identified in Sec. 4.0
 624.6(a)(2)(iv) or (b)(5): residual maturity between
 one and five years:....................................
Eligible GSE debt securities not identified in Sec. 8.0
 624.6(a)(2)(iv) or (b)(5): residual maturity greater
 than five years:.......................................
Other eligible publicly traded debt: residual maturity               1.0
 less than one-year.....................................
Other eligible publicly traded debt: residual maturity               4.0
 between one and five years.............................
Other eligible publicly traded debt: residual maturity               8.0
 greater than five years................................
Equities included in S&P 500 or related index...........            15.0
Equities included in S&P 1500 Composite or related index            25.0
 but not S&P 500 or related index.......................
Gold....................................................            15.0
------------------------------------------------------------------------
\1\ The discount to be applied to an eligible investment fund is the
  weighted average discount on all assets within the eligible investment
  fund at the end of the prior month. The weights to be applied in the
  weighted average should be calculated as a fraction of the fund's
  total market value that is invested in each asset with a given
  discount amount. As an example, an eligible investment fund that is
  comprised solely of $100 of 91 day Treasury bills and $100 of 3 year
  US Treasury bonds would receive a discount of (100/200)*0.5+(100/
  200)*2.0=(0.5)*0.5+(0.5)*2.0=1.25 percent.


[[Page 299]]



PART 625_APPLICATION FOR AWARD OF FEES AND OTHER EXPENSES UNDER THE
EQUAL ACCESS TO JUSTICE ACT--Table of Contents



                      Subpart A_General Provisions

Sec.
625.1  Purpose.
625.2  Proceedings covered.
625.3  Eligibility of applicants.
625.4  Standards for awards.
625.5  Allowable fees and expenses.
625.6  Rulemaking on maximum rates for attorney fees.
625.7  Awards against other agencies.

                Subpart B_Applicant Information Required

625.10  Contents of application.
625.11  Net worth exhibit.
625.12  Documentation of fees and expenses.
625.13  When an application may be filed.

            Subpart C_Procedures for Considering Applications

625.20  Settlement.
625.21  Filing and service of documents.
625.22  Answer to application.
625.23  Reply.
625.24  Comments by other parties.
625.25  Further proceedings.
625.26  Recommended decision.
625.27  Board decision.
625.28  Judicial review.
625.29  Payment of award.

    Authority: 5 U.S.C. 504, 12 U.S.C. 2252.

    Source: 57 FR 60109, Dec. 18, 1992, unless otherwise noted.



                      Subpart A_General Provisions



Sec. 625.1  Purpose.

    These rules implement the Equal Access to Justice Act, 5 U.S.C. 504 
(EAJA). The EAJA provides for the award of attorney fees and other 
expenses to eligible individuals and entities who are parties to certain 
administrative proceedings (designated by the EAJA as ``adversary 
adjudications'') before Federal agencies. An eligible party may receive 
an award when it prevails over an agency, unless the agency's position 
was substantially justified or special circumstances make an award 
unjust. The rules in this part explain how the EAJA applies to Farm 
Credit Administration (FCA) proceedings. The rules describe the parties 
eligible for awards, how such parties may apply for awards, and the 
procedures and standards that govern FCA consideration of applications.



Sec. 625.2  Proceedings covered.

    (a) The EAJA applies to adversary adjudications conducted by the FCA 
either on its own behalf or in connection with any other agency of the 
United States that participates in or in any way is a part of the 
adversary adjudication. Adversary adjudications are:
    (1) Adjudications under 5 U.S.C. 554 in which the position of the 
FCA or other agency is presented by an attorney or other representative 
who enters an appearance and participates in the proceeding; and
    (2) Enforcement proceedings under 12 U.S.C. 2261-2273.
    (b) The failure of the FCA to identify a type of proceeding as an 
adversary adjudication shall not preclude the filing of an application 
by a party who believes that the proceeding is covered by the EAJA; 
whether the proceeding is covered shall then be an issue for resolution 
in proceedings on the application.
    (c) If a proceeding includes both matters covered and excluded from 
coverage by the EAJA, any award made will include only fees and expenses 
related to covered issues.
    (d) Proceedings under this part may be conducted by the FCA Board 
(Board) or by the presiding officer (referred to as the ``adjudicative 
officer'' in the EAJA), as defined in Sec. 622.2(f) of this chapter. If 
the Board conducts proceedings, reference to the ``presiding officer'' 
in this part shall mean the Board, in applicable context. Where the 
Board presides, the recommended decision under Sec. 625.26 of this part 
will be omitted and the Board will make a final decision on the 
application in accordance with Sec. 625.27 of this part.
    (e) If a court reviews the underlying decision of the adversary 
adjudication, an award for fees and other expenses may be made only 
pursuant to 28 U.S.C. 2412(d)(3).



Sec. 625.3  Eligibility of applicants.

    (a) To be eligible for an award under the EAJA, an applicant must be 
a prevailing party named or admitted to the adversary adjudication for 
which an

[[Page 300]]

award is sought. The applicant must show that it meets all conditions of 
eligibility set out in this subpart and in subpart B of this part.
    (b) The types of eligible applicants are as follows:
    (1) An individual with a net worth of $2 million or less;
    (2) The sole owner of an unincorporated business who has both a net 
worth of $7 million or less (including personal and business interests), 
and 500 or fewer employees;
    (3) A charitable or other tax-exempt organization described in 
section 501(c)(3) of the Internal Revenue Code (26 U.S.C. 501(c)(3)) 
with 500 or fewer employees;
    (4) A cooperative association as defined in section 15(a) of the 
Agricultural Marketing Act (12 U.S.C. 1141j(a)) with 500 or fewer 
employees; and
    (5) Any other partnership, corporation, association, unit of local 
government, or organization with a net worth of $7 million or less and 
500 or fewer employees.
    (c) For eligibility purposes, the net worth and number of employees 
of an applicant shall be determined as of the date the adversary 
adjudication was initiated.
    (d) An applicant who owns an unincorporated business will be 
considered as an ``individual'' rather than a ``sole owner of an 
unincorporated business'' if the issues on which the applicant prevails 
are related primarily to personal interests rather than to business 
interests.
    (e) The employees of an applicant include all persons who regularly 
perform services for remuneration for that applicant, under the 
applicant's direction and control. Part-time employees shall be included 
on a proportional basis.
    (f) The net worth and number of employees of the applicant and all 
of its affiliates shall be aggregated to determine eligibility unless 
the presiding officer determines that aggregation would be unjust and 
contrary to the purposes of the EAJA in light of the actual relationship 
between the affiliated entities.
    (1) For purposes of this part, an affiliate is:
    (i) Any individual, corporation, or other entity that directly or 
indirectly controls or owns a majority of the voting shares or other 
interests of the applicant; or
    (ii) Any corporation or other entity of which the applicant directly 
or indirectly owns or controls a majority of the voting shares or other 
interests.
    (2) The presiding officer may determine that financial relationships 
of the applicant other than those described in paragraph (f)(1) of this 
section constitute special circumstances that would make an award 
unjust.
    (g) An applicant that participates in an adversary adjudication 
primarily on behalf of one or more other persons or entities that would 
be ineligible is not itself eligible for an award.



Sec. 625.4  Standards for awards.

    (a) If an eligible applicant prevails over the FCA in an adversary 
adjudication, or in a significant and discrete substantive portion 
thereof, the applicant may receive an award for fees and expenses 
incurred in the adjudication, or portion thereof, unless the position of 
the FCA over which the applicant prevailed was substantially justified.
    (b) The position of the FCA includes:
    (1) The position taken by the FCA in the adversary adjudication; and
    (2) The action or inaction of the FCA upon which the adversary 
adjudication is based.
    (c) Except as provided in paragraph (d) of this section, the FCA 
must prove that its position was substantially justified before an award 
may be denied to an otherwise eligible applicant.
    (d) An award will be reduced or denied if the applicant has unduly 
or unreasonably protracted the adversary adjudication or if special 
circumstances make the award sought unjust.



Sec. 625.5  Allowable fees and expenses.

    (a) Awards will be based on rates customarily charged by persons 
engaged in the business of acting as attorneys, agents, and expert 
witnesses, even if the services were made available without charge or at 
a reduced rate to the applicant.

[[Page 301]]

    (b) No award for the fee of an attorney or agent under these rules 
may exceed $75 per hour. No award to compensate an expert witness may 
exceed the highest rate at which the FCA pays expert witnesses. However, 
an award also may include the reasonable expenses of the attorney, 
agent, or expert witness as a separate item, if the attorney, agent, or 
expert witness ordinarily charges clients separately for such expenses.
    (c) In determining the reasonableness of the fee sought for an 
attorney, agent, or expert witness, the presiding officer shall consider 
the following:
    (1) If the attorney, agent, or expert witness is in private 
practice, his or her customary fees for similar services, or, if an 
employee of the applicant, the fully allocated costs of the services;
    (2) The prevailing rate for similar services in the community in 
which the attorney, agent, or expert witness ordinarily performs 
services;
    (3) The time actually spent in the representation of the applicant;
    (4) The time reasonably spent in light of the difficulty or 
complexity of the issues in the adversary adjudication; and
    (5) Such other factors as may bear on the value of the services 
provided.
    (d) The reasonable cost of any study, analysis, audit, engineering 
report, test, project, or similar matter prepared on behalf of a party 
may be awarded, to the extent that the charge for the service does not 
exceed the prevailing rate for similar services, and the study or other 
matter was necessary for the preparation of the applicant's case.



Sec. 625.6  Rulemaking on maximum rates for attorney fees.

    (a) If warranted by an increase in the cost of living or by special 
circumstances (such as limited availability of attorneys qualified to 
handle certain types of proceedings), the FCA may adopt regulations 
providing that attorney fees may be awarded at a rate higher than $75 
per hour in some or all of the types of proceedings covered by this 
part. The FCA will conduct any rulemaking proceedings for this purpose 
under the informal rulemaking procedures of the Administrative Procedure 
Act.
    (b) Any person may file with the FCA a petition for rulemaking to 
increase the maximum rate for attorney fees. The petition should 
identify the rate the petitioner believes the FCA should establish and 
the types of proceedings in which the rate should be used. It should 
also explain fully the reasons why the higher rate is warranted. The FCA 
will respond to the petition within 90 days after it is filed, by 
initiating a rulemaking proceeding, denying the petition, or taking 
other appropriate action.



Sec. 625.7  Awards against other agencies.

    If an applicant is entitled to an award because it prevails over 
another agency of the United States that participates in or in any way 
is a part of an adversary adjudication before the FCA and that agency's 
position is not substantially justified, the award or an appropriate 
portion of the award shall be made against that agency.



                Subpart B_Applicant Information Required



Sec. 625.10  Contents of application.

    (a) An application for an award of fees and other expenses under the 
EAJA shall identify the applicant and the adversary adjudication for 
which an award is sought. The application shall show that the applicant 
has prevailed in the adversary adjudication. If the application is made 
on the basis of significant and discrete substantive issues on which the 
applicant prevailed, the issues must be specifically identified. The 
application also shall identify each position of the FCA or other 
agencies that the applicant alleges was not substantially justified. 
Unless the applicant is an individual, the application shall describe 
briefly the type and purpose of its organization or business and state 
the number of persons employed.
    (b) The application shall include a statement that the applicant's 
net worth does not exceed $2 million (if an individual) or $7 million 
(for all other applicants, including their affiliates). However, an 
applicant may omit this statement if:

[[Page 302]]

    (1) It states that it has 500 employees or fewer and attaches a copy 
of a ruling by the Internal Revenue Service that it qualifies as an 
organization described in section 501(c)(3) of the Internal Revenue Code 
(26 U.S.C. 501(c)(3)) or, in the case of a tax-exempt organization not 
required to obtain a ruling from the Internal Revenue Service on its 
exempt status, a statement that describes the basis for the applicant's 
belief that it qualifies under such section; or
    (2) It states that it is a cooperative association as defined in 
section 15(a) of the Agricultural Marketing Act (12 U.S.C. 1141j(a)) 
with 500 or fewer employees.
    (c) The application shall state the total amount of fees and other 
expenses for which an award is sought.
    (d) The application may include any other relevant matters that the 
applicant wishes the FCA to consider in determining whether and in what 
amount an award should be made.
    (e) The application shall be signed by the applicant or an 
authorized officer or attorney of the applicant. The application must 
contain a written verification under oath or under penalty of perjury 
that the information provided in the application and any supporting 
documents is accurate.



Sec. 625.11  Net worth exhibit.

    (a) Each applicant, except a qualified tax-exempt organization or 
cooperative association, must provide with its application a detailed 
exhibit showing the net worth of the applicant and any affiliates (as 
defined in Sec. 625.3(f)(1) of this part) as of the date when the 
adversary adjudication was initiated. The exhibit may be in any 
convenient form that provides full disclosure of the assets and 
liabilities of the applicant and its affiliates and is otherwise 
sufficient to demonstrate that the applicant qualifies under the 
standards in this part. The presiding officer may require an applicant 
to file additional information supporting its eligibility for an award.
    (b) An applicant that objects to public disclosure of information in 
any portion of the net worth exhibit and believes there are legal 
grounds for withholding it from disclosure may submit that portion of 
the exhibit directly to the presiding officer in a sealed envelope 
labeled ``Confidential Financial Information,'' accompanied by a motion 
under Sec. 622.11 of this chapter to withhold the information from 
public disclosure. The motion shall describe the information sought to 
be withheld and explain, in detail, why it falls within one or more of 
the specific exemptions from mandatory disclosure under the Freedom of 
Information Act, 5 U.S.C. 552(b) (1)-(9), why public disclosure of the 
information would adversely affect the applicant, and why disclosure is 
not required in the public interest. The material in question shall be 
served on counsel representing the FCA, but need not be served on any 
other party to the application proceeding. If the presiding officer, or 
the FCA Board pursuant to Sec. 622.11(e) of this chapter, finds that the 
information should not be withheld from disclosure, it shall be placed 
in the public record of the application proceeding. Otherwise, any 
request to inspect or copy the exhibit shall be treated in accordance 
with the FCA's procedures regarding release of information (12 CFR part 
602).



Sec. 625.12  Documentation of fees and expenses.

    The application shall be accompanied by full documentation of the 
fees and expenses, including the cost of any study, analysis, audit, 
engineering report, test, project, or similar matter, for which an award 
is sought. A separate itemized statement shall be submitted for each 
professional firm or individual whose services are covered by the 
application, showing the hours spent in connection with the proceeding 
by each individual, a description of the specific services performed, 
the rates at which each fee has been computed, any expenses for which 
reimbursement is sought, and the total amount paid or payable by the 
applicant or by any other person or entity for the services provided. 
Under Sec. 625.25 of this part, the presiding officer may require the 
applicant to provide vouchers, receipts, logs, or other substantiation 
for any fees or expenses claimed.

[[Page 303]]



Sec. 625.13  When an application may be filed.

    (a) An application may be filed whenever the applicant has prevailed 
in the adversary adjudication, or in a significant and discrete 
substantive portion thereof, but in no case later than 30 days after the 
FCA's final disposition of the adversary adjudication.
    (b) For purposes of this rule, final disposition means the date on 
which a decision or order disposing of the merits of the adversary 
adjudication is issued or any other complete resolution of the adversary 
adjudication, such as a settlement or voluntary dismissal, becomes final 
and is unreviewable by the FCA, any other administrative body, or the 
courts.
    (c) If review, reconsideration, or appeal is sought or taken of an 
adversary adjudication decision as to which an applicant believes it has 
prevailed, application proceedings for any award of fees and other 
expenses shall be stayed pending final disposition of the underlying 
controversy.



            Subpart C_Procedures for Considering Applications



Sec. 625.20  Settlement.

    A prevailing party and the FCA through its counsel may agree on a 
proposed settlement of an award at any time, either in connection with a 
settlement of the underlying adversary adjudication or after the 
underlying adversary adjudication has been concluded. If a prevailing 
party and the FCA counsel agree on a proposed settlement of an award, 
the proposed settlement must be submitted to the presiding officer for a 
recommended decision pursuant to Sec. 625.26 of this part. If it has not 
been previously filed, the application must be submitted to the 
presiding officer along with the proposed settlement.



Sec. 625.21  Filing and service of documents.

    Any application for an award or other pleading or document related 
to an application shall be filed and served on all parties to the 
adversary adjudication in the same manner as other pleadings in the 
adversary adjudication (see Secs. 622.18 and 622.19 of this chapter), 
except as provided in Sec. 625.11(b) of this part for confidential 
financial information.



Sec. 625.22  Answer to application.

    (a) Within 30 days after service, counsel for the FCA may file an 
answer to the application. Unless the FCA counsel requests an extension 
of time for filing or a statement of intent to negotiate under paragraph 
(c) of this section is filed, the presiding officer, upon a satisfactory 
showing of entitlement by the applicant, may make an award for the 
applicant's fees and other expenses under the EAJA.
    (b) The answer shall set forth any objections to the requested award 
and identify the facts relied on in support of the FCA's position. If 
the answer is based on any alleged facts not already in the record of 
the adversary adjudication, the FCA counsel shall include with the 
answer either supporting affidavits or a request for further proceedings 
under Sec. 625.25 of this part.
    (c) If the FCA counsel and the applicant believe that the issues in 
the fee application can be settled, they may jointly file a statement of 
their intent to negotiate a settlement. The filing of this statement 
shall extend the time for filing an answer for an additional 30 days, 
and further extensions may be granted by the presiding officer upon 
request by the FCA counsel and the applicant.



Sec. 625.23  Reply.

    Within 15 days after service of an answer, the applicant may file a 
reply. If the reply is based on any alleged facts not already in the 
record of the adversary adjudication, the applicant shall include with 
the reply either supporting affidavits or a request for further 
proceedings under Sec. 625.25 of this part.



Sec. 625.24  Comments by other parties.

    Any party to a proceeding other than the applicant and FCA counsel 
may file comments on an application within 30 days after it is served or 
on an answer within 15 days after it is served. A commenting party may 
not participate further in proceedings on the application unless the 
presiding officer determines

[[Page 304]]

that the public interest requires such participation in order to permit 
full exploration of matters raised in the comments.



Sec. 625.25  Further proceedings.

    (a) The determination of an award shall be made on the basis of the 
written record unless the presiding officer finds that further 
proceedings are necessary for full and fair resolution of the issues 
arising from the application. Such further proceedings may be at the 
request of either the applicant or the FCA counsel, or on the presiding 
officer's own initiative, and shall be conducted as promptly as 
possible. Further proceedings may include an informal conference, oral 
argument, additional written submissions, or other actions required by 
the presiding officer, but may not include discovery or an evidentiary 
hearing with respect to the issue of whether the agency's position was 
substantially justified.
    (b) Whether or not the position of the agency was substantially 
justified shall be determined on the basis of the administrative record, 
as a whole, which is made in the adversary adjudication for which fees 
and other expenses are sought.
    (c) A request that the presiding officer order further proceedings 
under this section shall specifically identify the information sought or 
the disputed issues and shall explain why the additional proceedings are 
necessary to resolve the issues.



Sec. 625.26  Recommended decision.

    The presiding officer shall file a recommended decision within 30 
days after completion of proceedings on the application, and, promptly 
upon filing, shall serve a copy of the recommended decision upon each 
party to the proceedings. The decision shall include written findings 
and conclusions on the applicant's eligibility, status as a prevailing 
party, the recommended amount of the award, if any, and an explanation 
of the reasons for any difference between the amount requested and the 
amount awarded. The decision shall also include, if at issue, findings 
on whether the FCA's position was substantially justified, whether the 
applicant unduly protracted the adversary adjudication, or whether 
special circumstances make an award unjust. If the applicant has sought 
an award against more than one agency, the decision shall allocate 
responsibility for payment of any award made among the agencies, and 
shall explain the reasons for the allocation made.



Sec. 625.27  Board decision.

    Following filing of the recommended decision with the Board, the 
Board shall render a final decision on the application. The Board 
maintains full discretion to uphold, reverse, remand, or alter the 
recommended decision. The Board may order further proceedings (including 
those set forth in Secs. 622.11 and 622.13 through 622.16 of this 
chapter) upon request by any party to the application proceeding or on 
its own initiative, but such proceedings may not include discovery or an 
evidentiary hearing with respect to the issue of whether the agency's 
position was substantially justified.



Sec. 625.28  Judicial review.

    Judicial review of final FCA decisions on awards may be sought as 
provided in 5 U.S.C. 504(c)(2).



Sec. 625.29  Payment of award.

    (a) An applicant seeking payment of an award shall submit to the 
Secretary to the Board a copy of the final decision granting the award, 
accompanied by a certification that the applicant will not seek judicial 
review of the decision. The required submission and certification should 
be sent to: Secretary to the Board, Farm Credit Administration, 1501 
Farm Credit Drive, McLean, Virginia 22102-5090.
    (b) The FCA will pay the amount awarded to the applicant within 60 
days of receipt of the applicant's submission and certification.



PART 626_NONDISCRIMINATION IN LENDING--Table of Contents



Sec.
626.6000  Definitions.
626.6005  Nondiscrimination in lending and other services.
626.6010  Nondiscrimination in applications.
626.6015  Nondiscriminatory appraisal.
626.6020  Nondiscriminatory advertising.

[[Page 305]]

626.6025  Equal housing lender poster.
626.6030  Complaints.

    Authority: Secs. 1.5, 2.2, 2.12, 3.1, 5.9, 5.17 of the Farm Credit 
Act (12 U.S.C. 2013, 2073, 2093, 2122, 2243, 2252); 42 U.S.C. 3601 et 
seq.; 15 U.S.C. 1691 et seq.; 12 CFR 202, 24 CFR 100, 109, 110.

    Source: 37 FR 11421, June 7, 1972, and 57 FR 13637, Apr. 17, 1992, 
unless otherwise noted.. Redesignated at 62 FR 4441, Jan. 30, 1997.



Sec. 626.6000  Definitions.

    For the purpose of this subpart, the following definitions shall 
apply:
    (a) Applicant means any person who requests or who has received an 
extension of credit from a creditor and includes any person who is or 
may become contractually liable regarding an extension of credit.
    (b) Dwelling means any building, structure, or portion thereof which 
is occupied as, or designed or intended for occupancy as, a residence by 
one or more families, and any vacant land which is offered for sale or 
lease for the construction or location thereon of any such building, 
structure, or portion thereof.
    (c) Familial status means one or more individuals (who have not 
attained the age of 18 years) being domiciled with:
    (1) A parent or another person having legal custody of such 
individual or individuals; or
    (2) The designee of such parent or other person having such custody, 
with the written permission of such parent or other person.
    The protections afforded against discrimination on the basis of 
familial status shall apply to any person who is pregnant or is in the 
process of securing legal custody of any individual who has not attained 
the age of 18 years.
    (d) Handicap means, with respect to a person:
    (1) A physical or mental impairment which substantially limits one 
or more of such person's major life activities,
    (2) A record of having such an impairment, or
    (3) Being regarded as having such an impairment,


but such term does not include current, illegal use of or addiction to a 
controlled substance (as defined in section 102 of the Controlled 
Substances Act (21 U.S.C. 802)).
    (e) Residential real estate-related transaction means any of the 
following:
    (1) The making or purchasing of loans or providing other financial 
assistance:
    (i) For purchasing, constructing, improving, repairing, or 
maintaining a dwelling; or
    (ii) Secured by residential real estate.
    (2) The selling, brokering, or appraising of residential real 
property.

[57 FR 13637, Apr. 17, 1992. Redesignated at 62 FR 4441, Jan. 30, 1997]



Sec. 626.6005  Nondiscrimination in lending and other services.

    (a) No Farm Credit institution may discriminate in making credit or 
other financial assistance available in a residential real estate-
related transaction, or in the terms or conditions of such a 
transaction, because of race, color, religion, sex, handicap, familial 
status, or national origin.
    (b) No Farm Credit institution may discriminate in any aspect of a 
credit transaction or a financial service involving a credit transaction 
because of:
    (1) Race, color, religion, national origin, sex, marital status, or 
age (provided that the applicant has the capacity to enter into a 
binding contract); or
    (2) The fact that all or part of the applicant's income derives from 
any public assistance program; or
    (3) The fact that the applicant has in good faith exercised any 
right under title VII (Equal Credit Opportunity Act) of the Consumer 
Credit Protection Act.
    (c) Prohibited practices under this section include, but are not 
limited to, discrimination in fixing the amount, interest rate, 
duration, or other terms or conditions of any loan or a financial 
service involving a credit transaction or in the purchase of loans and 
securities on the basis of race, color, religion, sex, handicap, 
familial status (having one or more children under the age of 18), 
marital status, age (provided the applicant has the capacity to enter 
into a binding contract), or national origin.
    (d) Nothing in this subpart shall be deemed to change the 
eligibility requirements imposed by the Farm Credit Act of 1971, as 
amended, or any Farm

[[Page 306]]

Credit Administration regulation adopted pursuant thereto.

[57 FR 13638, Apr. 17, 1992. Redesignated at 62 FR 4441, Jan. 30, 1997]



Sec. 626.6010  Nondiscrimination in applications.

    (a) No Farm Credit institution may discourage or refuse to allow, 
receive, or consider any application, request, or inquiry regarding an 
eligible loan or other eligible credit service or discriminate in 
imposing conditions upon, or in processing, any such application, 
request, or inquiry on the basis of:
    (1) Race, color, religion, sex, marital status, age (provided that 
the applicant has the capacity to enter into a binding contract), or 
national origin, as prescribed under title VII (the Equal Credit 
Opportunity Act) of the Consumer Credit Protection Act, as amended by 
the Equal Credit Opportunity Act Amendments of 1976 (15 U.S.C. 1601 et 
seq.), and the Board of Governors of the Federal Reserve System's 
implementing regulation (12 CFR part 202); and
    (2) Race, color, religion, sex, national origin, handicap, or 
familial status, as prescribed under title VIII (the Fair Housing Act) 
of the Civil Rights Act of 1968, as amended by the Fair Housing 
Amendments Act of 1988 (42 U.S.C. 3601 et seq.), and the Department of 
Housing and Urban Development's implementing regulations (24 CFR part 
100).
    (b) The provisions of paragraph (a) of this section shall apply 
whenever:
    (1) An application is made for any such loan or other credit 
service; or
    (2) A request is made for forms or papers to be used to make 
application for any such loan or other credit service; or
    (3) An inquiry is made about the availability of such loan or other 
credit service.

[57 FR 13638, Apr. 17, 1992. Redesignated at 62 FR 4441, Jan. 30, 1997]



Sec. 626.6015  Nondiscriminatory appraisal.

    No Farm Credit institution shall discriminate against any person on 
the basis of race, color, religion, sex, handicap, familial status, or 
national origin when conducting, using, or relying upon an appraisal of 
residential real property that is subject to sale, rental, or other 
financing transaction.

[57 FR 13638, Apr. 17, 1992. Redesignated at 62 FR 4441, Jan. 30, 1997]



Sec. 626.6020  Nondiscriminatory advertising.

    (a) A Farm Credit institution that directly or through third parties 
engages in any form of advertising shall not use words, phrases, 
symbols, directions, forms, or models in such advertising which express, 
imply or suggest a policy of discrimination or exclusion in violation of 
the provisions of title VIII (the Fair Housing Act) of the Civil Rights 
Act of 1968, as amended by the Fair Housing Amendments Act of 1988 (42 
U.S.C. 3601-3631); the Department of Housing and Urban Development's 
implementing regulations (24 CFR parts 100 and 109), and title VII (the 
Equal Credit Opportunity Act) of the Consumer Credit Protection Act, as 
amended by the Equal Credit Opportunity Act Amendments of 1976 (15 
U.S.C. 1691-1691f); and the Board of Governors of the Federal Reserve 
System's implementing regulation (12 CFR part 202), or this subpart.
    (b) Written advertisements relating to dwellings shall include a 
facsimile of the following logotype and legend:
[GRAPHIC] [TIFF OMITTED] TC21SE91.000


[37 FR 16932, Aug. 23, 1972, as amended at 57 FR 13638, Apr. 17, 1992. 
Redesignated at 62 FR 4441, Jan. 30, 1997]

[[Page 307]]



Sec. 626.6025  Equal housing lender poster.

    (a) Each Farm Credit institution that makes loans for the purpose of 
purchasing, constructing, improving, repairing, or maintaining a 
dwelling or any loan secured by a dwelling shall post and maintain an 
Equal Housing Lender Poster in the lobby of each of its offices. The 
poster shall be in a prominent place readily apparent to all persons 
seeking such loans.
    (b) The Equal Housing Lender Poster shall be at least 11 inches by 
14 inches in size, and shall bear the logotype and legend set forth in 
Sec. 626.6020(b) of this subpart and the following text:

       WE DO BUSINESS IN ACCORDANCE WITH FEDERAL FAIR LENDING LAWS

    (The Civil Rights Act of 1968, as amended by the Fair Housing 
Amendments Act of 1988)
    UNDER THE FEDERAL FAIR HOUSING ACT, IT IS ILLEGAL, ON THE BASIS OF 
RACE, COLOR, NATIONAL ORIGIN, RELIGION, SEX, HANDICAP, OR FAMILIAL 
STATUS (HAVING CHILDREN UNDER THE AGE OF 18), TO:
      Deny a loan for the purpose of purchasing, constructing, 
improving, repairing, or maintaining a dwelling, or deny any loan 
secured by a dwelling; or
      Discriminate in fixing the amount, interest rate, 
duration, application procedures, or other terms or conditions of such a 
loan, or in appraising property.

 IF YOU BELIEVE YOU HAVE BEEN DISCRIMINATED AGAINST, YOU SHOULD SEND A 
                              COMPLAINT TO:

Assistant Secretary for Fair Housing and Equal Opportunity, Department 
of Housing and Urban Development, Washington, DC 20410, 1-800-669-9777 
(Toll Free), 1-800-927-9275 (TDD), for processing under the Federal Fair 
Housing Act
AND TO:
Farm Credit Administration, Office of Congressional and Public Affairs, 
1501 Farm Credit Drive, McLean, VA 22102-5090, 703-883-4056, 703-883-
4444 (TDD), for processing under Farm Credit Administration Regulations

                 UNDER THE EQUAL CREDIT OPPORTUNITY ACT

    (The Consumer Credit Protection Act, as amended by the Equal Credit 
Opportunity Act Amendments of 1976)

        IT IS ILLEGAL TO DISCRIMINATE IN ANY CREDIT TRANSACTION:

      On the basis of race, color, national origin, religion, 
sex, marital status, or age,
      Because income is from public assistance, or
      Because a right was exercised under the Consumer Credit 
Protection Act.

 IF YOU BELIEVE YOU HAVE BEEN DISCRIMINATED AGAINST, YOU SHOULD SEND A 
                              COMPLAINT TO:

Farm Credit Administration, Office of Congressional and Public Affairs, 
1501 Farm Credit Drive, McLean, VA 22102-5090, 703-883-4056, 703-883-
4444 (TDD).

[57 FR 13638, Apr. 17, 1992. Redesignated at 62 FR 4441, Jan. 30, 1997, 
as amended at 62 FR 4451, Jan. 30, 1997]



Sec. 626.6030  Complaints.

    (a) Complaints regarding discrimination in lending by a Farm Credit 
institution under the Fair Housing Act shall be referred to the 
Assistant Secretary for Fair Housing and Equal Opportunity, United 
States Department of Housing and Urban Development, Washington, DC 
20410, and to the Office of Congressional and Public Affairs, Farm 
Credit Administration, McLean, Virginia 22102-5090.
    (b) Complaints regarding discrimination in lending by a Farm Credit 
institution under the Equal Credit Opportunity Act shall be referred to 
the Office of Congressional and Public Affairs, Farm Credit 
Administration, McLean, Virginia 22102-5090.

[57 FR 13639, Apr. 17, 1992. Redesignated at 62 FR 4441, Jan. 30, 1997]



PART 627_TITLE IV CONSERVATORS, RECEIVERS, AND VOLUNTARY LIQUIDATIONS
--Table of Contents



                            Subpart A_General

Sec.
627.2700  General--applicability.
627.2705  Definitions.
627.2710  Grounds for appointment of conservators and receivers.
627.2715  Action for removal of conservator or receiver.

                  Subpart B_Receivers and Receiverships

627.2720  Appointment of receiver.
627.2725  Powers and duties of the receiver.
627.2726  Treatment by the conservator or receiver of financial assets 
          transferred in

[[Page 308]]

          connection with a securitization or participation.
627.2730  Preservation of equity.
627.2735  Notice to holders of uninsured accounts and stockholders.
627.2740  Creditors' claims.
627.2745  Priority of claims--associations.
627.2750  Priority of claims--banks.
627.2752  Priority of claims--other Farm Credit institutions.
627.2755  Payment of claims.
627.2760  Inventory, audit, and reports.
627.2765  Final discharge and release of the receiver.

               Subpart C_Conservators and Conservatorships

627.2770  Conservators.
627.2775  Appointment of a conservator.
627.2780  Powers and duties of conservators.
627.2785  Inventory, examination, audit, and reports to stockholders.
627.2790  Final discharge and release of the conservator.

                     Subpart D_Voluntary Liquidation

627.2795  Voluntary liquidation.
627.2797  Preservation of equity.

    Authority: Secs. 4.2, 5.9, 5.10, 5.17, 5.51, 5.58, 5.61 of the Farm 
Credit Act (12 U.S.C. 2183, 2243, 2244, 2252, 2277a, 2277a-7, 2277a-10).

    Source: 57 FR 46482, Oct. 9, 1992, unless otherwise noted.



                            Subpart A_General



Sec. 627.2700  General--applicability.

    The provisions of this part shall apply to conservatorships, 
receiverships, and voluntary liquidations.

[63 FR 5724, Feb. 4, 1998]



Sec. 627.2705  Definitions.

    For purposes of this part the following definitions apply:
    (a) Act means the Farm Credit Act of 1971, as amended.
    (b) Farm Credit institution(s) or institution(s) means all 
associations, banks, service corporations chartered under title IV of 
the Act, the Federal Farm Credit Banks Funding Corporation, and the Farm 
Credit System Financial Assistance Corporation.
    (c) Conservator means the Farm Credit System Insurance Corporation 
acting in its capacity as conservator.
    (d) Insurance Corporation means the Farm Credit System Insurance 
Corporation.
    (e) Receiver means the Insurance Corporation acting in its capacity 
as receiver.

[57 FR 46482, Oct. 9, 1992, as amended at 75 FR 35968, June 24, 2010]



Sec. 627.2710  Grounds for appointment of conservators and receivers.

    (a) Upon a determination by the Farm Credit Administration Board of 
the existence of one or more of the factors set forth in paragraph (b) 
of this section, with respect to any bank, association, or other 
institution of the System, the Farm Credit Administration Board may, in 
its discretion, appoint a conservator or receiver for such institution. 
After January 5, 1993, the Insurance Corporation shall be the sole 
entity to be appointed as conservator or receiver.
    (b) The grounds for the appointment of a conservator or receiver for 
a System institution are:
    (1) The institution is insolvent, in that the assets of the 
institution are less than its obligations to creditors and others, 
including its members. For purposes of determining insolvency, 
``obligations to members'' shall not include stock or allocated equities 
held by current or former borrowers.
    (2) There has been a substantial dissipation of the assets or 
earnings of the institution due to the violation of any law, rule, or 
regulation, or the conduct of an unsafe or unsound practice;
    (3) The institution is in an unsafe or unsound condition to transact 
business, including having insufficient capital or otherwise. For 
purposes of this regulation, ``unsafe or unsound condition'' shall 
include, but shall not be limited to, the following conditions:
    (i) [Reserved]
    (ii) For associations, a default by the association of one or more 
terms of its general financing agreement with its affiliated bank that 
the Farm Credit Administration determines to be a material default.
    (iii) For all institutions, permanent capital of less than one-half 
the minimum required level for the institution.
    (iv) [Reserved]
    (v) For associations, stock impairment.

[[Page 309]]

    (4) The institution has committed a willful violation of a final 
cease-and-desist order issued by the Farm Credit Administration Board; 
or
    (5) The institution is concealing its books, papers, records, or 
assets, or is refusing to submit its books, papers, records, assets, or 
other material relating to the affairs of the institution for inspection 
to any examiner or to any lawful agent of the Farm Credit Administration 
Board.
    (6) The institution is unable to make a timely payment of principal 
or interest on any insured obligation (as defined in section 5.51(3) of 
the Act) issued by the institution individually, or on which it is 
primarily liable.

[51 FR 32443, Sept. 12, 1986, as amended at 54 FR 1148, Jan. 12, 1989. 
Redesignated and amended at 46487, Oct. 9, 1992; 63 FR 39229, July 22, 
1998; 81 FR 49779, July 28, 2016]



Sec. 627.2715  Action for removal of conservator or receiver.

    Upon the appointment of a conservator or receiver for a Farm Credit 
institution by the Farm Credit Administration Board pursuant to 
Sec. 627.2710 of this part, the institution may, within 30 days of such 
appointment, bring an action in the United States District Court for the 
judicial district in which the home office of the institution is 
located, or in the United States District Court for the District of 
Columbia, for an order requiring the Farm Credit Administration Board to 
remove such conservator or receiver and, if the charter has been 
canceled, to rescind the cancellation of the charter. Notwithstanding 
any other provision of subpart B or C of this part, the institution's 
board of directors is empowered to meet subsequent to such appointment 
and authorize the filing of an action for removal. An action for removal 
may be authorized only by such institution's board of directors.



                  Subpart B_Receivers and Receiverships



Sec. 627.2720  Appointment of receiver.

    (a) The Farm Credit Administration Board may, in its discretion, 
appoint ex parte and without notice a receiver for any Farm Credit 
institution in accordance with the grounds for appointment set forth in 
Sec. 627.2710 of this part.
    (b) The receiver appointed for a Farm Credit institution shall be 
the Insurance Corporation.
    (c) Upon the appointment of the Insurance Corporation as receiver, 
the Chairman of the Farm Credit Administration Board shall immediately 
notify the institution, and its district bank in the case of an 
association, and shall publish a notice of the appointment in the 
Federal Register.
    (d) In the case of the voluntary or involuntary liquidation of an 
association, the district bank shall institute appropriate measures to 
minimize the adverse effect of the liquidation on those borrowers whose 
loans are purchased by or otherwise transferred to another System 
institution.
    (e) Upon the issuance of the order placing a Farm Credit institution 
into liquidation and appointing the Insurance Corporation as receiver, 
all rights, privileges, and powers of the board of directors, officers, 
and employees of the institution shall be vested exclusively in the 
receiver. The Farm Credit Administration Board may simultaneously, or 
any time thereafter, cancel the charter of the institution.

[57 FR 46482, Oct. 9, 1992, as amended at 63 FR 5724, Feb. 4, 1998]



Sec. 627.2725  Powers and duties of the receiver.

    (a) General. (1) Upon appointment as receiver, the receiver shall 
take possession of a Farm Credit institution pursuant to 12 U.S.C. 2183 
and Sec. 627.2710 of this part in order to wind up the business 
operations of such institution, collect the debts owed to the 
institution, liquidate its property and assets, pay its creditors, and 
distribute the remaining proceeds to stockholders. The receiver is 
authorized to exercise all powers necessary to the efficient termination 
of an institution's operation as provided for in this subpart.
    (2) Upon its appointment as receiver, the receiver automatically 
succeeds to--
    (i) All rights, titles, powers and privileges of the institution and 
of any stockholder, officer, or director of such

[[Page 310]]

institution with respect to the institution and the assets of the 
institution; and
    (ii) Title to the books, records, and assets of any previous 
conservator or other legal custodian of such institution.
    (3) The receiver of a Farm Credit institution serves as the trustee 
of the receivership estate and conducts its operations for the benefit 
of the creditors and stockholders of the institution.
    (b) Specific powers. The receiver may:
    (1) Exercise all powers as are conferred upon the officers and 
directors of the institution under law and the charter, articles, and 
bylaws of the institution.
    (2) Take any action the receiver considers appropriate or expedient 
to carry on the business of the institution during the process of 
liquidating its assets and winding up its affairs.
    (3) Extend credit to existing borrowers as necessary to honor 
existing commitments and to effectuate the purposes of the receivership.
    (4) Borrow such sums as necessary to effectuate the purposes of the 
receivership.
    (5) Pay any sum the receiver deems necessary or advisable to 
preserve, conserve, or protect the institution's assets or property or 
rehabilitate or improve such property and assets.
    (6) Pay any sum the receiver deems necessary or advisable to 
preserve, conserve, or protect any asset or property on which the 
institution has a lien or in which the institution has a financial or 
property interest, and pay off and discharge any liens, claims, or 
charges of any nature against such property.
    (7) Investigate any matter related to the conduct of the business of 
the institution, including, but not limited to, any claim of the 
institution against any individual or entity, and institute appropriate 
legal or other proceedings to prosecute such claims.
    (8) Institute, prosecute, maintain, defend, intervene, and otherwise 
participate in any legal proceeding by or against the institution or in 
which the institution or its creditors or members have any interest, and 
represent in every way the institution, its members, and creditors.
    (9) Employ attorneys, accountants, appraisers, and other 
professionals to give advice and assistance to the receivership 
generally or on particular matters, and pay their retainers, 
compensation, and expenses, including litigation costs.
    (10) Hire any agents or employees necessary for proper 
administration of the receivership.
    (11) Execute, acknowledge, and deliver, in person or through a 
general or specific delegation, any instrument necessary for any 
authorized purpose, and any instrument executed under this paragraph 
shall be valid and effective as if it had been executed by the 
institution's officers by authority of its board of directors.
    (12) Sell for cash or otherwise any mortgage, deed of trust, chose 
in action, note contract, judgment or decree, stock, or debt owed to the 
institution, or any property (real or personal, tangible or intangible).
    (13) Purchase or lease office space, automobiles, furniture, 
equipment, and supplies, and purchase insurance, professional, and 
technical services necessary for the conduct of the receivership.
    (14) Release any assets or property of any nature, regardless of 
whether the subject of pending litigation, and repudiate, with cause, 
any lease or executory contract the receiver considers burdensome.
    (15) Settle, release, or obtain release of, for cash or other 
consideration, claims and demands against or in favor of the institution 
or receiver.
    (16) Pay, out of the assets of the institution, all expenses of the 
receivership and all costs of carrying out or exercising the rights, 
powers, privileges, and duties as receiver.
    (17) Pay out of the assets of the institution all approved claims of 
indebtedness in accordance with priorities established in this subpart.
    (18) Take all actions and have such rights, powers, and privileges 
as are necessary and incident to the exercise of any specific power.
    (19) Take such actions, and have such additional rights, powers, 
privileges, immunities, and duties as the Farm

[[Page 311]]

Credit Administration Board authorizes by order or by amendment of any 
order or by regulation.
    (c) Authority to pay claims. The receiver of a bank is also 
empowered to pay claims of holders of notes, bonds, debentures, or other 
obligations issued by the bank under 12 U.S.C. 2153(c) or (d) in 
accordance with procedures specified by the Insurance Corporation 
pursuant to Sec. 627.2740(d) of this part.



Sec. 627.2726  Treatment by the conservator or receiver of financial
assets transferred in connection with a securitization or participation.

    (a) Definitions. For the purposes of this section, the following 
definitions apply:
    Beneficial interest means debt or equity (or mixed) interests or 
obligations of any type issued by a special purpose entity that entitle 
their holders to receive payments that depend primarily on the cash flow 
from financial assets owned by the special purpose entity.
    Financial asset means cash or a contract or instrument that conveys 
to one entity a contractual right to receive cash or another financial 
instrument from another entity.
    Participation means the transfer or assignment of an undivided 
interest in all or part of a loan or a lease from a seller, known as the 
``lead'', to a buyer, known as the ``participant'', without recourse to 
the lead, pursuant to an agreement between the lead and the participant. 
Without recourse means that the participation is not subject to any 
agreement that requires the lead to repurchase the participant's 
interest or to otherwise compensate the participant due to a default on 
the underlying obligation.
    Securitization means the issuance by a special purpose entity of 
beneficial interests:
    (1) The most senior class of which at the time of issuance is rated 
in one of the four highest categories assigned to long-term debt or in 
an equivalent short-term category (within either of which there may be 
sub-categories or gradations indicating relative standing) by one or 
more nationally recognized statistical rating organizations, or
    (2) Which are sold in transactions by an issuer not involving any 
public offering for purposes of section 4 of the Securities Act of 1933 
(15 U.S.C. 77d), as amended, or in transactions exempt from registration 
under such Act pursuant to Regulation S thereunder (or any successor 
regulation).
    Special purpose entity means a trust, corporation, or other entity 
demonstrably distinct from the Farm Credit institution that is primarily 
engaged in acquiring and holding (or transferring to another special 
purpose entity) financial assets, and in activities related or 
incidental thereto, in connection with the issuance by such special 
purpose entity (or by another special purpose entity that acquires 
financial assets directly or indirectly from such special purpose 
entity) of beneficial interests.
    (b) The receiver shall not, by exercise of its authority to 
repudiate contracts under Sec. 627.2725(b)(2) and (b)(14), reclaim, 
recover, or recharacterize as property of the institution or the 
receivership any financial assets transferred by a Farm Credit 
institution in connection with a securitization or participation, 
provided that such transfer meets all conditions for sale accounting 
treatment under generally accepted accounting principles, other than the 
``legal isolation'' condition as it applies to institutions for which 
the FCSIC may be appointed as receiver which is addressed by this 
section.
    (c) Paragraph (b) of this section shall not apply unless the Farm 
Credit institution received adequate consideration for the transfer of 
financial assets at the time of the transfer, and the documentation 
effecting the transfer of financial assets reflects the intent of the 
parties to treat the transaction as a sale, and not as a secured 
borrowing, for accounting purposes.
    (d) Paragraph (b) of this section shall not be construed as waiving, 
limiting, or otherwise affecting the power of the receiver to disaffirm 
or repudiate any agreement imposing continuing obligations or duties 
upon the institution in receivership.
    (e) Paragraph (b) of this section shall not be construed as waiving, 
limiting or otherwise affecting the rights or

[[Page 312]]

powers of the receiver to take any action or to exercise any power not 
specifically limited by this section, including, but not limited to, any 
rights, powers or remedies of the receiver regarding transfers taken in 
contemplation of the institution's insolvency or with the intent to 
hinder, delay, or defraud the institution or the creditors of such 
institution, or that is a fraudulent transfer under applicable law.
    (f) The receiver shall not seek to avoid an otherwise legally 
enforceable securitization agreement or participation agreement executed 
by a Farm Credit institution solely because such agreement does not meet 
the ``contemporaneous'' requirement of section 5.61(d) of the Act.
    (g) This section may be repealed or amended by the Farm Credit 
Administration, but any such repeal or amendment shall not apply to any 
transfers of financial assets made in connection with a securitization 
or participation that was in effect before such repeal or modification.

[70 FR 55515, Sept. 22, 2005]



Sec. 627.2730  Preservation of equity.

    (a) Except as provided for upon final distribution of the assets of 
the institution, no capital stock, participation certificates, equity 
reserves, or other allocated equities of an institution in receivership 
shall be issued, allocated, retired, sold, distributed, transferred, 
assigned, or applied against any indebtedness of the owners of such 
equities.
    (b) Notwithstanding paragraph (a) of this section, eligible borrower 
stock shall be retired in accordance with section 4.9A of the Act.

[57 FR 46482, Oct. 9, 1992, as amended at 63 FR 5724, Feb. 4, 1998]



Sec. 627.2735  Notice to holders of uninsured accounts and stockholders.

    (a) Upon the placing of an institution in liquidation, the receiver 
shall immediately notify every borrower who has an uninsured account 
(voluntary or involuntary) as described in Sec. 614.4175 of this chapter 
that the funds ceased earning interest when the receivership was 
instituted and will be applied against the outstanding indebtedness of 
any loans of such borrower unless, within 15 days of such notice, the 
borrower directs the receiver to otherwise apply such funds in the 
manner provided for in existing loan documents.
    (b) As soon as practicable after the receiver takes possession of 
the institution, the receiver shall notify, by first class mail, each 
holder of stock and participation certificates of the following matters:
    (1) The number of shares such holder owns;
    (2) That the stock and other equities of the institution may not be 
retired or transferred until the liquidation is completed, whereupon the 
receiver will distribute a liquidating dividend, if any, to the owners 
of such equities; and
    (3) Such other matters as the receiver or the Farm Credit 
Administration deems necessary.

[57 FR 46482, Oct. 9, 1992, as amended at 75 FR 35968, June 24, 2010]



Sec. 627.2740  Creditors' claims.

    (a) The receiver shall publish promptly a notice to creditors to 
present their claims against the institution, with proof thereof, to the 
receiver by a date specified in the notice, which shall be not less than 
90 calendar days after the first publication. The notice shall be 
republished approximately 30 days and 60 days after the first 
publication. The receiver shall promptly send, by first class mail, a 
similar notice to any creditor shown on the institution's books at the 
creditor's last address appearing thereon. Claims filed after the 
specified date shall be disallowed, except as the receiver may approve 
them for full or partial payment from the institution's assets remaining 
undistributed at the time of approval.
    (b) The receiver shall allow any claim that is timely received and 
proved to the receiver's satisfaction. The receiver may disallow in 
whole or in part any creditor's claim or claim of security, preference, 
or priority which is not proved to the receiver's satisfaction or is not 
timely received and shall notify the claimant of the disallowance and 
reason therefor. Sending the notice of disallowance by first class mail 
to the claimant's address appearing on the proof of claim shall be 
sufficient notice. The disallowance shall be final,

[[Page 313]]

unless, within 30 days after the notice of disallowance is mailed, the 
claimant files a written request for payment regardless of the 
disallowance. The receiver shall reconsider any claim upon the timely 
request of the claimant and may approve or disapprove such claim in 
whole or in part.
    (c) Creditors' claims that are allowed shall be paid by the receiver 
from time to time, to the extent funds are available therefor and in 
accordance with the priorities established in this subpart and in such 
manner and amounts as the receiver deems appropriate. In the event the 
institution has a claim against a creditor of the institution, the 
receiver shall offset the amount of such claim against the claim 
asserted by such creditor.
    (d) The claims of holders of notes, bonds, debentures, or other 
obligations issued by a bank under 12 U.S.C. 2153 (c) or (d) shall be 
made, if deemed necessary or appropriate, in accordance with procedures 
formulated by the Insurance Corporation. In the formulation of such 
procedures, the Insurance Corporation shall consult with the Farm Credit 
Administration.



Sec. 627.2745  Priority of claims--associations.

    The following priority of claims shall apply to the distribution of 
the assets of an association in liquidation:
    (a) All costs, expenses, and debts incurred by the receiver in 
connection with the administration of the receivership.
    (b) Administrative expenses of the association, provided that such 
expenses were incurred within 60 days prior to the receiver's taking 
possession, and that such expenses shall be limited to reasonable 
expenses incurred for services actually provided by accountants, 
attorneys, appraisers, examiners, or management companies, or reasonable 
expenses incurred by employees which were authorized and reimbursable 
under a pre-existing expense reimbursement policy, that, in the opinion 
of the receiver, are of benefit to the receivership, and shall not 
include wages or salaries of employees of the association.
    (c) If authorized by the receiver, claims for wages and salaries, 
including vacation pay, earned prior to the appointment of the receiver 
by an employee of the association whom the receiver determines it is in 
the best interest of the receivership to engage or retain for a 
reasonable period of time.
    (d) If authorized by the receiver, claims for wages and salaries, 
including vacation pay, earned prior to the appointment of the receiver, 
up to a maximum of three thousand dollars ($3,000) per person as 
adjusted for inflation, by an employee of the association not engaged or 
retained by the receiver. The adjustment for inflation shall be the 
percentage by which the Consumer Price Index (as prepared by the 
Department of Labor) for the calendar year preceding the appointment of 
the receiver exceeds the Consumer Price Index for the calendar year 
1992.
    (e) All claims for taxes.
    (f) All claims of creditors, including the district bank, which are 
secured by assets or equities of the association in accordance with 
applicable Federal or State law.
    (g) All claims of the district bank other than those provided for in 
paragraph (f) of this section, based on the financing agreement between 
the association and the bank, including interest accrued before and 
after the appointment of the receiver, minus any setoff for stock or 
other equity of the district bank owned by the association made in 
accordance with this paragraph or paragraph (f) of this section. Prior 
to making such setoff, the district bank must obtain the approval of the 
Farm Credit Administration Board for the retirement of such equities.
    (h) All claims of general creditors.
    (i) All claims that, by their terms, are subordinated in whole or in 
part to the claims of general creditors, other than distributions 
covered under Sec. 627.2755(b). Such claims shall receive the priority 
specified in the written instruments that evidence the claims and, to 
the extent that the written documents provide different priorities for 
different categories of such claims, each category shall be considered a 
class of claims for purposes of Sec. 627.2755(a).

[57 FR 46482, Oct. 9, 1992, as amended at 72 FR 54527, Sept. 26, 2007]

[[Page 314]]



Sec. 627.2750  Priority of claims--banks.

    The following priority of claims shall apply to the distribution of 
the assets of a bank in liquidation:
    (a) All costs, expenses, and debts incurred by the receiver in 
connection with the administration of the receivership.
    (b) Administrative expenses of the bank, provided that such expenses 
were incurred within 60 days prior to the receiver's taking possession, 
and that such expenses shall be limited to reasonable expenses incurred 
for services actually provided by accountants, attorneys, appraisers, 
examiners, or management companies, or reasonable expenses incurred by 
employees which were authorized and reimbursable under a pre-existing 
expense reimbursement policy, that, in the opinion of the receiver, are 
of benefit to the receivership, and shall not include wages or salaries 
of employees of the bank.
    (c) If authorized by the receiver, claims for wages and salaries, 
including vacation pay, earned prior to the appointment of the receiver 
by an employee of the bank whom the receiver determines it is in the 
best interest of the receivership to engage or retain for a reasonable 
period of time.
    (d) If authorized by the receiver, claims for wages and salaries, 
including vacation pay, earned prior to the appointment of the receiver, 
up to a maximum of three thousand dollars ($3,000) per person as 
adjusted for inflation, by an employee of the bank not engaged or 
retained by the receiver. The adjustment for inflation shall be the 
percentage by which the Consumer Price Index (as prepared by the 
Department of Labor) for the calendar year preceding the appointment of 
the receiver exceeds the Consumer Price Index for the calendar year 
1992.
    (e) All claims for taxes.
    (f) All claims of creditors which are secured by specific assets or 
equities of the bank, with priority of conflicting claims of creditors 
within this same class to be determined in accordance with priorities of 
applicable Federal or State law.
    (g) All claims of holders of bonds issued by the bank individually 
to the extent such are collateralized in accordance with 12 U.S.C. 2154.
    (h) All claims of holders of consolidated and System-wide bonds and 
all claims of the other Farm Credit banks arising from their payments on 
consolidated and System-wide bonds pursuant to 12 U.S.C. 2155 or 
pursuant to an agreement among the banks to reallocate the payments, 
provided the agreement is in writing and approved by the Farm Credit 
Administration.
    (i) All claims of general creditors.
    (j) All claims that, by their terms, are subordinated in whole or in 
part to the claims of general creditors, other than distributions 
covered under Sec. 627.2755(b). Such claims shall receive the priority 
specified in the written instruments that evidence the claims and, to 
the extent that the written documents provide different priorities for 
different categories of such claims, each category shall be considered a 
class of claims for purposes of Sec. 627.2755(a).

[57 FR 46482, Oct. 9, 1992, as amended at 72 FR 54527, 54529 Sept. 26, 
2007]



Sec. 627.2752  Priority of claims--other Farm Credit institutions.

    The following priority of claims shall apply to the distribution of 
the assets of an institution, other than a bank or association, in 
liquidation:
    (a) All costs, expenses, and debts incurred by the receiver in 
connection with the administration of the receivership.
    (b) Administrative expenses of the institution, provided that such 
expenses were incurred within 60 days prior to the receiver's taking 
possession, and that such expenses shall be limited to reasonable 
expenses incurred for services actually provided by accountants, 
attorneys, appraisers, examiners, or management companies, or reasonable 
expenses incurred by employees which were authorized and reimbursable 
under a pre-existing expense reimbursement policy, that, in the opinion 
of the receiver, are of benefit to the receivership, and shall not 
include wages or salaries of employees of the institution.
    (c) If authorized by the receiver, claims for wages and salaries, 
including vacation pay, earned prior to the

[[Page 315]]

appointment of the receiver by an employee of the institution whom the 
receiver determines it is in the best interest of the receivership to 
engage or retain for a reasonable period of time.
    (d) If authorized by the receiver, claims for wages and salaries, 
including vacation pay, earned prior to the appointment of the receiver, 
up to a maximum of three thousand dollars ($3,000) per person as 
adjusted for inflation, by an employee of the institution not engaged or 
retained by the receiver. The adjustment for inflation shall be the 
percentage by which the Consumer Price Index (as prepared by the 
Department of Labor) for the calendar year preceding the appointment of 
the receiver exceeds the Consumer Price Index for the calendar year 
1992.
    (e) All claims for taxes.
    (f) All claims of creditors which are secured by specific assets or 
equities of the institution, with priority of conflicting claims of 
creditors within this same class to be determined in accordance with 
priorities of applicable Federal or State law.
    (g) All claims of general creditors.
    (h) All claims that, by their terms, are subordinated in whole or in 
part to the claims of general creditors, other than distributions 
covered under Sec. 627.2755(b). Such claims shall receive the priority 
specified in the written instruments that evidence the claims and, to 
the extent that the written documents provide different priorities for 
different categories of such claims, each category shall be considered a 
class of claims for purposes of Sec. 627.2755(a).

[57 FR 46482, Oct. 9, 1992, as amended at 72 FR 54527, Sept. 26, 2007]



Sec. 627.2755  Payment of claims.

    (a) All claims of each class described in Sec. 627.2745, 
Sec. 627.2750, or Sec. 627.2752 of this part, respectively, shall be 
paid in full, or provisions shall be made for such payment, prior to the 
payment of any claim of a lesser priority. If there are insufficient 
funds to pay in full any class of claims described, distribution on such 
class shall be on a pro rata basis.
    (b) Following the payment of all claims, the receiver shall 
distribute the remainder of the assets of the institution to the owners 
of stock, participation certificates, and other equities in accordance 
with the priorities for impairment set forth in the bylaws of the 
institution.
    (c) Notwithstanding this section, eligible borrower stock shall be 
retired in accordance with section 4.9A of the Act.

[57 FR 46482, Oct. 9, 1992, as amended at 72 FR 54529, Sept. 26, 2007]



Sec. 627.2760  Inventory, audit, and reports.

    (a) As soon as practicable after taking possession of an 
institution, the receiver shall make an inventory of the assets and 
liabilities as of the date possession was taken.
    (b) The institution in receivership shall be audited on an annual 
basis by a certified public accountant selected by the receiver.
    (c) With respect to each receivership, the receiver shall make an 
annual accounting or report, as appropriate, available upon request to 
any stockholder of the institution in receivership or any member of the 
public, with a copy provided to the Farm Credit Administration.
    (d) Upon the final liquidation of the institution, the receiver 
shall send to each stockholder of record a report summarizing the 
disposition of the assets of the receivership and claims against the 
receivership.



Sec. 627.2765  Final discharge and release of the receiver.

    After the receiver has made a final distribution of the assets of 
the receivership, the receivership shall be terminated, the charter 
shall be canceled by the Farm Credit Administration Board if such 
cancellation has not previously occurred, and the receiver shall be 
finally discharged and released.



               Subpart C_Conservators and Conservatorships



Sec. 627.2770  Conservators.

    (a) The Insurance Corporation shall be appointed as conservator by 
the Farm Credit Administration Board pursuant to section 4.12 of the Act 
and Sec. 627.2710 of this part to take possession

[[Page 316]]

of an institution in accordance with the terms of the appointment. Upon 
appointment, the conservator shall direct the institution's further 
operation until the Farm Credit Administration Board decides whether to 
place the institution into receivership. Upon correction or resolution 
of the problem or condition that provided the basis for the appointment 
and upon a determination by the Farm Credit Administration Board that 
the institution can be returned to normal operations, the Farm Credit 
Administration Board may turn the institution over to such management as 
the Farm Credit Administration Board may direct.
    (b) The conservator shall exercise all powers necessary to continue 
the ongoing operations of the institution, to conserve and preserve the 
institution's assets and property, and otherwise protect the interests 
of the institution, its stockholders, and creditors as provided in this 
subpart.



Sec. 627.2775  Appointment of a conservator.

    (a) The Farm Credit Administration Board may appoint ex parte and 
without notice a conservator for any Farm Credit institution provided 
that one or more of the grounds for appointment as set forth in 
Sec. 627.2710 exist.
    (b) Upon the appointment of a conservator, the Chairman of the Farm 
Credit Administration shall immediately notify the institution and, in 
the case of an association, the district bank, and notice of the 
appointment shall be published in the Federal Register. As soon as 
practicable after the conservator takes possession of the institution, 
the conservator shall notify, by first class mail, each holder of stock 
and participation certificates in the institution of the establishment 
of the conservatorship and shall describe the effect of the 
conservatorship on the institution's operations and on the borrower's 
loan and equity holdings.
    (c) Upon the issuance of the order placing a Farm Credit institution 
in conservatorship, all rights, privileges, and powers of the members, 
board of directors, officers, and employees of the institution are 
vested exclusively in the conservator.
    (d) The conservator is responsible for conserving and preserving the 
assets of the institution and continuing the ongoing operations of the 
institution until the conservatorship is terminated by order of the Farm 
Credit Administration Board.
    (e) The Board may, at any time, terminate the conservatorship and 
direct the conservator to turn over the institution's operations to such 
management as the Board may designate, in which event the provisions of 
this subpart shall no longer apply.



Sec. 627.2780  Powers and duties of conservators.

    (a) The conservator of an institution serves as the trustee of the 
institution and conducts its operations for the benefit of the creditors 
and stockholders of the institution.
    (b) The conservator may, with respect to Farm Credit institutions, 
exercise the powers that a receiver of an institution may exercise under 
any of the provisions of Sec. 627.2725(b) of this part, except 
paragraphs Sec. 627.2725 (b)(2) and (b)(17). The provisions of 
Sec. 627.2726 shall also apply to the conservator of a Farm Credit 
institution. In interpreting the applicable paragraphs for purposes of 
this section, the terms ``conservator'' and ``conservatorship'' shall be 
read for ``receiver'' and ``receivership.''
    (c) The conservator may extend credit to new and existing borrowers 
as is necessary to the continuing operation of the institution and to 
effectuate the purposes of the conservatorship.
    (d) The conservator may also take any other action the conservator 
considers appropriate or expedient to the continuing operation of the 
institution.

[57 FR 46482, Oct. 9, 1992, as amended at 70 FR 55515, Sept. 22, 2005]



Sec. 627.2785  Inventory, examination, audit, and reports to stockholders.

    (a) As soon as practicable after taking possession of a Farm Credit 
institution the conservator shall make an inventory of the assets and 
liabilities of the institution as of the date possession was taken. One 
copy of the inventory shall be filed with the Farm Credit 
Administration.

[[Page 317]]

    (b) The institution in conservatorship shall be examined by the Farm 
Credit Administration in accordance with section 5.19 of the Act. The 
institution must also be audited by a qualified public accountant in 
accordance with part 621 of this chapter.
    (c) Each institution in conservatorship shall prepare and file with 
the Farm Credit Administration financial reports in accordance with the 
requirements of part 621 of this chapter. The conservator of the 
institution shall provide the certification required in Sec. 621.14 of 
this chapter.
    (d) Each institution in conservatorship must prepare and issue 
published financial reports in accordance with the provisions of part 
620 of this chapter, and the certifications and signatures of the board 
of directors or management provided for in Sec. 620.3 of this chapter 
must be provided by the conservator of the institution.

[57 FR 46482, Oct. 9, 1992, as amended at 58 FR 48791, Sept. 20, 1993; 
71 FR 76121, Dec. 20, 2006]



Sec. 627.2790  Final discharge and release of the conservator.

    At such time as the conservator shall be relieved of its 
conservatorship duties, the conservator shall file a report on the 
conservator's activities with the Farm Credit Administration. The 
conservator shall thereupon be completely and finally released.



                     Subpart D_Voluntary Liquidation

    Source: 63 FR 5725, Feb. 4, 1998, unless otherwise noted.



Sec. 627.2795  Voluntary liquidation.

    (a) A Farm Credit institution may voluntarily liquidate by a 
resolution of its board of directors, but only with the consent of, and 
in accordance with a plan of liquidation approved by, the Farm Credit 
Administration Board. Upon adoption of such resolution to liquidate, the 
Farm Credit institution shall submit the proposed voluntary liquidation 
plan to the Farm Credit Administration for preliminary approval. The 
Farm Credit Administration Board, in its discretion, may appoint a 
receiver as part of an approved liquidation plan. If a receiver is 
appointed for the Farm Credit institution as part of a voluntary 
liquidation, the receivership shall be conducted pursuant to subpart B 
of this part, except to the extent that an approved plan of liquidation 
provides otherwise.
    (b) If the Farm Credit Administration Board gives preliminary 
approval to the liquidation plan, the board of directors of the Farm 
Credit institution shall submit the resolution to liquidate and the 
liquidation plan to the stockholders for approval.
    (c) The resolution to liquidate and the liquidation plan shall be 
approved by the stockholders if agreed to by at least a majority of the 
voting stockholders of the institution voting, in person or by written 
proxy, at a duly authorized stockholders' meeting.
    (d) The Farm Credit Administration Board will consider final 
approval of the liquidation plan after an affirmative stockholder vote 
on the resolution to liquidate.
    (e) Any subsequent amendments, modifications, revisions, or 
adjustments to the liquidation plan shall require Farm Credit 
Administration Board approval.
    (f) The Farm Credit Administration Board, in its discretion, 
reserves the right to terminate or modify the liquidation plan at any 
time.



Sec. 627.2797  Preservation of equity.

    (a) Immediately upon the adoption of a resolution by its board of 
directors to voluntarily liquidate a Farm Credit institution, the 
capital stock, participation certificates, equity reserves, and 
allocated equities of the Farm Credit institution shall not be issued, 
allocated, retired, sold, distributed, transferred, assigned, or applied 
against any indebtedness of the owners of such equities. Such activities 
could resume if the stockholders of the Farm Credit institution 
disapprove the resolution to liquidate or the Farm Credit Administration 
Board disapproves the liquidation plan. In the event the resolution to 
liquidate is approved by the stockholders of the Farm Credit institution 
and the liquidation plan is approved by the Farm Credit Administration 
Board, the liquidation plan shall govern disposition of the equities of 
the Farm Credit institution, except that if the

[[Page 318]]

Farm Credit institution is placed in receivership, the provisions of 
Sec. 627.2730(a) shall govern further disposition of the equities of the 
Farm Credit institution.
    (b) Notwithstanding paragraph (a) of this section, eligible borrower 
stock shall be retired in accordance with section 4.9A of the Act.



PART 628_CAPITAL ADEQUACY OF SYSTEM INSTITUTIONS--Table of Contents



                      Subpart A_General Provisions

Sec.
628.1  Purpose, applicability, and reservations of authority.
628.2  Definitions.
628.3  Operational requirements for certain exposures.
628.4-628.9  [Reserved]

            Subpart B_Capital Ratio Requirements and Buffers

628.10  Minimum capital requirements.
628.11  Capital buffer amounts.
628.12-628.19  [Reserved]

                     Subpart C_Definition of Capital

628.20  Capital components and eligibility criteria for tier 1 and tier 
          2 capital instruments.
628.21  [Reserved]
628.22  Regulatory capital adjustments and deductions.
628.23  Limit on inclusion of third-party capital in total (tier 1 and 
          tier 2) capital.
628.24-628.29  [Reserved]

          Subpart D_Risk-Weighted Assets_Standardized Approach

628.30  Applicability.

              Risk-Weighted Assets for General Credit Risk

628.31  Mechanics for calculating risk-weighted assets for general 
          credit risk.
628.32  General risk weights.
628.33  Off-balance sheet exposures.
628.34  OTC derivative contracts.
628.35  Cleared transactions.
628.36  Guarantees and credit derivatives: Substitution treatment.
628.37  Collateralized transactions.

             Risk-Weighted Assets for Unsettled Transactions

628.38  Unsettled transactions.
628.39-628.40  [Reserved]

            Risk-Weighted Assets for Securitization Exposures

628.41  Operational requirements for securitization exposures.
628.42  Risk-weighted assets for securitization exposures.
628.43  Simplified supervisory formula approach (SSFA) and the gross-up 
          approach.
628.44  Securitization exposures to which the SSFA and gross-up approach 
          do not apply.
628.45  Recognition of credit risk mitigants for securitization 
          exposures.
628.46-628.50  [Reserved]

                Risk-Weighted Assets for Equity Exposures

628.51  Introduction and exposure measurement.
628.52  Simple risk-weight approach (SRWA).
628.53  Equity exposures to investment funds.
628.54-628.60  [Reserved]

                               Disclosures

628.61  Purpose and scope.
628.62  Disclosure requirements.
628.63  Disclosures.
628.64-628.99  [Reserved]

Subparts E-F [Reserved]

                     Subpart G_Transition Provisions

628.300  Transitions.
628.301  Initial compliance and reporting requirements.

    Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5, 
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 
6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm Credit 
Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 
2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 2211, 2243, 
2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-7, 
2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a), Pub. L. 100-233, 101 Stat. 
1568, 1608; sec. 939A, Pub. L. 111-203, 124 Stat. 1326, 1887 (15 U.S.C. 
78o-7 note).

    Source: 81 FR 49779, July 28, 2016, unless otherwise noted.



                      Subpart A_General Provisions



Sec. 628.1  Purpose, applicability, and reservations of authority.

    (a) Purpose. This part establishes minimum capital requirements and 
overall capital adequacy standards for System institutions. This part 
includes

[[Page 319]]

methodologies for calculating minimum capital requirements, public 
disclosure requirements related to the capital requirements, and 
transition provisions for the application of this part.
    (b) Limitation of authority. Nothing in this part limits the 
authority of FCA to take action under other provisions of law, including 
action to address unsafe or unsound practices or conditions, deficient 
capital levels, or violations of law or regulation under part C of title 
V of the Farm Credit Act.
    (c) Applicability. Subject to the requirements in paragraph (d) of 
this section:
    (1) Minimum capital requirements and overall capital adequacy 
standards. Each System institution must calculate its minimum capital 
requirements and meet the overall capital adequacy standards in subpart 
B of this part.
    (2) Regulatory capital. Each System institution must calculate its 
regulatory capital in accordance with subpart C of this part.
    (3) Risk-weighted assets. (i) Each System institution must use the 
methodologies in subpart D of this part to calculate total risk-weighted 
assets.
    (ii) [Reserved]
    (4) Disclosures. (i) All System banks must make the public 
disclosures described in subpart D of this part.
    (ii)-(iii) [Reserved]
    (d) Reservation of authority--(1) Additional capital in the 
aggregate. FCA may require a System institution to hold an amount of 
regulatory capital greater than otherwise required under this part if 
FCA determines that the System institution's capital requirements under 
this part are not commensurate with the System institution's credit, 
market, operational, or other risks according to part 615, subparts L 
and M, of this chapter.
    (2) Regulatory capital elements. (i) If FCA determines that a 
particular common equity tier 1 (CET1), additional tier 1 (AT1), or tier 
2 capital element has characteristics or terms that diminish its 
permanence or its ability to absorb losses, or otherwise present safety 
and soundness concerns, FCA may require the System institution to 
exclude all or a portion of such element from CET1 capital, AT1 capital, 
or tier 2 capital, as appropriate.
    (ii) Notwithstanding the criteria for regulatory capital instruments 
set forth in subpart C of this part, FCA may find that a capital element 
may be included in a System institution's CET1 capital, AT1 capital, or 
tier 2 capital on a permanent or temporary basis consistent with the 
loss absorption capacity of the element and in accordance with 
Sec. 628.20(e).
    (3) Risk-weighted asset amounts. If FCA determines that the risk-
weighted asset amount calculated under this part by the System 
institution for one or more exposures is not commensurate with the risks 
associated with those exposures, FCA may require the System institution 
to assign a different risk-weighted asset amount to the exposure(s) or 
to deduct the amount of the exposure(s) from its regulatory capital.
    (4) Total leverage. If FCA determines that the leverage exposure 
amount, or the amount reflected in the System institution's reported 
average total consolidated assets, for a balance sheet exposure 
calculated by a System institution under Sec. 628.10 is inappropriate 
for the exposure(s) or the circumstances of the System institution, FCA 
may require the System institution to adjust this exposure amount in the 
numerator and the denominator for purposes of the leverage ratio 
calculations.
    (5) [Reserved]
    (6) Other reservation of authority. With respect to any deduction or 
limitation required under this part, FCA may require a different 
deduction or limitation, provided that such alternative deduction or 
limitation is commensurate with the System institution's risk and 
consistent with safety and soundness.
    (e) Notice and response procedures. In making a determination under 
this section, FCA will apply notice and response procedures in the same 
manner as the notice and response procedures in Sec. 615.5352 of this 
chapter.
    (f) [Reserved]



Sec. 628.2  Definitions.

    As used in this part:
    Additional tier 1 capital (AT1) is defined in Sec. 628.20(c).

[[Page 320]]

    Allocated equities means stock or surplus representing a patronage 
payment to a member-borrower that a System institution has retained for 
the benefit of its membership.\1\ Allocated equities include qualified 
allocated equities and nonqualified allocated equities. Allocated 
equities are redeemable at the System institution board's discretion. 
Allocated equities contain no voting rights and are generally 
subordinated to borrower stock in receivership, insolvency, liquidation, 
or similar proceeding.
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    \1\ System institutions as cooperatives are required to send 
borrowers a written notice of allocation specifying the amount of 
patronage payments retained as equity pursuant to the Internal Revenue 
Code section 1388.
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    Allowances for loan losses (ALL) means valuation allowances that 
have been established through a charge against earnings to cover 
estimated credit losses on loans, lease financing receivables, or other 
extensions of credit as determined in accordance with generally accepted 
accounting principles (GAAP). For purposes of this part, ALL includes 
allowances that have been established through a charge against earnings 
to cover estimated credit losses associated with off-balance sheet 
credit exposures as determined in accordance with GAAP.
    Bank holding company means a bank holding company as defined in 
section 2 of the Bank Holding Company Act.
    Bank Holding Company Act means the Bank Holding Company Act of 1956, 
as amended (12 U.S.C. 1841 et seq.).
    Bankruptcy remote means, with respect to an entity or asset, that 
the entity or asset would be excluded from an insolvent entity's estate 
in receivership, insolvency, liquidation, or similar proceeding.
    Borrower stock means the capital investment a borrower holds in a 
System institution in connection with a loan.
    Call Report means reports of condition and performance, as described 
in subpart D of part 621 of this chapter.
    Carrying value means, with respect to an asset, the value of the 
asset on the balance sheet of the System institution, determined in 
accordance with GAAP.
    Central counterparty (CCP) means a counterparty (for example, a 
clearinghouse) that facilitates trades between counterparties in one or 
more financial markets by either guaranteeing trades or novating 
contracts.
    CFTC means the U.S. Commodity Futures Trading Commission.
    Clean-up call means a contractual provision that permits an 
originating System institution or servicer to call securitization 
exposures before their stated maturity or call date.
    Cleared transaction means an exposure associated with an outstanding 
derivative contract or repo-style transaction that a System institution 
or clearing member has entered into with a central counterparty (that 
is, a transaction that a central counterparty has accepted).
    (1) The following transactions are cleared transactions:
    (i)-(ii) [Reserved]
    (iii) A transaction between a clearing member client System 
institution and a clearing member where the clearing member acts as a 
financial intermediary on behalf of the clearing member client and 
enters into an offsetting transaction with a CCP, provided that the 
requirements set forth in Sec. 628.3(a) are met; or
    (iv) A transaction between a clearing member client System 
institution and a CCP where a clearing member guarantees the performance 
of the clearing member client System institution to the CCP and the 
transaction meets the requirements of Sec. 628.3(a)(2) and (3).
    (2) [Reserved]
    Clearing member means a member of, or direct participant in, a CCP 
that is entitled to enter into transactions with the CCP.
    Clearing member client means a party to a cleared transaction 
associated with a CCP in which a clearing member either acts as a 
financial intermediary with respect to the party or guarantees the 
performance of the party to the CCP.
    Collateral agreement means a legal contract that specifies the time 
when, and circumstances under which, a counterparty is required to 
pledge collateral to a System institution for a single financial 
contract or for all financial contracts in a netting set and

[[Page 321]]

confers upon the System institution a perfected, first-priority security 
interest (notwithstanding the prior security interest of any custodial 
agent), or the legal equivalent thereof, in the collateral posted by the 
counterparty under the agreement. This security interest must provide 
the System institution with a right to close-out the financial positions 
and liquidate the collateral upon an event of default of, or failure to 
perform by, the counterparty under the collateral agreement. A contract 
would not satisfy this requirement if the System institution's exercise 
of rights under the agreement may be stayed or avoided under applicable 
law in the relevant jurisdictions, other than:
    (1) In receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act, title II of the Dodd-Frank Act, or under 
any similar insolvency law applicable to GSEs, or laws of foreign 
jurisdictions that are substantially similar to the U.S. laws referenced 
in this paragraph (1) in order to facilitate the orderly resolution of 
the defaulting counterparty; or
    (2) Where the agreement is subject by its terms to any of the laws 
referenced in paragraph (1) of this definition.
    Commitment means any legally binding arrangement that obligates a 
System institution to extend credit or to purchase assets.
    Commodity derivative contract means a commodity-linked swap, 
purchased commodity-linked option, forward commodity-linked contract, or 
any other instrument linked to commodities that gives rise to similar 
counterparty credit risks.
    Commodity Exchange Act means the Commodity Exchange Act of 1936 (7 
U.S.C. 1 et seq.).
    Common cooperative equity or equities means common equities in the 
form of member-borrower stock, participation certificates, and allocated 
equities issued or allocated by a System institution to its current and 
former members.
    Common equity tier 1 capital (CET1) is defined in Sec. 628.20(b).
    Company means a corporation, partnership, limited liability company, 
depository institution, business trust, special purpose entity, System 
institution, association, or similar organization.
    Corporate exposure means an exposure to a company that is not:
    (1) An exposure to a sovereign, the Bank for International 
Settlements, the European Central Bank, the European Commission, the 
International Monetary Fund, a multi-lateral development bank (MDB), a 
depository institution, a foreign bank, a credit union, or a public 
sector entity (PSE);
    (2) An exposure to a GSE;
    (3) A residential mortgage exposure;
    (4)-(6) [Reserved]
    (7) A cleared transaction;
    (8) [Reserved]
    (9) A securitization exposure;
    (10) An equity exposure; or
    (11) An unsettled transaction.
    Country risk classification (CRC) with respect to a sovereign, means 
the most recent consensus CRC published by the Organization for Economic 
Cooperation and Development (OECD) as of December 31st of the prior 
calendar year that provides a view of the likelihood that the sovereign 
will service its external debt.
    Credit derivative means a financial contract executed under standard 
industry credit derivative documentation that allows one party (the 
protection purchaser) to transfer the credit risk of one or more 
exposures (reference exposure(s)) to another party (the protection 
provider) for a certain period of time.
    Credit-enhancing interest-only strip (CEIO) means an on-balance 
sheet asset that, in form or in substance:
    (1) Represents a contractual right to receive some or all of the 
interest and no more than a minimal amount of principal due on the 
underlying exposures of a securitization; and
    (2) Exposes the holder of the CEIO to credit risk directly or 
indirectly associated with the underlying exposures that exceeds a pro 
rata share of the holder's claim on the underlying exposures, whether 
through subordination provisions or other credit-enhancement techniques.
    Credit-enhancing representations and warranties means 
representations and warranties that are made or assumed

[[Page 322]]

in connection with a transfer of underlying exposures (including loan 
servicing assets) and that obligate a System institution to protect 
another party from losses arising from the credit risk of the underlying 
exposures. Credit-enhancing representations and warranties include 
provisions to protect a party from losses resulting from the default or 
nonperformance of the counterparties of the underlying exposures or from 
an insufficiency in the value of the collateral backing the underlying 
exposures. Credit-enhancing representations and warranties do not 
include:
    (1) Early default clauses and similar warranties that permit the 
return of, or premium refund clauses covering, 1-4 family residential 
first mortgage loans that qualify for a 50-percent risk weight for a 
period not to exceed 120 days from the date of transfer. These 
warranties may cover only those loans that were originated within 1 year 
of the date of transfer;
    (2) Premium refund clauses that cover assets guaranteed, in whole or 
in part, by the U.S. Government, a U.S. Government agency or a 
Government-sponsored enterprise (GSE), provided the premium refund 
clauses are for a period not to exceed 120 days from the date of 
transfer; or
    (3) Warranties that permit the return of underlying exposures in 
instances of misrepresentation, fraud, or incomplete documentation.
    Credit risk mitigant means collateral, a credit derivative, or a 
guarantee.
    Credit union means an insured credit union as defined under the 
Federal Credit Union Act (12 U.S.C. 1752 et seq.).
    Current exposure means, with respect to a netting set, the larger of 
0 or the fair value of a transaction or portfolio of transactions within 
the netting set that would be lost upon default of the counterparty, 
assuming no recovery on the value of the transactions. Current exposure 
is also called replacement cost.
    Current exposure methodology means the method of calculating the 
exposure amount for over-the-counter derivative contracts in 
Sec. 628.34(a).
    Custodian means a company that has legal custody of collateral 
provided to a CCP.
    Depository institution means a depository institution as defined in 
section 3 of the Federal Deposit Insurance Act.
    Depository institution holding company means a bank holding company 
or savings and loan holding company.
    Derivative contract means a financial contract whose value is 
derived from the values of one or more underlying assets, reference 
rates, or indices of asset values or reference rates. Derivative 
contracts include interest rate derivative contracts, exchange rate 
derivative contracts, equity derivative contracts, commodity derivative 
contracts, credit derivative contracts, and any other instrument that 
poses similar counterparty credit risks. Derivative contracts also 
include unsettled securities, commodities, and foreign exchange 
transactions with a contractual settlement or delivery lag that is 
longer than the lesser of the market standard for the particular 
instrument or 5 business days.
    Dodd-Frank Act means the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (Pub. L. 111-203, 124 Stat. 1376).
    Early amortization provision means a provision in the documentation 
governing a securitization that, when triggered, causes investors in the 
securitization exposures to be repaid before the original stated 
maturity of the securitization exposures, unless the provision:
    (1) Is triggered solely by events not directly related to the 
performance of the underlying exposures or the originating System 
institution (such as material changes in tax laws or regulations); or
    (2) Leaves investors fully exposed to future draws by borrowers on 
the underlying exposures even after the provision is triggered.
    Effective notional amount means, for an eligible guarantee or 
eligible credit derivative, the lesser of the contractual notional 
amount of the credit risk mitigant and the exposure amount of the hedged 
exposure, multiplied by the percentage coverage of the credit risk 
mitigant.
    Eligible clean-up call means a clean-up call that:

[[Page 323]]

    (1) Is exercisable solely at the discretion of the originating 
System institution or servicer;
    (2) Is not structured to avoid allocating losses to securitization 
exposures held by investors or otherwise structured to provide credit 
enhancement to the securitization; and
    (3)(i) For a traditional securitization, is only exercisable when 10 
percent or less of the principal amount of the underlying exposures or 
securitization exposures (determined as of the inception of the 
securitization) is outstanding; or
    (ii) For a synthetic securitization, is only exercisable when 10 
percent or less of the principal amount of the reference portfolio of 
underlying exposures (determined as of the inception of the 
securitization) is outstanding.
    Eligible credit derivative means a credit derivative in the form of 
a credit default swap, nth-to-default swap, total return 
swap, or any other form of credit derivative approved by the FCA, 
provided that:
    (1) The contract meets the requirements of an eligible guarantee and 
has been confirmed by the protection purchaser and the protection 
provider;
    (2) Any assignment of the contract has been confirmed by all 
relevant parties;
    (3) If the credit derivative is a credit default swap or 
nth-to-default swap, the contract includes the following 
credit events:
    (i) Failure to pay any amount due under the terms of the reference 
exposure, subject to any applicable minimal payment threshold that is 
consistent with standard market practice and with a grace period that is 
closely in line with the grace period of the reference exposure; and
    (ii) Receivership, insolvency, liquidation, conservatorship or 
inability of the reference exposure issuer to pay its debts, or its 
failure or admission in writing of its inability generally to pay its 
debts as they become due, and similar events;
    (4) The terms and conditions dictating the manner in which the 
contract is to be settled are incorporated into the contract;
    (5) If the contract allows for cash settlement, the contract 
incorporates a robust valuation process to estimate loss reliably and 
specifies a reasonable period for obtaining post-credit event valuations 
of the reference exposure;
    (6) If the contract requires the protection purchaser to transfer an 
exposure to the protection provider at settlement, the terms of at least 
one of the exposures that is permitted to be transferred under the 
contract provide that any required consent to transfer may not be 
unreasonably withheld;
    (7) If the credit derivative is a credit default swap or 
nth-to-default swap, the contract clearly identifies the 
parties responsible for determining whether a credit event has occurred, 
specifies that this determination is not the sole responsibility of the 
protection provider, and gives the protection purchaser the right to 
notify the protection provider of the occurrence of a credit event; and
    (8) If the credit derivative is a total return swap and the System 
institution records net payments received on the swap as net income, the 
System institution records offsetting deterioration in the value of the 
hedged exposure (either through reductions in fair value or by an 
addition to reserves).
    Eligible guarantee means a guarantee from an eligible guarantor 
that:
    (1) Is written;
    (2) Is either:
    (i) Unconditional; or
    (ii) A contingent obligation of the U.S. Government or its agencies, 
the enforceability of which is dependent upon some affirmative action on 
the part of the beneficiary of the guarantee or a third party (for 
example, meeting servicing requirements);
    (3) Covers all or a pro rata portion of all contractual payments of 
the obligated party on the reference exposure;
    (4) Gives the beneficiary a direct claim against the protection 
provider;
    (5) Is not unilaterally cancelable by the protection provider for 
reasons other than the breach of the contract by the beneficiary;
    (6) Except for a guarantee by a sovereign, is legally enforceable 
against the protection provider in a jurisdiction where the protection 
provider has sufficient assets against which a judgment may be attached 
and enforced;
    (7) Requires the protection provider to make payment to the 
beneficiary on

[[Page 324]]

the occurrence of a default (as defined in the guarantee) of the 
obligated party on the reference exposure in a timely manner without the 
beneficiary first having to take legal actions to pursue the obligor for 
payment; and
    (8) Does not increase the beneficiary's cost of credit protection on 
the guarantee in response to deterioration in the credit quality of the 
reference exposure.
    Eligible guarantor means:
    (1) A sovereign, the Bank for International Settlements, the 
International Monetary Fund, the European Central Bank, the European 
Commission, a Federal Home Loan Bank, Federal Agricultural Mortgage 
Corporation (Farmer Mac), a multilateral development bank (MDB), a 
depository institution, a bank holding company, a savings and loan 
holding company, a credit union, a foreign bank, or a qualifying central 
counterparty; or
    (2) An entity (other than a special purpose entity):
    (i) That at the time the guarantee is issued or anytime thereafter, 
has issued and outstanding an unsecured debt security without credit 
enhancement that is investment grade;
    (ii) Whose creditworthiness is not positively correlated with the 
credit risk of the exposures for which it has provided guarantees; and
    (iii) That is not an insurance company engaged predominately in the 
business of providing credit protection (such as a monoline bond insurer 
or re-insurer).
    Eligible margin loan means:
    (1) An extension of credit where:
    (i) The extension of credit is collateralized exclusively by liquid 
and readily marketable debt or equity securities, or gold;
    (ii) The collateral is marked-to-fair value daily, and the 
transaction is subject to daily margin maintenance requirements; and
    (iii) The extension of credit is conducted under an agreement that 
provides the System institution the right to accelerate and terminate 
the extension of credit and to liquidate or set-off collateral promptly 
upon an event of default, including upon an event of receivership, 
insolvency, liquidation, conservatorship, or similar proceeding, of the 
counterparty, provided that, in any such case, any exercise of rights 
under the agreement will not be stayed or avoided under applicable law 
in the relevant jurisdictions, other than in receivership, 
conservatorship, resolution under the Federal Deposit Insurance Act, 
Title II of the Dodd-Frank Act, or under any similar insolvency law 
applicable to GSEs,\2\ or laws of foreign jurisdictions that are 
substantially similar to the U.S. laws referenced in this paragraph 
(1)(iii) in order to facilitate the orderly resolution of the defaulting 
counterparty.
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    \2\ This requirement is met where all transactions under the 
agreement are (i) executed under U.S. law and (ii) constitute 
``securities contracts'' under section 555 of the Bankruptcy Code (11 
U.S.C. 555), qualified financial contracts under section 11(e)(8) of the 
Federal Deposit Insurance Act, or netting contracts between or among 
financial institutions under sections 401-407 of the Federal Deposit 
Insurance Corporation Improvement Act of the Federal Reserve Board's 
Regulation EE (12 CFR part 231).
---------------------------------------------------------------------------

    (2) In order to recognize an exposure as an eligible margin loan for 
purposes of this subpart, a System institution must comply with the 
requirements of Sec. 628.3(b) with respect to that exposure.
    Eligible servicer cash advance facility means a servicer cash 
advance facility in which:
    (1) The servicer is entitled to full reimbursement of advances, 
except that a servicer may be obligated to make non-reimbursable 
advances for a particular underlying exposure if any such advance is 
contractually limited to an insignificant amount of the outstanding 
principal balance of that exposure;
    (2) The servicer's right to reimbursement is senior in right of 
payment to all other claims on the cash flows from the underlying 
exposures of the securitization; and
    (3) The servicer has no legal obligation to, and does not make 
advances to the securitization if the servicer concludes the advances 
are unlikely to be repaid.
    Equity derivative contract means an equity-linked swap, purchased 
equity-linked option, forward equity-linked contract, or any other 
instrument

[[Page 325]]

linked to equities that gives rise to similar counterparty credit risks.
    Equity exposure means:
    (1) A security or instrument (whether voting or non-voting) that 
represents a direct or an indirect ownership interest in, and is a 
residual claim on, the assets and income of a company, unless:
    (i) The issuing company is consolidated with the System institution 
under GAAP;
    (ii) The System institution is required to deduct the ownership 
interest from tier 1 or tier 2 capital under this part;
    (iii) The ownership interest incorporates a payment or other similar 
obligation on the part of the issuing company (such as an obligation to 
make periodic payments); or
    (iv) The ownership interest is a securitization exposure;
    (2) A security or instrument that is mandatorily convertible into a 
security or instrument described in paragraph (1) of this definition;
    (3) An option or warrant that is exercisable for a security or 
instrument described in paragraph (1) of this definition; or
    (4) Any other security or instrument (other than a securitization 
exposure) to the extent the return on the security or instrument is 
based on the performance of a security or instrument described in 
paragraph (1) of this definition.
    ERISA means the Employee Retirement Income and Security Act of 1974 
(29 U.S.C. 1001 et seq.).
    Exchange rate derivative contract means a cross-currency interest 
rate swap, forward foreign-exchange contract, currency option purchased, 
or any other instrument linked to exchange rates that gives rise to 
similar counterparty credit risks.
    Exposure means an amount at risk.
    Exposure amount means:
    (1) For the on-balance sheet component of an exposure (other than an 
available-for-sale or held-to-maturity security; an OTC derivative 
contract; a repo-style transaction or an eligible margin loan for which 
the System institution determines the exposure amount under Sec. 628.37; 
a cleared transaction; or a securitization exposure), the System 
institution's carrying value of the exposure.
    (2) For a security (that is not a securitization exposure, equity 
exposure, or preferred stock classified as an equity security under 
GAAP) classified as available-for-sale or held-to-maturity, the System 
institution's carrying value (including net accrued but unpaid interest 
and fees) for the exposure less any net unrealized gains on the exposure 
and plus any net unrealized losses on the exposure.
    (3) For available-for-sale preferred stock classified as an equity 
security under GAAP, the System institution's carrying value of the 
exposure less any net unrealized gains on the exposure that are 
reflected in such carrying value but excluded from the System 
institution's regulatory capital components.
    (4) For the off-balance sheet component of an exposure (other than 
an OTC derivative contract; a repo-style transaction or an eligible 
margin loan for which the System institution calculates the exposure 
amount under Sec. 628.37; a cleared transaction; or a securitization 
exposure), the notional amount of the off-balance sheet component 
multiplied by the appropriate credit conversion factor (CCF) in 
Sec. 628.33.
    (5) For an exposure that is an OTC derivative contract, the exposure 
amount determined under Sec. 628.34.
    (6) For an exposure that is a cleared transaction, the exposure 
amount determined under Sec. 628.35.
    (7) For an exposure that is an eligible margin loan or repo-style 
transaction for which the bank calculates the exposure amount as 
provided in Sec. 628.37, the exposure amount determined under 
Sec. 628.37.
    (8) For an exposure that is a securitization exposure, the exposure 
amount determined under Sec. 628.42.
    Farm Credit Act means the Farm Credit Act of 1971, as amended (12 
U.S.C. 2001 et seq.).
    Federal Deposit Insurance Act means the Federal Deposit Insurance 
Act (12 U.S.C. 1813).
    Federal Deposit Insurance Corporation Improvement Act means the 
Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 
4401).

[[Page 326]]

    Financial collateral means collateral:
    (1) In the form of:
    (i) Cash on deposit at a depository institution or Federal Reserve 
Bank (including cash held for the System institution by a third-party 
custodian or trustee);
    (ii) Gold bullion;
    (iii) Long-term debt securities that are not resecuritization 
exposures and that are investment grade;
    (iv) Short-term debt instruments that are not resecuritization 
exposures and that are investment grade;
    (v) Equity securities that are publicly traded;
    (vi) Convertible bonds that are publicly traded; or
    (vii) Money market fund shares and other mutual fund shares if a 
price for the shares is publicly quoted daily; and
    (2) In which the System institution has a perfected, first-priority 
security interest or, outside of the United States, the legal equivalent 
thereof (with the exception of cash on deposit at a depository 
institution or Federal Reserve Bank and notwithstanding the prior 
security interest of any custodial agent).
    First-lien residential mortgage exposure means a residential 
mortgage exposure secured by a first lien.
    Foreign bank means a foreign bank as defined in Sec. 211.2 of the 
Federal Reserve Board's Regulation K (12 CFR 211.2) (other than a 
depository institution).
    Forward agreement means a legally binding contractual obligation to 
purchase assets with certain drawdown at a specified future date, not 
including commitments to make residential mortgage loans or forward 
foreign exchange contracts.
    GAAP means generally accepted accounting principles as used in the 
United States.
    Gain-on-sale means an increase in the equity capital of a System 
institution (as reported on the Call Report) resulting from a 
traditional securitization (other than an increase in equity capital 
resulting from the System institution's receipt of cash in connection 
with the securitization or reporting of a mortgage servicing asset on 
the Call Report).
    General obligation means a bond or similar obligation that is backed 
by the full faith and credit of a public sector entity (PSE).
    Government-sponsored enterprise (GSE) means an entity established or 
chartered by the U.S. Government to serve public purposes specified by 
the U.S. Congress but whose debt obligations are not explicitly 
guaranteed by the full faith and credit of the U.S. Government.
    Guarantee means a financial guarantee, letter of credit, insurance, 
or other similar financial instrument (other than a credit derivative) 
that allows one party (beneficiary) to transfer the credit risk of one 
or more specific exposures (reference exposure) to another party 
(protection provider).
    Home country means the country where an entity is incorporated, 
chartered, or similarly established.
    Insurance company means an insurance company as defined in section 
201 of the Dodd-Frank Act (12 U.S.C. 5381).
    Insurance underwriting company means an insurance company as defined 
in section 201 of the Dodd-Frank Act (12 U.S.C. 5381) that engages in 
insurance underwriting activities.
    Insured depository institution means an insured depository 
institution as defined in section 3 of the Federal Deposit Insurance 
Act.
    Interest rate derivative contract means a single-currency interest 
rate swap, basis swap, forward rate agreement, purchased interest rate 
option, when-issued securities, or any other instrument linked to 
interest rates that gives rise to similar counterparty credit risks.
    International Lending Supervision Act means the International 
Lending Supervision Act of 1983 (12 U.S.C. 3907).
    Investment fund means a company:
    (1) Where all or substantially all of the assets of the company are 
financial assets; and
    (2) That has no material liabilities.
    Investment grade means that the entity to which the System 
institution is exposed through a loan or security, or the reference 
entity with respect to a credit derivative, has adequate capacity to 
meet financial commitments for the projected life of the asset or 
exposure. Such an entity or reference entity has adequate capacity to 
meet financial commitments if the risk of its

[[Page 327]]

default is low and the full and timely repayment of principal and 
interest is expected.
    Junior-lien residential mortgage exposure means a residential 
mortgage exposure that is not a first-lien residential mortgage 
exposure.
    Member means a borrower or former borrower from a System institution 
that holds voting or nonvoting cooperative equities of the institution.
    Money market fund means an investment fund that is subject to 17 CFR 
270.2a-7 or any foreign equivalent thereof.
    Mortgage servicing assets (MSAs) means the contractual rights owned 
by a System institution to service for a fee mortgage loans that are 
owned by others.
    Multilateral development bank (MDB) means the International Bank for 
Reconstruction and Development, the Multilateral Investment Guarantee 
Agency, the International Finance Corporation, the Inter-American 
Development Bank, the Asian Development Bank, the African Development 
Bank, the European Bank for Reconstruction and Development, the European 
Investment Bank, the European Investment Fund, the Nordic Investment 
Bank, the Caribbean Development Bank, the Islamic Development Bank, the 
Council of Europe Development Bank, and any other multilateral lending 
institution or regional development bank in which the U.S. Government is 
a shareholder or contributing member or which the FCA determines poses 
comparable credit risk.
    National Bank Act means the National Bank Act (12 U.S.C. 24).
    Netting set means a group of transactions with a single counterparty 
that are subject to a qualifying master netting agreement or a 
qualifying cross-product master netting agreement. For purposes of 
calculating risk-based capital requirements using the internal models 
methodology in subpart E of this part, this term does not cover a 
transaction:
    (1) That is not subject to such a master netting agreement; or
    (2) Where the System institution has identified specific wrong-way 
risk.
    Nonqualified allocated equities mean a patronage payment to a 
member-borrower in the form of stock or surplus that a System 
institution retains as equity for the benefit of the membership. A 
System institution does not deduct this patronage payment from its 
current taxable income according to the Internal Revenue Code sections 
1382(b) and 1383. Nonqualified allocated equities also include allocated 
surplus in a tax-exempt institution or subsidiary. When a System 
institution revolves a nonqualified allocation, the System institution 
deducts the allocation from its taxable income, if any, and the borrower 
generally recognizes the tax liability, if any, as ordinary income. 
System institutions pay two types of nonqualified allocated equities 
through written notices of allocation to the borrowers:
    (1) Those subject to revolvement; and
    (2) Those not subject to revolvement. The second type for GAAP 
purposes is generally considered an equivalent of unallocated surplus 
and consolidated with unallocated surplus on externally prepared 
shareholder reports.
    Nth-to-default credit derivative means a credit derivative that 
provides credit protection only for the nth-defaulting reference 
exposure in a group of reference exposures.
    Operating entity means a company established to conduct business 
with clients with the intention of earning a profit in its own right and 
that generally produces goods or provides services beyond the business 
of investing, reinvesting, holding, or trading in financial assets. All 
System banks, associations, and service corporations, and all 
unincorporated business entities, are operating entities.
    Original maturity with respect to an off-balance sheet commitment 
means the length of time between the date a commitment is issued and:
    (1) For a commitment that is not subject to extension or renewal, 
the stated expiration date of the commitment; or
    (2) For a commitment that is subject to extension or renewal, the 
earliest date on which the System institution can, at its option, 
unconditionally cancel the commitment.
    Originating System institution, with respect to a securitization, 
means a System institution that:

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    (1) Directly or indirectly originated the underlying exposures 
included in the securitization; or
    (2) [Reserved]
    Other financing institution (OFI) means any entity referred to in 
section 1.7(b)(1)(B) of the Farm Credit Act.
    Over-the-counter (OTC) derivative contract means a derivative 
contract that is not a cleared transaction.
    Participation certificate means borrower stock held by a borrower or 
customer of a System institution that does not have voting rights.
    Patronage payment means a cash declaration or equity allocation to 
member-borrowers that pursuant to Internal Revenue Code section 1381(a) 
is based on a System institution's net income and allocated to borrowers 
based on business conducted with the institution. Patronage payments may 
be paid as cash, allocated equity (stock or surplus), or a combination 
of cash and allocated equity.
    Performance standby letter of credit (or performance bond) means an 
irrevocable obligation of a System institution to pay a third-party 
beneficiary when a customer (account party) fails to perform on any 
contractual nonfinancial or commercial obligation. To the extent 
permitted by law or regulation, performance standby letters of credit 
include arrangements backing, among other things; subcontractors' and 
suppliers' performance, labor; and materials contracts, and construction 
bids.
    Protection amount (P) means, with respect to an exposure hedged by 
an eligible guarantee or eligible credit derivative, the effective 
notional amount of the guarantee or credit derivative, reduced to 
reflect any currency mismatch, maturity mismatch, or lack of 
restructuring coverage (as provided in Sec. 628.36).
    Publicly traded means traded on:
    (1) Any exchange registered with the Securities and Exchange 
Commission (SEC) as a national securities exchange under section 6 of 
the Securities Exchange Act; or
    (2) Any non-U.S.-based securities exchange that:
    (i) Is registered with, or approved by, a national securities 
regulatory authority; and
    (ii) Provides a liquid, two-way market for the instrument in 
question.
    Public sector entity (PSE) means a state, local authority, or other 
governmental subdivision below the sovereign level.
    Qualified allocated equities means patronage allocated to a member-
borrower, in the form of stock or surplus, that a System institution 
retains as equity for the benefit of the membership. A System 
institution can deduct this patronage from its current taxable income 
provided that the borrower has agreed to include the patronage in its 
taxable income. A System institution must pay at least 20 percent of a 
qualified patronage payment in cash to borrowers. A System institution 
must provide the borrowers with a qualified written notice of allocation 
when they allocate qualified patronage payments pursuant to Internal 
Revenue Code section 1381(b) and 1388(c). A System institution revolves 
qualified allocated equities according to a board-approved plan.
    Qualifying central counterparty (QCCP) means a central counterparty 
that:
    (1)(i) Is a designated financial market utility (FMU), as defined in 
section 803 of the Dodd-Frank Act;
    (ii) If not located in the United States, is regulated and 
supervised in a manner equivalent to a designated FMU; or
    (iii) Meets the following standards:
    (A) The central counterparty requires all parties to contracts 
cleared by the counterparty to be fully collateralized on a daily basis;
    (B) The System institution demonstrates to the satisfaction of the 
FCA that the central counterparty:
    (1) Is in sound financial condition;
    (2) Is subject to supervision by the Board, the CFTC, or the 
Securities Exchange Commission (SEC), or, if the central counterparty is 
not located in the United States, is subject to effective oversight by a 
national supervisory authority in its home country; and
    (3) Meets or exceeds the risk-management standards for central 
counterparties set forth in regulations established by the Board, the 
CFTC, or the SEC under title VII or title VIII of the

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Dodd-Frank Act; or if the central counterparty is not located in the 
United States, meets or exceeds similar risk-management standards 
established under the law of its home country that are consistent with 
international standards for central counterparty risk management as 
established by the relevant standard setting body of the Bank of 
International Settlements; and
    (2)(i) Provides the System institution with the central 
counterparty's hypothetical capital requirement or the information 
necessary to calculate such hypothetical capital requirement, and other 
information the System institution is required to obtain under 
Sec. 628.35(d)(3);
    (ii) Makes available to the FCA and the CCP's regulator the 
information described in paragraph (2)(i) of this definition; and
    (iii) Has not otherwise been determined by the FCA to not be a QCCP 
due to its financial condition, risk profile, failure to meet 
supervisory risk management standards, or other weaknesses or 
supervisory concerns that are inconsistent with the risk weight assigned 
to qualifying central counterparties under Sec. 628.35.
    (3) A QCCP that fails to meet the requirements of a QCCP in the 
future may still be treated as a QCCP under the conditions specified in 
Sec. 628.3(f).
    Qualifying master netting agreement means a written, legally 
enforceable agreement provided that:
    (1) The agreement creates a single legal obligation for all 
individual transactions covered by the agreement upon an event of 
default following any stay permitted by paragraph (2) of this 
definition, including upon an event of receivership, conservatorship, 
insolvency, liquidation, or similar proceeding, of the counterparty;
    (2) The agreement provides the System institution the right to 
accelerate, terminate, and close-out on a net basis all transactions 
under the agreement and to liquidate or set-off collateral promptly upon 
an event of default, including upon an event of receivership, 
conservatorship, insolvency, liquidation, or similar proceeding, of the 
counterparty, provided that, in any such case, any exercise of rights 
under the agreement will not be stayed or avoided under applicable law 
in the relevant jurisdictions, other than:
    (i) In receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act, title II of the Dodd-Frank Act, or under 
any similar insolvency law applicable to GSEs, or laws of foreign 
jurisdictions that are substantially similar to the U.S. laws referenced 
in this paragraph (2)(i) in order to facilitate the orderly resolution 
of the defaulting counterparty; or
    (ii) Where the agreement is subject by its terms to, or 
incorporates, any of the laws reference in paragraph (2)(i) of this 
definition;
    (3) The agreement does not contain a walkaway clause (that is, a 
provision that permits a non-defaulting counterparty to make a lower 
payment than it otherwise would make under the agreement, or no payment 
at all, to a defaulter or the estate of a defaulter, even if the 
defaulter or the estate of the defaulter is a net creditor under the 
agreement); and
    (4) In order to recognize an agreement as a qualifying master 
netting agreement for purposes of this subpart, a System institution 
must comply with the requirements of Sec. 628.3(d) with respect to that 
agreement.
    Repo-style transaction means a repurchase or reverse repurchase 
transaction, or a securities borrowing or securities lending 
transaction, including a transaction in which the System institution 
acts as agent for a customer and indemnifies the customer against loss, 
provided that:
    (1) The transaction is based solely on liquid and readily marketable 
securities, cash, or gold;
    (2) The transaction is marked-to-fair value daily and subject to 
daily margin maintenance requirements;
    (3)(i) The transaction is a ``securities contract'' or ``repurchase 
agreement'' under section 555 or 559, respectively, of the Bankruptcy 
Code (11 U.S.C. 555 or 559) or a qualified financial contract under 
section 11(e)(8) of the Federal Deposit Insurance Act; or
    (ii) If the transaction does not meet the criteria set forth in 
paragraph (3)(i) of this definition, then either:
    (A) The transaction is executed under an agreement that provides the 
System

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institution the right to accelerate, terminate, and close-out the 
transaction on a net basis and to liquidate or set-off collateral 
promptly upon an event of default, including upon an event of 
receivership, insolvency, liquidation, or similar proceeding, of the 
counterparty, provided that, in any such case, any exercise of rights 
under the agreement will not be stayed or avoided under applicable law 
in the relevant jurisdictions, other than in receivership, 
conservatorship, or resolution under the Federal Deposit Insurance Act, 
title II of the Dodd-Frank Act, or under any similar insolvency law 
applicable to GSEs, or laws of foreign jurisdictions that are 
substantially similar to the U.S. laws referenced in this paragraph 
(3)(ii)(A) in order to facilitate the orderly resolution of the 
defaulting counterparty; or
    (B) The transaction is:
    (1) Either overnight or unconditionally cancelable at any time by 
the System institution; and
    (2) Executed under an agreement that provides the System institution 
the right to accelerate, terminate, and close-out the transaction on a 
net basis and to liquidate or set-off collateral promptly upon an event 
of counterparty default; and
    (3) [Reserved]
    (4) In order to recognize an exposure as a repo-style transaction 
for purposes of this subpart, a System institution must comply with the 
requirements of Sec. 628.3(e) of this part with respect to that 
exposure.
    Resecuritization means a securitization which has more than one 
underlying exposure and in which one or more of the underlying exposures 
is a securitization exposure.
    Resecuritization exposure means:
    (1) An on- or off-balance sheet exposure to a resecuritization; or
    (2) An exposure that directly or indirectly references a 
resecuritization exposure.
    Residential mortgage exposure means an exposure (other than a 
securitization exposure or equity exposure) that is:
    (1) An exposure that is primarily secured by a first or subsequent 
lien on one-to-four family residential property, provided that the 
dwelling (including attached components such as garages, porches, and 
decks) represents at least 50 percent of the total appraised value of 
the collateral secured by the first or subsequent lien; or
    (2) [Reserved]
    Revenue obligation means a bond or similar obligation that is an 
obligation of a PSE, but which the PSE is committed to repay with 
revenues from the specific project financed rather than general tax 
funds.
    Savings and loan holding company means a savings and loan holding 
company as defined in section 10 of the Home Owners' Loan Act (12 U.S.C. 
1467a).
    Securities and Exchange Commission (SEC) means the U.S. Securities 
and Exchange Commission.
    Securities Exchange Act means the Securities Exchange Act of 1934 
(15 U.S.C. 78).
    Securitization exposure means:
    (1) An on-balance sheet or off-balance sheet credit exposure 
(including credit-enhancing representations and warranties) that arises 
from a traditional securitization or synthetic securitization (including 
a resecuritization); or
    (2) An exposure that directly or indirectly references a 
securitization exposure described in paragraph (1) of this definition.
    Securitization special purpose entity (securitization SPE) means a 
corporation, trust, or other entity organized for the specific purpose 
of holding underlying exposures of a securitization, the activities of 
which are limited to those appropriate to accomplish this purpose, and 
the structure of which is intended to isolate the underlying exposures 
held by the entity from the credit risk of the seller of the underlying 
exposures to the entity.
    Servicer cash advance facility means a facility under which the 
servicer of the underlying exposures of a securitization may advance 
cash to ensure an uninterrupted flow of payments to investors in the 
securitization, including advances made to cover foreclosure costs or 
other expenses to facilitate the timely collection of the underlying 
exposures.
    Small Business Act means the Small Business Act (15 U.S.C. 632).

[[Page 331]]

    Small Business Investment Act means the Small Business Investment 
Act of 1958 (15 U.S.C. 682).
    Sovereign means a central government (including the U.S. Government) 
or an agency, department, ministry, or central bank of a central 
government.
    Sovereign default means noncompliance by a sovereign with its 
external debt service obligations or the inability or unwillingness of a 
sovereign government to service an existing loan according to its 
original terms, as evidenced by failure to pay principal and interest 
timely and fully, arrearages, or restructuring.
    Sovereign exposure means:
    (1) A direct exposure to a sovereign; or
    (2) An exposure directly and unconditionally backed by the full 
faith and credit of a sovereign.
    Standardized total risk-weighted assets means:
    (1) The sum of:
    (i) Total risk-weighted assets for general credit risk as calculated 
under Sec. 628.31;
    (ii) Total risk-weighted assets for cleared transactions as 
calculated under Sec. 628.35;
    (iii) Total risk-weighted assets for unsettled transactions as 
calculated under Sec. 628.38;
    (iv) Total risk-weighted assets for securitization exposures as 
calculated under Sec. 628.42;
    (v) Total risk-weighted assets for equity exposures as calculated 
under Secs. 628.52 and 628.53; minus
    (vi) [Reserved]
    (2) Any amount of the System institution's allowance for loan losses 
that is not included in tier 2 capital.
    Subsidiary means, with respect to a company, a company controlled by 
that company.
    Synthetic exposure means an exposure whose value is linked to the 
value of an investment in the System institution's own capital 
instrument.
    Synthetic securitization means a transaction in which:
    (1) All or a portion of the credit risk of one or more underlying 
exposures is retained or transferred to one or more third parties 
through the use of one or more credit derivatives or guarantees (other 
than a guarantee that transfers only the credit risk of an individual 
retail exposure);
    (2) The credit risk associated with the underlying exposures has 
been separated into at least two tranches reflecting different levels of 
seniority;
    (3) Performance of the securitization exposures depends upon the 
performance of the underlying exposures; and
    (4) All or substantially all of the underlying exposures are 
financial exposures (such as loans, commitments, credit derivatives, 
guarantees, receivables, asset-backed securities, mortgage-backed 
securities, other debt securities, or equity securities).
    System bank means a Farm Credit Bank, an agricultural credit bank, 
and a bank for cooperatives.
    System institution means a System bank, an association of the Farm 
Credit System, Farm Credit Leasing Services Corporation, and their 
successors, and any other institution chartered by the FCA that the FCA 
determines should be considered a System institution for the purposes of 
this part.
    Tier 1 capital means the sum of common equity tier 1 capital and 
additional tier 1 capital.
    Tier 2 capital is defined in Sec. 628.20(d).
    Total capital means the sum of tier 1 capital and tier 2 capital.
    Traditional securitization means a transaction in which:
    (1) All or a portion of the credit risk of one or more underlying 
exposures is transferred to one or more third parties other than through 
the use of credit derivatives or guarantees;
    (2) The credit risk associated with the underlying exposures has 
been separated into at least two tranches reflecting different levels of 
seniority;
    (3) Performance of the securitization exposures depends upon the 
performance of the underlying exposures;
    (4) All or substantially all of the underlying exposures are 
financial exposures (such as loans, commitments, credit derivatives, 
guarantees, receivables, asset-backed securities, mortgage-backed 
securities, other debt securities, or equity securities);
    (5) The underlying exposures are not owned by an operating entity;
    (6) The underlying exposures are not owned by a rural business 
investment

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company described in 7 U.S.C. 2009cc et seq.;
    (7) [Reserved]
    (8) The FCA may determine that a transaction in which the underlying 
exposures are owned by an investment firm that exercises substantially 
unfettered control over the size and composition of its assets, 
liabilities, and off-balance sheet exposures is not a traditional 
securitization based on the transaction's leverage, risk profile, or 
economic substance;
    (9) The FCA may deem a transaction that meets the definition of a 
traditional securitization, notwithstanding paragraph (5), (6), or (7) 
of this definition, to be a traditional securitization based on the 
transaction's leverage, risk profile, or economic substance; and
    (10) The transaction is not:
    (i) An investment fund;
    (ii) A collective investment fund (as defined in [12 CFR 9.18 
(national bank) and 12 CFR 151.40 (Federal saving association) (OCC); 12 
CFR 208.34 (Board)];
    (iii) An employee benefit plan (as defined in paragraphs (3) and 
(32) of section 3 of ERISA), a ``governmental plan'' (as defined in 29 
U.S.C. 1002(32)) that complies with the tax deferral qualification 
requirements provided in the Internal Revenue Code, or any similar 
employee benefit plan established under the laws of a foreign 
jurisdiction;
    (iv) A synthetic exposure to the capital of a System institution to 
the extent deducted from capital under Sec. 628.22; or
    (v) Registered with the SEC under the Investment Company Act of 1940 
(15 U.S.C. 80a-1) or foreign equivalents thereof.
    Tranche means all securitization exposures associated with a 
securitization that have the same seniority level.
    Two-way market means a market where there are independent bona fide 
offers to buy and sell so that a price reasonably related to the last 
sales price or current bona fide competitive bid and offer quotations 
can be determined within 1 day and settled at that price within a 
relatively short timeframe conforming to trade custom.
    Unallocated retained earnings (URE) means accumulated net income 
that a System institution has not allocated to a member-borrower.
    Unallocated retained earnings (URE) equivalents means nonqualified 
allocated equities, other than equities allocated to other System 
institutions, and paid-in capital resulting from a merger of System 
institutions or from a repurchase of third-party capital that a System 
institution:
    (1) Designates as URE equivalents at the time of allocation (or on 
or before March 31, 2017, if allocated prior to January 1, 2017) and 
undertakes in its capitalization bylaws or a currently effective board 
of directors resolution not to change the designation without prior FCA 
approval; and
    (2) Undertakes, in its capitalization bylaws or a currently 
effective board of directors resolution, not to exercise its discretion 
to revolve except upon dissolution or liquidation and not to offset 
against a loan in default except as required under final order of a 
court of competent jurisdiction or if required under Sec. 615.5290 of 
this chapter in connection with a restructuring under part 617 of this 
chapter.
    Unconditionally cancelable means, with respect to a commitment that 
a System institution may, at any time, with or without cause, refuse to 
extend credit under the commitment (to the extent permitted under 
applicable law).
    Underlying exposures means one or more exposures that have been 
securitized in a securitization transaction.
    U.S. Government agency means an instrumentality of the U.S. 
Government whose obligations are fully guaranteed as to the timely 
payment of principal and interest by the full faith and credit of the 
U.S. Government.



Sec. 628.3  Operational requirements for certain exposures.

    For purposes of calculating risk-weighted assets under subpart D of 
this part:
    (a) Cleared transaction. In order to recognize certain exposures as 
cleared transactions pursuant to paragraph (1)(ii), (iii), or (iv) of 
the definition of

[[Page 333]]

``cleared transaction'' in Sec. 628.2, the exposures must meet all of 
the requirements set forth in this paragraph (a).
    (1) The offsetting transaction must be identified by the CCP as a 
transaction for the clearing member client.
    (2) The collateral supporting the transaction must be held in a 
manner that prevents the System institution from facing any loss due to 
an event of default, including from a liquidation, receivership, 
insolvency, or similar proceeding of either the clearing member or the 
clearing member's other clients. Omnibus accounts established under 17 
CFR parts 190 and 300 satisfy the requirements of this paragraph (a).
    (3) The System institution must conduct sufficient legal review to 
conclude with a well-founded basis (and maintain sufficient written 
documentation of that legal review) that in the event of a legal 
challenge (including one resulting from a default or receivership, 
insolvency, liquidation, or similar proceeding) the relevant court and 
administrative authorities would find the arrangements of paragraph 
(a)(2) of this section to be legal, valid, binding and enforceable under 
the law of the relevant jurisdictions.
    (4) The offsetting transaction with a clearing member must be 
transferable under the transaction documents and applicable laws in the 
relevant jurisdiction(s) to another clearing member should the clearing 
member default, become insolvent, or enter receivership, insolvency, 
liquidation, or similar proceedings.
    (b) Eligible margin loan. In order to recognize an exposure as an 
eligible margin loan as defined in Sec. 628.2, a System institution must 
conduct sufficient legal review to conclude with a well-founded basis 
(and maintain sufficient written documentation of that legal review) 
that the agreement underlying the exposure:
    (1) Meets the requirements of paragraph (1)(iii) of the definition 
of ``eligible margin loan'' in Sec. 628.2; and
    (2) Is legal, valid, binding, and enforceable under applicable law 
in the relevant jurisdictions.
    (c) [Reserved]
    (d) Qualifying master netting agreement. In order to recognize an 
agreement as a qualifying master netting agreement as defined in 
Sec. 628.2, a System institution must:
    (1) Conduct sufficient legal review to conclude with a well-founded 
basis (and maintain sufficient written documentation of that legal 
review) that:
    (i) The agreement meets the requirements of paragraph (2) of the 
definition of ``qualifying master netting agreement'' in Sec. 628.2; and
    (ii) In the event of a legal challenge (including one resulting from 
default or from receivership, insolvency, liquidation, or similar 
proceeding) the relevant court and administrative authorities would find 
the agreement to be legal, valid, binding, and enforceable under the law 
of the relevant jurisdictions; and
    (2) Establish and maintain written procedures to monitor possible 
changes in relevant law and to ensure that the agreement continues to 
satisfy the requirements of the definition of ``qualifying master 
netting agreement'' in Sec. 628.2.
    (e) Repo-style transaction. In order to recognize an exposure as a 
repo-style transaction as defined in Sec. 628.2, a System institution 
must conduct sufficient legal review to conclude with a well-founded 
basis (and maintain sufficient written documentation of that legal 
review) that the agreement underlying the exposure:
    (1) Meets the requirements of paragraph (3) of the definition of 
``repo-style transaction'' in Sec. 628.2, and
    (2) Is legal, valid, binding, and enforceable under applicable law 
in the relevant jurisdictions.
    (f) Failure of a QCCP to satisfy the rule's requirements. If a 
System institution determines that a CCP ceases to be a QCCP due to the 
failure of the CCP to satisfy one or more of the requirements set forth 
in paragraph (2)(i) through (iii) of the definition of a ``QCCP'' in 
Sec. 628.2, the System institution may continue to treat the CCP as a 
QCCP for up to 3 months following the determination. If the CCP fails to 
remedy the relevant deficiency within 3 months after the initial 
determination, or the CCP fails to satisfy the requirements set forth in 
paragraph (2)(i) through (iii) of the definition of a

[[Page 334]]

QCCP continuously for a 3-month period after remedying the relevant 
deficiency, a System institution may not treat the CCP as a QCCP for the 
purposes of this part until after the System institution has determined 
that the CCP has satisfied the requirements in paragraph (2)(i) through 
(iii) of the definition of a QCCP for 3 continuous months.



Secs. 628.4-628.9  [Reserved]



            Subpart B_Capital Ratio Requirements and Buffers



Sec. 628.10  Minimum capital requirements.

    (a) Computation of regulatory capital ratios. A System institution's 
regulatory capital ratios are determined on the basis of the financial 
statements of the institution prepared in accordance with GAAP using 
average daily balances for the most recent 3 months.
    (b) Minimum capital requirements. A System institution must maintain 
the following minimum capital ratios:
    (1) A common equity tier 1 (CET1) capital ratio of 4.5 percent.
    (2) A tier 1 capital ratio of 6 percent.
    (3) A total capital ratio of 8 percent.
    (4) A tier 1 leverage ratio of 4 percent, of which at least 1.5 
percent must be composed of URE and URE equivalents.
    (5) [Reserved]
    (6) A permanent capital ratio of 7 percent.
    (c) Capital ratio calculations. A System institution's regulatory 
capital ratios are as follows:
    (1) CET1 capital ratio. A System institution's CET1 capital ratio is 
the ratio of the System institution's CET1 capital to total risk-
weighted assets;
    (2) Tier 1 capital ratio. A System institution's tier 1 capital 
ratio is the ratio of the System institution's tier 1 capital to total 
risk-weighted assets;
    (3) Total capital ratio. A System institution's total capital ratio 
is the ratio of the System institution's total (tier 1 and tier 2) 
capital to total risk-weighted assets; and
    (4) Tier 1 leverage ratio. A System institution's leverage ratio is 
the ratio of the institution's tier 1 capital to the institution's 
average total consolidated assets as reported on the institution's Call 
Report minus amounts deducted from tier 1 capital under Secs. 628.22(a) 
and (c) and 628.23.
    (5) Permanent capital ratio. A System institution's permanent 
capital ratio is the ratio of the institution's permanent capital to its 
total risk-adjusted asset base as reported on the institution's Call 
Report, calculated in accordance with the regulations in part 615, 
subpart H, of this chapter.
    (d) [Reserved]
    (e) Capital adequacy. (1) Notwithstanding the minimum requirements 
in this part, a System institution must maintain capital commensurate 
with the level and nature of all risks to which the System institution 
is exposed. FCA may evaluate a System institution's capital adequacy and 
require the institution to maintain higher minimum regulatory capital 
ratios using the factors listed in Sec. 615.5350 of this chapter.
    (2) A System institution must have a process for assessing its 
overall capital adequacy in relation to its risk profile and a 
comprehensive strategy for maintaining an appropriate level of capital 
under Sec. 615.5200 of this chapter.



Sec. 628.11  Capital buffer amounts.

    (a) Capital conservation buffer and leverage buffer--(1) Composition 
of the capital conservation buffer and leverage buffer. (i) The capital 
conservation buffer for the CET1 capital ratio, tier 1 capital ratio, 
and total capital ratio is composed solely of CET1 capital.
    (ii) The leverage buffer for the tier 1 leverage ratio is composed 
solely of tier 1 capital.
    (2) Definitions. For purposes of this section, the following 
definitions apply:
    (i) Eligible retained income. The eligible retained income of a 
System institution is the System institution's net income for the 4 
calendar quarters preceding the current calendar quarter, based on the 
System institution's quarterly Call Reports, net of any capital 
distributions and associated tax effects not already reflected in net 
income.
    (ii) Maximum payout ratio. The maximum payout ratio is the 
percentage of eligible retained income that a System institution can pay 
out in the form of

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capital distributions and discretionary bonus payments during the 
current calendar quarter. The maximum payout ratio is based on the 
System institution's capital conservation buffer, calculated as of the 
last day of the previous calendar quarter, as set forth in Table 1 to 
Sec. 628.11.
    (iii) Maximum payout amount. A System institution's maximum payout 
amount for the current calendar quarter is equal to the System 
institution's eligible retained income, multiplied by the applicable 
maximum payout ratio, as set forth in Table 1 to Sec. 628.11.
    (iv) [Reserved]
    (v) Maximum leverage payout ratio. The maximum leverage payout ratio 
is the percentage of eligible retained income that a System institution 
can pay out in the form of capital distributions and discretionary bonus 
payments during the current quarter. The maximum leverage payout ratio 
is based on the System institution's leverage buffer, calculated as of 
the last day of the previous quarter, as set forth in Table 2 to 
Sec. 628.11.
    (vi) Maximum leverage payout amount. A System institution's maximum 
leverage payout amount for the current calendar quarter is equal to the 
System institution's eligible retained income, multiplied by the 
applicable maximum leverage payout ratio, as set forth in Table 2 of 
Sec. 628.11.
    (vii) Capital distribution means:
    (A) A reduction of tier 1 capital through the repurchase, 
redemption, or revolvement of a tier 1 capital instrument or by other 
means, except when a System institution, within the same quarter when 
the repurchase is announced, fully replaces a tier 1 capital instrument 
it has repurchased, redeemed, or revolved by issuing a purchased capital 
instrument that meets the eligibility criteria for:
    (1) A CET1 capital instrument if the instrument being repurchased, 
redeemed, or revolved was part of the System institution's CET1 capital; 
or
    (2) A CET1 or AT1 capital instrument if the instrument being 
repurchased, redeemed, or revolved was part of the System institution's 
tier 1 capital;
    (B) A reduction of tier 2 capital through the repurchase, redemption 
prior to maturity, or revolvement of a tier 2 capital instrument or by 
other means, except when a System institution, within the same quarter 
when the repurchase, redemption, or revolvement is announced, fully 
replaces a tier 2 capital instrument it has repurchased, redeemed, or 
revolved by issuing a purchased capital instrument that meets the 
eligibility criteria for a tier 1 or tier 2 capital instrument;
    (C) A dividend declaration or payment on any tier 1 capital 
instrument;
    (D) A dividend declaration or interest payment on any capital 
instrument other than a tier 1 capital instrument if the System 
institution has full discretion to permanently or temporarily suspend 
such payments without triggering an event of default;
    (E) A cash patronage declaration or payment;
    (F) A patronage declaration in the form of allocated equities that 
did not qualify as tier 1 or tier 2 capital; or
    (G) Any similar transaction that the FCA determines to be in 
substance a distribution of capital.
    (viii) Discretionary bonus payment means a payment made to a senior 
officer of a System institution, where:
    (A) The System institution retains discretion as to whether to make, 
and the amount of, the payment until the payment is awarded to the 
senior officer;
    (B) The amount paid is determined by the System institution without 
prior promise to, or agreement with, the senior officer; and
    (C) The senior officer has no contractual right, whether express or 
implied, to the bonus payment.
    (ix) Senior officer means the Chief Executive Officer, the Chief 
Operations Officer, the Chief Financial Officer, the Chief Credit 
Officer, and the General Counsel, or persons in similar positions; and 
any other person responsible for a major policy-making function.
    (3) Calculation of capital conservation buffer and leverage buffer. 
(i) A System institution's capital conservation buffer is equal to the 
lowest of paragraphs (a)(3)(i)(A), (B), and (C) of this section, and the 
leverage buffer is equal to paragraph (a)(3)(i)(D) of this section, 
calculated as of the last day of the previous calendar quarter based on 
the

[[Page 336]]

System institution's most recent Call Report:
    (A) The System institution's CET1 capital ratio minus the System 
institution's minimum CET1 capital ratio requirement under Sec. 628.10;
    (B) The System institution's tier 1 capital ratio minus the System 
institution's minimum tier 1 capital ratio requirement under 
Sec. 628.10;
    (C) The System institution's total capital ratio minus the System 
institution's minimum total capital ratio requirement under Sec. 628.10; 
and
    (D) The System institution's tier 1 leverage ratio minus the System 
institution's minimum tier 1 leverage ratio requirement under 
Sec. 628.10.
    (ii) Notwithstanding paragraphs (a)(3)(i)(A) through (D) of this 
section, if the System institution's CET1 capital ratio, tier 1 capital 
ratio, total capital ratio or tier 1 leverage ratio is less than or 
equal to the System institution's minimum CET1 capital ratio, tier 1 
capital ratio, total capital ratio or tier 1 leverage ratio requirement 
under Sec. 628.10, respectively, the System institution's capital 
conservation buffer or leverage buffer is zero.
    (4) Limits on capital distributions and discretionary bonus 
payments. (i) A System institution must not make capital distributions 
or discretionary bonus payments or create an obligation to make such 
capital distributions or payments during the current calendar quarter 
that, in the aggregate, exceed the maximum payout amount or, as 
applicable, the maximum leverage payout amount.
    (ii) A System institution that has a capital conservation buffer 
that is greater than 2.5 percent and a leverage buffer that is greater 
than 1.0 percent is not subject to a maximum payout amount or maximum 
leverage payout amount under this section.
    (iii) Negative eligible retained income. Except as provided in 
paragraph (a)(4)(iv) of this section, a System institution may not make 
capital distributions or discretionary bonus payments during the current 
calendar quarter if the System institution's:
    (A) Eligible retained income is negative; and
    (B) Capital conservation buffer was less than 2.5 percent, or the 
leverage buffer was less than 1.0 percent, as of the end of the previous 
calendar quarter.
    (iv) Prior approval. Notwithstanding the limitations in paragraphs 
(a)(4)(i) through (iii) of this section, FCA may permit a System 
institution to make a capital distribution or discretionary bonus 
payment upon a request of the System institution, if FCA determines that 
the capital distribution or discretionary bonus payment would not be 
contrary to the purposes of this section, or to the safety and soundness 
of the System institution. In making such a determination, FCA will 
consider the nature and extent of the request and the particular 
circumstances giving rise to the request.

      Table 1 to Sec. 628.11--Calculation of Maximum Payout Amount
------------------------------------------------------------------------
                                            Maximum payout ratio (as a
       Capital conservation buffer            percentage of eligible
                                                 retained income)
------------------------------------------------------------------------
>2.500 percent..........................  No limitation.
2.500 percent, and >1.875 percent.......  60 percent.
1.875 percent, and >1.250 percent.......  40 percent.
1.250 percent, and >0.625 percent.......  20 percent.
0.625 percent...........................  0 percent.
------------------------------------------------------------------------


 Table 2 to Sec. 628.11--Calculation of Maximum Leverage Payout Amount
------------------------------------------------------------------------
                                           Maximum leverage payout ratio
             Leverage buffer               (as a percentage of eligible
                                                 retained income)
------------------------------------------------------------------------
>1.00 percent...........................  No limitation.
1.00 percent, and >0.75 percent.........  60 percent.
0.75 percent, and >0.50 percent.........  40 percent.
0.50 percent, and >0.25 percent.........  20 percent.
0.25 percent............................  0 percent.
------------------------------------------------------------------------

    (v) Other limitations on capital distributions. Additional 
limitations on capital distributions may apply to a System institution 
under subpart C of this part and under part 615, subparts L and M, of 
this chapter.
    (vi) A System institution is subject to the lower of the maximum 
payout amount as determined under paragraph

[[Page 337]]

(a)(2)(iii) of this section and the maximum leverage payout amount as 
determined under paragraph (a)(2)(vi) of this section.
    (b) [Reserved]



Secs. 628.12-628.19  [Reserved]



                     Subpart C_Definition of Capital



Sec. 628.20  Capital components and eligibility criteria for tier 
1 and tier 2 capital instruments.

    (a) Regulatory capital components. A System institution's regulatory 
capital components are:
    (1) CET1 capital;
    (2) AT1 capital; and
    (3) Tier 2 capital.
    (b) CET1 capital. CET1 capital is the sum of the CET1 capital 
elements in paragraph (b) of this section, minus regulatory adjustments 
and deductions in Sec. 628.22. The CET1 capital elements are:
    (1) Any common cooperative equity instrument issued by a System 
institution that meets all of the following criteria:
    (i) The instrument is issued directly by the System institution and 
represents a claim subordinated to general creditors, subordinated debt 
holders, and preferred stock holders in a receivership, insolvency, 
liquidation, or similar proceeding of the System institution;
    (ii) The holder of the instrument is entitled to a claim on the 
residual assets of the System institution, the claim will be paid only 
after all creditors, subordinated debt holders, and preferred stock 
claims have been satisfied in a receivership, insolvency, liquidation, 
or similar proceeding;
    (iii) The instrument has no maturity date, can be redeemed only at 
the discretion of the System institution and with the prior approval of 
FCA, and does not contain any term or feature that creates an incentive 
to redeem;
    (iv) The System institution did not create, through any action or 
communication, an expectation that it will buy back, cancel, redeem, or 
revolve the instrument, and the instrument does not include any term or 
feature that might give rise to such an expectation, except that the 
establishment of a revolvement period of 7 years or more, or the 
practice of redeeming or revolving the instrument no less than 7 years 
after issuance or allocation, will not be considered to create such an 
expectation;
    (v) Any cash dividend payments on the instrument are paid out of the 
System institution's net income or unallocated retained earnings, and 
are not subject to a limit imposed by the contractual terms governing 
the instrument;
    (vi) The System institution has full discretion at all times to 
refrain from paying any dividends without triggering an event of 
default, a requirement to make a payment-in-kind, or an imposition of 
any other restrictions on the System institution;
    (vii) Dividend payments and other distributions related to the 
instrument may be paid only after all legal and contractual obligations 
of the System institution have been satisfied, including payments due on 
more senior claims;
    (viii) The holders of the instrument bear losses as they occur 
before any losses are borne by holders of preferred stock claims on the 
System institution and holders of any other claims with priority over 
common cooperative equity instruments in a receivership, insolvency, 
liquidation, or similar proceeding;
    (ix) The instrument is classified as equity under GAAP;
    (x) The System institution, or an entity that the System institution 
controls, did not purchase or directly or indirectly fund the purchase 
of the instrument, except that where there is an obligation for a member 
of the institution to hold an instrument in order to receive a loan or 
service from the System institution, an amount of that loan equal to the 
minimum borrower stock requirement under section 4.3A of the Act will 
not be considered as a direct or indirect funding where:
    (A) The purpose of the loan is not the purchase of capital 
instruments of the System institution providing the loan; and
    (B) The purchase or acquisition of one or more member equities of 
the institution is necessary in order for the

[[Page 338]]

beneficiary of the loan to become a member of the System institution;
    (xi) The instrument is not secured, not covered by a guarantee of 
the System institution, and is not subject to any other arrangement that 
legally or economically enhances the seniority of the instrument;
    (xii) The instrument is issued in accordance with applicable laws 
and regulations and with the institution's capitalization bylaws;
    (xiii) The instrument is reported on the System institution's 
regulatory financial statements separately from other capital 
instruments; and
    (xiv) The System institution's capitalization bylaws, or a 
resolution adopted by its board of directors under Sec. 615.5200(d) of 
this chapter and re-affirmed by the board on an annual basis, provides 
that the institution:
    (A) Establishes a minimum redemption or revolvement period of 7 
years for equities included in CET1; and
    (B) Shall not redeem, revolve, cancel, or remove any equities 
included in CET1 without prior approval of the FCA under Sec. 628.20(f), 
except that the minimum statutory borrower stock described in paragraph 
(b)(1)(x) of this section may be redeemed without a minimum period 
outstanding after issuance and without the prior approval of the FCA.
    (2) Unallocated retained earnings.
    (3) Paid-in capital resulting from a merger of System institutions 
or repurchase of third-party capital.
    (4)-(5) [Reserved]
    (c) AT1 capital. AT1 capital is the sum of additional tier 1 capital 
elements and related surplus, minus the regulatory adjustments and 
deductions in Secs. 628.22 and 628.23. AT1 capital elements are:
    (1) Instruments and related surplus, other than common cooperative 
equities, that meet the following criteria:
    (i) The instrument is issued and paid-in;
    (ii) The instrument is subordinated to general creditors and 
subordinated debt holders of the System institution in a receivership, 
insolvency, liquidation, or similar proceeding;
    (iii) The instrument is not secured, not covered by a guarantee of 
the System institution and not subject to any other arrangement that 
legally or economically enhances the seniority of the instrument;
    (iv) The instrument has no maturity date and does not contain a 
dividend step-up or any other term or feature that creates an incentive 
to redeem;
    (v) If callable by its terms, the instrument may be called by the 
System institution only after a minimum of 5 years following issuance, 
except that the terms of the instrument may allow it to be called 
earlier than 5 years upon the occurrence of a regulatory event that 
precludes the instrument from being included in AT1 capital, or a tax 
event. In addition:
    (A) The System institution must receive prior approval from FCA to 
exercise a call option on the instrument.
    (B) The System institution does not create at issuance of the 
instrument, through any action or communication, an expectation that the 
call option will be exercised.
    (C) Prior to exercising the call option, or immediately thereafter, 
the System institution must either replace the instrument to be called 
with an equal amount of instruments that meet the criteria under 
paragraph (b) of this section or this paragraph (c),\3\ or demonstrate 
to the satisfaction of FCA that following redemption, the System 
institution will continue to hold capital commensurate with its risk;
---------------------------------------------------------------------------

    \3\ Replacement can be concurrent with redemption of existing AT1 
capital instruments.
---------------------------------------------------------------------------

    (vi) Redemption or repurchase of the instrument requires prior 
approval from FCA;
    (vii) The System institution has full discretion at all times to 
cancel dividends or other distributions on the instrument without 
triggering an event of default, a requirement to make a payment-in-kind, 
or an imposition of other restrictions on the System institution except 
in relation to any distributions to holders of common cooperative equity 
instruments or other instruments that are pari passu with the 
instrument;

[[Page 339]]

    (viii) Any distributions on the instrument are paid out of the 
System institution's net income, unallocated retained earnings, or 
surplus related to other AT1 capital instruments;
    (ix) The instrument does not have a credit-sensitive feature, such 
as a dividend rate that is reset periodically based in whole or in part 
on the System institution's credit quality, but may have a dividend rate 
that is adjusted periodically independent of the System institution's 
credit quality, in relation to general market interest rates or similar 
adjustments;
    (x) The paid-in amount is classified as equity under GAAP;
    (xi) The System institution did not purchase or directly or 
indirectly fund the purchase of the instrument;
    (xii) The instrument does not have any features that would limit or 
discourage additional issuance of capital by the System institution, 
such as provisions that require the System institution to compensate 
holders of the instrument if a new instrument is issued at a lower price 
during a specified timeframe; and
    (xiii) [Reserved]
    (xiv) The System institution's capitalization bylaws, or a 
resolution adopted by its board of directors under Sec. 615.5200(d) of 
this chapter and re-affirmed by the board on an annual basis, provides 
that the institution:
    (A) Establishes a minimum redemption or no-call period of 5 years 
for equities included in additional tier 1; and
    (B) Shall not redeem, revolve, cancel, or remove any equities 
included in additional tier 1 capital without prior approval of the FCA 
under Sec. 628.20(f).
    (2)-(3) [Reserved]
    (4) Notwithstanding the criteria for AT1 capital instruments 
referenced in paragraph (c)(1) of this section:
    (i) [Reserved]
    (ii) An instrument with terms that provide that the instrument may 
be called earlier than 5 years upon the occurrence of a rating agency 
event does not violate the criterion in paragraph (c)(1)(v) of this 
section provided that the instrument was issued and included in a System 
institution's core surplus capital prior to January 1, 2017, and that 
such instrument satisfies all other criteria under this Sec. 628.20(c).
    (d) Tier 2 Capital. Tier 2 capital is the sum of tier 2 capital 
elements and any related surplus minus regulatory adjustments and 
deductions in Secs. 628.22 and 628.23. Tier 2 capital elements are:
    (1) Instruments (plus related surplus) that meet the following 
criteria:
    (i) The instrument is issued and paid-in, is a common cooperative 
equity, or is member equity purchased in accordance with paragraph 
(d)(1)(viii) of this section;
    (ii) The instrument is subordinated to general creditors of the 
System institution;
    (iii) The instrument is not secured, not covered by a guarantee of 
the System institution and not subject to any other arrangement that 
legally or economically enhances the seniority of the instrument in 
relation to more senior claims;
    (iv) The instrument has a minimum original maturity of at least 5 
years. At the beginning of each of the last 5 years of the life of the 
instrument, the amount that is eligible to be included in tier 2 capital 
is reduced by 20 percent of the original amount of the instrument (net 
of redemptions) and is excluded from regulatory capital when the 
remaining maturity is less than 1 year. In addition, the instrument must 
not have any terms or features that require, or create significant 
incentives for, the System institution to redeem the instrument prior to 
maturity; \4\
---------------------------------------------------------------------------

    \4\ An instrument that by its terms automatically converts into a 
tier 1 capital instrument prior to five years after issuance complies 
with the five-year maturity requirement of this criterion.
---------------------------------------------------------------------------

    (v) The instrument, by its terms, may be called by the System 
institution only after a minimum of 5 years following issuance, except 
that the terms of the instrument may allow it to be called sooner upon 
the occurrence of an event that would preclude the instrument from being 
included in tier 2 capital, or a tax event. In addition:
    (A) The System institution must receive the prior approval of FCA to 
exercise a call option on the instrument.
    (B) The System institution does not create at issuance, through 
action or communication, an expectation the call option will be 
exercised.

[[Page 340]]

    (C) Prior to exercising the call option, or immediately thereafter, 
the System institution must either: replace any amount called with an 
equivalent amount of an instrument that meets the criteria for 
regulatory capital under this section; \5\ or demonstrate to the 
satisfaction of FCA that following redemption, the System institution 
would continue to hold an amount of capital that is commensurate with 
its risk;
---------------------------------------------------------------------------

    \5\ A System institution may replace tier 2 capital instruments 
concurrent with the redemption of existing tier 2 capital instruments.
---------------------------------------------------------------------------

    (vi) The holder of the instrument must have no contractual right to 
accelerate payment of principal, dividends, or interest on the 
instrument, except in the event of a receivership, insolvency, 
liquidation, or similar proceeding of the System institution;
    (vii) The instrument has no credit-sensitive feature, such as a 
dividend or interest rate that is reset periodically based in whole or 
in part on the System institution's credit standing, but may have a 
dividend rate that is adjusted periodically independent of the System 
institution's credit standing, in relation to general market interest 
rates or similar adjustments;
    (viii) The System institution has not purchased and has not directly 
or indirectly funded the purchase of the instrument, except that where 
common cooperative equity instruments are held by a member of the 
institution in connection with a loan, and the institution funds the 
acquisition of such instruments, that loan shall not be considered as a 
direct or indirect funding where:
    (A) The purpose of the loan is not the purchase of capital 
instruments of the System institution providing the loan;
    (B) The purchase or acquisition of one or more capital instruments 
of the institution is necessary in order for the beneficiary of the loan 
to become a member of the System institution; and
    (C) The capital instruments are in excess of the statutory minimum 
stock purchase amount.
    (ix) [Reserved]
    (x) Redemption of the instrument prior to maturity or repurchase is 
at the discretion of the System institution and requires the prior 
approval of the FCA;
    (xi) The System institution's capitalization bylaws, or a resolution 
adopted by its board of directors under Sec. 615.5200(d) of this chapter 
and re-affirmed by the board on an annual basis, provides that the 
institution:
    (A) Establishes a minimum call, redemption or revolvement period of 
5 years for equities included in tier 2 capital; and
    (B) Shall not call, redeem, revolve, cancel, or remove any equities 
included in tier 2 capital without prior approval of the FCA under 
Sec. 628.20(f).
    (2) [Reserved]
    (3) ALL up to 1.25 percent of the System institution's total risk-
weighted assets not including any amount of the ALL.
    (4)-(6) [Reserved]
    (e) FCA approval of a capital element. (1) A System institution must 
receive FCA prior approval to include a capital element (as listed in 
this section) in its CET1 capital, AT1 capital, or tier 2 capital unless 
the element is equivalent, in terms of capital quality and ability to 
absorb losses with respect to all material terms, to a regulatory 
capital element FCA determined may be included in regulatory capital 
pursuant to paragraph (e)(3) of this section.
    (i)-(ii) [Reserved]
    (2) [Reserved]
    (3) After determining that a regulatory capital element may be 
included in a System institution's CET1 capital, AT1 capital, or tier 2 
capital, FCA will make its decision publicly available.
    (f) FCA prior approval of capital redemptions and dividends included 
in tier 1 and tier 2 capital. (1) Subject to the provisions of 
paragraphs (f)(5) and (6) of this section, a System institution must 
obtain the prior approval of the FCA before paying cash dividend 
payments, cash patronage payments, or redeeming equities included in 
tier 1 or tier 2 capital, other than term equities redeemed on their 
maturity date.
    (2) At least 30 days prior to the intended action, the System 
institution must submit a request for approval to the FCA. The FCA's 30-
day review period begins on the date on which the FCA receives the 
request.

[[Page 341]]

    (3) The request is deemed to be granted if the FCA does not notify 
the System institution to the contrary before the end of the 30-day 
review period.
    (4)(i) A System institution may request advance approval to cover 
several anticipated cash dividend or patronage payments, or equity 
redemptions, provided that the institution projects sufficient current 
net income during those periods to support the amount of the cash 
dividend or patronage payments and equity redemptions. In determining 
whether to grant advance approval, the FCA will consider:
    (A) The reasonableness of the institution's request, including its 
historical and projected cash dividend and patronage payments and equity 
redemptions;
    (B) The institution's historical trends and current projections for 
capital growth through earnings retention;
    (C) The overall condition of the institution, with particular 
emphasis on current and projected capital adequacy as described in 
Sec. 628.10(e); and
    (D) Any other information that the FCA deems pertinent to reviewing 
the institution's request.
    (ii) After considering these standards, the FCA may grant advance 
prior approval of an institution's request to pay cash dividends and 
patronage or to redeem or revolve equity. Notwithstanding any such 
approval, an institution may not declare a dividend or patronage payment 
or redeem or revolve equities if, after such declaration, redemption, or 
revolvement, the institution would not meet its regulatory capital 
requirements set forth in this part and part 615 of this chapter.
    (5) Subject to any capital distribution restrictions specified in 
Sec. 628.11, a System institution is deemed to have FCA prior approval 
for revolvements and redemptions of common cooperative equities, for 
cash dividend payments on all equities, and for cash patronage payments 
on all cooperative equities, provided that:
    (i) For redemptions or revolvements of common cooperative equities 
included in CET1 capital or tier 2 capital, other than as provided in 
paragraph (f)(6) of this section, the institution issued or allocated 
such equities at least 7 years ago for CET1 capital and at least 5 years 
ago for tier 2 capital;
    (ii) After such cash payments, the dollar amount of the System 
institution's CET1 capital equals or exceeds the dollar amount of CET1 
capital on the same date in the previous calendar year; and
    (iii) The System institution continues to comply with all regulatory 
capital requirements and supervisory or enforcement actions.
    (6) The following equities are eligible to be redeemed or revolved 
under paragraph (f)(5)(i) of this section in less than the applicable 
minimum required holding period (7 years for CET1 inclusion and 5 years 
for tier 2 inclusion), provided that the requirements of paragraphs 
(f)(5)(ii) and (iii) of this section are met:
    (i) Equities mandated to be redeemed or retired by a final order of 
a court of competent jurisdiction;
    (ii) Equities held by the estate of a deceased former borrower; and
    (iii) Equities that the institution is required to cancel under 
Sec. 615.5290 of this chapter in connection with a restructuring under 
part 617 of this chapter.



Sec. 628.21  [Reserved]



Sec. 628.22  Regulatory capital adjustments and deductions.

    (a) Regulatory capital deductions from CET1 capital. A System 
institution must deduct from the sum of its CET1 capital elements the 
items set forth in this paragraph (a):
    (1) Goodwill, net of associated deferred tax liabilities (DTLs) in 
accordance with paragraph (e) of this section;
    (2) Intangible assets, other than mortgage servicing assets (MSAs), 
net of associated DTLs in accordance with paragraph (e) of this section;
    (3) Deferred tax assets (DTAs) that arise from net operating loss 
and tax credit carryforwards net of any related valuation allowances and 
net of DTLs in accordance with paragraph (e) of this section;
    (4) Any gain-on-sale in connection with a securitization exposure;
    (5) Any defined benefit pension fund net asset, net of any 
associated DTL in accordance with paragraph (e) of this section, except 
that, with FCA prior

[[Page 342]]

approval, this deduction is not required for any defined benefit pension 
fund net asset to the extent the institution has unrestricted and 
unfettered access to the assets in that fund;
    (6) The System institution's allocated equity investment in another 
System institution; and
    (7) [Reserved]
    (8) If, without the required prior FCA approval, the System 
institution redeems or revolves purchased or allocated equities included 
in its CET1 capital that have been outstanding for less than 7 years, 
the FCA may take appropriate supervisory or enforcement actions against 
the institution, which may include requiring the institution to deduct a 
portion of its purchased and allocated equities from CET1 capital.
    (b) [Reserved]
    (c) Deductions from regulatory capital.\6\ (1) [Reserved]
---------------------------------------------------------------------------

    \6\ The System institution must calculate amounts deducted under 
paragraphs (c) through (f) of this section and Sec. 628.23 after it 
calculates the amount of ALL includable in tier 2 capital under 
Sec. 628.20(d)(3).
---------------------------------------------------------------------------

    (2) Corresponding deduction approach. For purposes of subpart C of 
this part, the corresponding deduction approach is the methodology used 
for the deductions from regulatory capital related to purchased equity 
investments in another System institution (as described in paragraph 
(c)(5) of this section). Under the corresponding deduction approach, a 
System institution must make deductions from the component of capital 
for which the underlying instrument would qualify if it were issued by 
the System institution itself. If the System institution does not have a 
sufficient amount of a specific component of capital to effect the 
required deduction, the shortfall must be deducted according to 
paragraph (f) of this section.
    (i)-(iii) [Reserved]
    (3)-(4) [Reserved]
    (5) Purchased equity investments in another System institution. 
System institutions must deduct all purchased equity investments in 
another System institution, service corporation, or the Funding 
Corporation by applying the corresponding deduction approach. The 
deductions described in this section are net of associated DTLs in 
accordance with paragraph (e) of this section. With prior written 
approval of FCA, for the period stipulated by FCA, a System institution 
is not required to deduct an investment in the capital of another 
institution in distress if such investment is made to provide financial 
support to the System institution as determined by FCA.
    (d) [Reserved]
    (e) Netting of DTLs against assets subject to deduction. (1) The 
netting of DTLs against assets that are subject to deduction under this 
section is required, if the following conditions are met:
    (i) The DTL is associated with the asset; and
    (ii) The DTL would be extinguished if the associated asset becomes 
impaired or is derecognized under GAAP.
    (2) A DTL may only be netted against a single asset.
    (3)-(4) [Reserved]
    (5) A System institution must net DTLs against assets subject to 
deduction under this section in a consistent manner from reporting 
period to reporting period.
    (f) Insufficient amounts of a specific regulatory capital component 
to effect deductions. Under the corresponding deduction approach, if a 
System institution does not have a sufficient amount of a specific 
component of capital to effect the required deduction after completing 
the deductions required under paragraph (c) of this section, the System 
institution must deduct the shortfall from the next higher (that is, 
more subordinated) component of regulatory capital.
    (g) Treatment of assets that are deducted. A System institution must 
exclude from total risk-weighted assets any item deducted from 
regulatory capital under paragraphs (a) and (c) of this section.
    (h) [Reserved]



Sec. 628.23  Limit on inclusion of third-party capital in total
(tier 1 and tier 2) capital.

    The combined amount of third-party capital instruments that a System 
institution may include in total (tier 1 and tier 2) capital is equal to 
the greater of the following:

[[Page 343]]

    (a) The then existing limit, if any; or
    (b) The lesser of:
    (1) Forty percent of total capital, calculated by taking two thirds 
of the average of the previous 4 quarters of total capital reported on 
the institution's Call Report filed with the FCA, less any amounts of 
third-party capital reported in total capital; or
    (2) The average of the previous 4 quarters of CET1 capital reported 
on its Call Report filed with the FCA.
    (c) Treatment of assets that are deducted. A System institution must 
exclude from total risk-weighted assets any item deducted from 
regulatory capital under this section.



Secs. 628.24-628.29  [Reserved]



          Subpart D_Risk-Weighted Assets_Standardized Approach



Sec. 628.30  Applicability.

    (a) This subpart sets forth methodologies for determining risk-
weighted assets for purposes of the generally applicable risk-based 
capital requirements for all System institutions.
    (b) [Reserved]

              Risk-Weighted Assets for General Credit Risk



Sec. 628.31  Mechanics for calculating risk-weighted assets for 
general credit risk.

    (a) General risk-weighting requirements. A System institution must 
apply risk weights to its exposures as follows:
    (1) A System institution must determine the exposure amount of each 
on-balance sheet exposure, each OTC derivative contract, and each off-
balance sheet commitment, trade and transaction-related contingency, 
guarantee, repo-style transaction, financial standby letter of credit, 
forward agreement, or other similar transaction that is not:
    (i) An unsettled transaction subject to Sec. 628.38;
    (ii) A cleared transaction subject to Sec. 628.35;
    (iii) [Reserved]
    (iv) A securitization exposure subject to Secs. 628.41 through 
628.45; or
    (v) An equity exposure (other than an equity OTC derivative 
contract) subject to Secs. 628.51 through 628.53.
    (2) The System institution must multiply each exposure amount by the 
risk weight appropriate to the exposure based on the exposure type or 
counterparty, eligible guarantor, or financial collateral to determine 
the risk-weighted asset amount for each exposure.
    (b) Total risk-weighted assets for general credit risk equals the 
sum of the risk-weighted asset amounts calculated under this section.



Sec. 628.32  General risk weights.

    (a) Sovereign exposures--(1) Exposures to the U.S. Government. (i) 
Notwithstanding any other requirement in this subpart, a System 
institution must assign a 0-percent risk weight to:
    (A) An exposure to the U.S. Government, its central bank, or a U.S. 
Government agency; and
    (B) The portion of an exposure that is directly and unconditionally 
guaranteed by the U.S. Government, its central bank, or a U.S. 
Government agency. This includes a deposit or other exposure, or the 
portion of a deposit or other exposure that is insured or otherwise 
unconditionally guaranteed by the Federal Deposit Insurance Corporation 
or National Credit Union Administration.
    (ii) A System institution must assign a 20-percent risk weight to 
the portion of an exposure that is conditionally guaranteed by the U.S. 
Government, its central bank, or a U.S. Government agency. This includes 
an exposure, or the portion of an exposure, that is conditionally 
guaranteed by the Federal Deposit Insurance Corporation or National 
Credit Union Administration.
    (2) Other sovereign exposures. In accordance with Table 1 to 
Sec. 628.32, a System institution must assign a risk weight to a 
sovereign exposure based on the Country Risk Classification (CRC) 
applicable to the sovereign or the sovereign's Organization for Economic 
Cooperation and Development (OECD) membership status if there is no CRC 
applicable to the sovereign.

[[Page 344]]



      Table 1 to Sec. 628.32--Risk Weights for Sovereign Exposures
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
CRC:
  0-1...................................................               0
  2.....................................................              20
  3.....................................................              50
  4-6...................................................             100
  7.....................................................             150
OECD Member with no CRC.................................               0
Non-OECD Member with no CRC.............................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------

    (3) Certain sovereign exposures. Notwithstanding paragraph (a)(2) of 
this section, a System institution may assign to a sovereign exposure a 
risk weight that is lower than the applicable risk weight in table 1 to 
Sec. 628.32 if:
    (i) The exposure is denominated in the sovereign's currency;
    (ii) The System institution has at least an equivalent amount of 
liabilities in that currency; and
    (iii) The risk weight is not lower than the risk weight that the 
sovereign allows banking organizations under its jurisdiction to assign 
to the same exposures to the sovereign.
    (4) Exposures to a non-OECD member sovereign with no CRC. Except as 
provided in paragraphs (a)(3), (5), and (6) of this section, a System 
institution must assign a 100-percent risk weight to a sovereign 
exposure if the sovereign does not have a CRC.
    (5) Exposures to an OECD member sovereign with no CRC. Except as 
provided in paragraph (a)(6) of this section, a System institution must 
assign a 0-percent risk weight to an exposure to a sovereign that is a 
member of the OECD if the sovereign does not have a CRC.
    (6) Sovereign default. A System institution must assign a 150-
percent risk weight to a sovereign exposure immediately upon determining 
that an event of sovereign default has occurred, or if an event of 
sovereign default has occurred during the previous 5 years.
    (b) Certain supranational entities and multilateral development 
banks (MDBs). A System institution must assign a 0-percent risk weight 
to an exposure to the Bank for International Settlements, the European 
Central Bank, the European Commission, the International Monetary Fund, 
or an MDB.
    (c) Exposures to Government-sponsored enterprises (GSEs). (1) A 
System institution must assign a 20-percent risk weight to an exposure 
to a GSE other than an equity exposure or preferred stock.
    (2) A System institution must assign a 100-percent risk weight to 
preferred stock issued by a non-System GSE.
    (3) Purchased equity investments (including preferred stock 
investments) in other System institutions do not receive a risk weight, 
because they are deducted from capital in accordance with Sec. 628.22.
    (d) Exposures to depository institutions, foreign banks, and credit 
unions--(1) Exposures to U.S. depository institutions and credit unions. 
A System institution must assign a 20-percent risk weight to an exposure 
to a depository institution or credit union that is organized under the 
laws of the United States or any state thereof, except as otherwise 
provided in this paragraph (d). This risk weight applies to an exposure 
a System bank has to another financing institution (OFI) that is a 
depository institution or credit union organized under the laws of the 
United States or any state thereof or is owned and controlled by such an 
entity that guarantees the exposure. If the OFI exposure does not 
satisfy these requirements, it must be assigned a risk weight as a 
corporate exposure pursuant to paragraph (f)(1)(ii) or (f)(2) of this 
section.
    (2) Exposures to foreign banks. (i) Except as otherwise provided 
under paragraph (d)(2)(iv) of this section, a System institution must 
assign a risk weight to an exposure to a foreign bank, in accordance 
with table 2 to Sec. 628.32, based on the CRC rating that corresponds to 
the foreign bank's home country or the OECD membership status of the 
foreign bank's home country if there is no CRC applicable to the foreign 
bank's home country.

  Table 2 to Sec. 628.32--Risk Weights for Exposures to Foreign Banks
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
CRC:
  0-1...................................................              20

[[Page 345]]

 
  2.....................................................              50
  3.....................................................             100
  4-7...................................................             150
OECD Member with No CRC.................................              20
Non-OECD with No CRC....................................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------

    (ii) A System institution must assign a 20-percent risk weight to an 
exposure to a foreign bank whose home country is a member of the OECD 
and does not have a CRC.
    (iii) A System institution must assign a 100-percent risk weight to 
an exposure to a foreign bank whose home country is not a member of the 
OECD and does not have a CRC, with the exception of self-liquidating, 
trade-related contingent items that arise from the movement of goods, 
and that have a maturity of 3 months or less, which may be assigned a 
20-percent risk weight.
    (iv) A System institution must assign a 150-percent risk weight to 
an exposure to a foreign bank immediately upon determining that an event 
of sovereign default has occurred in the bank's home country, or if an 
event of sovereign default has occurred in the foreign bank's home 
country during the previous 5 years.
    (3) [Reserved]
    (e) Exposures to public sector entities (PSEs)--(1) Exposures to 
U.S. PSEs. (i) A System institution must assign a 20-percent risk weight 
to a general obligation exposure to a PSE that is organized under the 
laws of the United States or any state or political subdivision thereof.
    (ii) A System institution must assign a 50-percent risk weight to a 
revenue obligation exposure to a PSE that is organized under the laws of 
the United States or any state or political subdivision thereof.
    (2) Exposures to foreign PSEs. (i) Except as provided in paragraphs 
(e)(1) and (3) of this section, a System institution must assign a risk 
weight to a general obligation exposure to a foreign PSE, in accordance 
with Table 3 to Sec. 628.32, based on the CRC that corresponds to the 
PSE's home country or the OECD membership status of the PSE's home 
country if there is no CRC applicable to the PSE's home country.
    (ii) Except as provided in paragraphs (e)(1) and (3) of this 
section, a System institution must assign a risk weight to a revenue 
obligation exposure to a foreign PSE, in accordance with Table 4 to 
Sec. 628.32, based on the CRC that corresponds to the PSE's home 
country; or the OECD membership status of the PSE's home country if 
there is no CRC applicable to the PSE's home country.
    (3) A System institution may assign a lower risk weight than would 
otherwise apply under tables 3 and 4 to Sec. 628.32 to an exposure to a 
foreign PSE if:
    (i) The PSE's home country supervisor allows banks under its 
jurisdiction to assign a lower risk weight to such exposures; and
    (ii) The risk weight is not lower than the risk weight that 
corresponds to the PSE's home country in accordance with table 1 to 
Sec. 628.32.

     Table 3 to Sec. 628.32--Risk Weights for Non-U.S. PSE General
                               Obligations
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
CRC:
  0-1...................................................              20
  2.....................................................              50
  3.....................................................             100
  4-7...................................................             150
OECD Member with No CRC.................................              20
Non-OECD Member with No CRC.............................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------


     Table 4 to Sec. 628.32--Risk Weights for Non-U.S. PSE Revenue
                               Obligations
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
CRC:
  0-1...................................................              50
  2-3...................................................             100
  4-7...................................................             150
OECD Member with No CRC.................................              50
Non-OECD Member with No CRC.............................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------


[[Page 346]]

    (4) Exposures to PSEs from an OECD member sovereign with no CRC. (i) 
A System institution must assign a 20-percent risk weight to a general 
obligation exposure to a PSE whose home country is a OECD member 
sovereign with no CRC.
    (ii) A System institution must assign a 50-percent risk weight to a 
revenue obligation exposure to a PSE whose country is an OECD member 
sovereign with no CRC.
    (5) Exposures to PSEs whose home country is not an OECD member 
sovereign with no CRC. A System institution must assign a 100-percent 
risk weight to an exposure to a PSE whose home country is not a member 
of the OECD and does not have a CRC.
    (6) A System institution must assign a 150-percent risk weight to a 
PSE exposure immediately upon determining that an event of sovereign 
default has occurred in a PSE's home country or if an event of sovereign 
default has occurred in the PSE's home country during the previous 5 
years.
    (f) Corporate exposures--(1) 100-percent risk weight. Except as 
provided in paragraph (f)(2) of this section, a System institution must 
assign a 100-percent risk weight to all its corporate exposures. Assets 
assigned a risk weight under this provision include:
    (i) Borrower loans such as agricultural loans and consumer loans, 
regardless of the corporate form of the borrower, unless those loans 
qualify for different risk weights under other provisions of this 
subpart D;
    (ii) System bank exposures to OFIs that do not satisfy the 
requirements for a 20-percent risk weight pursuant to paragraph (d)(1) 
of this section or a 50-percent risk weight pursuant to paragraph (f)(2) 
of this section; and
    (iii) Premises, fixed assets, and other real estate owned.
    (2) 50-percent risk weight. Unless the OFI satisfies the 
requirements for a 20-percent risk weight pursuant to paragraph (d)(1) 
of this section, a System institution must assign a 50-percent risk 
weight to an exposure to an OFI that satisfies at least one of the 
following requirements:
    (i) The OFI is investment grade or is owned and controlled by an 
investment grade entity that guarantees the exposure; or
    (ii) The OFI meets capital, risk identification and control, and 
operational standards similar to the OFIs identified in paragraph (d)(1) 
of this section.
    (g) Residential mortgage exposures. (1) A System institution must 
assign a 50-percent risk weight to a first-lien residential mortgage 
exposure that:
    (i) Is secured by a property that is either owner-occupied or 
rented;
    (ii) Is made in accordance with prudent underwriting standards 
suitable for residential property, including standards relating to the 
loan amount as a percent of the appraised value of the property;
    (iii) Is not 90 days or more past due or carried in nonaccrual 
status; and
    (iv) Is not restructured or modified.
    (2) A System institution must assign a 100-percent risk weight to a 
first-lien residential mortgage exposure that does not meet the criteria 
in paragraph (g)(1) of this section, and to junior-lien residential 
mortgage exposures.
    (3) For the purpose of this paragraph (g), if a System institution 
holds the first-lien and junior-lien(s) residential mortgage exposures, 
and no other party holds an intervening lien, the System institution 
must combine the exposures and treat them as a single first-lien 
residential mortgage exposure.
    (4) A loan modified or restructured solely pursuant to the U.S. 
Treasury's Home Affordable Mortgage Program is not modified or 
restructured for purposes of this section.
    (h)-(j) [Reserved]
    (k) Past due and nonaccrual exposures. Except for a sovereign 
exposure or a residential mortgage exposure, a System institution must 
determine a risk weight for an exposure that is 90 days or more past due 
or in nonaccrual status according to the requirements set forth in this 
paragraph (k).
    (1) A System institution must assign a 150-percent risk weight to 
the portion of the exposure that is not guaranteed or that is not 
secured by financial collateral.
    (2) A System institution may assign a risk weight to the guaranteed 
portion of a past due or nonaccrual exposure based on the risk weight 
that applies

[[Page 347]]

under Sec. 628.36 if the guarantee or credit derivative meets the 
requirements of that section.
    (3) A System institution may assign a risk weight to the portion of 
a past due or nonaccrual exposure that is collateralized by financial 
collateral based on the risk weight that applies under Sec. 628.37 if 
the financial collateral meets the requirements of that section.
    (l) Other assets. (1) A System institution must assign a 0-percent 
risk weight to cash owned and held in all offices of the System 
institution, in transit, or in accounts at a depository institution or a 
Federal Reserve Bank; to gold bullion held in a depository institution's 
vaults on an allocated basis, to the extent the gold bullion assets are 
offset by gold bullion liabilities; and to exposures that arise from the 
settlement of cash transactions (such as equities, fixed income, spot 
foreign exchange (FX) and spot commodities) with a central counterparty 
where there is no assumption of ongoing counterparty credit risk by the 
central counterparty after settlement of the trade.
    (2) A System institution must assign a 20-percent risk weight to 
cash items in the process of collection.
    (3) A System institution must assign a 100-percent risk weight to 
deferred tax assets (DTAs) arising from temporary differences in 
relation to net operating loss carrybacks.
    (4) A System institution must assign a 100-percent risk weight to 
all MSAs.
    (5) A System institution must assign a 100-percent risk weight to 
all assets that are not specifically assigned a different risk weight 
under this subpart and that are not deducted from tier 1 or tier 2 
capital pursuant to Sec. 628.22.
    (6) [Reserved]



Sec. 628.33  Off-balance sheet exposures.

    (a) General. (1) A System institution must calculate the exposure 
amount of an off-balance sheet exposure using the credit conversion 
factors (CCFs) in paragraph (b) of this section.
    (2) Where a System institution commits to provide a commitment, the 
System institution may apply the lower of the two applicable CCFs.
    (3) Where a System institution provides a commitment structured as a 
syndication or participation, the System institution is only required to 
calculate the exposure amount for its pro rata share of the commitment.
    (4) Where a System institution provides a commitment, enters into a 
repurchase agreement, or provides a credit enhancing representation and 
warranty, and such commitment, repurchase agreement, or credit-enhancing 
representation and warranty is not a securitization exposure, the 
exposure amount shall be no greater than the maximum contractual amount 
of the commitment, repurchase agreement, or credit-enhancing 
representation and warranty, as applicable.
    (5) The exposure amount of a System bank's commitment to an 
association or OFI is the difference between the association's or OFI's 
maximum credit limit with the System bank (as established by the general 
financing agreement or promissory note, as required by Sec. 614.4125(d) 
of this chapter), and the amount the association or OFI has borrowed 
from the System bank.
    (b) Credit conversion factors--(1) Zero-percent (0%) CCF. A System 
institution must apply a 0-percent CCF to a commitment that is 
unconditionally cancelable by the System institution.
    (2) Twenty-percent (20%) CCF. A System institution must apply a 20-
percent CCF to the amount of:
    (i) Commitments, other than a System bank's commitment to an 
association or OFI, with an original maturity of 14 months or less that 
are not unconditionally cancelable by the System institution.
    (ii) Self-liquidating, trade-related contingent items that arise 
from the movement of goods, with an original maturity of 14 months or 
less.
    (iii) A System bank's commitment to an association or OFI that is 
not unconditionally cancelable by the System bank, regardless of 
maturity.
    (3) Fifty-percent (50%) CCF. A System institution must apply a 50-
percent CCF to the amount of:
    (i) Commitments, other than a System bank's commitment to an 
association or OFI, with an original maturity of more than 14 months 
that are not unconditionally cancelable by the System institution.

[[Page 348]]

    (ii) Transaction-related contingent items, including performance 
bonds, bid bonds, warranties, and performance standby letters of credit.
    (4) One hundred-percent (100%) CCF. A System institution must apply 
a 100-percent CCF to the following off-balance sheet items and other 
similar transactions:
    (i) Guarantees;
    (ii) Repurchase agreements (the off-balance sheet component of which 
equals the sum of the current fair values of all positions the System 
institution has sold subject to repurchase);
    (iii) Credit-enhancing representations and warranties that are not 
securitization exposures;
    (iv) Off-balance sheet securities lending transactions (the off-
balance sheet component of which equals the sum of the current fair 
values of all positions the System institution has lent under the 
transaction);
    (v) Off-balance sheet securities borrowing transactions (the off-
balance sheet component of which equals the sum of the current fair 
values of all non-cash positions the System institution has posted as 
collateral under the transaction);
    (vi) Financial standby letters of credit; and
    (vii) Forward agreements.



Sec. 628.34  OTC derivative contracts.

    (a) Exposure amount--(1) Single OTC derivative contract. Except as 
modified by paragraph (b) of this section, the exposure amount for a 
single OTC derivative contract that is not subject to a qualifying 
master netting agreement is equal to the sum of the System institution's 
current credit exposure and potential future credit exposure (PFE) on 
the OTC derivative contract.
    (i) Current credit exposure. The current credit exposure for a 
single OTC derivative contract is the greater of the mark-to-fair value 
of the OTC derivative contract or 0.
    (ii) PFE. (A) The PFE for a single OTC derivative contract, 
including an OTC derivative contract with a negative mark-to-fair value, 
is calculated by multiplying the notional principal amount of the OTC 
derivative contract by the appropriate conversion factor in Table 1 to 
Sec. 628.34.
    (B) For purposes of calculating either the PFE under this paragraph 
or the gross PFE under paragraph (a)(2) of this section for exchange 
rate contracts and other similar contracts in which the notional 
principal amount is equivalent to the cash flows, notional principal 
amount is the net receipts to each party falling due on each value date 
in each currency.
    (C) For an OTC derivative contract that does not fall within one of 
the specified categories in Table 1 to Sec. 628.34, the PFE must be 
calculated using the appropriate ``other'' conversion factor.
    (D) A System institution must use an OTC derivative contract's 
effective notional principal amount (that is, the apparent or stated 
notional principal amount multiplied by any multiplier in the OTC 
derivative contract) rather than the apparent or stated notional 
principal amount in calculating PFE.
    (E) The PFE of the protection provider of a credit derivative is 
capped at the net present value of the amount of unpaid premiums.

[[Page 349]]



                                     Table 1 to Sec. 628.34--Conversion Factor Matrix for Derivative Contracts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Credit       Credit (non-
                                                              Foreign       (investment     investment-                      Precious
         Remaining maturity \2\            Interest rate   exchange rate       grade           grade          Equity      metals (except       Other
                                                             and gold        reference       reference                         gold)
                                                                            asset) \3\        asset)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One (1) year or less....................            0.00            0.01            0.05            0.10            0.06            0.07            0.10
Greater than one (1) year and less than            0.005            0.05            0.05            0.10            0.08            0.07            0.12
 or equal to five (5) years.............
Greater than five (5) years.............           0.015           0.075            0.05            0.10            0.10            0.08            0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For a derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the
  derivative contract.
\2\ For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that
  the fair value of the contract is 0, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract with a
  remaining maturity of greater than 1 year that meets these criteria, the minimum conversion factor is 0.005.
\3\ A System institution must use the column labeled ``Credit (investment-grade reference asset)'' for a credit derivative whose reference asset is an
  outstanding unsecured long-term debt security without credit enhancement that is investment grade. A System institution must use the column labeled
  ``Credit (non-investment-grade reference asset)'' for all other credit derivatives.


[[Page 350]]

    (2) Multiple OTC derivative contracts subject to a qualifying master 
netting agreement. Except as modified by paragraph (b) of this section, 
the exposure amount for multiple OTC derivative contracts subject to a 
qualifying master netting agreement is equal to the sum of the net 
current credit exposure and the adjusted sum of the PFE amounts for all 
OTC derivative contracts subject to the qualifying master netting 
agreement.
    (i) Net current credit exposure. The net current credit exposure is 
the greater of the net sum of all positive and negative mark-to-fair 
values of the individual OTC derivative contracts subject to the 
qualifying master netting agreement or 0.
    (ii) Adjusted sum of the PFE amounts. The adjusted sum of the PFE 
amounts, Anet, is calculated as:

Anet = (0.4 x Agross) + 
(0.6 x NGR x Agross)

Where:

Agross = the gross PFE (that is, the sum of the PFE amounts 
          (as determined under paragraph (a)(1)(ii) of this section for 
          each individual derivative contract subject to the qualifying 
          master netting agreement); and
Net-to-gross Ratio (NGR) = the ratio of the net current credit exposure 
          to the gross current credit exposure. In calculating the NGR, 
          the gross current credit exposure equals the sum of the 
          positive current credit exposures (as determined under 
          paragraph (a)(1)(i) of this section) of all individual 
          derivative contracts subject to the qualifying master netting 
          agreement.

    (b) Recognition of credit risk mitigation of collateralized OTC 
derivative contracts. (1) A System institution may recognize the credit 
risk mitigation benefits of financial collateral that secures an OTC 
derivative contract or multiple OTC derivative contracts subject to a 
qualifying master netting agreement (netting set) by using the simple 
approach in Sec. 628.37(b).
    (2) Alternatively, if the financial collateral securing a contract 
or netting set described in paragraph (b)(1) of this section is marked-
to-fair value on a daily basis and subject to a daily margin maintenance 
requirement, a System institution may recognize the credit risk 
mitigation benefits of financial collateral that secures the contract or 
netting set by using the collateral haircut approach in Sec. 628.37(c).
    (c) Counterparty credit risk for OTC credit derivatives--(1) 
Protection purchasers. A System institution that purchases an OTC credit 
derivative that is recognized under Sec. 628.36 as a credit risk 
mitigant is not required to compute a separate counterparty credit risk 
capital requirement under Sec. 628.32 provided that the System 
institution does so consistently for all such credit derivatives. The 
System institution must either include all or exclude all such credit 
derivatives that are subject to a qualifying master netting agreement 
from any measure used to determine counterparty credit risk exposure to 
all relevant counterparties for risk-based capital purposes.
    (2) Protection providers. (i) A System institution that is the 
protection provider under an OTC credit derivative must treat the OTC 
credit derivative as an exposure to the underlying reference asset. The 
System institution is not required to compute a counterparty credit risk 
capital requirement for the OTC credit derivative under Sec. 628.32, 
provided that this treatment is applied consistently for all such OTC 
credit derivatives. The System institution must either include all or 
exclude all such OTC credit derivatives that are subject to a qualifying 
master netting agreement from any measure used to determine counterparty 
credit risk exposure.
    (ii) The provisions of paragraph (c)(2) of this section apply to all 
relevant counterparties for risk-based capital purposes.
    (d) Counterparty credit risk for OTC equity derivatives. (1) A 
System institution must treat an OTC equity derivative contract as an 
equity exposure and compute a risk-weighted asset amount for the OTC 
equity derivative contract under Secs. 628.51 through 628.53.
    (2) [Reserved]
    (3) If the System institution risk weights the contract under the 
Simple Risk-Weight Approach (SRWA) in Sec. 628.52, the System 
institution may choose not to hold risk-based capital against the 
counterparty credit risk of the OTC equity derivative contract, as

[[Page 351]]

long as it does so for all such contracts. Where the OTC equity 
derivative contracts are subject to a qualifying master netting 
agreement, a System institution using the SRWA must either include all 
or exclude all of the contracts from any measure used to determine 
counterparty credit risk exposure.
    (e) [Reserved]



Sec. 628.35  Cleared transactions.

    (a) General requirements--(1) Clearing member clients. A System 
institution that is a clearing member client must use the methodologies 
described in paragraph (b) of this section to calculate risk-weighted 
assets for a cleared transaction.
    (2) [Reserved]
    (b) Clearing member client System institutions--(1) Risk-weighted 
assets for cleared transactions. (i) To determine the risk-weighted 
asset amount for a cleared transaction, a System institution that is a 
clearing member client must multiply the trade exposure amount for the 
cleared transaction, calculated in accordance with paragraph (b)(2) of 
this section, by the risk weight appropriate for the cleared 
transaction, determined in accordance with paragraph (b)(3) of this 
section.
    (ii) A clearing member client System institution's total risk-
weighted assets for cleared transactions is the sum of the risk-weighted 
asset amounts for all its cleared transactions.
    (2) Trade exposure amount. (i) For a cleared transaction that is 
either a derivative contract or netting set of derivative contracts, the 
trade exposure amount equals:
    (A) The exposure amount for the derivative contract or netting set 
of derivative contracts, calculated using the current exposure method 
(CEM) for OTC derivative contracts under Sec. 628.34; plus
    (B) The fair value of the collateral posted by the clearing member 
client System institution and held by the central counterparty (CCP), 
clearing member, or custodian in a manner that is not bankruptcy remote.
    (ii) For a cleared transaction that is a repo-style transaction, the 
trade exposure amount equals:
    (A) The exposure amount for the repo-style transaction calculated 
using the collateral haircut methodology under Sec. 628.37(c); plus
    (B) The fair value of the collateral posted by the clearing member 
client System institution and held by the CCP or a clearing member in a 
manner that is not bankruptcy remote.
    (3) Cleared transaction risk weights. (i) For a cleared transaction 
with a qualifying CCP (QCCP), a clearing member client System 
institution must apply a risk weight of:
    (A) Two (2) percent if the collateral posted by the System 
institution to the QCCP or clearing member is subject to an arrangement 
that prevents any losses to the clearing member client System 
institution due to the joint default or a concurrent insolvency, 
liquidation, or receivership proceeding of the clearing member and any 
other clearing member clients of the clearing member; and the clearing 
member client System institution has conducted sufficient legal review 
to conclude with a well-founded basis (and maintains sufficient written 
documentation of that legal review) that in the event of a legal 
challenge (including one resulting from default or from liquidation, 
insolvency, or receivership proceeding) the relevant court and 
administrative authorities would find the arrangements to be legal, 
valid, binding and enforceable under the law of the relevant 
jurisdictions; or
    (B) Four (4) percent if the requirements of paragraph (b)(3)(i)(A) 
of this section are not met.
    (ii) For a cleared transaction with a CCP that is not a QCCP, a 
clearing member client System institution must apply the risk weight 
appropriate for the CCP according to Sec. 628.32.
    (4) Collateral. (i) Notwithstanding any other requirements in this 
section, collateral posted by a clearing member client System 
institution that is held by a custodian (in its capacity as custodian) 
in a manner that is bankruptcy remote from the CCP, the custodian, 
clearing member and other clearing member clients of the clearing 
member, is not subject to a capital requirement under this section.
    (ii) A clearing member client System institution must calculate a 
risk-

[[Page 352]]

weighted asset amount for any collateral provided to a CCP, clearing 
member, or custodian in connection with a cleared transaction in 
accordance with the requirements under Sec. 628.32.
    (c)-(d) [Reserved]



Sec. 628.36  Guarantees and credit derivatives: Substitution treatment.

    (a) Scope--(1) General. A System institution may recognize the 
credit risk mitigation benefits of an eligible guarantee or eligible 
credit derivative by substituting the risk weight associated with the 
protection provider for the risk weight assigned to an exposure, as 
provided under this section.
    (2) This section applies to exposures for which:
    (i) Credit risk is fully covered by an eligible guarantee or 
eligible credit derivative; or
    (ii) Credit risk is covered on a pro rata basis (that is, on a basis 
in which the System institution and the protection provider share losses 
proportionately) by an eligible guarantee or eligible credit derivative.
    (3) Exposures on which there is a tranching of credit risk 
(reflecting at least two different levels of seniority) generally are 
securitization exposures subject to Secs. 628.41 through 628.45.
    (4) If multiple eligible guarantees or eligible credit derivatives 
cover a single exposure described in this section, a System institution 
may treat the hedged exposure as multiple separate exposures each 
covered by a single eligible guarantee or eligible credit derivative and 
may calculate a separate risk-weighted asset amount for each separate 
exposure as described in paragraph (c) of this section.
    (5) If a single eligible guarantee or eligible credit derivative 
covers multiple hedged exposures described in paragraph (a)(2) of this 
section, a System institution must treat each hedged exposure as covered 
by a separate eligible guarantee or eligible credit derivative and must 
calculate a separate risk-weighted asset amount for each exposure as 
described in paragraph (c) of this section.
    (b) Rules of recognition. (1) A System institution may only 
recognize the credit risk mitigation benefits of eligible guarantees and 
eligible credit derivatives.
    (2) A System institution may only recognize the credit risk 
mitigation benefits of an eligible credit derivative to hedge an 
exposure that is different from the credit derivative's reference 
exposure used for determining the derivative's cash settlement value, 
deliverable obligation, or occurrence of a credit event if:
    (i) The reference exposure ranks pari passu with, or is subordinated 
to, the hedged exposure; and
    (ii) The reference exposure and the hedged exposure are to the same 
legal entity, and legally enforceable cross-default or cross-
acceleration clauses are in place to ensure payments under the credit 
derivative are triggered when the obligated party of the hedged exposure 
fails to pay under the terms of the hedged exposure.
    (c) Substitution approach--(1) Full coverage. If an eligible 
guarantee or eligible credit derivative meets the conditions in 
paragraphs (a) and (b) of this section and the protection amount (P) of 
the guarantee or credit derivative is greater than or equal to the 
exposure amount of the hedged exposure, a System institution may 
recognize the guarantee or credit derivative in determining the risk-
weighted asset amount for the hedged exposure by substituting the risk 
weight applicable to the guarantor or credit derivative protection 
provider under Sec. 628.32 for the risk weight assigned to the exposure.
    (2) Partial coverage. If an eligible guarantee or eligible credit 
derivative meets the conditions in Secs. 628.36(a) and 628.37(b) and the 
protection amount (P) of the guarantee or credit derivative is less than 
the exposure amount of the hedged exposure, the System institution must 
treat the hedged exposure as two separate exposures (protected and 
unprotected) in order to recognize the credit risk mitigation benefit of 
the guarantee or credit derivative.
    (i) The System institution may calculate the risk-weighted asset 
amount for the protected exposure under Sec. 628.32, where the 
applicable risk weight is the risk weight applicable to the guarantor or 
credit derivative protection provider.

[[Page 353]]

    (ii) The System institution must calculate the risk-weighted asset 
amount for the unprotected exposure under Sec. 628.32, where the 
applicable risk weight is that of the unprotected portion of the hedged 
exposure.
    (iii) The treatment provided in this section is applicable when the 
credit risk of an exposure is covered on a partial pro rata basis and 
may be applicable when an adjustment is made to the effective notional 
amount of the guarantee or credit derivative under paragraph (d), (e), 
or (f) of this section.
    (d) Maturity mismatch adjustment. (1) A System institution that 
recognizes an eligible guarantee or eligible credit derivative in 
determining the risk-weighted asset amount for a hedged exposure must 
adjust the effective notional amount of the credit risk mitigant to 
reflect any maturity mismatch between the hedged exposure and the credit 
risk mitigant.
    (2) A maturity mismatch occurs when the residual maturity of a 
credit risk mitigant is less than that of the hedged exposure(s).
    (3) The residual maturity of a hedged exposure is the longest 
possible remaining time before the obligated party of the hedged 
exposure is scheduled to fulfill its obligation on the hedged exposure. 
If a credit risk mitigant has embedded options that may reduce its term, 
the System institution (protection purchaser) must use the shortest 
possible residual maturity for the credit risk mitigant. If a call is at 
the discretion of the protection provider, the residual maturity of the 
credit risk mitigant is at the first call date. If the call is at the 
discretion of the System institution (protection purchaser), but the 
terms of the arrangement at origination of the credit risk mitigant 
contain a positive incentive for the System institution to call the 
transaction before contractual maturity, the remaining time to the first 
call date is the residual maturity of the credit risk mitigant.
    (4) A credit risk mitigant with a maturity mismatch may be 
recognized only if its original maturity is greater than or equal to 1 
year and its residual maturity is greater than 3 months.
    (5) When a maturity mismatch exists, the System institution must 
apply the following adjustment to reduce the effective notional amount 
of the credit risk mitigant:

Pm = E x [(t-0.25)/(T-0.25)]

Where:

Pm = effective notional amount of the credit risk mitigant, adjusted for 
          maturity mismatch;
E = effective notional amount of the credit risk mitigant;
t = the lesser of T or the residual maturity of the credit risk 
          mitigant, expressed in years; and
T = the lesser of 5 or the residual maturity of the hedged exposure, 
          expressed in years.

    (e) Adjustment for credit derivatives without restructuring as a 
credit event. If a System institution recognizes an eligible credit 
derivative that does not include as a credit event a restructuring of 
the hedged exposure involving forgiveness or postponement of principal, 
interest, or fees that results in a credit loss event (that is, a 
charge-off, specific provision, or other similar debit to the profit and 
loss account), the System institution must apply the following 
adjustment to reduce the effective notional amount of the credit 
derivative:

Pr = Pm x 0.60

Where:

Pr = effective notional amount of the credit risk mitigant, adjusted for 
          lack of restructuring event (and maturity mismatch, if 
          applicable); and
Pm = effective notional amount of the credit risk mitigant (adjusted for 
          maturity mismatch, if applicable).

    (f) Currency mismatch adjustment. (1) If a System institution 
recognizes an eligible guarantee or eligible credit derivative that is 
denominated in a currency different from that in which the hedged 
exposure is denominated, the System institution must apply the following 
formula to the effective notional amount of the guarantee or credit 
derivative:

Pc = Pr x (1-Hfx)

Where:

Pc = effective notional amount of the credit risk mitigant, adjusted for 
          currency mismatch (and maturity mismatch and lack of 
          restructuring event, if applicable);

[[Page 354]]

Pr = effective notional amount of the credit risk mitigant (adjusted for 
          maturity mismatch and lack of restructuring event, if 
          applicable); and
Hfx = haircut appropriate for the currency mismatch between the credit 
          risk mitigant and the hedged exposure.

    (2) A System institution must set Hfx equal to 8 percent.
    (3) A System institution must adjust Hfx calculated in paragraph 
(f)(2) of this section upward if the System institution revalues the 
guarantee or credit derivative less frequently than once every 10 
business days using the following square root of time formula:
[GRAPHIC] [TIFF OMITTED] TR28JY16.001

Where TM equals the greater of 10 or the number of days between 
          revaluation.



Sec. 628.37  Collateralized transactions.

    (a) General. (1) To recognize the risk-mitigating effects of 
financial collateral, a System institution may use:
    (i) The simple approach in paragraph (b) of this section for any 
exposure.
    (ii) The collateral haircut approach in paragraph (c) of this 
section for repo-style transactions, eligible margin loans, 
collateralized derivative contracts, and single-product netting sets of 
such transactions.
    (2) A System institution may use any approach described in this 
section that is valid for a particular type of exposure or transaction; 
however, it must use the same approach for similar exposures or 
transactions.
    (b) The simple approach--(1) General requirements. (i) A System 
institution may recognize the credit risk mitigation benefits of 
financial collateral that secures any exposure.
    (ii) To qualify for the simple approach, the financial collateral 
must meet the following requirements:
    (A) The collateral must be subject to a collateral agreement for at 
least the life of the exposure;
    (B) The collateral must be revalued at least every 6 months; and
    (C) The collateral (other than gold) and the exposure must be 
denominated in the same currency.
    (2) Risk-weight substitution. (i) A System institution may apply a 
risk weight to the portion of an exposure that is secured by the fair 
value of financial collateral (that meets the requirements of paragraph 
(b)(1) of this section) based on the risk weight assigned to the 
collateral under Sec. 628.32. For repurchase agreements, reverse 
repurchase agreements, and securities lending and borrowing 
transactions, the collateral is the instruments, gold, and cash the 
System institution has borrowed, purchased subject to resale, or taken 
as collateral from the counterparty under the transaction. Except as 
provided in paragraph (b)(3) of this section, the risk weight assigned 
to the collateralized portion of the exposure may not be less than 20 
percent.
    (ii) A System institution must apply a risk weight to the unsecured 
portion of the exposure based on the risk weight assigned to the 
exposure under this subpart.
    (3) Exceptions to the 20-percent risk-weight floor and other 
requirements. Notwithstanding paragraph (b)(2)(i) of this section:
    (i) A System institution may assign a 0-percent risk weight to an 
exposure to an OTC derivative contract that is marked-to-fair on a daily 
basis and subject to a daily margin maintenance requirement, to the 
extent the contract is collateralized by cash on deposit.
    (ii) A System institution may assign a 10-percent risk weight to an 
exposure to an OTC derivative contract that is marked-to-fair value 
daily and subject to a daily margin maintenance requirement, to the 
extent that the contract is collateralized by an exposure to a

[[Page 355]]

sovereign that qualifies for a 0-percent risk weight under Sec. 628.32.
    (iii) A System institution may assign a 0-percent risk weight to the 
collateralized portion of an exposure where:
    (A) The financial collateral is cash on deposit; or
    (B) The financial collateral is an exposure to a sovereign that 
qualifies for a 0-percent risk weight under Sec. 628.32, and the System 
institution has discounted the fair value of the collateral by 20 
percent.
    (c) Collateral haircut approach--(1) General. A System institution 
may recognize the credit risk mitigation benefits of financial 
collateral that secures an eligible margin loan, repo-style transaction, 
collateralized derivative contract, or single-product netting set of 
such transactions by using the standard supervisory haircuts in 
paragraph (c)(3) of this section.
    (2) Exposure amount equation. A System institution must determine 
the exposure amount for an eligible margin loan, repo-style transaction, 
collateralized derivative contract, or a single-product netting set of 
such transactions by setting the exposure amount equal to max:

0, [([sum]E--[sum]C) + [sum](Es x Hs) + [sum](Efx x Hfx)]

Where:

[sum]E = for eligible margin loans and repo-style transactions and 
          netting sets thereof, the value of the exposure (the sum of 
          the current fair values of all instruments, gold, and cash the 
          System institution has lent, sold subject to repurchase, or 
          posted as collateral to the counterparty under the transaction 
          (or netting set)); and
[sum]E = for collateralized derivative contracts and netting sets 
          thereof, the exposure amount of the OTC derivative contract 
          (or netting set) calculated under Sec. 628.34(c) or (d).
[sum]C = the value of the collateral (the sum of the current fair values 
          of all instruments, gold and cash the System institution has 
          borrowed, purchased subject to resale, or taken as collateral 
          from the counterparty under the transaction (or netting set));
Es = the absolute value of the net position in a given 
          instrument or in gold (where the net position in the 
          instrument or gold equals the sum of the current fair values 
          of the instrument or gold the System institution has lent, 
          sold subject to repurchase, or posted as collateral to the 
          counterparty minus the sum of the current fair values of that 
          same instrument or gold the System institution has borrowed, 
          purchased subject to resale, or taken as collateral from the 
          counterparty);
Hs = the fair value price volatility haircut appropriate to the 
          instrument or gold referenced in Es;
Efx = the absolute value of the net position of instruments and cash in 
          a currency that is different from the settlement currency 
          (where the net position in a given currency equals the sum of 
          the current fair values of any instruments or cash in the 
          currency the System institution has lent, sold subject to 
          repurchase, or posted as collateral to the counterparty minus 
          the sum of the current fair values of any instruments or cash 
          in the currency the System institution has borrowed, purchased 
          subject to resale, or taken as collateral from the 
          counterparty); and
Hfx = the haircut appropriate to the mismatch between the currency 
          referenced in Efx and the settlement currency.

    (3) Standard supervisory haircuts. (i) A System institution must use 
the haircuts for fair value price volatility (Hs) provided in Table 1 to 
Sec. 628.37, as adjusted in certain circumstances in accordance with the 
requirements of paragraphs (c)(3)(iii) and (iv) of this section:

[[Page 356]]



                                    Table 1 to Sec. 628.37--Standard Supervisory Market Price Volatility Haircut \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Haircut (in percent) assigned based on
                                         ------------------------------------------------------------------------------------------------   Investment
                                             Sovereign issuers risk weight under Sec. Non-sovereign issuers risk weight under Sec. grade
            Residual maturity                               628.32 \2\                                        628.32                      securitization
                                         ------------------------------------------------------------------------------------------------  exposures (in
                                               Zero         20% or -50%        100%             20%             50%            100%          percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Less than or equal to 1 year............             0.5             1.0            15.0             1.0             2.0            25.0            4.0%
Great than 1 years and less than and                 2.0             3.0            15.0             4.0             6.0            25.0           12.0%
 equal to 5 years.......................
Greater than 5 years....................             4.0             6.0            15.0             8.0            12.0            25.0           24.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
               Main index equities (including convertible bonds) and go15.0%
             Other publically traded equities (including convertible bo25.0%
                                      MutuaHighest haircut applicable to any security in which the fund
                                                                    can invest
                                     Cash collateral                    0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The market price volatility haircut in Table 1 to Sec. 628.37 are based on 10-day holding period.
\2\ Includes a foreign PSE that receives a 0-percent risk weight.


[[Page 357]]

    (ii) For currency mismatches, a System institution must use a 
haircut for foreign exchange rate volatility (Hfx) of 8 
percent, as adjusted in certain circumstances under paragraphs 
(c)(3)(iii) and (iv) of this section.
    (iii) For repo-style transactions, a System institution may multiply 
the standard supervisory haircuts provided in paragraphs (c)(3)(i) and 
(ii) of this section by the square root of \1/2\ (which equals 
0.707107).
    (iv) If the number of trades in a netting set exceeds 5,000 at any 
time during a quarter, a System institution must adjust the supervisory 
haircuts provided in paragraphs (c)(3)(i) and (ii) of this section 
upward on the basis of a holding period of 20 business days for the 
following quarter except in the calculation of the exposure amount for 
purposes of Sec. 628.35. If a netting set contains one or more trades 
involving illiquid collateral or an OTC derivative that cannot be easily 
replaced, a System institution must adjust the supervisory haircuts 
upward on the basis of a holding period of 20 business days. If over the 
2 previous quarters more than two margin disputes on a netting set have 
occurred that lasted more than the holding period, then the System 
institution must adjust the supervisory haircuts upward for that netting 
set on the basis of a holding period that is at least two times the 
minimum holding period for that netting set. A System institution must 
adjust the standard supervisory haircuts upward using the following 
formula:
[GRAPHIC] [TIFF OMITTED] TR28JY16.002

Where:

TM = a holding period of longer than 10 business days for eligible 
          margin loans and derivative contracts or longer than 5 
          business days for repo-style transactions;
HS = the standard supervisory haircut; and
TS = 10 business days for eligible margin loans and derivative contracts 
          or 5 business days for repo-style transactions.

    (v) If the instrument a System institution has lent, sold subject to 
repurchase, or posted as collateral does not meet the definition of 
financial collateral in Sec. 628.2, the System institution must use a 
25-percent haircut for fair value price volatility (HS).
    (4) [Reserved]

             Risk-Weighted Assets for Unsettled Transactions



Sec. 628.38  Unsettled transactions.

    (a) Definitions. For purposes of this section:
    (1) Delivery-versus-payment (DvP) transaction means a securities or 
commodities transaction in which the buyer is obligated to make payment 
only if the seller has made delivery of the securities or commodities 
and the seller is obligated to deliver the securities or commodities 
only if the buyer has made payment.
    (2) Payment-versus-payment (PvP) transaction means a foreign 
exchange transaction in which each counterparty is obligated to make a 
final transfer of one or more currencies only if the other counterparty 
has made a final transfer of one or more currencies.
    (3) A transaction has a normal settlement period if the contractual 
settlement period for the transaction is equal to or less than the fair 
value standard for the instrument underlying the transaction and equal 
to or less than 5 business days.
    (4) Positive current exposure of a System institution for a 
transaction is the difference between the transaction value at the 
agreed settlement price and the current fair value price of the 
transaction, if the difference results in a credit exposure of the 
System institution to the counterparty.
    (b) Scope. This section applies to all transactions involving 
securities, foreign exchange instruments, and commodities that have a 
risk of delayed

[[Page 358]]

settlement or delivery. This section does not apply to:
    (1) Cleared transactions that are marked-to-fair value daily and 
subject to daily receipt and payment of variation margin;
    (2) Repo-style transactions, including unsettled repo-style 
transactions;
    (3) One-way cash payments on OTC derivative contracts; or
    (4) Transactions with a contractual settlement period that is longer 
than the normal settlement period (which are treated as OTC derivative 
contracts as provided in Sec. 628.34).
    (c) System-wide failures. In the case of a system-wide failure of a 
settlement, clearing system or central counterparty, the FCA may waive 
risk-based capital requirements for unsettled and failed transactions 
until the situation is rectified.
    (d) Delivery-versus-payment (DvP) and payment-versus-payment (PvP) 
transactions. A System institution must hold risk-based capital against 
any DvP or PvP transaction with a normal settlement period if the System 
institution's counterparty has not made delivery or payment within 5 
business days after the settlement date. The System institution must 
determine its risk-weighted asset amount for such a transaction by 
multiplying the positive current exposure of the transaction for the 
System institution by the appropriate risk weight in Table 1 to 
Sec. 628.38.

     Table 1 to Sec. 628.38--Risk Weights for Unsettled DVP and PVP
                              Transactions
------------------------------------------------------------------------
                                                          Risk weight to
                                                           be applied to
  Number of business days after contractual settlement       positive
                          date                                current
                                                           exposure (in
                                                             percent)
------------------------------------------------------------------------
From 5 to 15............................................           100.0
From 16 to 30...........................................           625.0
From 31 to 45...........................................           937.5
46 or more..............................................         1,250.0
------------------------------------------------------------------------

    (e) Non-DvP/non-PvP (non-delivery-versus-payment/non-payment-versus-
payment) transactions. (1) A System institution must hold risk-based 
capital against any non-DvP/non-PvP transaction with a normal settlement 
period if the System institution has delivered cash, securities, 
commodities, or currencies to its counterparty but has not received its 
corresponding deliverables by the end of the same business day. The 
System institution must continue to hold risk-based capital against the 
transaction until the System institution has received its corresponding 
deliverables.
    (2) From the business day after the System institution has made its 
delivery until 5 business days after the counterparty delivery is due, 
the System institution must calculate the risk-weighted asset amount for 
the transaction by treating the current fair value of the deliverables 
owed to the System institution as an exposure to the counterparty and 
using the applicable counterparty risk weight under Sec. 628.32.
    (3) If the System institution has not received its deliverables by 
the 5th business day after counterparty delivery was due, the System 
institution must assign a 1,250-percent risk weight to the current fair 
value of the deliverables owed to the System institution.
    (f) Total risk-weighted assets for unsettled transactions. Total 
risk-weighted assets for unsettled transactions is the sum of the risk-
weighted asset amounts of all DvP, PvP, and non-DvP/non-PvP 
transactions.



Secs. 628.39-628.40  [Reserved]

            Risk-Weighted Assets for Securitization Exposures



Sec. 628.41  Operational requirements for securitization exposures.

    (a) Operational criteria for traditional securitizations. A System 
institution that transfers exposures it has originated or purchased to a 
third party in connection with a traditional securitization may exclude 
the exposures from the calculation of its risk-weighted assets only if 
each condition in this section is satisfied. A System institution that 
meets these conditions must hold risk-based capital against any credit 
risk it retains in connection with the securitization. A System 
institution that fails to meet these conditions must hold risk-based 
capital against the transferred exposures as if they had not been 
securitized and must deduct from CET1 capital, pursuant to

[[Page 359]]

Sec. 628.22, any after-tax gain-on-sale resulting from the transaction. 
The conditions are:
    (1) The exposures are not reported on the System institution's 
consolidated balance sheet under GAAP;
    (2) The System institution has transferred to one or more third 
parties credit risk associated with the underlying exposures;
    (3) Any clean-up calls relating to the securitization are eligible 
clean-up calls; and
    (4) The securitization does not:
    (i) Include one or more underlying exposures in which the borrower 
is permitted to vary the drawn amount within an agreed limit under a 
line of credit; and
    (ii) Contain an early amortization provision.
    (b) Operational criteria for synthetic securitizations. For 
synthetic securitizations, a System institution may recognize for risk-
based capital purposes the use of a credit risk mitigant to hedge 
underlying exposures only if each condition in this paragraph is 
satisfied. A System institution that meets these conditions must hold 
risk-based capital against any credit risk of the exposures it retains 
in connection with the synthetic securitization. A System institution 
that fails to meet these conditions or chooses not to recognize the 
credit risk mitigant for purposes of this section must instead hold 
risk-based capital against the underlying exposures as if they had not 
been synthetically securitized. The conditions are:
    (1) The credit risk mitigant is:
    (i) Financial collateral;
    (ii) A guarantee that meets all criteria set forth in the definition 
of ``eligible guarantee'' in Sec. 628.2, except for the criteria in 
paragraph (3) of that definition; or
    (iii) A credit derivative that meets all criteria as set forth in 
the definition of ``eligible credit derivative'' in Sec. 628.2, except 
for the criteria in paragraph (3) of the definition of ``eligible 
guarantee'' in Sec. 628.2.
    (2) The System institution transfers credit risk associated with the 
underlying exposures to one or more third parties, and the terms and 
conditions in the credit risk mitigants employed do not include 
provisions that:
    (i) Allow for the termination of the credit protection due to 
deterioration in the credit quality of the underlying exposures;
    (ii) Require the System institution to alter or replace the 
underlying exposures to improve the credit quality of the pool of 
underlying exposures;
    (iii) Increase the System institution's cost of credit protection in 
response to deterioration in the credit quality of the underlying 
exposures;
    (iv) Increase the yield payable to parties other than the System 
institution in response to a deterioration in the credit quality of the 
underlying exposures; or
    (v) Provide for increases in a retained first loss position or 
credit enhancement provided by the System institution after the 
inception of the securitization;
    (3) The System institution obtains a well-reasoned opinion from 
legal counsel that confirms the enforceability of the credit risk 
mitigant in all relevant jurisdictions; and
    (4) Any clean-up calls relating to the securitization are eligible 
clean-up calls.
    (c) Due diligence requirements. (1) Except for exposures that are 
deducted from CET1 capital (pursuant to Sec. 628.22) and exposures 
subject to Sec. 628.42(h), if a System institution is unable to 
demonstrate to the satisfaction of the FCA a comprehensive understanding 
of the features of a securitization exposure that would materially 
affect the performance of the exposure, the System institution must 
assign the securitization exposure a risk weight of 1,250 percent. The 
System institution's analysis must be commensurate with the complexity 
of the securitization exposure and the materiality of the exposure in 
relation to its capital.
    (2) A System institution must demonstrate its comprehensive 
understanding of a securitization exposure under paragraph (c)(1) of 
this section for each securitization exposure by:
    (i) Conducting an analysis of the risk characteristics of a 
securitization exposure prior to acquiring the exposure, and documenting 
such analysis within

[[Page 360]]

3 business days after acquiring the exposure, considering:
    (A) Structural features of the securitization that would materially 
impact the performance of the exposure, for example, the contractual 
cash flow waterfall, waterfall-related triggers, credit enhancements, 
liquidity enhancements, fair value triggers, the performance of 
organizations that service the exposure, and deal-specific definitions 
of default;
    (B) Relevant information regarding the performance of the underlying 
credit exposure(s), for example, the percentage of loans 30, 60, and 90 
days past due; default rates; prepayment rates; loans in foreclosure; 
property types; occupancy; average credit score or other measures of 
creditworthiness; average loan-to-value (LTV) ratio; and industry and 
geographic diversification data on the underlying exposure(s);
    (C) Relevant market data of the securitization, for example, bid-ask 
spread, most recent sales price and historic price volatility, trading 
volume, implied market rating, and size, depth and concentration level 
of the market for the securitization; and
    (D) For resecuritization exposures, performance information on the 
underlying securitization exposures, for example, the issuer name and 
credit quality, and the characteristics and performance of the 
exposures; and
    (ii) On an on-going basis (no less frequently than quarterly), 
evaluating, reviewing, and updating as appropriate the analysis required 
under paragraph (c)(1) of this section for each securitization exposure.



Sec. 628.42  Risk-weighted assets for securitization exposures.

    (a) Securitization risk weight approaches. Except as provided in 
this section or in Sec. 628.41:
    (1) A System institution must deduct from CET1 capital any after-tax 
gain-on-sale resulting from a securitization (as provided in 
Sec. 628.22) and must apply a 1,250-percent risk weight to the portion 
of a credit-enhancing interest-only strip (CEIO) that does not 
constitute after-tax gain-on-sale.
    (2) If a securitization exposure does not require deduction under 
paragraph (a)(1) of this section, a System institution may assign a risk 
weight to the securitization exposure using the simplified supervisory 
formula approach (SSFA) in accordance with Sec. 628.43(a) through (d) 
and subject to the limitation under paragraph (e) of this section. 
Alternatively, a System institution may assign a risk weight to the 
purchased securitization exposure using the gross-up approach in 
accordance with Sec. 628.43(e), provided however, that such System 
institution must apply either the SSFA or the gross-up approach 
consistently across all of its securitization exposures, except as 
provided in paragraphs (a)(1), (3), and (4) of this section.
    (3) If a securitization exposure does not require deduction under 
paragraph (a)(1) of this section and the System institution cannot or 
chooses not to apply the SSFA or the gross-up approach to the exposure, 
the System institution must assign a risk weight to the exposure as 
described in Sec. 628.44.
    (4) If a securitization exposure is a derivative contract (other 
than protection provided by a System institution in the form of a credit 
derivative) that has a first priority claim on the cash flows from the 
underlying exposures (notwithstanding amounts due under interest rate or 
currency derivative contracts, fees due, or other similar payments), a 
System institution may choose to set the risk-weighted asset amount of 
the exposure equal to the amount of the exposure as determined in 
paragraph (c) of this section.
    (b) Total risk-weighted assets for securitization exposures. A 
System institution's total risk-weighted assets for securitization 
exposures equals the sum of the risk-weighted asset amount for 
securitization exposures that the System institution risk weights under 
paragraph (a)(1) of this section, Sec. 628.41(c), and Sec. 628.43, 
Sec. 628.44, or Sec. 628.45, except as provided in paragraphs (e) 
through (j) of this section, as applicable.
    (c) Exposure amount of a securitization exposure. (1) [Reserved]
    (2) On-balance sheet securitization exposures (available-for-sale or 
held-to-maturity securities). The exposure amount of an on-balance sheet 
securitization exposure that is an available-for-sale or held-to-
maturity security is the

[[Page 361]]

System institution's carrying value (including net accrued but unpaid 
interest and fees), less any net unrealized gains on the exposure and 
plus any net unrealized losses on the exposure.
    (3) Off-balance sheet securitization exposures. (i) Except as 
provided in paragraph (j) of this section, the exposure amount of an 
off-balance sheet securitization that is not a repo-style transaction, 
an eligible margin loan, a cleared transaction (other than a credit 
derivative), or an OTC derivative contract (other than a credit 
derivative) is the notional amount of the exposure.
    (ii)-(iii) [Reserved]
    (4) Repo-style transactions, eligible margin loans, and derivative 
contracts. The exposure amount of a securitization exposure that is a 
repo-style transaction, an eligible margin loan, or a derivative 
contract (other than a credit derivative) is the exposure amount of the 
transaction as calculated under Sec. 628.34 or Sec. 628.37 as 
applicable.
    (d) Overlapping exposures. If a System institution has multiple 
securitization exposures that provide duplicative coverage to the 
underlying exposures of a securitization, the System institution is not 
required to hold duplicative risk-based capital against the overlapping 
position. Instead, the System institution may apply to the overlapping 
position the applicable risk-based capital treatment that results in the 
highest risk-based capital requirement.
    (e) Implicit support. If a System institution provides support to a 
securitization in excess of the System institution's contractual 
obligation to provide credit support to the securitization (implicit 
support):
    (1) The System institution must include in risk-weighted assets all 
of the underlying exposures associated with the securitization as if the 
exposures had not been securitized and must deduct from CET1 capital 
(pursuant to Sec. 628.22) any after-tax gain-on-sale resulting from the 
securitization; and
    (2) The System institution must disclose publicly:
    (i) That it has provided implicit support to the securitization; and
    (ii) The risk-based capital impact to the System institution of 
providing such implicit support.
    (f) Undrawn portion of an eligible servicer cash advance facility. 
(1) Notwithstanding any other provision of this subpart, a System 
institution that is a servicer under an eligible servicer cash advance 
facility is not required to hold risk-based capital against potential 
future cash advance payments that it may be required to provide under 
the contract governing the facility.
    (2) For a System institution that acts as a servicer, the exposure 
amount for a servicer cash advance facility that is not an eligible cash 
advance facility is equal to the amount of all potential future cash 
payments that the System institution may be contractually required to 
provide during the subsequent 12-month period under the governing 
facility.
    (g) Interest-only mortgage-backed securities. Regardless of any 
other provisions of this subpart, the risk weight for a non-credit-
enhancing interest-only mortgage-backed security may not be less than 
100 percent.
    (h) Small-business loans and leases on personal property transferred 
with retained contractual exposure. (1) Regardless of any other 
provisions of this subpart, a System institution that has transferred 
small-business loans and leases on personal property (small-business 
obligations) must include in risk-weighted assets only its contractual 
exposure to the small-business obligations if all the following 
conditions are met:
    (i) The transaction must be treated as a sale under GAAP.
    (ii) The System institution establishes and maintains, pursuant to 
GAAP, a non-capital reserve sufficient to meet the System institution's 
reasonably estimated liability under the contractual obligation.
    (iii) The small business obligations are to businesses that meet the 
criteria for a small-business concern established by the Small Business 
Administration under section 3(a) of the Small Business Act.
    (iv) [Reserved]
    (2) The total outstanding amount of contractual exposure retained by 
a System institution on transfers of small-business obligations 
receiving

[[Page 362]]

the capital treatment specified in paragraph (h)(1) of this section 
cannot exceed 15 percent of the System institution's total capital.
    (3) If a System institution exceeds the 15-percent capital 
limitation provided in paragraph (h)(2) of this section, the capital 
treatment under paragraph (h)(1) of this section will continue to apply 
to any transfers of small-business obligations with retained contractual 
exposure that occurred during the time that the System institution did 
not exceed the capital limit.
    (4) [Reserved]
    (i)-(ii) [Reserved]
    (i) Nth-to-default credit derivatives--(1) Protection provider. A 
System institution must assign a risk weight to an nth-to-default credit 
derivative in accordance with FCA guidance.
    (2)-(3) [Reserved]
    (4) Protection purchaser--(i) First-to-default credit derivatives. A 
System institution that obtains credit protection on a group of 
underlying exposures through a first-to-default credit derivative that 
meets the rules of recognition of Sec. 628.36(b) must determine its 
risk-based capital requirement for the underlying exposures as if the 
System institution synthetically securitized the underlying exposure 
with the smallest risk-weighted asset amount and had obtained no credit 
risk mitigant on the other underlying exposures. A System institution 
must calculate a risk-based capital requirement for counterparty credit 
risk according to Sec. 628.34 for a first-to-default credit derivative 
that does not meet the rules of recognition of Sec. 628.36(b).
    (ii) Second-or-subsequent-to-default credit derivatives. (A) A 
System institution that obtains credit protection on a group of 
underlying exposures through a nth-to-default credit derivative that 
meets the rules of recognition of Sec. 628.36(b) (other than a first-to-
default credit derivative) may recognize the credit risk mitigation 
benefits of the derivative only if:
    (1) The System institution also has obtained credit protection on 
the same underlying exposures in the form of first-through-(n-1)-to-
default credit derivatives; or
    (2) If n-1 of the underlying exposures have already defaulted.
    (B) If a System institution satisfies the requirements of paragraph 
(i)(4)(ii)(A) of this section, the System institution must determine its 
risk-based capital requirement for the underlying exposures as if the 
System institution had only synthetically securitized the underlying 
exposure with the nth smallest risk-weighted asset amount and had 
obtained no credit risk mitigant on the underlying exposures.
    (C) A System institution must calculate a risk-based capital 
requirement for counterparty credit risk according to Sec. 628.34 for a 
nth-to-default credit derivative that does not meet the rules of 
recognition of Sec. 628.36(b).
    (j) Guarantees and credit derivatives other than nth-to-default 
credit derivatives--(1) Protection provider. For a guarantee or credit 
derivative (other than an nth-to-default credit derivative) provided by 
a System institution that covers the full amount or a pro rata share of 
a securitization exposure's principal and interest, the System 
institution must risk weight the guarantee or credit derivative in 
accordance with FCA guidance.
    (2) Protection purchaser. (i) A System institution that purchases a 
guarantee or OTC credit derivative (other than an nth-to-default credit 
derivative) that is recognized under Sec. 628.45 as a credit risk 
mitigant (including via collateral recognized under Sec. 628.37) is not 
required to compute a separate credit risk capital requirement under 
Sec. 628.31, in accordance with Sec. 628.34(c).
    (ii) If a System institution cannot, or chooses not to, recognize a 
purchased credit derivative as a credit risk mitigant under Sec. 628.45, 
the System institution must determine the exposure amount of the credit 
derivative under Sec. 628.34.
    (A) If the System institution purchases credit protection from a 
counterparty that is not a securitization special purpose entity (SPE), 
the System institution must determine the risk weight for the exposure 
according to general risk weights under Sec. 628.32.
    (B) If the System institution purchases the credit protection from a

[[Page 363]]

counterparty that is a securitization SPE, the System institution must 
determine the risk weight for the exposure according to this section, 
including paragraph (a)(4) of this section for a credit derivative that 
has a first priority claim on the cash flows from the underlying 
exposures of the securitization SPE (notwithstanding amounts due under 
interest rate or currency derivative contracts, fees due, or other 
similar payments).



Sec. 628.43  Simplified supervisory formula approach (SSFA) and the 
gross-up approach.

    (a) General requirements for the SSFA. To use the SSFA to determine 
the risk weight for a securitization exposure, a System institution must 
have data that enables it to assign accurately the parameters described 
in paragraph (b) of this section. Data used to assign the parameters 
described in paragraph (b) of this section must be the most currently 
available data; if the contract governing the underlying exposures of 
the securitization require payment on a monthly or quarterly basis, the 
data used to assign the parameters described in paragraph (b) of this 
section must be no more than 91 calendar days old. A System institution 
that does not have the appropriate data to assign the parameters 
described in paragraph (b) of this section must assign a risk weight of 
1,250 percent to the exposure.
    (b) SSFA parameters. To calculate the risk weight for a 
securitization exposure using the SSFA, a System institution must have 
accurate information on the following five inputs to the SSFA 
calculation:
    (1) KG is the weighted-average (with unpaid principal used as the 
weight for each exposure) total capital requirement of the underlying 
exposures calculated using this subpart. KG is expressed as a decimal 
value between 0 and 1 (that is, an average risk weight of 100 percent 
represents a value of KG equal to .08).
    (2) Parameter W is expressed as a decimal value between 0 and 1. 
Parameter W is the ratio of the sum of the dollar amounts of any 
underlying exposures within the securitized pool that meet any of the 
criteria as set forth in paragraphs (b)(2)(i) through (vi) of this 
section to the balance, measured in dollars, of underlying exposures:
    (i) Ninety (90) days or more past due;
    (ii) Subject to a bankruptcy or insolvency proceeding;
    (iii) In the process of foreclosure;
    (iv) Held as real estate owned;
    (v) Has contractually deferred interest payments for 90 days or 
more, other than principal or interest payments deferred on:
    (A) Federally guaranteed student loans, in accordance with the terms 
of those guarantee programs; or
    (B) Consumer loans, including non-federally guaranteed student 
loans, provided that such payments are deferred pursuant to provisions 
included in the contract at the time funds are disbursed that provide 
for periods(s) of deferral that are not initiated based on changes in 
the creditworthiness of the borrower; or
    (vi) Is in default.
    (3) Parameter A is the attachment point for the exposure, which 
represents the threshold at which credit losses will first be allocated 
to the exposure. Except as provided in Sec. 628.42(i) for nth-to-default 
credit derivatives, parameter A equals the ratio of the current dollar 
amount of underlying exposures that are subordinated to the exposure of 
the System institution to the current dollar amount of underlying 
exposures. Any reserve account funded by the accumulated cash flows from 
the underlying exposures that is subordinated to the System 
institution's securitization exposure may be included in the calculation 
of parameter A to the extent that cash is present in the account. 
Parameter A is expressed as a decimal value between 0 and 1.
    (4) Parameter D is the detachment point for the exposure, which 
represents the threshold at which credit losses of principal allocated 
to the exposure would result in a total loss of principal. Except as 
provided in Sec. 628.42(i) for nth-to-default credit derivatives, 
parameter D equals parameter A plus the ratio of the current dollar 
amount of the securitization exposures that are pari passu with the 
exposure (that is, have equal seniority with respect to credit risk) to 
the current

[[Page 364]]

dollar amount of the underlying exposures. Parameter D is expressed as a 
decimal value between 0 and 1.
    (5) A supervisory calibration parameter, p, is equal to 0.5 for 
securitization exposures that are not resecuritization exposures and 
equal to 1.5 for resecuritization exposures.
    (c) Mechanics of the SSFA. KG and W are used to calculate KA, the 
augmented value of KG, which reflects the observed credit quality of the 
underlying pool of exposures. KA is defined in paragraph (d) of this 
section. The values of parameters A and D, relative to KA determine the 
risk weight assigned to a securitization exposure as described in 
paragraph (d) of this section. The risk weight assigned to a 
securitization exposure, or portion of a securitization exposure, as 
appropriate, is the larger of the risk weight determined in accordance 
with this paragraph (d) of this section and a risk weight of 20 percent.
    (1) When the detachment point, parameter D, for a securitization 
exposure is less than or equal to KA, the exposure must be assigned a 
risk weight of 1,250 percent.
    (2) When the attachment point, parameter A, for a securitization 
exposure is greater than or equal to KA, the System institution must 
calculate the risk weight in accordance with paragraph (d) of this 
section.
    (3) When A is less than KA and D is greater than KA, the risk weight 
is a weighted average of 1,250 percent and 1,250 percent times KSSFA 
calculated in accordance with paragraph (d) of this section. For the 
purpose of this weighted-average calculation:
    (i) The weight assigned to 1,250 percent equals:
    [GRAPHIC] [TIFF OMITTED] TR28JY16.003
    
    (ii) The weight assigned to 1,250 percent times KSSFA equals:
    [GRAPHIC] [TIFF OMITTED] TR28JY16.004
    
    (iii) The risk weight will be set equal to:
    [GRAPHIC] [TIFF OMITTED] TR28JY16.005
    
    (d) SSFA equation. (1) The System institution must define the 
following parameters:

KA = (1 - W)  x  KG  x  (0.5  x  W)

    (2) Then the System institution must calculate KSSFA according to 
the following equation:

[[Page 365]]

[GRAPHIC] [TIFF OMITTED] TR28JY16.006

    (3) The risk weight for the exposure (expressed as a percent) is 
equal to KSSFA  x  1,250.
    (e) Gross-up approach--(1) Applicability. A System institution may 
apply the gross-up approach set forth in this section instead of the 
SSFA to determine the risk weight of its securitization exposures, 
provided that it applies the gross-up approach to all of its 
securitization exposures, except as otherwise provided for certain 
securitization exposures in Secs. 628.44 and 628.45.
    (2) To use the gross-up approach, a System institution must 
calculate the following four inputs:
    (i) Pro rata share A, which is the par value of the System 
institution's securitization exposure X as a percent of the par value of 
the tranche in which the securitization exposure resides Y:
[GRAPHIC] [TIFF OMITTED] TR28JY16.007

    (ii) Enhanced amount B, which is the value of tranches that are more 
senior to the tranche in which the System institution's securitization 
resides;
    (iii) Exposure amount (carrying value) C of the System institution's 
securitization exposure calculated under Sec. 628.42(c); and
    (iv) Risk weight (RW), which is the weighted-average risk weight of 
underlying exposures in the securitization pool as calculated under this 
subpart. For example, RW for an asset-backed security with underlying 
car loans would be 100 percent.
    (3) Credit equivalent amount (CEA). The CEA of a securitization 
exposure under this section equals the sum of:
    (i) The exposure amount C of the System institution's securitization 
exposure; plus
    (ii) The pro rata share A multiplied by the enhanced amount B, each 
calculated in accordance with paragraph (e)(2) of this section:

CEA = C + (A  x  B)

    (4) Risk-weighted assets (RWA). To calculate RWA for a 
securitization exposure under the gross-up approach, a System 
institution must apply the RW calculated under paragraph (e)(2) of

[[Page 366]]

this section to the CEA calculated in paragraph (e)(3) of this section:

RWA = RW  x  CEA

    (f) Limitations. Notwithstanding any other provision of this 
section, a System institution must assign a risk weight of not less than 
20 percent to a securitization exposure.



Sec. 628.44  Securitization exposures to which the SSFA and gross-up
approach do not apply.

    (a) General requirement. A System institution must assign a 1,250-
percent risk weight to all securitization exposures to which the System 
institution does not apply the SSFA or the gross up approach under 
Sec. 628.43.
    (b) [Reserved]



Sec. 628.45  Recognition of credit risk mitigants for securitization
exposures.

    (a) General. (1) An originating System institution that has obtained 
a credit risk mitigant to hedge its exposure to a synthetic or 
traditional securitization that satisfies the operational criteria 
provided in Sec. 628.41 may recognize the credit risk mitigant under 
Sec. 628.36 or Sec. 628.37, but only as provided in this section.
    (2) An investing System institution that has obtained a credit risk 
mitigant to hedge a securitization exposure may recognize the credit 
risk mitigant under Sec. 628.36 or Sec. 628.37, but only as provided in 
this section.
    (b) Mismatches. A System institution must make any applicable 
adjustment to the protection amount of an eligible guarantee or credit 
derivative as required in Sec. 628.36(d), (e), and (f) for any hedged 
securitization exposure. In the context of a synthetic securitization, 
when an eligible guarantee or eligible credit derivative covers multiple 
hedged exposures that have different residual maturities, the System 
institution must use the longest residual maturity of any of the hedged 
exposures as the residual maturity of all hedged exposures.



Secs. 628.46-628.50  [Reserved]

                Risk-Weighted Assets for Equity Exposures



Sec. 628.51  Introduction and exposure measurement.

    (a) General. (1) To calculate its risk-weighted asset amounts for 
equity exposures that are not equity exposures to an investment fund, a 
System institution must use the Simple Risk-Weight Approach (SRWA) 
provided in Sec. 628.52. A System institution must use the look-through 
approaches provided in Sec. 628.53 to calculate its risk-weighted asset 
amounts for equity exposures to investment funds. Equity investments 
(including preferred stock investments) in other System institutions, 
service corporations, and the Funding Corporation do not receive a risk 
weight, because they are deducted from capital in accordance with 
Sec. 628.22.
    (2)-(3) [Reserved]
    (b) Adjusted carrying value. For purposes of Secs. 628.51 through 
628.53, the adjusted carrying value of an equity exposure is:
    (1) For the on-balance sheet component of an equity exposure (other 
than an equity exposure that is classified as available-for-sale), the 
System institution's carrying value of the exposure;
    (2) For the on-balance sheet component of an equity exposure that is 
classified as available-for-sale, the System institution's carrying 
value of the exposure less any net unrealized gains on the exposure that 
are reflected in such carrying value but excluded from the System 
institution's regulatory capital components;
    (3) For the off-balance sheet component of an equity exposure that 
is not an equity commitment, the effective notional principal amount of 
the exposure, the size of which is equivalent to a hypothetical on-
balance sheet position in the underlying equity instrument that would 
evidence the same change in fair value (measured in dollars) given a 
small change in the price of the underlying equity instrument, minus the 
adjusted carrying value of the on-balance sheet component of the 
exposure as calculated in paragraph (b)(1) of this section; and

[[Page 367]]

    (4) For a commitment to acquire an equity exposure (an equity 
commitment), the effective notional principal amount of the exposure is 
multiplied by the following conversion factors (CFs):
    (i) Conditional equity commitments with an original maturity of 14 
months or less receive a CF of 20 percent.
    (ii) Conditional equity commitments with an original maturity of 
over 14 months receive a CF of 50 percent.
    (iii) Unconditional equity commitments receive a CF of 100 percent.



Sec. 628.52  Simple risk-weight approach (SRWA).

    (a) General. Under the SRWA, a System institution's total risk-
weighted assets for equity exposures equals the sum of the risk-weighted 
asset amounts for each of the System institution's individual equity 
exposures (other than equity exposures to an investment fund) as 
determined under this section and the risk-weighted asset amounts for 
each of the System institution's individual equity exposures to an 
investment fund as determined under Sec. 628.53.
    (b) SRWA computation for individual equity exposures. A System 
institution must determine the risk-weighted asset amount for an 
individual equity exposure (other than an equity exposure to an 
investment fund) by multiplying the adjusted carrying value of the 
equity exposure or the effective portion and ineffective portion of a 
hedge pair (as defined in paragraph (c) of this section) by the lowest 
applicable risk weight in this paragraph.
    (1) Zero-percent (0%) risk weight equity exposures. An equity 
exposure to a sovereign, the Bank for International Settlements, the 
European Central Bank, the European Commission, the International 
Monetary Fund, an MDB, and any other entity whose credit exposures 
receive a 0-percent risk weight under Sec. 628.32 may be assigned a 0-
percent risk weight.
    (2) Twenty-percent (20%) risk weight equity exposures. An equity 
exposure to a PSE or the Federal Agricultural Mortgage Corporation 
(Farmer Mac) must be assigned a 20-percent risk weight.
    (3) One hundred-percent (100%) risk weight equity exposures. The 
equity exposures set forth in this paragraph (b)(3) must be assigned a 
100-percent risk weight:
    (i) [Reserved]
    (ii) Effective portion of hedge pairs. The effective portion of a 
hedge pair.
    (iii) Non-significant equity exposures. Equity exposures, excluding 
exposures to an investment firm that would meet the definition of a 
traditional securitization in Sec. 628.2 were it not for the application 
of paragraph (8) of that definition and has greater than immaterial 
leverage, to the extent that aggregate adjusted carrying value of the 
exposures does not exceed 10 percent of the System institution's total 
capital.
    (A) Equity exposures subject to paragraph (b)(3)(iii) of this 
section include:
    (1) Equity exposures to unconsolidated unincorporated business 
entities and equity exposures held through consolidated unincorporated 
business entities, as authorized by subpart J of part 611 of this 
chapter; and
    (2) [Reserved]
    (3) Equity exposures to an unconsolidated rural business investment 
company and equity exposures held through a consolidated rural business 
investment company described in 7 U.S.C. 2009cc et seq.
    (B) To compute the aggregate adjusted carrying value of a System 
institution's equity exposures for purposes of this section, the System 
institution may exclude equity exposures described in paragraphs (b)(1) 
and (2) and (b)(3)(ii) of this section, the equity exposure in a hedge 
pair with the smaller adjusted carrying value, and a proportion of each 
equity exposure to an investment fund equal to the proportion of the 
assets of the investment fund that are not equity exposures or that meet 
the criterion of paragraph (b)(3)(i) of this section. If a System 
institution does not know the actual holdings of the investment fund, 
the System institution may calculate the proportion of the assets of the 
fund that are not equity exposures based on the terms of the prospectus, 
partnership agreement, or similar contract that defines the fund's 
permissible investments. If the sum of the investment limits for all 
exposure classes

[[Page 368]]

within the fund exceeds 100 percent, the System institution must assume 
for purposes of this section that the investment fund invests to the 
maximum extent possible in equity exposures.
    (C) When determining which of a System institution's equity 
exposures qualify for a 100-percent risk weight under this paragraph, a 
System institution first must include equity exposures to unconsolidated 
rural business investment companies or held through consolidated rural 
business investment companies described in 7 U.S.C. 2009cc et seq.; then 
must include equity exposures to unconsolidated unincorporated business 
entities and equity exposures held through consolidated unincorporated 
business entities, as authorized by subpart J of part 611 of this 
chapter; then must include publicly traded equity exposures (including 
those held indirectly through investment funds); and then must include 
non-publicly traded equity exposures (including those held indirectly 
through investment funds).
    (4) Other equity exposures. The risk weight for any equity exposure 
that does not qualify for a risk weight under paragraph (b)(1), (2), 
(3), or (7) of this section will be determined by the FCA.
    (5)-(6) [Reserved]
    (7) Six hundred-percent (600%) risk weight equity exposures. An 
equity exposure to an investment firm must be assigned a 600-percent 
risk weight, provided that the investment firm:
    (i) Would meet the definition of a traditional securitization in 
Sec. 628.2 were it not for the application of paragraph (8) of that 
definition; and
    (ii) Has greater than immaterial leverage.
    (c) Hedge transactions--(1) Hedge pair. A hedge pair is two equity 
exposures that form an effective hedge so long as each equity exposure 
is publicly traded or has a return that is primarily based on a publicly 
traded equity exposure.
    (2) Effective hedge. Two equity exposures form an effective hedge if 
the exposures either have the same remaining maturity or each has a 
remaining maturity of at least 3 months; the hedge relationship is 
formally documented in a prospective manner (that is, before the System 
institution acquires at least one of the equity exposures); the 
documentation specifies the measure of effectiveness (E) the System 
institution will use for the hedge relationship throughout the life of 
the transaction; and the hedge relationship has an E greater than or 
equal to 0.8. A System institution must measure E at least quarterly and 
must use one of three alternative measures of E as set forth in this 
paragraph (c):
    (i) Under the dollar-offset method of measuring effectiveness, the 
System institution must determine the ratio of value change (RVC). The 
RVC is the ratio of the cumulative sum of the changes in value of one 
equity exposure to the cumulative sum of the changes in the value of the 
other equity exposure. If RVC is positive, the hedge is not effective 
and E equals 0. If RVC is negative and greater than or equal to -1 (that 
is, less than 0 and greater than or equal to -1), then E equals the 
absolute value of RVC. If RVC is negative and less than -1, then E 
equals 2 plus RVC.
    (ii) Under the variability-reduction method of measuring 
effectiveness:
[GRAPHIC] [TIFF OMITTED] TR28JY16.008

Where:

Xt = At  x  Bt;
At = the value at time t of one exposure in a hedge pair; and
Bt = the value at time t of the other exposure in a hedge pair.


[[Page 369]]


    (iii) Under the regression method of measuring effectiveness, E 
equals the coefficient of determination of a regression in which the 
change in value of one exposure in a hedge pair is the dependent 
variable and the change in value of the other exposure in a hedge pair 
is the independent variable. However, if the estimated regression 
coefficient is positive, then E equals 0.
    (3) The effective portion of a hedge pair is E multiplied by the 
greater of the adjusted carrying values of the equity exposures forming 
a hedge pair.
    (4) The ineffective portion of a hedge pair is (1-E) multiplied by 
the greater of the adjusted carrying values of the equity exposures 
forming a hedge pair.



Sec. 628.53  Equity exposures to investment funds.

    (a) Available approaches. (1) A System institution must determine 
the risk-weighted asset amount of an equity exposure to an investment 
fund under the full look-through approach described in paragraph (b) of 
this section, the simple modified look-through approach described in 
paragraph (c) of this section, or the alterative modified look-through 
approach described paragraph (d) of this section, provided, however, 
that the minimum risk weight that may be assigned to an equity exposure 
under this section is 20 percent.
    (2) [Reserved]
    (3) If an equity exposure to an investment fund is part of a hedge 
pair and the System institution does not use the full look-through 
approach, the System institution must use the ineffective portion of the 
hedge pair as determined under Sec. 628.52(c) as the adjusted carrying 
value for the equity exposure to the investment fund. The risk-weighted 
asset amount of the effective portion of the hedge pair is equal to its 
adjusted carrying value.
    (b) Full look-through approach. A System institution that is able to 
calculate a risk-weighted asset amount for its proportional ownership 
share of each exposure held by the investment fund (as calculated under 
this subpart as if the proportional ownership share of the adjusted 
carrying value of each exposure were held directly by the System 
institution) may set the risk-weighted asset amount of the System 
institution's exposure to the fund equal to the product of:
    (1) The aggregate risk-weighted asset amounts of the exposures held 
by the fund as if they were held directly by the System institution; and
    (2) The System institution's proportional ownership share of the 
fund.
    (c) Simple modified look-through approach. Under the simple modified 
look-through approach, the risk-weighted asset amount for a System 
institution's equity exposure to an investment fund equals the adjusted 
carrying value of the equity exposure multiplied by the highest risk 
weight that applies to any exposure the fund is permitted to hold under 
the prospectus, partnership agreement, or similar agreement that defines 
the fund's permissible investments (excluding derivative contracts that 
are used for hedging rather than speculative purposes and that do not 
constitute a material portion of the fund's exposures).
    (d) Alternative modified look-through approach. Under the 
alternative modified look-through approach, a System institution may 
assign the adjusted carrying value of an equity exposure to an 
investment fund on a pro rata basis to different risk weight categories 
under this subpart based on the investment limits in the fund's 
prospectus, partnership agreement, or similar contract that defines the 
fund's permissible investments. The risk-weighted asset amount for the 
System institution's equity exposure to the investment fund equals the 
sum of each portion of the adjusted carrying value assigned to an 
exposure type multiplied by the applicable risk weight under this 
subpart. If the sum of the investment limits for all exposure types 
within the fund exceeds 100 percent, the System institution must assume 
that the fund invests to the maximum extent permitted under its 
investment limits in the exposure type with the highest applicable risk 
weight under this subpart and continues to make investments in order of 
the exposure type with the next highest applicable risk weight under 
this subpart until the maximum total investment level is reached. If 
more than one exposure type applies to an exposure, the System 
institution must use the highest

[[Page 370]]

applicable risk weight. A System institution may exclude derivative 
contracts held by the fund that are used for hedging rather than for 
speculative purposes and do not constitute a material portion of the 
fund's exposures.



Secs. 628.54-628.60  [Reserved]

                               Disclosures



Sec. 628.61  Purpose and scope.

    Sections 628.62 and 628.63 establish public disclosure requirements 
for each System bank related to the capital requirements contained in 
this part.



Sec. 628.62  Disclosure requirements.

    (a) A System bank must provide timely public disclosures each 
calendar quarter of the information in the applicable tables in 
Sec. 628.63. The System bank must make these disclosures in its 
quarterly and annual reports to shareholders required in part 620 of 
this chapter. The System bank need not make these disclosures in the 
format set out in the applicable tables or all in the same location in a 
report, as long as a summary table specifically indicating the 
location(s) of all such disclosures is provided. If a significant change 
occurs, such that the most recent reported amounts are no longer 
reflective of the System bank's capital adequacy and risk profile, then 
a brief discussion of this change and its likely impact must be 
disclosed as soon as practicable thereafter. This disclosure requirement 
may be satisfied by providing a notice under Sec. 620.15 of this 
chapter. Qualitative disclosures that typically do not change each 
quarter (for example, a general summary of the System bank's risk 
management objectives and policies, reporting system, and definitions) 
may be disclosed annually after the end of the 4th calendar quarter, 
provided that any significant changes are disclosed in the interim.
    (b) A System bank must have a formal disclosure policy approved by 
the board of directors that addresses its approach for determining the 
disclosures it makes. The policy must address the associated internal 
controls and disclosure controls and procedures. The board of directors 
and senior management are responsible for establishing and maintaining 
an effective internal control structure over financial reporting, 
including the disclosures required by this subpart, and must ensure that 
appropriate review of the disclosures takes place. The chief executive 
officer, the chief financial officer, and a designated board member must 
attest that the disclosures meet the requirements of this subpart.
    (c) If a System bank concludes that disclosure of specific 
proprietary or confidential commercial or financial information that it 
would otherwise be required to disclose under this section would 
compromise its position, then the System bank is not required to 
disclose that specific information pursuant to this section, but must 
disclose more general information about the subject matter of the 
requirement, together with the fact that, and the reason why, the 
specific items of information have not been disclosed.



Sec. 628.63  Disclosures.

    (a) Except as provided in Sec. 628.62, a System bank must make the 
disclosures described in Tables 1 through 10 of this section. The System 
bank must make these disclosures publicly available for each of the last 
3 years (that is, 12 quarters) or such shorter period beginning on 
January 1, 2017.
    (b) A System bank must publicly disclose each quarter the following:
    (1) CET1 capital, tier 1 capital, and total capital ratios, 
including all the regulatory capital elements and all the regulatory 
adjustments and deductions needed to calculate the numerator of such 
ratios;
    (2) Total risk-weighted assets, including the different regulatory 
adjustments and deductions needed to calculate total risk-weighted 
assets;
    (3) Regulatory capital ratios during the transition period, 
including a description of all the regulatory capital elements and all 
regulatory adjustments and deductions needed to calculate the numerator 
and denominator of each capital ratio during the transition period; and
    (4) A reconciliation of regulatory capital elements as they relate 
to its balance sheet in any audited consolidated financial statements.

[[Page 371]]



                                  Table 1 to Sec. 628.63--Scope of Application
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Qualitative Disclosures..........................................  (a) The name of the top corporate entity in
                                                                    the group to which this subpart applies.\1\
                                                                   (b) A brief description of the differences in
                                                                    the basis for consolidating entities \2\ for
                                                                    accounting and regulatory purposes, with a
                                                                    description of those entities:
                                                                      (1) That are fully consolidated;
                                                                      (2) That are deconsolidated and deducted
                                                                       from total capital;
                                                                      (3) For which the total capital
                                                                       requirement is deducted; and
                                                                      (4) That are neither consolidated nor
                                                                       deducted (for example, where the
                                                                       investment in the entity is assigned a
                                                                       risk weight in accordance with this
                                                                       subpart).
                                                                   (c) Any restrictions, or other major
                                                                    impediments, on transfer of funds or total
                                                                    capital within the group.
Quantitative Disclosures.........................................  (d) [Reserved]
                                                                   (e) The aggregate amount by which actual
                                                                    total capital is less than the minimum total
                                                                    capital requirement in all subsidiaries,
                                                                    with total capital requirements and the
                                                                    name(s) of the subsidiaries with such
                                                                    deficiencies.
----------------------------------------------------------------------------------------------------------------
\1\ The System bank is the top corporate entity.
\2\ Entities include any subsidiaries authorized by the FCA, including operating subsidiaries, service
  corporations, and unincorporated business entities.


                                   Table 2 to Sec. 628.63--Capital Structure
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Qualitative Disclosures..........................................  (a) Summary information on the terms and
                                                                    conditions of the main features of all
                                                                    regulatory capital instruments.
Quantitative Disclosures.........................................  (b) The amount of common equity tier 1
                                                                    capital, with separate disclosure of:
                                                                      (1) Common cooperative equities
                                                                        a. Statutory minimum purchased borrower
                                                                         stock;
                                                                        b. Other required member purchased
                                                                         stock;
                                                                        c. Allocated equities (stock or
                                                                         surplus):
                                                                          1. Qualified allocated equities
                                                                           subject to retirement;
                                                                          2. Nonqualified allocated equities
                                                                           subject to retirement;
                                                                          3. Nonqualified allocated equities not
                                                                           subject to retirement;
                                                                      (2) Unallocated retained earnings (URE);
                                                                      (3) Paid-in capital; and
                                                                      (4) Regulatory adjustments and deductions
                                                                       made to common equity tier 1 capital.
                                                                   (c) The amount of tier 1 capital, with
                                                                    separate disclosure of:
                                                                      (1) Additional tier 1 capital elements;
                                                                       and
                                                                      (2) Regulatory adjustments and deductions
                                                                       made to tier 1 capital.
                                                                   (d) The amount of total capital, with
                                                                    separate disclosure of:

[[Page 372]]

 
                                                                      (1) Common cooperative equities not
                                                                       included in common equity tier 1 capital;
                                                                      (2) Tier 2 capital elements, including
                                                                       tier 2 capital instruments; and
                                                                      (3) Regulatory adjustments and deductions
                                                                       made to total capital, including
                                                                       deductions of third-party capital under
                                                                       Sec. 628.23.
----------------------------------------------------------------------------------------------------------------


                                    Table 3 to Sec. 628.63--Capital Adequacy
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Qualitative disclosures..........................................  (a) A summary discussion of the System bank's
                                                                    approach to assessing the adequacy of its
                                                                    capital to support current and future
                                                                    activities.
Quantitative disclosures.........................................  (b) Risk-weighted assets for:
                                                                      (1) Exposures to sovereign entities;
                                                                      (2) Exposures to certain supranational
                                                                       entities and MDBs;
                                                                      (3) Exposures to GSEs;
                                                                      (4) Exposures to depository institutions,
                                                                       foreign banks, and credit unions,
                                                                       including OFI exposures that are risk
                                                                       weighted as exposures to U.S. depository
                                                                       institutions and credit unions;
                                                                      (5) Exposures to PSEs;
                                                                      (6) Corporate exposures, including
                                                                       borrower loans (including agricultural
                                                                       and consumer loans) and OFI exposures
                                                                       that are not risk weighted as exposures
                                                                       to U.S. depository institutions and
                                                                       credit unions;
                                                                      (7) Residential mortgage exposures;
                                                                      (8) [Reserved]
                                                                      (9) Past due and nonaccrual exposures;
                                                                      (10) Exposures to other assets;
                                                                      (11) Cleared transactions;
                                                                      (12) Unsettled transactions;
                                                                      (13) Securitization exposures; and
                                                                      (14) Equity exposures.
                                                                   (c) [Reserved]
                                                                   (d) Common equity tier 1, tier 1 and total
                                                                    risk-based capital ratios for the System
                                                                    bank.
                                                                   (e) Total standardized risk-weighted assets.
----------------------------------------------------------------------------------------------------------------


                                    Table 4 to Sec. 628.63--Capital Buffers
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Quantitative Disclosures.........................................  (a) At least quarterly, the System bank must
                                                                    calculate and publicly disclose the capital
                                                                    conservation buffer and leverage buffer as
                                                                    described under Sec. 628.11.
                                                                   (b) At least quarterly, the System bank must
                                                                    calculate and publicly disclose the eligible
                                                                    retained income of the System bank, as
                                                                    described under Sec. 628.11.

[[Page 373]]

 
                                                                   (c) At least quarterly, the System bank must
                                                                    calculate and publicly disclose any
                                                                    limitations it has on distributions and
                                                                    discretionary bonus payments resulting from
                                                                    the buffer framework described under Sec.
                                                                    628.11, including the maximum payout amount
                                                                    and/or maximum leverage payout amount for
                                                                    the quarter.
----------------------------------------------------------------------------------------------------------------

    (c) General qualitative disclosure requirement. For each separate 
risk area described in tables 5 through 10 of this section, the System 
bank must describe its risk management objectives and policies, 
including: Strategies and processes; the structure and organization of 
the relevant risk management function; the scope and nature of risk 
reporting and/or measurement systems; policies for hedging and/or 
mitigating risk and strategies and processes for monitoring the 
continuing effectiveness of hedges/mitigants.

                          Table 5 to Sec. 628.63 \1\--Credit Risk: General Disclosures
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Qualitative Disclosures..........................................  (a) The general qualitative disclosure
                                                                    requirement with respect to credit risk
                                                                    (excluding counterparty credit risk
                                                                    disclosed in accordance with Table 6 of this
                                                                    section), including the:
                                                                      (1) Policy for determining past due or
                                                                       delinquency status;
                                                                      (2) Policy for placing loans in nonaccrual
                                                                       status;
                                                                      (3) Policy for returning loans to accrual
                                                                       status;
                                                                      (4) Definition of and policy for
                                                                       identifying impaired loans (for financial
                                                                       accounting purposes);
                                                                      (5) Description of the methodology that
                                                                       the System bank uses to estimate its
                                                                       allowance for loan losses, including
                                                                       statistical methods used where
                                                                       applicable;
                                                                      (6) Policy for charging-off uncollectible
                                                                       amounts; and
                                                                      (7) Discussion of the System bank's credit
                                                                       risk management policy.
Quantitative Disclosures.........................................  (b) Total credit risk exposures and average
                                                                    credit risk exposures, after accounting
                                                                    offsets in accordance with GAAP, without
                                                                    taking into account the effects of credit
                                                                    risk mitigation techniques (for example,
                                                                    collateral and netting not permitted under
                                                                    GAAP), over the period categorized by major
                                                                    types of credit exposure. For example,
                                                                    System banks could use categories similar to
                                                                    that used for financial statement purposes.
                                                                    Such categories might include, for instance:
                                                                      (1) Loans, off-balance sheet commitments,
                                                                       and other non-derivative off-balance
                                                                       sheet exposures;
                                                                      (2) Debt securities; and
                                                                      (3) OTC derivatives.\2\
                                                                   (c) Geographic distribution of exposures,
                                                                    categorized in significant areas by major
                                                                    types of credit exposure.\3\

[[Page 374]]

 
                                                                   (d) Industry or counterparty type
                                                                    distribution of exposures, categorized by
                                                                    major types of credit exposure.
                                                                   (e) By major industry or counterparty type:
                                                                      (1) Amount of impaired loans for which
                                                                       there was a related allowance under GAAP;
                                                                      (2) Amount of impaired loans for which
                                                                       there was no related allowance under
                                                                       GAAP;
                                                                      (3) Amount of loans past due 90 days and
                                                                       in nonaccrual status;
                                                                      (4) Amount of loans past due 90 days and
                                                                       still accruing; \4\
                                                                      (5) The balance in the allowance for loan
                                                                       losses at the end of each period
                                                                       according to GAAP; and
                                                                      (6) Charge-offs during the period.
                                                                   (f) Amount of impaired loans and, if
                                                                    available, the amount of past due loans
                                                                    categorized by significant geographic areas
                                                                    including, if practical, the amounts of
                                                                    allowances related to each geographical
                                                                    area,\5\ further categorized as required by
                                                                    GAAP.
                                                                   (g) Reconciliation of changes in allowances
                                                                    for loan losses.\6\
                                                                   (h) Remaining contractual maturity
                                                                    delineation (for example, one year or less)
                                                                    of the whole portfolio, categorized by
                                                                    credit exposure.
----------------------------------------------------------------------------------------------------------------
\1\ This Table 5 does not cover equity exposures, which should be reported in Table 9 of this section.
\2\ See, for example, ASC Topic 815-10 and 210, as they may be amended from time to time.
\3\ A System bank can satisfy this requirement by describing the geographic distribution of its loan portfolio
  by State or other significant geographic division, if any.
\4\ A System bank is encouraged also to provide an analysis of the aging of past-due loans.
\5\ The portion of the general allowance that is not allocated to a geographical area should be disclosed
  separately.
\6\ The reconciliation should include the following: A description of the allowance; the opening balance of the
  allowance; charge-offs taken against the allowance during the period; amounts provided (or reversed) for
  estimated probable loan losses during the period; any other adjustments (for example, exchange rate
  differences, business combinations, acquisitions and disposals of subsidiaries), including transfers between
  allowances; and the closing balance of the allowance. Charge-offs and recoveries that have been recorded
  directly to the income statement should be disclosed separately.


           Table 6 to Sec. 628.63--General Disclosure for Counterparty Credit Risk-Related Exposures
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Qualitative Disclosures..........................................  (a) The general qualitative disclosure
                                                                    requirement with respect to OTC derivatives,
                                                                    eligible margin loans, and repo-style
                                                                    transactions, including a discussion of:
                                                                      (1) The methodology used to assign credit
                                                                       limits for counterparty credit exposures;
                                                                      Policies for securing collateral, valuing
                                                                       and managing collateral, and establishing
                                                                       credit reserves;
                                                                      (3) The primary types of collateral taken;
                                                                       and
                                                                      (4) The impact of the amount of collateral
                                                                       the System bank would have to provide
                                                                       given deterioration in the System bank's
                                                                       own creditworthiness.

[[Page 375]]

 
Quantitative Disclosures.........................................  (b) Gross positive fair value of contracts,
                                                                    collateral held (including type, for
                                                                    example, cash, government securities), and
                                                                    net unsecured credit exposure.\1\ A System
                                                                    bank also must disclose the notional value
                                                                    of credit derivative hedges purchased for
                                                                    counterparty credit risk protection and the
                                                                    distribution of current credit exposure by
                                                                    exposure type.\2\
                                                                   (c) Notional amount of purchased credit
                                                                    derivatives used for the System bank's own
                                                                    credit portfolio.
----------------------------------------------------------------------------------------------------------------
\1\ Net unsecured credit exposure is the credit exposure after considering both the benefits from legally
  enforceable netting agreements and collateral arrangements without taking into account haircuts for price
  volatility, liquidity, etc.
\2\ This may include interest rate derivative contracts, foreign exchange derivative contracts, equity
  derivative contracts, credit derivatives, commodity or other derivative contracts, repo-style transactions,
  and eligible margin loans.


                               Table 7 to Sec. 628.63--Credit Risk Mitigation 1 2
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Qualitative Disclosures..........................................  (a) The general qualitative disclosure
                                                                    requirement with respect to credit risk
                                                                    mitigation, including:
                                                                      (1) Policies and processes for collateral
                                                                       valuation and management;
                                                                      (2) A description of the main types of
                                                                       collateral taken by the System bank;
                                                                      (3) The main types of guarantors/credit
                                                                       derivative counterparties and their
                                                                       creditworthiness; and
                                                                      (4) Information about (market or credit)
                                                                       risk concentrations with respect to
                                                                       credit risk mitigation.
Quantitative Disclosures.........................................  (b) For each separately disclosed credit risk
                                                                    portfolio, the total exposure that is
                                                                    covered by eligible financial collateral,
                                                                    and after the application of haircuts.
                                                                   (c) For each separately disclosed portfolio,
                                                                    the total exposure that is covered by
                                                                    guarantees/credit derivatives and the risk-
                                                                    weighted asset amount associated with that
                                                                    exposure.
----------------------------------------------------------------------------------------------------------------
\1\ At a minimum, a System bank must provide the disclosures in this Table 7 in relation to credit risk
  mitigation that has been recognized for the purposes of reducing capital requirements under this subpart.
  Where relevant, System banks are encouraged to give further information about mitigants that have not been
  recognized for that purpose.
\2\ Credit derivatives that are treated, for the purposes of this subpart, as synthetic securitization exposures
  should be excluded from the credit risk mitigation disclosures and included within those relating to
  securitization (Table 8 of this section).


                                   Table 8 to Sec. 628.63--Securitization \1\
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Qualitative Disclosures..........................................  (a) The general qualitative disclosure
                                                                    requirement with respect to a securitization
                                                                    (including synthetic securitizations),
                                                                    including a discussion of:
                                                                      (1) The System bank's objectives for
                                                                       securitizing assets, including the extent
                                                                       to which these activities transfer credit
                                                                       risk of the underlying exposures away
                                                                       from the System bank to other entities
                                                                       and including the type of risks assumed
                                                                       and retained with resecuritization
                                                                       activity; \2\
                                                                      (2) The nature of the risks (e.g.
                                                                       liquidity risk) inherent in the
                                                                       securitized assets;

[[Page 376]]

 
                                                                      (3) The roles played by the System bank in
                                                                       the securitization process \3\ and an
                                                                       indication of the extent of the System
                                                                       bank's involvement in each of them;
                                                                      (4) The processes in place to monitor
                                                                       changes in the credit and market risk of
                                                                       securitization exposures including how
                                                                       those processes differ for
                                                                       resecuritization exposures;
                                                                      (5) The System bank's policy for
                                                                       mitigating the credit risk retained
                                                                       through securitization and
                                                                       resecuritization exposures; and
                                                                      (6) The risk-based capital approaches that
                                                                       the System bank follows for its
                                                                       securitization exposures including the
                                                                       type of securitization exposure to which
                                                                       each approach applies.
                                                                   (b) [Reserved]
                                                                   (c) Summary of the System bank's accounting
                                                                    policies for securitization activities,
                                                                    including:
                                                                      (1) Whether the transactions are treated
                                                                       as sales or financings;
                                                                      (2) Recognition of gain-on-sale;
                                                                      (3) Methods and key assumptions applied in
                                                                       valuing retained or purchased interests;
                                                                      (4) Changes in methods and key assumptions
                                                                       from the previous period for valuing
                                                                       retained interests and impact of the
                                                                       changes;
                                                                      (5) Treatment of synthetic
                                                                       securitizations;
                                                                      (6) How exposures intended to be
                                                                       securitized are valued and whether they
                                                                       are recorded under subpart D of this
                                                                       part; and
                                                                      (7) Policies for recognizing liabilities
                                                                       on the balance sheet for arrangements
                                                                       that could require the System bank to
                                                                       provide financial support for securitized
                                                                       assets.
                                                                   (d) An explanation of significant changes to
                                                                    any quantitative information since the last
                                                                    reporting period.
Quantitative Disclosures.........................................  (e) The total outstanding exposures
                                                                    securitized by the System bank in
                                                                    securitizations that meet the operational
                                                                    criteria provided in Sec. 628.41
                                                                    (categorized into traditional and synthetic
                                                                    securitizations), by exposure type.\4\
                                                                   (f) For exposures securitized by the System
                                                                    bank in securitizations that meet the
                                                                    operational criteria in Sec. 628.41:
                                                                      (1) Amount of securitized assets that are
                                                                       impaired/past due categorized by exposure
                                                                       type; \5\ and
                                                                      (2) Losses recognized by the System bank
                                                                       during the current period categorized by
                                                                       exposure type.\6\
                                                                   (g) The total amount of outstanding exposures
                                                                    intended to be securitized categorized by
                                                                    exposure type.
                                                                   (h) Aggregate amount of:

[[Page 377]]

 
                                                                      (1) On-balance sheet securitization
                                                                       exposures retained or purchased
                                                                       categorized by exposure type; and
                                                                      (2) Off-balance sheet securitization
                                                                       exposures categorized by exposure type.
                                                                   (i) (1) Aggregate amount of securitization
                                                                    exposures retained or purchased and the
                                                                    associated capital requirements for these
                                                                    exposures, categorized between
                                                                    securitization and resecuritization
                                                                    exposures, further categorized into a
                                                                    meaningful number of risk weight bands and
                                                                    by risk-based capital approach (e.g., SSFA);
                                                                    and
                                                                      (2) Exposures that have been deducted
                                                                       entirely from tier 1 capital, CEIOs
                                                                       deducted from total capital (as described
                                                                       in Sec. 628.42(a)(1)), and other
                                                                       exposures deducted from total capital
                                                                       should be disclosed separately by
                                                                       exposure type.
                                                                   (j) Summary of current year's securitization
                                                                    activity, including the amount of exposures
                                                                    securitized (by exposure type), and
                                                                    recognized gain or loss on sale by exposure
                                                                    type.
                                                                   (k) Aggregate amount of resecuritization
                                                                    exposures retained or purchased categorized
                                                                    according to:
                                                                      (1) Exposures to which credit risk
                                                                       mitigation is applied and those not
                                                                       applied; and
                                                                      (2) Exposures to guarantors categorized
                                                                       according to guarantor creditworthiness
                                                                       categories or guarantor name.
----------------------------------------------------------------------------------------------------------------
\1\ A System bank is not authorized to perform every role in a securitization, and nothing in these capital
  rules authorizes a System bank to engage in activities relating to securitizations that are not otherwise
  authorized.
\2\ The System bank should describe the structure of resecuritizations in which it participates; this
  description should be provided for the main categories of resecuritization products in which the System bank
  is active.
\3\ Roles in securitizations generally could include originator, investor, servicer, provider of credit
  enhancement, sponsor, liquidity provider, or swap provider. As noted in footnote 1 of this table, however, a
  System bank is not authorized to perform all of these roles.
\4\ ``Exposures securitized'' include underlying exposures originated by the System bank, whether generated by
  them or purchased, and recognized in the balance sheet, from third parties, and third-party exposures included
  in sponsored transactions. Securitization transactions (including underlying exposures originally on the
  System bank's balance sheet and underlying exposures acquired by the System bank from third-party entities) in
  which the originating System bank (as an originating System institution) does not retain any securitization
  exposure should be shown separately but need only be reported for the year of inception. System banks are
  required to disclose exposures regardless of whether there is a capital charge under this part.
\5\ Include credit-related other than temporary impairment (OTTI).
\6\ For example, charge-offs/allowances (if the assets remain on the System bank's balance sheet) or credit-
  related OTTI of interest-only strips and other retained residual interests, as well as recognition of
  liabilities for probable future financial support required of the System bank with respect to securitized
  assets.


                                        Table 9 to Sec. 628.63--Equities
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Qualitative Disclosures..........................................  (a) The general qualitative disclosure
                                                                    requirement with respect to equity risk:
                                                                      (1) Differentiation between holdings on
                                                                       which capital gains are expected and
                                                                       those taken under other objectives
                                                                       including for relationship and strategic
                                                                       reasons; and

[[Page 378]]

 
                                                                      (2) Discussion of important policies
                                                                       covering the valuation of and accounting
                                                                       for equity. This includes the accounting
                                                                       techniques and valuation methodologies
                                                                       used, including key assumptions and
                                                                       practices affecting valuation as well as
                                                                       significant changes in these practices.
Quantitative Disclosures.........................................  (b) Value disclosed on the balance sheet of
                                                                    investments, as well as the fair value of
                                                                    those investments; for securities that are
                                                                    publicly traded, a comparison to publicly
                                                                    quoted share values where the share price is
                                                                    materially different from fair value.
                                                                   (c) The types and nature of investments,
                                                                    including the amount that is:
                                                                      (1) Publicly traded; and
                                                                      (2) Non-publicly traded.
                                                                   (d) The cumulative realized gains (losses)
                                                                    arising from sales and liquidations in the
                                                                    reporting period.
                                                                   (e) (1) Total unrealized gains (losses).\1\
                                                                      (2) Total latent revaluation gains
                                                                       (losses).\2\
                                                                      (3) Any amounts of the above included in
                                                                       tier 1 or tier 2 capital.
                                                                   (f) [Reserved]
----------------------------------------------------------------------------------------------------------------
\1\ Unrealized gains (losses) recognized on the balance sheet but not through earnings.
\2\ Unrealized gains (losses) not recognized either on the balance sheet or through earnings.


                     Table 10 to Sec. 628.63--Interest Rate Risk for Non-Trading Activities
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Qualitative disclosures..........................................  (a) The general qualitative disclosure
                                                                    requirement, including the nature of
                                                                    interest rate risk for non-trading
                                                                    activities and key assumptions, including
                                                                    assumptions regarding loan prepayments and
                                                                    behavior of non-maturity deposits, and
                                                                    frequency of measurement of interest rate
                                                                    risk for non-trading activities.
Quantitative disclosures.........................................  (b) The increase (decline) in earnings or
                                                                    economic value (or market value of equity or
                                                                    other relevant measure used by management)
                                                                    for upward and downward rate shocks
                                                                    according to management's method for
                                                                    measuring interest rate risk for non-trading
                                                                    activities, categorized by currency (as
                                                                    appropriate).
----------------------------------------------------------------------------------------------------------------



Secs. 628.64-628.99  [Reserved]

Subparts E-F [Reserved]



                     Subpart G_Transition Provisions



Sec. 628.300  Transitions.

    (a) Capital conservation buffer. (1) [Reserved]
    (2) Beginning January 1, 2017 through December 31, 2019 a System 
institution's maximum capital conservation buffer payout ratio must be 
determined as set forth in Table 1 to Sec. 628.300.

[[Page 379]]



                                            Table 1 to Sec. 628.300
----------------------------------------------------------------------------------------------------------------
                                                                                  Maximum payout ratio (as a
            Transition Period                 Capital conservation buffer      percentage of eligible retained
                                                                                           income)
----------------------------------------------------------------------------------------------------------------
Calendar year 2017.......................  >0.625 percent..................  No limitation.
                                           0.625 percent, and >0.469         60 percent.
                                            percent.
                                           0.469 percent, and >0.313         40 percent.
                                            percent.
                                           0.313 percent, and >0.156         20 percent.
                                            percent.
                                           0.156 percent...................  0 percent.
Calendar year 2018.......................  >1.25 percent...................  No limitation.
                                           1.25 percent, and >0.938 percent  60 percent.
                                           0.938 percent, and >0.625         40 percent.
                                            percent.
                                           0.625 percent, and >0.313         20 percent.
                                            percent.
                                           0.313 percent...................  0 percent.
Calendar year 2019.......................  >1.875 percent..................  No limitation.
                                           1.875 percent, and >1.406         60 percent.
                                            percent.
                                           1.406 percent, and >0.938         40 percent.
                                            percent.
                                           0.938 percent, and >0.469         20 percent.
                                            percent.
                                           0.469 percent...................  0 percent.
----------------------------------------------------------------------------------------------------------------

    (b)-(e) [Reserved]



Sec. 628.301  Initial compliance and reporting requirements.

    (a) A System institution that fails to satisfy one or more of its 
minimum applicable CET1, tier 1, or total risk-based capital ratios or 
its tier 1 leverage ratio at the end of the quarter in which these 
regulations become effective shall report its initial noncompliance to 
the FCA within 20 days following such quarterend and shall also submit a 
capital restoration plan for achieving and maintaining the standards, 
demonstrating appropriate annual progress toward meeting the goal, to 
the FCA within 60 days following such quarterend. If the capital 
restoration plan is not approved by the FCA, the FCA will inform the 
institution of the reasons for disapproval, and the institution shall 
submit a revised capital restoration plan within the time specified by 
the FCA.
    (b) Approval of compliance plans. In determining whether to approve 
a capital restoration plan submitted under this section, the FCA shall 
consider the following factors, as applicable:
    (1) The conditions or circumstances leading to the institution's 
falling below minimum levels, the exigency of those circumstances, and 
whether or not they were caused by actions of the institution or were 
beyond the institution's control;
    (2) The overall condition, management strength, and future prospects 
of the institution and, if applicable, affiliated System institutions;
    (3) The institution's capital, adverse assets (including nonaccrual 
and nonperforming loans), ALL, and other ratios compared to the ratios 
of its peers or industry norms;
    (4) How far an institution's ratios are below the minimum 
requirements;
    (5) The estimated rate at which the institution can reasonably be 
expected to generate additional earnings;
    (6) The effect of the business changes required to increase capital;
    (7) The institution's previous compliance practices, as appropriate;
    (8) The views of the institution's directors and senior management 
regarding the plan; and
    (9) Any other facts or circumstances that the FCA deems relevant.
    (c) An institution shall be deemed to be in compliance with the 
regulatory capital requirements of this subpart if it is in compliance 
with a capital restoration plan that is approved by the FCA within 180 
days following the end of the quarter in which these regulations become 
effective.
      
  
  
  
  
  



[[Page 380]]



PART 630_DISCLOSURE TO INVESTORS IN SYSTEMWIDE AND CONSOLIDATED BANK
DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM--Table of Contents



                            Subpart A_General

Sec.
630.1  Purpose.
630.2  Definitions.
630.3  Publishing and filing the report to investors.
630.4  Responsibilities for preparing the report to investors.
630.5  Prohibition against incomplete, inaccurate, or misleading 
          disclosure.
630.6  Funding Corporation committees.

                  Subpart B_Annual Report to Investors

630.20  Contents of the annual report to investors.

                Subpart C_Quarterly Reports to Investors

630.40  Contents of the quarterly report to investors.

Appendix A to Part 630--Supplemental Information Disclosure Guidelines

    Authority: Secs. 4.2, 4.9, 5.9, 5.17, 5.19 of the Farm Credit Act 
(12 U.S.C. 2153, 2160, 2243, 2252, 2254); sec. 424 of Pub. L. 100-233, 
101 Stat. 1568, 1656; sec. 514 of Pub. L. 102-552, 106 Stat. 4102.

    Source: 59 FR 46742, Sept. 12, 1994, unless otherwise noted.



                            Subpart A_General



Sec. 630.1  Purpose.

    This part sets forth the requirements for preparation and 
publication by the Farm Credit System (FCS or System) of annual and 
quarterly reports to investors and potential investors in Systemwide and 
consolidated bank debt obligations of the System and to other users of 
the reports in the general public.



Sec. 630.2  Definitions.

    For purposes of this part, the following definitions shall apply:
    (a) Bank means any bank chartered under the Farm Credit Act of 1971, 
as amended (Act).
    (b) Combined financial statements means financial statements 
prepared on a combined basis by a group of affiliated entities that 
share the same financial interest, regardless of whether any of the 
entities has the ability to exercise control over another. For purposes 
of this part, unless otherwise specified, combined financial data of a 
bank and its related associations includes financial data of the bank's 
consolidated subsidiaries.
    (c) Disclosure entity means any Farm Credit bank and the Federal 
Farm Credit Banks Funding Corporation (Funding Corporation).
    (d) Engagement letter means the proposal, contract, letter, and 
other documents reflecting the understandings between the audit 
committee or board of directors of a bank or an association and its 
independent public accountant regarding the scope, terms, and nature of 
the audit services to be performed.
    (e) Farm Credit System means, collectively, the banks, associations, 
and such other institutions that are or may be made a part of the System 
under the Act, all of which are chartered by and subject to regulation 
by the Farm Credit Administration (FCA). For purposes of this part, the 
System does not include the Federal Agricultural Mortgage Corporation 
(Farmer Mac).
    (f) FCS debt obligation means, collectively, notes, bonds, 
debentures, and other debt securities issued by banks pursuant to 
section 4.2(c) (consolidated bank debt securities) and section 4.2(d) 
(Systemwide debt securities) of the Act.
    (g) Report to investors or report means a report that presents the 
Systemwide combined financial statements, supplemental financial 
statement information, and related financial and nonfinancial 
information pertaining to the System required by this part.
    (h) Systemwide combined financial statements means the combined 
financial statements required by this part.

[59 FR 46742, Sept. 12, 1994, as amended at 71 FR 76121, Dec. 20, 2006]



Sec. 630.3  Publishing and filing the report to investors.

    (a) The disclosure entities shall jointly publish the following 
reports in order to provide meaningful information pertaining to the 
financial condition and results of operations of the

[[Page 381]]

System to investors and potential investors in FCS debt obligations and 
other users of the report:
    (1) An annual report to investors within 75 calendar days after the 
end of each fiscal year;
    (2) A quarterly report to investors within 45 calendar days after 
the end of each quarter, except for the quarter that coincides with the 
end of the fiscal year.
    (3) Interim reports, as required by the Funding Corporation's 
written policies and procedures, disclosing significant events or 
material changes in information occurring since the most recently 
published report to investors.
    (b) Each report to investors shall present Systemwide combined 
financial statements and related footnotes deemed appropriate for the 
purpose of the report to provide investors with the most meaningful 
presentation pertaining to the financial condition and results of 
operations of the System.
    (c) All items of essentially the same character as items required to 
be reported in the reports of condition and performance pursuant to part 
621 of this chapter shall be prepared in accordance with the rules set 
forth in part 621 of this chapter.
    (d) Each report to investors shall contain the information required 
by subparts B and C of this part, as applicable, and such other 
information as is necessary to make the required statements, in light of 
the circumstances under which they are made, not misleading.
    (e) Information in any part of the report may be referenced or 
incorporated in answer or partial answer to any other item of the 
report. Information required by this part may be presented in any order 
deemed suitable by the Funding Corporation.
    (f) Information in documents prepared for investors in connection 
with the offering of debt securities issued through the Funding 
Corporation may be incorporated by reference in the annual and quarterly 
reports in answer or partial answer to any item required in the reports 
under this part. A complete description of any offering documents 
incorporated by reference must be clearly identified in the report 
(e.g., Federal Farm Credit Banks Consolidated System-wide Bonds and 
Discount Notes--Offering Circular issued on [insert date]). Offering 
documents incorporated by reference in either an annual or quarterly 
report prepared under this part must be filed with the Farm Credit 
Administration according to our instructions either prior to or at the 
time of submission of the report under paragraph (h) of this section. 
Any offering document incorporated by reference is subject to the 
delivery and availability requirements set forth in Sec. 630.4(a)(5) and 
(a)(6).
    (g) The report shall include a statement in a prominent location 
that Systemwide debt securities and consolidated bank debt obligations 
are joint and several liabilities of individual banks and that copies of 
each bank's recent periodic reports to shareholders are available upon 
request. The report shall also include addresses and telephone numbers 
where copies of the report to investors and the periodic reports of 
individual banks can be obtained. Copies of the report to investors 
shall be available for public inspection at the Funding Corporation.
    (h) Complete copies of the report must be filed with the Farm Credit 
Administration according to our instructions. All copies must comply 
with the requirements of Sec. 630.5 of this part.

[59 FR 46724, Sept. 12, 1994, as amended at 62 FR 15094, Mar. 31, 1997; 
71 FR 76121, Dec. 20, 2006]



Sec. 630.4  Responsibilities for preparing the report to investors.

    (a) Responsibilities of the Funding Corporation. The Funding 
Corporation shall:
    (1) Prepare the reports to investors required by Sec. 630.3(a), 
including the Systemwide combined financial statements and notes 
thereto, and such other disclosures, supplemental information, and 
related analysis as are required by this part to make the reports 
meaningful and not misleading.
    (2) Establish a system of internal controls sufficient to reasonably 
ensure that any information it releases to investors and the general 
public concerning any matter required to be disclosed by this part is 
true and that

[[Page 382]]

there are no omissions of material information. The system of internal 
controls, at a minimum, shall require that the Funding Corporation:
    (i) Maintain written policies and procedures, approved by the System 
Audit Committee, to be carried out by the disclosure entities for 
preparation of the report to investors;
    (ii) Provide instructions to the disclosure entities regarding the 
information needed for preparation of the Systemwide combined financial 
statements and disclosures required to be presented in the report to 
investors;
    (iii) Review the information submitted to it for preparation of the 
report to investors, and make reasonable inquiries to ascertain whether 
the information is reliable, accurate, and complete; and
    (iv) Specify procedures for monitoring interim disclosures of System 
institutions and disclose, in a timely manner, any material changes in 
information contained in the most recently published report to 
investors.
    (3) Collect from each disclosure entity financial data and related 
analyses and other information needed for preparation of the report to 
investors, including any information that is material to the disclosure 
entity.
    (4) File the reports with the FCA in accordance with Sec. 630.3(f) 
and (h) and Sec. 630.5.
    (5) Ensure prompt delivery of sufficient copies of each report to 
selling group dealers for distribution to investors and potential 
investors in FCS debt obligations.
    (6) Make the report available to the general public upon request.
    (7) Notify the FCA if it is unable to prepare and publish the report 
to investors in compliance with the requirements of this part because 
one or more banks have failed to comply with the requirements of 
paragraph (c) of this section. A notification, signed by the officer(s) 
designated by the board of directors of the Funding Corporation to 
certify the report to investors and by the chief executive officer, 
shall be made to the FCA as soon as the Funding Corporation becomes 
aware of its inability to comply. The Funding Corporation shall explain 
the reasons for the notification and may request that the FCA extend the 
due date for the report to investors.
    (8) Include in the report a statement that briefly explains the 
respective responsibilities of the disclosure entities and states that 
the Funding Corporation has policies and procedures in place to ensure, 
to the best of the knowledge and belief of management and the board of 
the Funding Corporation, that the information contained in the report is 
true, accurate, and complete. The statement shall be signed by the chief 
executive officer and the chairperson of the board of the Funding 
Corporation.
    (9) Request the FCA to provide information regarding the content of 
the latest Reports of Examination of any banks and related associations, 
if such information is necessary for preparation of a report that is 
meaningful and not misleading and is not forthcoming from a bank in 
accordance with paragraph (c) of this section. The request shall be made 
to the Chief Examiner, Farm Credit Administration, McLean, Virginia 
22102-5090.
    (b) Responsibilities of banks. Each bank shall:
    (1) Provide to the Funding Corporation annual, quarterly, and 
interim financial and other information in accordance with instructions 
of the Funding Corporation for preparation of the report to investors, 
including:
    (i) Financial data of the bank or, if the bank is required under 
generally accepted accounting principles (GAAP) to prepare its financial 
statements on a consolidated basis with its subsidiaries, consolidated 
financial data of the bank and its consolidated subsidiaries; and
    (ii) Combined financial data of the bank (including any consolidated 
subsidiaries of the bank) and related associations of the bank.
    (2) Respond to Funding Corporation inquiries and provide any 
followup information requested by the Funding Corporation in connection 
with the preparation of the report to investors in accordance with 
instructions of the Funding Corporation.
    (3) Notify the Funding Corporation promptly of any events occurring 
subsequent to publication of the report

[[Page 383]]

that may be material either to the financial condition and results of 
operations of the bank or to the combined financial condition and 
results of operations of the bank and its related associations. Furnish 
the Funding Corporation with any information necessary to provide 
interim Systemwide disclosure to investors to make the most recently 
published report to investors not misleading.
    (4) Respond to inquiries from the Funding Corporation relating to 
preparation of the report.
    (5) Certify to the Funding Corporation that all information needed 
for preparation of the report to investors has been submitted in 
accordance with the instructions of the Funding Corporation and the 
information submitted complies with the signature and certification 
provisions of Sec. 620.3(b) and (c), respectively.
    (c) Responsibilities of associations. Each association must:
    (1) Provide its related bank with the information necessary to allow 
the bank to provide accurate and complete information regarding the bank 
and its related associations to the Funding Corporation for preparation 
of the report. The financial information provided by the association to 
its related bank must be signed and certified in the same manner as 
provided in Sec. 620.3(b) and (c), respectively.
    (2) Respond to inquiries of the related bank pertaining to 
preparation of the combined financial data of the association and its 
related bank.

[59 FR 46724, Sept. 12, 1994, as amended at 71 FR 76121, Dec. 20, 2006]



Sec. 630.5  Accuracy of reports and assessment of internal control
over financial reporting.

    (a) Prohibition against incomplete, inaccurate, or misleading 
disclosure. Neither the Funding Corporation, nor any institution 
supplying information to the Funding Corporation under this part, nor 
any employee, officer, director, or nominee for director of the Funding 
Corporation or of such institutions, shall make or cause to be made any 
disclosure to investors and the general public required by this part 
that is incomplete, inaccurate, or misleading. When any such institution 
or person makes or causes to be made disclosure under this part that, in 
the judgment of the FCA, is incomplete, inaccurate, or misleading, 
whether or not such disclosure is made in published statements required 
by this part, such institution or person shall promptly furnish to the 
Funding Corporation, and the Funding Corporation shall promptly publish, 
such additional or corrective disclosure as is necessary to provide full 
and fair disclosure to investors and the general public. Nothing in this 
section shall prevent the FCA from taking additional actions to enforce 
this section pursuant to its authority under title V, part C of the Act.
    (b) Signatures. The name and position title of each person signing 
the report must be printed beneath his or her signature. If any person 
required to sign the report has not signed the report, the name and 
position title of the individual and the reasons such individual is 
unable to, or refuses to, sign must be disclosed in the report. All 
reports must be dated and signed on behalf of the Funding Corporation 
by:
    (1) The chief executive officer (CEO);
    (2) The officer in charge of preparing financial statements; and
    (3) A board member formally designated by action of the board to 
certify reports of condition and performance on behalf of individual 
board members.
    (c) Certification of financial accuracy. The report must be 
certified as financially accurate by the signatories to the report. If 
any signatory is unable to, or refuses to, certify the report, the 
institution must disclose the individual's name and position title and 
the reason(s) such individual is unable or refuses to certify the 
report. At a minimum, the certification must include a statement that:
    (1) The signatories have reviewed the report,
    (2) The report has been prepared in accordance with all applicable 
statutory or regulatory requirements, and
    (3) The information is true, accurate, and complete to the best of 
signatories' knowledge and belief.
    (d) Management assessment of internal control over financial 
reporting. (1) Annual reports must include a report by

[[Page 384]]

the Funding Corporation's management assessing the effectiveness of the 
internal control over financial reporting for the System-wide report to 
investors. The assessment must be conducted during the reporting period 
and be reported to the Funding Corporation's board of directors. 
Quarterly and annual reports must disclose any material change(s) in the 
internal control over financial reporting occurring during the reporting 
period.
    (2) The Funding Corporation must require its external auditor to 
issue an attestation report, which must express an opinion on the 
effectiveness of internal control over financial reporting. The 
resulting attestation report must accompany management's assessment and 
be included in the annual report.

[71 FR 76121, Dec. 20, 2006, as amended at 72 FR 64130, Nov. 15, 2007]



Sec. 630.6  Funding Corporation committees.

    (a) System Audit Committee. The Funding Corporation must establish 
and maintain a System Audit Committee (SAC) by adopting a written 
charter describing the committee's composition, authorities, and 
responsibilities in accordance with this section. The SAC must maintain 
records of meetings, including attendance, for at least 3 fiscal years.
    (1) Composition. All SAC members should be knowledgeable in at least 
one of the following: Public and corporate finance, financial reporting 
and disclosure, or accounting procedures.
    (i) At least one-third of the SAC members must be representatives 
from the Farm Credit System.
    (ii) The SAC may not consist of less than three members and at least 
one member must be a financial expert. A financial expert is one who 
either has experience with internal controls and procedures for 
financial reporting or experience in preparing or auditing financial 
statements.
    (iii) The chair of the SAC must be a financial expert.
    (2) Independence. Every audit committee member must be free from any 
relationship that, in the opinion of the Funding Corporation board, 
would interfere with the exercise of independent judgment as a committee 
member.
    (3) Resources. The Funding Corporation must provide the SAC monetary 
and nonmonetary resources the SAC determines necessary to enable it to 
perform the duties listed in paragraph (a)(4) of this section. The 
Funding Corporation must permit the SAC to contract, for reasons 
directly related to the duties listed in paragraph (a)(4) of this 
section, the services of external auditors, independent legal counsel, 
and outside advisors. The SAC must only use the resources of the Funding 
Corporation in a manner that complies with laws and regulations and for 
the purpose of preserving and promoting the safety and soundness of the 
System. The SAC must provide the Funding Corporation board of directors 
a quarterly accounting of expenditures made pursuant to this section.
    (4) Duties. The SAC reports only to the Funding Corporation board of 
directors. In its capacity as a committee of the board, the SAC is 
responsible for the following:
    (i) Financial reports. The SAC must oversee the Funding 
Corporation's preparation of the report to stockholders and investors; 
review the impact of any significant accounting and auditing 
developments; review accounting policy changes relating to preparation 
of the System-wide combined financial statements; and review annual and 
quarterly reports prior to release. After the SAC reviews a financial 
policy, procedure, or report, it must record in its minutes its 
agreement or disagreement with the item(s) under review.
    (ii) External auditors. The external auditor must report directly to 
the SAC. The SAC must:
    (A) Determine, with the agreement of the Funding Corporation board 
of directors, the appointment, compensation, and retention of the 
external auditors issuing System-wide audit reports;
    (B) Review the external auditor's work;
    (C) Give prior approval for any non-audit services performed by the 
external auditor, except the audit committee may not approve those non-

[[Page 385]]

audit services specifically prohibited by FCA regulation; and
    (D) Comply with the auditor independence provisions of part 621 of 
this chapter.
    (iii) Internal controls. The SAC must oversee the Funding 
Corporation's system of internal controls relating to preparation of 
financial reports, including controls relating to the Farm Credit 
System's compliance with applicable laws and regulations.
    (b) Compensation committee. The Funding Corporation must establish 
and maintain a compensation committee by adopting a written charter 
describing the committee's composition, authorities, and 
responsibilities in accordance with this section. The compensation 
committee must report only to the board of directors. The compensation 
committee is required to maintain records of meetings, including 
attendance, for at least 3 fiscal years.
    (1) Composition. The committee must consist of at least three 
members and all members must be members of the Funding Corporation's 
board of directors. Every compensation committee member must be free 
from any relationship that, in the opinion of the board, would interfere 
with the exercise of independent judgment as a committee member.
    (2) Responsibilities. It is the responsibility of the compensation 
committee to review the compensation policies and plans for senior 
officers and employees and to approve the overall compensation program 
for senior officers. In fulfilling its responsibilities, the 
compensation committee must document that it determined the:
    (i) Funding Corporation's projected long-term compensation and 
retirement benefit obligations are appropriate to the services performed 
and not excessive;
    (ii) Incentive-based compensation programs and payments are 
reasonable and proportionate to the services performed and structured so 
the payout schedule considers the potential for future losses or undue 
risks to the Funding Corporation; and
    (iii) Senior officer compensation, incentive, and benefit programs 
support the Funding Corporation's long-term business strategy and 
mission, as well as promote safe and sound business practices.
    (3) Resources. The Funding Corporation must provide monetary and 
nonmonetary resources to enable its compensation committee to perform 
its duties.

[71 FR 5767, Feb. 2, 2006, as amended at 71 FR 76122, Dec. 20, 2006; 77 
FR 59052, Sept. 26, 2012; 77 FR 60602, Oct. 3, 2012]



                  Subpart B_Annual Report to Investors



Sec. 630.20  Contents of the annual report to investors.

    The annual report must contain the following:
    (a) Description of business. (1) The description shall include a 
brief discussion of the following:
    (i) The System's overall organizational structure, its lending 
institutions by type and their respective authorities, the relationships 
between different types of institutions, and the overall geographic area 
and eligible borrowers served by those institutions;
    (ii) The types of lending activities engaged in and financial 
services offered by System institutions;
    (iii) Any significant developments within the last 5 years that have 
had or could have a material impact on the System's organizational 
structure and the manner in which System institutions conduct business, 
including, but not limited to, statutory or regulatory changes, mergers 
or liquidations of System institutions, terminations of System 
institution status, and financial assistance provided by or to System 
institutions through loss-sharing or capital preservation agreements or 
from any other source;
    (iv) Any acquisition or disposition of material assets during the 
last fiscal year that took place outside the ordinary course of 
business;
    (v) Any concentrations of more than 10 percent of total assets in 
particular types of agricultural activities or businesses, and any 
dependence of an institution or a group of institutions of the System 
upon a specific activity or business, a single customer, or a few 
customers, including other financing institutions (OFIs), the loss of 
any one

[[Page 386]]

of which would have a material effect on the System; and
    (vi) The authority of System institutions to purchase and sell 
interests in loans in secondary markets and the risk involved in such 
activities.
    (2) List the address of the headquarters of each disclosure entity 
and service corporation of the System.
    (b) Federal regulation and insurance--(1) Farm Credit 
Administration. Describe the regulatory and enforcement authority of the 
FCA over System institutions under the Act.
    (2) Farm Credit System Insurance Corporation. (i) Describe the role 
and authorities of the Farm Credit System Insurance Corporation (FCSIC) 
under part E of title V of the Act. Describe specifically the role of 
the FCSIC in insuring the timely payment of principal and interest on 
FCS debt obligations and in providing assistance to System institutions.
    (ii) Describe the FCSIC's status as a Government corporation and 
state that System institutions have no control over the management of 
the FCSIC or the discretionary expenditures from the Farm Credit 
Insurance Fund (Insurance Fund), which are the sole prerogative of the 
FCSIC.
    (c) Description of legal proceedings and enforcement actions. (1) 
Describe any material pending legal proceedings in which one or more 
System institutions are a party, or that involve claims that a System 
institution(s) may be required by contract or operation of law to 
satisfy, and the potential impact of such proceedings, to the extent 
known, on the System.
    (2) Provide a summary of the types of enforcement actions in effect 
during the year, and any material impact of such proceedings on the 
System.
    (d) Description of liabilities. (1) Describe how the System funds 
its lending operations, including:
    (i) System banks' authority to borrow, and issue notes, bonds, 
debentures, and other obligations, and limitations thereof under section 
4.2 of the Act;
    (ii) A description of the types of debt obligations authorized to be 
issued under the Act, the types of debt obligations currently issued, 
the manner and form in which they are issued, rights of securities 
holders, risk factors, use of proceeds, tax effects of holding 
securities, market information, and other pertinent information;
    (iii) For each of the types of obligations that may be issued, 
whether it is insured, and the extent of any joint and several liability 
for the obligations; and
    (iv) Any applicable statutory and regulatory requirements affecting 
a bank's ability to incur debt.
    (2) Describe agreements among System banks and the Funding 
Corporation affecting a bank's ability to incur debt.
    (3) Describe agreements among System institutions regarding capital 
preservation, loss sharing, or any other forms of financial assistance.
    (e) Description of capital. (1) Describe the capitalization of the 
System, including capital structure, types of stock and participation 
certificates, and voting rights of holders of stock and participation 
certificates.
    (2) Describe the statutory requirement that a borrower purchase 
stock as a condition of obtaining a loan; how such stock is purchased, 
transferred, and retired; and how earnings are distributed.
    (3) Describe any statutory or other authority of a System 
institution to require additional capital contributions from 
stockholders.
    (4) Describe regulatory minimum permanent capital standards and 
capital adequacy requirements for banks and associations. State the 
number of institutions, if any, categorized by banks and associations, 
that are not currently in compliance with such standards and include a 
brief discussion of the reasons for the noncompliance.
    (5) Describe any statutory and regulatory restrictions on retirement 
of stock and distribution of earnings by System institutions. State the 
number of System institutions, if any, categorized by banks and 
associations, that are currently affected by such restrictions and 
provide a summary of the causes of such prohibitions.
    (f) Selected financial data. At a minimum, furnish the following 
combined

[[Page 387]]

financial data of the System in comparative columnar form for each of 
the last 5 fiscal years, if material.
    (1) Balance sheet.
    (i) Loans.
    (ii) Allowance for losses.
    (iii) Net loans.
    (iv) Cash and investments.
    (v) Other property owned.
    (vi) Total assets.
    (vii) FCS debt obligations and other bonds, notes, debentures, and 
obligations, presented by type, with a descriptive title.
    (viii) Total liabilities.
    (ix) Capital stock and surplus.
    (2) Statement of income.
    (i) Net interest income.
    (ii) Net other expenses.
    (iii) Provision for loan losses.
    (iv) Extraordinary items.
    (v) Provision for income taxes.
    (vi) Net income (loss).
    (3) Key financial ratios. (i) Return on average assets.
    (ii) Return on average capital stock and surplus.
    (iii) Net interest income as a percentage of average earning assets.
    (iv) Net loan chargeoffs as a percentage of average loans.
    (v) Allowance for loan losses as a percentage of gross loans 
outstanding at yearend.
    (vi) Capital stock and surplus as a percentage of total assets at 
yearend.
    (vii) Debt to capital stock and surplus at yearend.
    (g) Discussion and analysis. Fully discuss any material aspects of 
financial condition, changes in financial condition, and results of 
operations of System institutions, on a combined basis, for the 
comparative years required by paragraph (g)(6)(ii) of this section or 
such other time periods specified in the following paragraphs of this 
section. Identify favorable and unfavorable trends, and significant 
events or uncertainties necessary to understand the financial condition 
and results of operations of the System. At a minimum, the discussion 
shall include the following:
    (1) Loan portfolio--(i) Categorization. Describe the loan portfolio 
of the System by major loan purpose category, indicating the amount and 
approximate percentage of the total dollar portfolio represented by each 
major category.
    (ii) Risk exposure. (A) Describe and analyze all high-risk assets, 
including an analysis of the nature and extent of significant current 
and potential credit risks within the loan portfolio and of other 
information that could adversely affect the loan portfolio and other 
property owned.
    (B) Provide an analysis of the allowance for loan losses that 
includes the ratios of the allowance for loan losses to loans 
(outstanding at yearend) and net chargeoffs to average loans, and a 
discussion of the adequacy of the allowance for loan losses to absorb 
the risk inherent in the loan portfolio and the basis for such 
determination.
    (iii) Secondary market activities. (A) If material, quantify System 
institutions' secondary market activities and the risk involved in such 
activities.
    (B) If material, provide an analysis of historical loss experience 
and the amount provided for risk of loss associated with secondary 
market activities.
    (2) Results of operations. (i) Describe, on a comparative basis, 
changes in the major components of net interest income. Include a 
discussion of significant factors that contributed to the changes and 
quantify the amount of change(s) due to an increase or decrease in 
volume and the amount due to changes in interest rates earned and paid, 
based on averages for each period.
    (ii) Describe any unusual or infrequent events or transactions, or 
any significant economic changes that materially affected reported 
income and, in each case, indicate the extent to which income was so 
affected.
    (iii) Discuss the factors underlying any material changes in the 
return on average assets and return on average capital stock and 
surplus.
    (iv) Describe, on a comparative basis, the major components of 
operating expense and any other significant components of income or 
expense, indicating the reasons for any significant increases or 
decreases.
    (v) Describe any known trends or uncertainties that have had, or 
that are reasonably expected to have, a material impact on net interest 
income or net income. Disclose any known events that will cause a 
material change in

[[Page 388]]

the relationship between costs and revenues.
    (vi) Explain the changes that have taken place, by major components 
on a comparative basis, in Insurance Fund assets and related restricted 
capital and how such changes affected reported income.
    (3) Funding sources and liquidity--(i) Funding sources. (A) Provide, 
in tabular form, the component amounts and the total amount of FCS debt 
obligations, debt obligations issued by banks individually, and 
Financial Assistance Corporation debt obligations outstanding at yearend 
for each of the past 2 fiscal years. List debt obligations issued by 
System institutions separately by type, also separating insured 
obligations from uninsured obligations. For each type of debt obligation 
listed, provide the following, at a minimum, for each fiscal year 
listed:
    (1) The beginning balance, the total amount of debt issued, the 
total amount of debt retired, and the yearend balance; and
    (2) The average maturities and average interest rates on debt 
outstanding at yearend, and the average maturities and average interest 
rates of new debt issued during the year.
    (B) Summarize any other sources of funds, including lines of credit 
with commercial lenders, and their terms.
    (ii) Liquidity. (A) Include a brief overview of any FCA regulations 
or System policies with regard to liquidity and liquidity reserves.
    (B) Identify any known trends, demands, commitments, events, or 
uncertainties that will result in, or that are reasonably likely to 
result in, System liquidity increasing or decreasing in any material 
way. If a material liquidity deficiency is identified, indicate the 
course of action that has been taken or is proposed to be taken by 
management of affected System institutions to remedy the deficiency.
    (iii) Investment. Provide a brief overview of the System's 
investment policies and objectives, any regulatory limitations thereon, 
and the contents of the System's existing investment portfolio.
    (iv) Interest rate sensitivity. (A) Provide a brief overview of the 
System's asset and liability management practices, including interest 
rate risk measurement systems, and methods used to control interest rate 
risk, such as the use of investments, derivatives, and other off-
balance-sheet transactions.
    (B) Provide an analysis of the System's exposure to interest rate 
risk and its ability to control such risk.
    (4) Capital resources. (i) Describe any material commitments to 
purchase capital assets and the anticipated sources of funding.
    (ii) Describe any material trends, favorable or unfavorable, in the 
System's capital resources, including any material changes in the mix of 
capital and debt, the relative cost of capital resources, and any off-
balance- sheet financing arrangements.
    (iii) Provide a general discussion of any trends, commitments, 
contingencies, or events that are reasonably likely to have a material 
adverse effect on System institutions' ability to comply with regulatory 
capital standards.
    (5) Insurance Fund. (i) Describe the purposes for which expenditures 
from the Insurance Fund may be made and the statutory requirements for 
making such expenditures.
    (ii) Provide a schedule itemizing the amount of Insurance Fund 
assets that have been specifically identified by the FCSIC for payment 
of estimated obligations of the FCSIC and the amount of Insurance Fund 
assets for which no specific use has been identified or designated by 
the FCSIC. Information provided shall be as of the end of the most 
recent fiscal year.
    (iii) Explain how FCSIC expenditures or designations of Insurance 
Fund assets for payment of future obligations affect the combined assets 
and capital of the System, and quantify the effect, if any.
    (6) Instructions for discussion and analysis. (i) The purpose of the 
discussion and analysis (D&A) shall be to provide to investors and other 
users information relevant to an assessment of the combined financial 
condition and results of operations of System institutions as determined 
by evaluating the amounts and certainty of cashflows from operations and 
from outside sources. The information provided pursuant to this section 
need only include

[[Page 389]]

that which is available to System institutions and which does not 
clearly appear in the combined financial statements.
    (ii) The D&A of the financial statements and other statistical data 
shall be presented in a manner designed to enhance a reader's 
understanding of the combined financial condition, results of 
operations, cashflows, and changes in capital of System institutions. 
Unless otherwise specified in Sec. 630.20(g), the discussion shall cover 
the period covered by the financial statements and shall use year-to-
year comparisons or any other understandable format. Where trend 
information is relevant, reference to the 5-year selected financial data 
required by paragraph (f) of this section may be necessary.
    (iii) The D&A shall focus specifically on material events and 
uncertainties known at the time of reporting that would cause reported 
financial information not to be necessarily indicative of future 
operating results or of future financial condition. This should include 
descriptions and amounts of:
    (A) Matters that would have an impact on future operations but that 
have not had an impact in the past; and
    (B) Matters that have had an impact on reported operations but are 
not expected to have an impact on future operations.
    (h) Directors and management--(1) Board of directors. Briefly 
describe the composition of boards of directors of the disclosure 
entities. List the name of each director of such entities, including the 
director's term of office and principal occupation during the past 5 
years, or state that such information is available upon request.
    (2) Senior officers. List the names of all senior officers employed 
by the disclosure entities, including position title and length of 
service at current position.
    (i) Compensation of directors and senior officers. State that 
information on the compensation of directors and senior officers of Farm 
Credit banks is contained in each bank's annual report to shareholders 
and that the annual report of each bank is available to investors upon 
request pursuant to Sec. 630.3(g).
    (j) Related party transactions. (1) Briefly describe how System 
institutions, in the ordinary course of business and subject to 
regulation by the FCA, may enter into loan transactions with related 
parties, including their directors, officers, and employees, the 
immediate family members (as defined in Sec. 620.1(e) of this chapter) 
of such persons, and any organizations with which such persons and their 
immediate family members are affiliated.
    (2) On a comparative basis for each of the fiscal years covered by 
the balance sheet, state the aggregate amount of the following:
    (i) Loans made to related parties;
    (ii) Loans outstanding at yearend to related parties;
    (iii) Loans outstanding at yearend to related parties that are made 
on more favorable terms than those prevailing at the time for comparable 
transactions with unrelated borrowers; and
    (iv) Loans outstanding at yearend to related parties that involve 
more than a normal risk of collectibility (as defined in Sec. 620.1(i) 
of this chapter).
    (k) Relationship with qualified public accountant. (1) If a change 
in the qualified public accountant who has previously examined and 
expressed an opinion on the System-wide combined financial statements 
has taken place since the last annual report to investors or if a 
disagreement with a qualified public accountant has occurred that the 
Funding Corporation would be required to report to the FCA under part 
621 of this chapter, disclose the information required by Sec. 621.4(c) 
and (d).
    (2) Disclose the total fees paid during the reporting period to the 
qualified public accountant by the category of services provided. At a 
minimum, identify fees paid for audit services, tax services, and non-
audit services. The types of non-audit services must be identified and 
indicate audit committee approval of the services.
    (l) Financial statements. Furnish System-wide combined financial 
statements and related footnotes prepared in accordance with GAAP, and 
accompanied by supplemental information prepared in accordance with the 
requirements of Sec. 630.20(m). The System-wide combined financial 
statements shall provide investors and potential

[[Page 390]]

investors in FCS debt obligations with the most meaningful presentation 
pertaining to the financial condition and results of operations of the 
System. The System-wide combined financial statement and accompanying 
supplemental information shall be audited in accordance with generally 
accepted auditing standards by a qualified public accountant. The 
System-wide combined financial statements shall include the following:
    (1) A balance sheet as of the end of each of the 2 most recent 
fiscal years; and
    (2) Statements of income, statements of changes in capital stock and 
surplus (or, if applicable, statements of changes in protected borrower 
capital and capital stock and surplus), and statements of cash flows for 
each of the 3 most recent fiscal years.
    (m) Supplemental information. Furnish supplemental information 
regarding the components of the Systemwide combined financial statements 
that has been prepared in accordance with the requirements of this 
paragraph and any additional guidance or instructions provided by the 
FCA.
    (1) At a minimum, the supplemental information shall include the 
following:
    (i) Supplemental balance sheet information as of the end of the most 
recent fiscal year; and
    (ii) Supplemental income statement information for the most recently 
completed fiscal year.
    (2) At a minimum, the report shall present supplemental information 
showing combined financial data for the following components on a stand-
alone basis:
    (i) Banks;
    (ii) Associations;
    (iii) Combined financial data of the System without the Insurance 
Fund;
    (iv) The Insurance Fund and related combination entries; and
    (v) Combined financial data of the System with the Insurance Fund.
    (3) The supplemental information shall be presented in a columnar 
format and include, at a minimum, the selected financial data listed in 
the schedules in appendix A of this part. The prescribed components 
shall be designated as column headings and they may be abbreviated in 
the schedules. The financial data required by Sec. 630.20(m)(2)(i) shall 
include the financial data required to be submitted by each bank 
pursuant to the requirement of Sec. 630.4(c)(1)(i).
    (4) The supplemental information may be presented separately or in 
accompanying notes to the Systemwide combined financial statements and 
shall contain additional disclosures sufficient to explain the basis of 
the presentation of the supplemental information, the components, and 
any adjustments contained therein to enable readers to understand the 
effect of each component on the Systemwide combined financial 
statements.
    (n) System Audit Committee. The Funding Corporation must include in 
the System-wide Report to Investors a description of the System Audit 
Committee and its activities during the reporting period. At a minimum, 
the description must:
    (1) List the names of the System Audit Committee members, including 
each member's term of office and principal occupation during the past 5 
years. For each member, state the total cash and noncash compensation 
paid for services on the System Audit Committee during the reporting 
period.
    (2) Disclose by category the monetary and nonmonetary resources used 
by the System Audit Committee during the reporting period. Discuss only 
those categories where the resources used within a category equaled or 
exceeded a total aggregate value of $5,000 during the reporting period. 
Fees paid for the audit of the System-wide financial statements, which 
are disclosed under paragraph (k)(2) of this section, are not included 
in any category under this paragraph. At a minimum, there must be 
separate categories for:
    (i) Administrative expenses,
    (ii) Contracted legal services,
    (iii) Contracted consultants and advisors, and
    (iv) Other contracted services, identifying the services.
    (o) Include a detailed index setting forth the major disclosure 
captions of this subpart and the page or pages on which the required 
information appears in the report.

[[Page 391]]

    (p) Credit and services to young, beginning, and small farmers and 
ranchers and producers or harvesters of aquatic products. The Farm 
Credit banks must include a report on consolidated YBS lending data of 
their affiliated associations. The report must include the definitions 
of ``young,'' ``beginning,'' and ``small'' farmers and ranchers. A 
narrative report may be necessary for an ample understanding of the YBS 
mission results.

[59 FR 46742, Sept. 12, 1994, as amended at 63 FR 36549, July 7, 1998; 
69 FR 16471, Mar. 30, 2004; 71 FR 5767, Feb. 2, 2006; 71 FR 76122, Dec. 
20, 2006; 77 FR 59052, Sept. 26, 2012; 78 FR 31835, May 28, 2013; 79 FR 
17856, Mar. 31, 2014]



                Subpart C_Quarterly Reports to Investors



Sec. 630.40  Contents of the quarterly report to investors.

    (a) General. The quarterly report to investors shall contain the 
information specified in this section along with any other material 
information necessary to make the required disclosures, in light of the 
circumstances under which they are made, not misleading. The quarterly 
report must be presented in a format that is easily understandable and 
not misleading.
    (b) Rules for condensation. For purposes of this subpart, major 
captions to be provided in interim financial statements are the same as 
those provided in the financial statements contained in the annual 
report to investors, except that the financial statements included in 
the quarterly report may be condensed into major captions in accordance 
with the rules prescribed under this paragraph.
    (1) Interim balance sheets. When any major balance sheet caption is 
less than 10 percent of total assets and the amount in the caption has 
not increased or decreased by more than 25 percent since the end of the 
preceding fiscal year, the caption may be combined with others.
    (2) Interim statements of income. When any major income statement 
caption is less than 15 percent of average net income for the 3 most 
recent fiscal years and the amount in the caption has not increased or 
decreased by more than 20 percent since the corresponding interim period 
of the preceding fiscal year, the caption may be combined with others. 
In calculating average net income, loss years should be excluded. If 
losses were incurred in each of the 3 most recent fiscal years, the 
average loss shall be used for purposes of this test.
    (3) The interim financial information shall include disclosure 
either on the face of the financial statements or in accompanying 
footnotes sufficient to make the interim information presented not 
misleading. It may be presumed that users of the interim financial 
information have read or have access to the audited financial statements 
for the preceding fiscal year, and the adequacy of additional disclosure 
needed for a fair presentation may be determined in that context. 
Accordingly, footnote disclosure that would substantially duplicate the 
disclosure contained in the most recent audited financial statements 
(such as a statement of significant accounting policies and practices) 
and details of accounts that have not changed significantly in amount or 
composition since the end of the most recently completed fiscal year may 
be omitted.
    (4) Interim reports shall disclose events that have occurred 
subsequent to the end of the most recently completed fiscal year that 
have a material impact on the System. Disclosures should encompass, for 
example, significant changes since the end of the most recently 
completed fiscal year in such items as accounting principles and 
practices, estimates used in the preparation of financial statements, 
status of long-term contracts, capitalization, significant new 
indebtedness or modification of existing financing agreements, financial 
assistance received, significant business combinations and liquidations 
of System institutions, and terminations of System institution status. 
Notwithstanding the provisions of this paragraph, where material 
contingencies exist, disclosure of such matters shall be provided even 
though a significant change since yearend may not have occurred.
    (5) In addition to meeting the reporting requirements specified by 
existing accounting pronouncements for accounting changes, state the 
date of any

[[Page 392]]

material accounting change and the reasons for making it.
    (6) Any material prior period adjustment made during any period 
covered by the interim financial statements shall be disclosed, together 
with its effect upon net income and upon the balance of surplus for any 
prior period included. If results of operations for any period presented 
have been adjusted retroactively by such an item subsequent to the 
initial reporting of such period, similar disclosure of the effect of 
the change shall be made.
    (7) Interim financial statements furnished shall reflect all 
adjustments that are necessary to a fair statement of the results for 
the interim periods presented. A statement to that effect shall be 
included. Furnish any material information necessary to make the 
information called for not misleading, such as a statement that the 
results for interim periods are not necessarily indicative of results to 
be expected for the year.
    (8) If any amount that would otherwise be required to be shown by 
this section with respect to any item is not material, it need not be 
separately shown. The combination of insignificant items is permitted.
    (c) Discussion and analysis of interim financial condition and 
results of operations. Discuss any material changes to the information 
disclosed to investors pursuant to Sec. 630.20(g) that have occurred 
during the periods specified in paragraphs (d)(1) and (d)(2) of this 
section. Provide any additional information needed to enable the reader 
to assess material changes in financial condition and results of 
operations between the periods specified in paragraphs (d)(1) and (d)(2) 
of this section.
    (1) Material changes in financial condition. Discuss any material 
changes in financial condition from the end of the preceding fiscal year 
to the date of the most recent interim balance sheet provided.
    (2) Material changes in results of operations. Discuss any material 
changes in the combined results of operations of the System with respect 
to the most recent fiscal year-to-date period for which an income 
statement is provided and the corresponding year-to-date period of the 
preceding fiscal year. Such discussion shall also cover material changes 
with respect to the most recent fiscal quarter and the corresponding 
fiscal quarter in the preceding fiscal year.
    (d) Financial statements. Interim combined financial statements must 
be provided in the quarterly report to investors as set forth in 
paragraphs (d)(1) through (4). Indicate that the financial statements 
were prepared under the oversight of the System Audit Committee.
    (1) An interim balance sheet as of the end of the most recent fiscal 
quarter and a balance sheet as of the end of the preceding fiscal year.
    (2) Interim statements of income for the most recent fiscal quarter, 
for the period between the end of the preceding fiscal year and the end 
of the most recent fiscal quarter, and for the comparable periods for 
the previous fiscal year.
    (3) Interim statements of changes in capital stock and surplus (or, 
if applicable, interim statements of changes in protected borrower 
capital and capital stock and surplus) for the period between the end of 
the preceding fiscal year and the end of the most recent fiscal quarter, 
and for the comparable period for the preceding fiscal year.
    (4) Interim statements of cash flows for the period between the end 
of the preceding fiscal year and the end of the most recent fiscal 
quarter, and for the comparable period for the preceding fiscal year.
    (e) Supplemental information. The interim report shall present 
supplemental information in accordance with the requirements of 
Sec. 630.20 (m)(2), (m)(3), and (m)(4), as well as other requirements 
and instructions of the FCA, and shall include, at a minimum, the 
following:
    (1) Supplemental balance sheet information as of the end of the most 
recent quarter; and
    (2) Supplemental income statement information for the period between 
the end of the preceding fiscal year and the end of the most recent 
fiscal quarter.
    (f) Review by independent public accountant. Unless otherwise 
ordered by the FCA as a result of a supervisory action, the interim 
financial statements and supplemental information need not

[[Page 393]]

be audited or reviewed by an independent public accountant prior to 
filing. If, however, a review of the report is made in accordance with 
the established professional standards and procedures for such a review, 
a statement that the independent accountant has performed such a review 
may be included. If such a statement is made, the report of the 
independent accountant on such review shall accompany the interim 
financial information.

[59 FR 46742, Sept. 12, 1994, as amended at 71 FR 5768, Feb. 2, 2006]



    Sec. Appendix A to Part 630--Supplemental Information Disclosure 
                               Guidelines

    Supplemental information required by Secs. 630.20(m) and 630.40(e) 
shall contain, at a minimum, the current year financial data for the 
components listed in the following tables and be presented in the 
columnar format illustrated in the following tables:

[[Page 394]]

[GRAPHIC] [TIFF OMITTED] TR12SE94.000


[[Page 395]]





PART 650_FEDERAL AGRICULTURAL MORTGAGE CORPORATION GENERAL PROVISIONS--
Table of Contents



            Subpart A_Regulation, Examination and Enforcement

Sec.
650.1  Definitions.
650.2  Regulatory authority.
650.3  Supervision and enforcement.
650.4  Access to Corporation records and personnel.
650.5  Reports of examination.
650.6  Criminal referrals.

           Subpart B_Conservators, Receivers, and Liquidations

650.10  Voluntary liquidation.
650.13  Grounds for appointment of a receiver or conservator.
650.14  Action for removal of receiver or conservator.
650.15  Appointment of a receiver.
650.20  Powers and duties of the receiver.
650.25  Report to Congress.
650.30  Preservation of equity.
650.35  Notice to stockholders.
650.40  Creditor claims.
650.45  Priority of claims.
650.50  Payment of claims.
650.55  Inventory, audit, and reports.
650.60  Final discharge and release of the receiver.
650.65  Appointment of a conservator.
650.70  Powers and duties of the conservator.
650.75  Inventory, examination, and reports to stockholders.
650.80  Final discharge and release of the conservator.

    Authority: Secs. 4.12, 5.9, 5.17, 5.25, 8.11, 8.12, 8.31, 8.32, 
8.33, 8.34, 8.35, 8.36, 8.37, 8.41 of Pub. L. 92-181, 85 Stat. 583 (12 
U.S.C. 2183, 2243, 2252, 2261, 2279aa-11, 2279aa-12, 2279bb, 2279bb-1, 
2279bb-2, 2279bb-3, 2279bb-4, 2279bb-5, 2279bb-6, 2279cc); sec. 514 of 
Pub. L. 102-552, 106 Stat. 4102; sec. 118 of Pub. L. 104-105, 110 Stat. 
168.

    Source: 62 FR 43636, Aug. 15, 1997. Redesignated at 70 FR 40650, 
July 14, 2005, unless otherwise noted.



            Subpart A_Regulation, Examination and Enforcement

    Source: 81 FR 49151, July 27, 2016, unless otherwise noted.



Sec. 650.1  Definitions.

    The following definitions apply to this part:
    Act or Authorizing statute means the Farm Credit Act of 1971, as 
amended.
    Business day means a day the Corporation is open for business, 
excluding the legal public holidays identified in 5 U.S.C. 6103(a).
    Corporation or Farmer Mac means the Federal Agricultural Mortgage 
Corporation and its affiliates.
    FCA means the Farm Credit Administration, an independent Federal 
agency of the executive branch.
    NYSE means the New York Stock Exchange, a listing exchange.
    OSMO means the FCA Office of Secondary Market Oversight, which is 
responsible for the general supervision of the safe and sound exercise 
of the Corporation's powers, functions, and duties and compliance with 
laws and regulations.
    Our or we means the FCA or OSMO, as appropriate to the context of 
the provision employing the term.
    SEC means the Securities and Exchange Commission.
    Securities Act means the Securities Act of 1933 (15 U.S.C. 77a et 
seq.) or the Exchange Act of 1934 (15 U.S.C. 78a et seq.), or both, as 
appropriate to the context of the provision employing the term.
    Signed, when referring to paper form, means a manual signature, and, 
when referring to electronic form, means marked in a manner that 
authenticates each signer's identity.



Sec. 650.2  Regulatory authority.

    (a) General. The Corporation is a for-profit Government-sponsored 
enterprise developed to provide a secondary market for qualified 
agricultural, USDA-guaranteed, and rural utility loans, with public 
policy objectives included in its statutory charter. The Corporation is 
regulated by the FCA, operating through OSMO. The Corporation also lists 
securities on the NYSE, making it subject to certain SEC listing and 
disclosure requirements.
    (b) Primary regulator. The FCA, operating through OSMO, holds 
primary regulatory, examination, and enforcement authority over the 
Corporation. The FCA, operating through OSMO, is responsible for the 
general supervision of the safe and sound exercise of the Corporation's 
powers, functions, and

[[Page 396]]

duties and compliance with applicable laws and regulations.
    (c) Other regulatory authorities. The Corporation registers its 
common stock and certain offerings of Farmer Mac Guaranteed Securities 
under the Securities Act and related regulations so must comply with 
certain SEC reporting requirements.



Sec. 650.3  Supervision and enforcement.

    The Act provides FCA, acting through OSMO, with enforcement 
authority to protect the financial safety and soundness of the 
Corporation and to ensure that the Corporation's powers, functions, and 
duties are exercised in a safe and sound manner.
    (a) General supervision. When we determine the Corporation has 
violated a law, rule, or regulation or is engaging in an unsafe or 
unsound condition or practice, we have enforcement authority that 
includes, but is not limited to, the following:
    (1) Issue an order to cease and desist;
    (2) Issue a temporary order to cease and desist;
    (3) Assess civil monetary penalties against the Corporation and its 
directors, officers, employees, and agents; and
    (4) Issue an order to suspend, remove, or prohibit directors and 
officers.
    (b) Financial safety and soundness of the Corporation. When we 
determine the Corporation is taking excessive risks that adversely 
impact the adequacy of Regulatory Capital, we have authority to address 
that risk. This includes, but is not limited to, requiring capital 
restoration plans, restricting dividend distributions, requiring changes 
in the Corporation's obligations and assets, requiring the acquisition 
of new capital and restricting those Corporation activities determined 
to create excessive risk to the Corporation's Regulatory Capital.



Sec. 650.4  Access to Corporation records and personnel.

    (a) The Corporation must make its records available promptly upon 
request by OSMO, at a location and in a form and manner acceptable to 
OSMO.
    (b) The Corporation must make directors, officers, employees and 
other individuals or entities engaged by the Corporation to participate 
in the conduct of the Corporation's business available to OSMO during 
the course of an examination or supervisory action when OSMO determines 
it necessary to facilitate an examination or supervisory action.



Sec. 650.5  Reports of examination.

    The Corporation is subject to the provisions in 12 CFR part 602 
regarding FCA Reports of Examination.



Sec. 650.6  Criminal referrals.

    The rules at 12 CFR part 612, subpart B, regarding ``Referral of 
Known or Suspected Criminal Violations'' are applicable to the 
Corporation.



           Subpart B_Conservators, Receivers, and Liquidations



Sec. 650.10  Voluntary liquidation.

    (a) The Corporation may voluntarily liquidate by a resolution of its 
board of directors, but only with the consent of, and in accordance with 
a plan of liquidation approved by, the Farm Credit Administration Board. 
Upon adoption of such resolution, the Corporation shall submit the 
resolution and proposed voluntary liquidation plan to the Farm Credit 
Administration Board for preliminary approval. The Farm Credit 
Administration Board, in its discretion, may appoint a receiver as part 
of an approved liquidation plan. If a receiver is appointed for the 
Corporation as part of a voluntary liquidation, the receivership shall 
be conducted pursuant to the regulations of this part, except to the 
extent that an approved plan of liquidation provides otherwise.
    (b) If the Farm Credit Administration Board gives preliminary 
approval to the liquidation plan, the board of directors of the 
Corporation shall submit the resolution to liquidate to the stockholders 
for a vote in accordance with the bylaws of the Corporation.
    (c) The Farm Credit Administration Board will consider final 
approval of the resolution to voluntarily liquidate and the liquidation 
plan after an affirmative stockholder vote on the resolution.

[[Page 397]]



Sec. 650.13  Grounds for appointment of a receiver or conservator.

    (a) The grounds for the appointment of a receiver or conservator for 
the Corporation are:
    (1) The Corporation is insolvent. For purposes of this paragraph, 
insolvent means:
    (i) The assets of the Corporation are less than its obligations to 
its creditors and others; or
    (ii) The Corporation is unable to pay its debts as they fall due in 
the ordinary course of business;
    (2) There has been a substantial dissipation of the assets or 
earnings of the Corporation due to the violation of any law, rule, or 
regulation, or the conduct of an unsafe or unsound practice;
    (3) The Corporation is in an unsafe or unsound condition to transact 
business;
    (4) The Corporation has committed a willful violation of a final 
cease-and-desist order issued by the Farm Credit Administration Board;
    (5) The Corporation is concealing its books, papers, records, or 
assets, or is refusing to submit its books, papers, records, assets, or 
other material relating to the affairs of the Corporation for inspection 
to any examiner or any lawful agent of the Farm Credit Administration 
Board.
    (b) In addition to the grounds set forth in paragraph (a) of this 
section, a receiver can be appointed for the Corporation if the Farm 
Credit Administration Board determines that the appointment of a 
conservator would not be appropriate when one of the following 
conditions exists:
    (1) The authority of the Corporation to purchase qualified loans or 
issue or guarantee loan-backed securities is suspended; or
    (2) The Corporation is classified under section 8.35 of the Act as 
within enforcement level III or IV and the alternative actions available 
under subtitle B of title VIII of the Act are not satisfactory.
    (c) In addition to the grounds set forth in paragraph (a) of this 
section, a conservator can be appointed for the Corporation if:
    (1) The Corporation is classified under section 8.35 of the Act as 
within enforcement level III or IV; or
    (2) The authority of the Corporation to purchase qualified loans or 
issue or guarantee loan-backed securities is suspended.

[62 FR 43636, Aug. 15, 1997. Redesignated at 70 FR 40650, July 14, 2005. 
Further redesignated at 81 FR 49151, July 27, 2016]



Sec. 650.14  Action for removal of receiver or conservator.

    Upon the appointment of a receiver or conservator for the 
Corporation by the Farm Credit Administration Board pursuant to 
Sec. 650.50 of this subpart, the Corporation may, within 30 days of such 
appointment, bring an action in the United States District Court for the 
District of Columbia, for an order requiring the Farm Credit 
Administration Board to remove the receiver or conservator and, if the 
charter has been canceled, to rescind the cancellation of the charter. 
Notwithstanding any other provision of this part, the Corporation's 
board of directors is empowered to meet subsequent to such appointment 
and authorize the filing of an action for removal. An action for removal 
may be authorized only by the Corporation's board of directors.

[62 FR 43636, Aug. 15, 1997. Redesignated at 70 FR 40650, July 14, 2005. 
Further redesignated at 81 FR 49151, July 27, 2016]



Sec. 650.15  Appointment of a receiver.

    (a) The Farm Credit Administration Board may in its discretion 
appoint, ex parte and without prior notice, a receiver for the 
Corporation provided that one or more of the grounds for appointment as 
set forth in Sec. 650.50 of this subpart exist.
    (b) Upon the appointment of the receiver, the Chairman of the Farm 
Credit Administration Board shall immediately notify the Corporation and 
shall publish a notice of the appointment in the Federal Register.
    (c) Upon the issuance of the order placing the Corporation into 
liquidation and appointing the receiver, all rights, privileges, and 
powers of the board of directors, officers, and employees of the 
Corporation shall be vested exclusively in the receiver. The Farm Credit 
Administration Board may cancel the charter of the Corporation on such 
date as the Farm Credit Administration Board determines is

[[Page 398]]

appropriate, but not later than the conclusion of the receivership and 
discharge of the receiver.



Sec. 650.20  Powers and duties of the receiver.

    (a) General. (1) Upon appointment as receiver, the receiver shall 
take possession of the Corporation in order to wind up the business 
operations of the Corporation, collect the debts owed to the 
Corporation, liquidate its property and assets, pay its creditors, and 
distribute the remaining proceeds to stockholders. The receiver is 
authorized to exercise all powers necessary to the efficient termination 
of the Corporation's operation as provided for in this part.
    (2) Upon its appointment as receiver, the receiver automatically 
succeeds to:
    (i) All rights, titles, powers, and privileges of the Corporation 
and of any stockholder, officer, or director of the Corporation with 
respect to the Corporation and the assets of the Corporation; and
    (ii) Title to the books, records, and assets of the Corporation in 
the possession of any other legal custodian of the Corporation.
    (3) The receiver of the Corporation serves as the trustee of the 
receivership estate and conducts its operations for the benefit of the 
creditors and stockholders of the Corporation.
    (b) Specific powers. The receiver may:
    (1) Exercise all powers as are conferred upon the officers and 
directors of the Corporation under law and the charter, articles, and 
bylaws of the Corporation.
    (2) Take any action the receiver considers appropriate or expedient 
to carry on the business of the Corporation during the process of 
liquidating its assets and winding up its affairs.
    (3) Borrow funds in accordance with section 8.41(f) of the Act to 
meet the ongoing administrative expenses or other liquidity needs of the 
receivership.
    (4) Pay any sum the receiver deems necessary or advisable to 
preserve, conserve, or protect the Corporation's assets or property or 
rehabilitate or improve such property and assets.
    (5) Pay any sum the receiver deems necessary or advisable to 
preserve, conserve, or protect any asset or property on which the 
Corporation has a lien or in which the Corporation has a financial or 
property interest, and pay off and discharge any liens, claims, or 
charges of any nature against such property.
    (6) Investigate any matter related to the conduct of the business of 
the Corporation, including, but not limited to, any claim of the 
Corporation against any individual or entity, and institute appropriate 
legal or other proceedings to prosecute such claims.
    (7) Institute, prosecute, maintain, defend, intervene, and otherwise 
participate in any legal proceeding by or against the Corporation or in 
which the Corporation or its creditors or stockholders have any 
interest, and represent in every way the Corporation, its stockholders 
and creditors.
    (8) Employ attorneys, accountants, appraisers, and other 
professionals to give advice and assistance to the receivership 
generally or on particular matters, and pay their retainers, 
compensation, and expenses, including litigation costs.
    (9) Hire any agents or employees necessary for proper administration 
of the receivership.
    (10) Execute, acknowledge, and deliver, in person or through a 
general or specific delegation, any instrument necessary for any 
authorized purpose, and any instrument executed under this paragraph 
shall be valid and effective as if it had been executed by the 
Corporation's officers by authority of its board of directors.
    (11) Sell for cash or otherwise any mortgage, deed of trust, chose 
in action, note, contract, judgment or decree, stock, or debt owed to 
the Corporation, or any property (real or personal, tangible or 
intangible).
    (12) Purchase or lease office space, automobiles, furniture, 
equipment, and supplies, and purchase insurance, professional, and 
technical services necessary for the conduct of the receivership.
    (13) Release any assets or property of any nature, regardless of 
whether the subject of pending litigation, and repudiate, with cause, 
any lease or executory contract the receiver considers burdensome.

[[Page 399]]

    (14) Settle, release, or obtain release of, for cash or other 
consideration, claims and demands against or in favor of the Corporation 
or receiver.
    (15) Pay, out of the assets of the Corporation, all expenses of the 
receivership (including compensation to personnel employed to represent 
or assist the receiver) and all costs of carrying out or exercising the 
rights, powers, privileges, and duties as receiver.
    (16) Pay, out of the assets of the Corporation, all approved claims 
of indebtedness in accordance with the priorities established in this 
part.
    (17) Take all actions and have such rights, powers, and privileges 
as are necessary and incident to the exercise of any specific power.
    (18) Take such actions, and have such additional rights, powers, 
privileges, immunities, and duties as the Farm Credit Administration 
Board authorizes by order or by amendment of any order or by regulation.



Sec. 650.25  Report to Congress.

    On a determination by the receiver that there are insufficient 
assets of the receivership to pay all valid claims against the 
receivership, the receiver shall submit to the Secretary of the Treasury 
and Congress a report on the financial condition of the receivership.



Sec. 650.30  Preservation of equity.

    (a) Except as provided for upon final distribution of the assets of 
the Corporation pursuant to Sec. 650.62 of this subpart, no capital 
stock, equity reserves, or other allocated equities of the Corporation 
in receivership shall be issued, allocated, retired, sold, distributed, 
transferred, or assigned.
    (b) Immediately upon the adoption of a resolution by its board of 
directors to voluntarily liquidate the Corporation, the capital stock, 
equity reserves, and allocated equities of the Corporation shall not be 
issued, allocated, retired, sold, distributed, transferred, or assigned. 
Such activities could resume if the stockholders of the Corporation or 
the Farm Credit Administration Board disapprove the resolution. In the 
event the resolution is approved by the stockholders of the Corporation 
and the Farm Credit Administration Board, the liquidation plan shall 
govern disposition of the equities of the Corporation as provided in 
Sec. 650.52 of this subpart.



Sec. 650.35  Notice to stockholders.

    As soon as practicable after a receiver takes possession of the 
Corporation, the receiver shall notify, by first class mail, each holder 
of stock of the following matters:
    (a) The number of shares such holder owns;
    (b) That the stock and other equities of the Corporation may not be 
retired or transferred until the liquidation is completed, whereupon the 
receiver will distribute a liquidating dividend, if any, to the 
stockholders; and
    (c) Such other matters as the receiver or the Farm Credit 
Administration Board deems necessary.



Sec. 650.40  Creditor claims.

    (a) Upon appointment, the receiver shall promptly publish a notice 
to creditors to present their claims against the Corporation, with proof 
thereof, to the receiver by a date specified in the notice, which shall 
be not less than 90 calendar days after the first publication. The 
notice shall be republished approximately 30 days and 60 days after the 
first publication. The receiver shall promptly send, by first class 
mail, a similar notice to any creditor shown on the Corporation's books 
at the creditor's last address appearing thereon. Claims filed after the 
specified date shall be disallowed except as the receiver may approve 
them for full or partial payment from the Corporation's assets remaining 
undistributed at the time of approval.
    (b) The receiver shall allow any claim that is timely received and 
proved to the receiver's satisfaction. The receiver may disallow in 
whole or in part any creditor's claim or claim of security, preference, 
or priority that is not proved to the receiver's satisfaction or is not 
timely received and shall notify the claimant of the disallowance and 
reason therefor. Sending the notice of disallowance by first class mail 
to the claimant's address appearing on the proof of claim shall be 
sufficient notice. The disallowance shall be final unless, within 30 
days after the notice of disallowance is mailed, the claimant

[[Page 400]]

files a written request for payment regardless of the disallowance. The 
receiver shall reconsider any claim upon the timely request of the 
claimant and may approve or disapprove such claim in whole or in part.
    (c) Creditors' claims that are allowed shall be paid by the receiver 
from time to time, to the extent funds are available therefor and in 
accordance with the priorities established in this part and in such 
manner and amounts as the receiver deems appropriate. In the event the 
Corporation has a claim against a creditor of the Corporation, the 
receiver shall offset the amount of such claim against the claim 
asserted by such creditor.



Sec. 650.45  Priority of claims.

    The following priority of claims shall apply to the distribution of 
the assets of the Corporation in liquidation:
    (a) All costs, expenses, and debts incurred by the receiver in 
connection with the administration of the receivership, all Farm Credit 
Administration assessments for the costs of supervising and examining 
the Corporation, and any amounts borrowed pursuant to Sec. 650.56(b)(3).
    (b) Administrative expenses of the Corporation, provided that such 
expenses were incurred within 60 days prior to the receiver's taking 
possession, and that such expenses shall be limited to reasonable 
expenses incurred for services actually provided by accountants, 
attorneys, appraisers, examiners, or management companies, or reasonable 
expenses incurred by employees that were authorized and reimbursable 
under a preexisting expense reimbursement policy and that, in the 
opinion of the receiver, are of benefit to the receivership, and shall 
not include wages or salaries of employees of the Corporation.
    (c) If authorized by the receiver, claims for wages and salaries, 
including vacation pay, earned prior to the appointment of the receiver 
by an employee of the Corporation whom the receiver determines it is in 
the best interest of the receivership to engage or retain for a 
reasonable period of time.
    (d) If authorized by the receiver, claims for wages and salaries, 
including vacation pay, earned prior to the appointment of the receiver, 
up to a maximum of three thousand dollars ($3,000) per person as 
adjusted for inflation, by an employee of the Corporation not engaged or 
retained by the receiver. The adjustment for inflation shall be the 
percentage by which the Consumer Price Index (as prepared by the 
Department of Labor) for the calendar year preceding the appointment of 
the receiver exceeds the Consumer Price Index for the calendar year 
1992.
    (e) All claims for taxes.
    (f) All claims of creditors which are secured by specific assets of 
the Corporation, with priority of conflicting claims of creditors within 
this same class to be determined in accordance with priorities of 
applicable Federal or State law.
    (g) All claims of general creditors.



Sec. 650.50  Payment of claims.

    (a) All claims of each class described in Sec. 650.61 of this 
subpart shall be paid in full or provisions shall be made for such 
payment prior to the payment of any claim of a lesser priority. If there 
are insufficient funds to pay all claims in a class in full, 
distribution to that class will be on a pro rata basis.
    (b) Following the payment of all claims, the receiver shall 
distribute the remainder of the assets of the Corporation, if any, to 
the owners of stock and other equities in accordance with the priorities 
for impairment set forth in section 8.4(e)(3) of the Act and the bylaws 
of the Corporation.



Sec. 650.55  Inventory, audit, and reports.

    (a) As soon as practicable after taking possession of the 
Corporation, the receiver shall take an inventory of the assets and 
liabilities as of the date possession was taken.
    (b) The receivership shall be audited on an annual basis by a 
certified public accountant selected by the receiver.
    (c) The receiver shall make an annual accounting or report, as 
appropriate, available for review upon request to any stockholder of the 
Corporation or any member of the public, with a copy provided to the 
Farm Credit Administration.
    (d) As soon as practicable after final distribution, the receiver 
shall send to each stockholder of record a report

[[Page 401]]

summarizing the disposition of the assets of the receivership and claims 
against the receivership.



Sec. 650.60  Final discharge and release of the receiver.

    After the receiver has made a final distribution of the assets of 
the receivership, the receivership shall be terminated, the charter 
shall be canceled by the Farm Credit Administration Board if such 
cancellation has not previously occurred, and the receiver shall be 
finally discharged and released.



Sec. 650.65  Appointment of a conservator.

    (a) The Farm Credit Administration Board may in its discretion 
appoint, ex parte and without prior notice, a conservator for the 
Corporation provided that one or more of the grounds for appointment as 
set forth in Sec. 650.50 of this subpart exist;
    (b) Upon the appointment of a conservator, the Chairman of the Farm 
Credit Administration shall immediately notify the Corporation and shall 
publish a notice of the appointment in the Federal Register.
    (c) As soon as practicable after the conservator takes possession of 
the Corporation, the conservator shall notify, by first class mail, each 
holder of stock in the Corporation of the establishment of the 
conservatorship and shall describe the effect of the conservatorship on 
the Corporation's operations and equity holdings.
    (d) Upon the issuance of the order placing the Corporation in 
conservatorship, all rights, privileges, and powers of the board of 
directors, officers, and employees of the Corporation are vested 
exclusively in the conservator.
    (e) The Farm Credit Administration Board may, at any time, terminate 
the conservatorship and direct the conservator to turn over the 
Corporation's operations to such management as the Farm Credit 
Administration Board may designate, in which event the provisions of 
this subpart shall no longer apply.



Sec. 650.70  Powers and duties of the conservator.

    (a) The conservator shall direct the Corporation's further operation 
until the Farm Credit Administration Board decides that the Corporation 
can operate without the conservatorship or places the Corporation into 
receivership. Upon correction or resolution of the problem or condition 
that provided the basis for the appointment, the Farm Credit 
Administration Board may turn the Corporation over to such management as 
the Farm Credit Administration Board may direct.
    (b) The conservator shall exercise all powers necessary to continue 
the ongoing operations of the Corporation, to conserve and preserve the 
Corporation's assets and property, and otherwise protect the interests 
of the Corporation, its stockholders, and creditors as provided in this 
subpart.
    (c) The conservator serves as the trustee of the Corporation and 
conducts its operations for the benefit of the creditors and 
stockholders of the Corporation.
    (d) The conservator may exercise the powers that a receiver of the 
Corporation may exercise under any of the provisions of Sec. 650.56(b) 
of this subpart, except paragraphs (b)(2) and (b)(16). In interpreting 
the applicable paragraphs for purposes of this section, the terms 
``conservator'' and ``conservatorship'' shall be read for ``receiver'' 
and ``receivership''.
    (e) The conservator may also take any other action the conservator 
considers appropriate or expedient to the continuing operation of the 
Corporation.



Sec. 650.75  Inventory, examination, and reports to stockholders.

    (a) As soon as practicable after taking possession of the 
Corporation, the conservator shall take an inventory of the assets and 
liabilities of the Corporation as of the date possession was taken. One 
copy of the inventory shall be filed with the Farm Credit 
Administration.
    (b) The conservatorship shall be examined by the Farm Credit 
Administration in accordance with section 8.11 of the Act.
    (c) The conservatorship shall prepare and file financial reports and 
other documents in accordance with the requirements of Sec. 655.1 and 
part 621 of this

[[Page 402]]

chapter. The conservator of the Corporation shall provide the 
certification required in Sec. 621.14 of this chapter.

[62 FR 43636, Aug. 15, 1997. Redesignated and amended at 70 FR 40650, 
40651, July 14, 2005]



Sec. 650.80  Final discharge and release of the conservator.

    At such time as the conservator shall be relieved of its 
conservatorship duties, the conservator shall file a report on the 
conservator's activities with the Farm Credit Administration. The 
conservator shall thereupon be completely and finally released.



PART 651_FEDERAL AGRICULTURAL MORTGAGE CORPORATION GOVERNANCE--
Table of Contents



                            Subpart A_General

Sec.
651.1  Definitions.
651.2  [Reserved]

                     Subpart B_Standards of Conduct

651.21  [Reserved]
651.22  Conflict-of-interest policy.
651.23  Implementation of policy.
651.24  Director, officer, employee, and agent responsibilities.

                       Subpart C_Board Governance

651.30  [Reserved]
651.35  [Reserved]
651.40  [Reserved]
651.50  Committees of the Corporation's board of directors.

    Authority: Secs. 4.12, 5.9, 5.17, 8.3, 8.11, 8.14, 8.31, 8.32, 8.33, 
8.34, 8.35, 8.36, 8.37, 8.41 of Pub. L. 92-181, 85 Stat. 583 (12 U.S.C. 
2183, 2243, 2252, 2279aa-3, 2279aa-11, 2279aa-14, 2279bb, 2279bb-1, 
2279bb-2, 2279bb-3, 2279bb-4, 2279bb-5, 2279bb-6, 2279cc); sec. 514 of 
Pub. L. 102-552, 106 Stat. 4102; sec. 118 of Pub. L. 104-105, 110 Stat. 
168.

    Source: 81 FR 49152, July 27, 2016, unless otherwise noted.



                            Subpart A_General



Sec. 651.1  Definitions.

    The following definitions apply to this part:
    Act or Authorizing statute means the Farm Credit Act of 1971, as 
amended.
    Affiliate means any entity established under authority granted to 
the Corporation under section 8.3(c)(14) of the Act.
    Agent means any person (other than a director, officer, or employee 
of the Corporation) who represents the Corporation in contacts with 
third parties or who provides professional services such as legal, 
accounting, or appraisal services to the Corporation.
    Appointed director means a member of the Corporation's board of 
directors who was appointed to the Corporation board by the President of 
the United States of America.
    Business day means a day the Corporation is open for business, 
excluding the legal public holidays identified in 5 U.S.C. 6103(a).
    Class A stockholders means holders of common stock in the 
Corporation that are insurance companies, banks, or other financial 
institutions or entities.
    Class B stockholders means holders of common stock in the 
Corporation that are Farm Credit System institutions.
    Conflict-of-interest means a director, officer, or employee of the 
Corporation has an interest in a transaction, relationship, or activity 
that might adversely affect, or appear to adversely affect, the ability 
of the director, officer, or employee to perform his or her official 
duties on behalf of the Corporation in an objective and impartial manner 
in furtherance of the interest of the Corporation and its statutory 
purposes.
    Corporation means the Federal Agricultural Mortgage Corporation and 
its affiliates.
    Director elections mean the process of searching for director 
candidates, conducting director nominations, and voting for directors.
    Elected director means a member of the Corporation's board of 
directors who was elected by either Class A or Class B stockholders.
    Employee means any salaried individual working part-time, full-time, 
or temporarily for the Corporation.
    Entity means a corporation, company, association, firm, joint 
venture, partnership (general or limited), society, joint stock company, 
trust (business or otherwise), fund, or other organization or 
institution.
    FCA means the Farm Credit Administration, an independent Federal 
agency of the executive branch.

[[Page 403]]

    Material means conflicting interests of sufficient magnitude or 
significance that a reasonable person with knowledge of the relevant 
facts would question the ability of the person having such interest to 
discharge official duties in an objective and impartial manner in 
furtherance of the interests and statutory purposes of the Corporation.
    Officer means the salaried president, vice presidents, secretary, 
treasurer, and general counsel, or other person, however designated, who 
holds a position of similar authority in the Corporation.
    OSMO means the FCA Office of Secondary Market Oversight, which is 
responsible for the general supervision of the safe and sound exercise 
of the Corporation's powers, functions, and duties and compliance with 
laws and regulations.
    Our or we means the FCA or OSMO, as appropriate to the context of 
the provision employing the term.
    Person means individual or entity.
    Reasonable person means a person under similar circumstances 
exercising the average level of care, skill, and judgment in his or her 
conduct.
    Resolved means an actual or potential material conflict-of-interest 
that has been altered so that a reasonable person with knowledge of the 
relevant facts would conclude that the conflicting interest would not 
adversely affect the person's performance of official duties in an 
objective and impartial manner and in furtherance of the interests and 
statutory purposes of the Corporation.
    Signed, when referring to paper form, means a manual signature, and, 
when referring to electronic form, means marked in a manner that 
authenticates each signer's identity.



Sec. 651.2  [Reserved]



                     Subpart B_Standards of Conduct



Sec. 651.21  [Reserved]



Sec. 651.22  Conflict-of-interest policy.

    The Corporation shall establish and administer a conflict-of-
interest policy that will provide reasonable assurance that the 
directors, officers, employees, and agents of the Corporation discharge 
their official responsibilities in an objective and impartial manner in 
furtherance of the interests and statutory purposes of the Corporation. 
The policy shall, at a minimum:
    (a) Define the types of transactions, relationships, or activities 
that could reasonably be expected to give rise to potential conflicts of 
interest. For the purpose of determining whether a potential conflict of 
interest exists, the following interests shall be imputed to a person 
subject to this regulation as if they were that person's own interests:
    (1) Interests of any individual residing in that person's household;
    (2) Interests of any individual identified as a legal dependent of 
that person;
    (3) Interests of that person's general business partner;
    (4) Interests of an organization or entity that the person serves as 
officer, director, trustee, general partner or employee; and
    (5) Interests of a person, organization, or entity with which that 
person is negotiating for or has an arrangement concerning current or 
prospective employment.
    (b) Require each director, officer, and employee to report in 
writing, annually, and at such other times as conflicts may arise, 
sufficient information about financial interests, transactions, 
relationships, and activities to inform the Corporation of potential 
conflicts of interest;
    (c) Require each director, officer, and employee who had no 
transaction, relationship, or activity required to be reported under 
paragraph (b) of this section at any time during the year to file a 
signed statement to that effect;
    (d) Establish guidelines for determining when a potential conflict 
is material in accordance with this subpart;
    (e) Establish procedures for resolving or disclosing material 
conflicts of interest.
    (f) Provide internal controls to ensure that reports are filed as 
required and that conflicts are resolved or disclosed in accordance with 
this subpart.
    (g) Notify directors, officers, and employees of the conflict-of-
interest policy and any subsequent changes thereto and allow them a 
reasonable period of time to conform to the policy.

[[Page 404]]



Sec. 651.23  Implementation of policy.

    (a) The Corporation shall disclose any unresolved material conflicts 
of interest involving its directors, officers, and employees to:
    (1) Shareholders through annual reports and proxy statements; and
    (2) Investors and potential investors through disclosure documents 
supplied to them.
    (b) The Corporation shall make available to any shareholder, 
investor, or potential investor, upon request, a copy of its policy on 
conflicts of interest. The Corporation may charge a nominal fee to cover 
the costs of reproduction and handling.
    (c) The Corporation shall maintain all reports of all potential 
conflicts of interest and documentation of materiality determinations 
and resolutions of conflicts of interest for a period of 6 years.



Sec. 651.24  Director, officer, employee, and agent responsibilities.

    (a) Each director, officer, employee, and agent of the Corporation 
shall:
    (1) Conduct the business of the Corporation following high standards 
of honesty, integrity, impartiality, loyalty, and care, consistent with 
applicable law and regulation in furtherance of the Corporation's public 
purpose;
    (2) Adhere to the requirements of the conflict-of-interest policy 
established by the Corporation and provide any information the 
Corporation deems necessary to discharge its responsibilities under this 
subpart.
    (b) Directors, officers, employees, and agents of the Corporation 
shall be subject to the penalties of part C of title V of the Farm 
Credit Act of 1971, as amended, for violations of this regulation, 
including failure to adhere to the conflict-of-interest policy 
established by the Corporation.



                       Subpart C_Board Governance



Sec. 651.30  [Reserved]



Sec. 651.35  [Reserved]



Sec. 651.40  [Reserved]



Sec. 651.50  Committees of the Corporation's board of directors.

    (a) General. No committee of the board of directors may be delegated 
the authority of the board of directors to amend Corporation bylaws. No 
committee of the board of directors shall relieve the board of directors 
or any board member of a responsibility imposed by law or regulation.
    (b) Required committees. The board of directors of the Corporation 
must have committees, however styled, that address risk management, 
audit, compensation, and corporate governance. Neither the risk 
management committee nor the audit committee may be combined with any 
other committees. This provision does not prevent the board of directors 
from establishing any other committees that it deems necessary or useful 
to carrying out its responsibilities.
    (c) Charter. Each committee required by this section must develop a 
formal written charter that specifies the scope of the committee's 
powers and responsibilities, as well as the committee's structure, 
processes, and membership requirements. To be effective, the charter 
must be approved by action of the full board of directors. No director 
may serve as chairman of more than one of the board committees required 
by this section.
    (d) Frequency of meetings and records. Each committee of the board 
of directors required by this section must meet with sufficient 
frequency to carry out its obligations and duties under applicable laws, 
regulations, and its operating charter. Each of these committees must 
maintain minutes of its meetings. The minutes must record attendance, 
the agenda (or equivalent list of issues under discussion), a summary of 
the relevant discussions held by the committee during the meeting, and 
any resulting recommendations to the board. Such minutes must be 
retained for a minimum of 3 years and

[[Page 405]]

must be available to the entire board of directors and to OSMO.



PART 652_FEDERAL AGRICULTURAL MORTGAGE CORPORATION FUNDING AND FISCAL
AFFAIRS--Table of Contents



                     Subpart A_Investment Management

Sec.
652.1  Purpose.
652.5  Definitions.
652.10  Investment management.
652.15  Non-program investment purposes and limitation.
652.20  Eligible non-program investments.
652.25  Management of ineligible investments and reservation of 
          authority.
652.30  Interest rate risk management.
652.35  Liquidity management.
652.40  Liquidity reserve requirement and supplemental liquidity.
652.45  Temporary regulatory waivers or modifications for extraordinary 
          situations.

                Subpart B_Risk-Based Capital Requirements

652.50  Definitions.
652.55  General.
652.60  Corporate business planning.
652.61  Capital planning.
652.62  Notice to OSMO of capital distributions.
652.65  Risk-based capital stress test.
652.70  Risk-based capital level.
652.75  Your responsibility for determining the risk-based capital 
          level.
652.80  When you must determine the risk-based capital level.
652.85  When to report the risk-based capital level.
652.90  How to report your risk-based capital determination.
652.95  Failure to meet capital requirements.
652.100  Audit of the risk-based capital stress test.

Appendix A to Subpart B of Part 652--Risk-Based Capital Stress Test

    Authority: Secs. 4.12, 5.9, 5.17, 8.11, 8.31, 8.32, 8.33, 8.34, 
8.35, 8.36, 8.37, 8.41 of the Farm Credit Act (12 U.S.C. 2183, 2243, 
2252, 2279aa-11, 2279bb, 2279bb-1, 2279bb-2, 2279bb-3, 2279bb-4, 2279bb-
5, 2279bb-6, 2279cc); sec. 514 of Pub. L. 102-552, 106 Stat. 4102; sec. 
118 of Pub. L. 104-105, 110 Stat. 168; sec. 939A of Pub. L. 11-203, 124 
Stat. 1326, 1887 (15 U.S.C. 78o-7 note) (July 21, 2010).

    Source: 70 FR 40644, July 14, 2005, unless otherwise noted.



                     Subpart A_Investment Management

    Source: 77 FR 66382, Nov. 5, 2012, unless otherwise noted.



Sec. 652.1  Purpose.

    The purpose of this subpart is to ensure safety and soundness, 
continuity of funding, and appropriate use of non-program investments 
considering the Federal Agricultural Mortgage Corporation's (Farmer Mac 
or Corporation) special status as a Government-sponsored enterprise 
(GSE). The subpart contains requirements for Farmer Mac's board of 
directors to adopt policies covering such areas as investment 
management, interest rate risk, and liquidity reserves. The subpart also 
requires Farmer Mac to comply with various reporting requirements.



Sec. 652.5  Definitions.

    For purposes of this subpart, the following definitions will apply:
    Affiliate means any entity established under authority granted to 
the Corporation under section 8.3(c)(14) of the Farm Credit Act of 1971, 
as amended.
    Asset-backed securities (ABS) mean investment securities that 
provide for ownership of a fractional undivided interest or collateral 
interests in specific assets of a trust that are sold and traded in the 
capital markets. For the purposes of this subpart, ABS exclude mortgage 
securities that are defined below.
    Cash means cash balances held at Federal Reserve Banks, proceeds 
from traded-but-not-yet-settled debt, and deposit accounts at Federal 
Deposit Insurance Corporation-insured banks.
    Contingency Funding Plan (CFP) is described in Sec. 652.35(d)(2).
    Eurodollar time deposit means a non-negotiable deposit denominated 
in United States dollars and issued by an overseas branch of a United 
States bank or by a foreign bank outside the United States.
    Farmer Mac, Corporation, you, and your means the Federal 
Agricultural Mortgage Corporation and its affiliates.
    FCA, our, us, or we means the Farm Credit Administration.

[[Page 406]]

    Final maturity means the last date on which the remaining principal 
amount of a security is due and payable (matures) to the registered 
owner. It does not mean the call date, the expected average life, the 
duration, or the weighted average maturity.
    General obligations of a state or political subdivision means:
    (1) The full faith and credit obligations of a state, the District 
of Columbia, the Commonwealth of Puerto Rico, a territory or possession 
of the United States, or a political subdivision thereof that possesses 
general powers of taxation, including property taxation; or
    (2) An obligation that is unconditionally guaranteed by an obligor 
possessing general powers of taxation, including property taxation.
    Government agency means the United States or an agency, 
instrumentality, or corporation of the United States Government whose 
obligations are fully and explicitly insured or guaranteed as to the 
timely repayment of principal and interest by the full faith and credit 
of the United States Government.
    Government-sponsored agency means an agency, instrumentality, or 
corporation chartered or established to serve public purposes specified 
by the United States Congress but whose obligations are not fully and 
explicitly insured or guaranteed by the full faith and credit of the 
United States Government, including but not limited to any Government-
sponsored enterprise.
    Liability Maturity Management Plan (LMMP) is described in 
Sec. 652.35(d)(2)(iv).
    Liquid investments are assets that can be promptly converted into 
cash without significant loss to the investor. A security is liquid if 
the spread between its bid price and ask price is narrow and a 
reasonable amount can be sold at those prices promptly.
    Liquidity reserve is described in Sec. 652.40.
    Long-Term Standby Purchase Commitment (LTSPC) is a commitment by 
Farmer Mac to purchase specified eligible loans on one or more 
undetermined future dates. In consideration for Farmer Mac's assumption 
of the credit risk on the specified loans underlying an LTSPC, Farmer 
Mac receives an annual commitment fee on the outstanding balance of 
those loans in monthly installments based on the outstanding balance of 
those loans.
    Market risk means the risk to your financial condition because the 
value of your holdings may decline if interest rates or market prices 
change. Exposure to market risk is measured by assessing the effect of 
changing rates and prices on either the earnings or economic value of an 
individual instrument, a portfolio, or the entire Corporation.
    Maturing obligations means maturing debt and other obligations that 
may be expected, such as buyouts of long-term standby purchase 
commitments or repurchases of agricultural mortgage securities.
    Mortgage securities means securities that are either:
    (1) Pass-through securities or participation certificates that 
represent ownership of a fractional undivided interest in a specified 
pool of residential (excluding home equity loans), multifamily or 
commercial mortgages, or
    (2) A multiclass security (including collateralized mortgage 
obligations and real estate mortgage investment conduits) that is backed 
by a pool of residential, multifamily or commercial real estate 
mortgages, pass-through mortgage securities, or other multiclass 
mortgage securities.
    (3) This definition does not include agricultural mortgage-backed 
securities guaranteed by Farmer Mac itself.
    Nationally recognized statistical rating organization (NRSRO) means 
a rating organization that the Securities and Exchange Commission 
recognizes as an NRSRO.
    Non-program investments means investments other than those in:
    (1) ``Qualified loans'' as defined in section 8.0(9) of the Farm 
Credit Act of 1971, as amended; or
    (2) Securities collateralized by ``qualified loans.''
    OSMO means FCA's Office of Secondary Market Oversight.
    Program assets means on-balance sheet ``qualified loans'' as defined 
in section 8.0(9) of the Farm Credit Act of 1971, as amended.
    Program obligations means off-balance sheet ``qualified loans'' as 
defined in

[[Page 407]]

section 8.0(9) of the Farm Credit Act of 1971, as amended.
    Regulatory capital means your core capital plus an allowance for 
losses and guarantee claims, as determined in accordance with generally 
accepted accounting principles.
    Revenue bond means an obligation of a municipal government that 
finances a specific project or enterprise, but it is not a full faith 
and credit obligation. The obligor pays a portion of the revenue 
generated by the project or enterprise to the bondholders.
    Weighted average life (WAL) means the average time until the 
investor receives the principal on a security, weighted by the size of 
each principal payment and calculated under specified prepayment 
assumptions.

[79 FR 53127, Sept. 8, 2014]



Sec. 652.10  Investment management.

    (a) Responsibilities of the board of directors. Your board of 
directors must adopt written policies for managing your non-program 
investment activities. Your board must also ensure that management 
complies with these policies and that appropriate internal controls are 
in place to prevent loss. At least annually, your board, or a designated 
committee of the board, must review the sufficiency of these investment 
policies. Any changes to the policies must be adopted by the board. You 
must report any changes to these policies to the OSMO within 10 business 
days of adoption.
    (b) Investment policies--general requirements. Your investment 
policies must address the purposes and objectives of investments, risk 
tolerance, delegations of authority, internal controls, due diligence, 
and reporting requirements. Moreover, your investment policies must 
fully address the extent of pre-purchase analysis that management must 
perform for various types, classes, and structure of investments. 
Furthermore, the policies must include reporting requirements and 
approvals needed for exceptions to the board's policies. Investment 
policies must be sufficiently detailed, consistent with, and appropriate 
for the amounts, types, and risk characteristics of your investments. 
You must document in the Corporation's records any analyses used in 
formulating your policies or amendments to the policies.
    (c) Investment policies--risk tolerance. Your investment policies 
must establish risk limits for the various types, classes, and sectors 
of eligible investments. These policies must include concentration 
limits to ensure prudent diversification of credit, market, and 
liquidity risks in the investment portfolio. Risk limits must be based 
on all relevant factors, including the Corporation's objectives, capital 
position, earnings, and quality and reliability of risk management 
systems. Your policies must identify the types and quantity of 
investments that you will hold to achieve your objectives and control 
credit, market, liquidity, and operational risks. Your policies must 
establish risk limits for the following four types of risk:
    (1) Credit risk. Your investment policies must establish:
    (i) Credit quality standards, limits on counterparty risk, and risk 
diversification standards that limit concentrations in a single or 
related counterparty(ies), geographical areas, industry sectors, and 
asset classes or obligations with similar characteristics.
    (ii) Criteria for selecting brokers, dealers, and investment bankers 
(collectively, securities firms). You must buy and sell eligible 
investments with more than one securities firm. As part of your review 
of your investment policies required under paragraph (a) of this 
section, your board of directors, or a designated committee of the 
board, must review the criteria for selecting securities firms. Any 
changes to the criteria must be approved by the board.
    (iii) Collateral margin requirements on repurchase agreements. You 
must regularly mark the collateral to market and ensure appropriate 
controls are maintained over collateral held.
    (2) Market risk. Your investment policies must set market risk 
limits for specific types of investments and for the investment 
portfolio.
    (3) Liquidity risk. Your investment policies must describe the 
liquidity characteristics of eligible investments that you will hold to 
meet your liquidity needs and the Corporation's other objectives.

[[Page 408]]

    (4) Operational risk. Investment policies must address operational 
risks, including delegations of authority and internal controls in 
accordance with paragraphs (d) and (e) of this section.
    (d) Delegation of authority. All delegations of authority to 
specified personnel or committees must state the extent of management's 
authority and responsibilities for investments.
    (e) Internal controls. You must:
    (1) Establish appropriate internal controls to detect and prevent 
loss, fraud, embezzlement, conflicts of interest, and unauthorized 
investments.
    (2) Establish and maintain a separation of duties between personnel 
who supervise or execute investment transactions and personnel who 
supervise or engage in all other investment-related functions.
    (3) Maintain records and management information systems that are 
appropriate for the level and complexity of your investment activities.
    (4) Implement an effective internal audit program to review, at 
least annually, your investment management functions, controls, 
processes, and compliance with FCA regulations. The scope of the annual 
review must be appropriate for the size, risk, and complexity of the 
investment portfolio.
    (f) Due diligence--(1) Pre-purchase analysis--(i) Objective, 
eligibility, and compliance with investment policies. Before you 
purchase an investment, you must conduct sufficient due diligence to 
determine whether the investment is eligible under Sec. 652.20, is for 
an authorized purpose under Sec. 652.15(a), and complies with your 
board-approved investment policies. You must document its eligibility, 
purpose, and investment policy compliance and your investment objective. 
Your investment policies must fully address the extent of pre-purchase 
analysis that management must perform for various types, classes, and 
structure of investments. Your board must approve your decision to hold 
an investment that does not comply with your written investment policy 
requirements.
    (ii) Valuation. Prior to purchase, you must verify the value of the 
investment (unless it is a new issue) with a source that is independent 
of the broker, dealer, counterparty or other intermediary to the 
transaction.
    (iii) Risk assessment. Your risk assessment must be documented and, 
at a minimum, include an evaluation of credit risk, market risk, and 
liquidity risk and the underlying collateral of the investment. You must 
conduct stress testing before you purchase any investment that is 
structured or that has uncertain cash flows, including all mortgage-
backed securities or asset-backed securities. The stress testing must be 
commensurate with the risk and complexity of the investments and must 
comply with the requirements of paragraph (f)(4) of this section.
    (2) Monthly fair value determination. At least monthly, you must 
determine the fair market value of each investment in your portfolio and 
the fair market value of your whole investment portfolio.
    (3) Ongoing analysis of credit risk. You must establish and maintain 
processes to monitor and evaluate changes in the credit quality of each 
security and the whole investment portfolio on an ongoing basis.
    (4) Quarterly stress testing. (i) You must stress test your entire 
investment portfolio, including stress tests of all investments 
individually and stress tests of the portfolio as a whole, at the end of 
each quarter. The stress tests must enable you to determine that your 
investment securities, both individually and on a portfolio-wide basis, 
do not expose your capital, earnings, or liquidity to risks that exceed 
the risk tolerance specified in your investment policies. If your 
portfolio risk exceeds your investment policy limits, you must develop a 
plan to reduce risk and comply with your investment policy limits.
    (ii) Your stress tests must be comprehensive and appropriate for the 
risk profile of your investment portfolio and the Corporation. At a 
minimum, the stress tests must be able to measure the price sensitivity 
of investments over a range of possible interest rate/yield curve 
scenarios. The methodology that you use to analyze investment securities 
must be appropriate for the complexity, structure, and cash flows of the 
investments in your portfolio. You must rely to the maximum extent

[[Page 409]]

practicable on verifiable information to support all your assumptions, 
including prepayment and interest rate volatility assumptions, when you 
apply your stress tests. Your assumptions must be prudent and based on 
sound judgment, and you must document the basis for all assumptions that 
you use to evaluate the security and its underlying collateral. You must 
also document all subsequent changes in your assumptions.
    (5) Presale value verification. Before you sell an investment, you 
must verify its value with a source that is independent of the broker, 
dealer, counterparty, or other intermediary to the transaction.
    (g) Reports to the board of directors. At least quarterly, executive 
management must report on the following to the board of directors or a 
designated committee of the board:
    (1) Plans and strategies for achieving the board's objectives for 
the investment portfolio;
    (2) Whether the investment portfolio effectively achieves the 
board's objectives;
    (3) The current composition, quality, and liquidity profile of the 
investment portfolio;
    (4) The performance of each class of investments and the entire 
investment portfolio, including all gains and losses that you incurred 
during the quarter on individual securities that you sold before 
maturity and why they were liquidated;
    (5) Potential risk exposure to changes in market interest rates as 
identified through quarterly stress testing and any other factors that 
may affect the value of your investment holdings;
    (6) How investments affect your capital, earnings, and overall 
financial condition;
    (7) Any deviations from the board's policies. These deviations must 
be formally approved by the board of directors.



Sec. 652.15  Non-program investment purposes and limitation.

    (a) Farmer Mac is authorized to hold eligible non-program 
investments listed under Sec. 652.20 for the purposes of enterprise risk 
management, including complying with its interest rate risk requirements 
in Sec. 652.30; complying with its liquidity requirements in 
Sec. 652.40; managing surplus short-term funds; and complementing 
program business activities.
    (b) Non-program investments cannot exceed 35 percent of program 
assets and program obligations, excluding 75 percent of the program 
assets that are guaranteed by the United States Department of 
Agriculture as described in section 8.0(9)(B) of the Farm Credit Act of 
1971, as amended. When calculating the total amount of non-program 
investments under this section, exclude investments pledged to meet 
margin requirements on derivative transactions.



Sec. 652.20  Eligible non-program investments.

    (a) You may hold only the types, quantities, and qualities of non-
program investments listed in the following Non-Program Investment 
Eligibility Criteria Table. These investments must be denominated in 
United States dollars.

                                Non-Program Investment Eligibility Criteria Table
----------------------------------------------------------------------------------------------------------------
                                                                                              Maximum percentage
                                    Final maturity      NRSRO issue or                           of total non-
           Asset class                   limit           issuer credit    Other requirements  program investment
                                                      rating requirement                           portfolio
----------------------------------------------------------------------------------------------------------------
(1) Obligations of the United     None..............  NA................  None..............  None.
 States.
  Treasuries
  Other obligations
 (except mortgage securities)
 fully insured or guaranteed by
 the United States Government or
 a Government agency.

[[Page 410]]

 
(2) Obligations of Government-    None..............  NA................  None..............  None.
 sponsored agencies.
  Government-sponsored
 agency securities (except
 mortgage securities).
  Other obligations
 (except mortgage securities)
 fully insured or guaranteed by
 Government-sponsored agencies.
(3) Municipal Securities:
  General obligations...  10 years..........  One of the two      None..............  None.
                                                       highest.
  Revenue bonds.........  5 years for fixed   Highest...........  None..............  15%.
                                   rate bonds and 10
                                   years for index/
                                   floating rate
                                   bonds.
(4) International and             None..............  None..............  The United States   None.
 Multilateral Development Bank                                             must be a voting
 Obligations.                                                              shareholder.
(5) Money Market Instruments:
  Federal funds.........  1 day or            One of the two      None..............  None.
                                   continuously        highest short-
                                   callable up to      term.
                                   100 days.
  Negotiable              1 year............  One of the two      None..............  None.
 certificates of deposit.                              highest short-
                                                       term.
  Bankers acceptances...  None..............  One of the two      Issued by a         None.
                                                       highest short-      depository
                                                       term.               institution.
  Prime commercial paper  270 days..........  Highest short-term  None..............  None.
  Non-callable term       100 days..........  Highest short-term  None..............  20%.
 Federal funds and Eurodollar
 time deposits.
  Master notes..........  270 days..........  Highest short-term  None..............  20%.
  Repurchase agreements   100 days..........  NA................  ..................  None.
 collateralized by eligible
 investments or marketable
 securities rated in the highest
 credit rating category by an
 NRSRO.
(6) Mortgage Securities:
  Issued or guaranteed    None..............  NA................  ..................  None.
 by the United States or a
 Government agency.
  Government-sponsored    None..............  One of the two      ..................  50%.
 agency mortgage securities.                           highest.
  Non-Government agency   None..............  Highest...........  ..................  15% combined.
 or Government-sponsored agency
 securities that comply with 15
 U.S.C. 77d(5) or 15 U.S.C.
 78c(a)(41).

[[Page 411]]

 
  Commercial mortgage-    None..............  Highest...........    Security
 backed securities.                                                        must be backed by
                                                                           a minimum of 100
                                                                           loans.
                                                                            Loans
                                                                           from a single
                                                                           mortgagor cannot
                                                                           exceed 5% of the
                                                                           pool..
                                                                            Pool
                                                                           must be
                                                                           geographically
                                                                           diversified
                                                                           pursuant to the
                                                                           board's policy..
(7) Asset-Backed Securities       None..............  Highest...........  Maximum of 5-year   25% combined.
 secured by:                                                               WAL for fixed
  Credit card                                                      rate or floating
 receivables.                                                              rate ABS at their
  Automobile loans......                                           contractual
  Home equity loans.....                                           interest rate
  Wholesale automobile                                             caps.
 dealer loans.
  Student loans.........
  Equipment loans.......
  Manufactured housing
 loans.
(8) Corporate Debt Securities...  5 years...........  One of the highest  Cannot be           25%.
                                                       two for             convertible to
                                                       maturities          equity securities.
                                                       greater than 3
                                                       years, and one of
                                                       the highest three
                                                       for maturities of
                                                       three years or
                                                       less.
(9) Diversified Investment Funds  NA................  NA................  The portfolio of    None, if your
Shares of an investment company                                            the investment      shares in each
 registered under section 8 of                                             company must        investment
 the Investment Company Act of                                             consist solely of   company comprise
 1940..                                                                    eligible            less than 10% of
                                                                           investments         your portfolio.
                                                                           authorized by       Otherwise counts
                                                                           this section.       toward limit for
                                                                          The investment       each type of
                                                                           company's risk      investment.
                                                                           and return
                                                                           objectives and
                                                                           use of
                                                                           derivatives must
                                                                           be consistent
                                                                           with FCA guidance
                                                                           and your
                                                                           investment
                                                                           policies..
----------------------------------------------------------------------------------------------------------------
Note: You must also comply with requirements of paragraphs (b), (c), and (d) of this section, and Sec. 651.40
  when applicable. ``NA'' means not applicable.

    (b) Rating of foreign countries. Whenever the obligor or issuer of 
an eligible investment is located outside the United States, the host 
country must maintain the highest sovereign rating for political and 
economic stability by an NRSRO.
    (c) Marketable investments. All eligible investments, except money 
market instruments, must be readily marketable. An eligible investment 
is marketable if you can sell it promptly at a price that closely 
reflects its fair value in an active and universally recognized 
secondary market. You must evaluate and document the size and liquidity 
of the secondary market for the investment at time of purchase.
    (d) Obligor limits. (1) You may not invest more than 25 percent of 
your regulatory capital in eligible investments issued by any single 
entity, issuer, or obligor. This obligor limit does not apply to 
Government-sponsored agencies or Government agencies. You may not invest 
more than 100 percent of your regulatory capital in any one Government-
sponsored agency. There are no obligor limits for Government agencies.
    (2) Obligor limits for your holdings in an investment company. You 
must count securities that you hold through an investment company toward 
the obligor

[[Page 412]]

limits of this section unless the investment company's holdings of the 
security of any one issuer do not exceed 5 percent of the investment 
company's total portfolio.
    (e) Preferred stock and other investments approved by the FCA. (1) 
You may purchase non-program investments in preferred stock issued by 
other Farm Credit System institutions only with our written prior 
approval. You may also purchase non-program investments other than those 
listed in the Non-Program Investment Eligibility Criteria Table at 
paragraph (a) of this section only with our written prior approval.
    (2) Your request for our approval must explain the risk 
characteristics of the investment and your purpose and objectives for 
making the investment.



Sec. 652.25  Management of ineligible investments and reservation
of authority.

    (a) Investments ineligible when purchased. Investments that do not 
satisfy the eligibility criteria set forth in Sec. 652.20 at the time of 
purchase are ineligible. You must not purchase ineligible investments. 
If you determine that you have purchased an ineligible investment, you 
must notify the OSMO within 15 calendar days after such determination. 
You must divest of the investment no later than 60 calendar days after 
the determination unless we approve, in writing, a plan that authorizes 
you to divest of the investment over a longer period of time.
    (b) Investments that no longer satisfy eligibility criteria. If you 
determine that an investment (that satisfied the eligibility criteria 
set forth in Sec. 652.20 when purchased) no longer satisfies the 
eligibility criteria, you must notify the OSMO within 15 calendar days 
of the determination.
    (c) Requirements for investments that are ineligible or no longer 
satisfy eligibility criteria--(1) Reporting requirements. Each quarter, 
you must report to the OSMO and your board on the status of investments 
identified in paragraph (a) or (b) of this section. Your report must 
demonstrate the effect that these investments may have on the 
Corporation's capital, earnings, and liquidity position. Additionally, 
the report must address how the Corporation plans to reduce its risk 
exposure from these investments or exit the position(s).
    (2) Other requirements. Investments identified in paragraph (a) or 
(b) of this section may not be used to satisfy the liquidity 
requirement(s) in Sec. 652.40. These investments must continue to be 
included in the investment portfolio limit calculation established in 
Sec. 652.15(b).
    (d) Reservation of authority. FCA retains the authority to require 
you to divest of any investment at any time for failure to comply with 
Sec. 652.15(a) or for safety and soundness reasons. The timeframe set by 
FCA for such required divestiture will consider the expected loss on the 
transaction (or transactions) and the effect on the Corporation's 
financial condition and performance.



Sec. 652.30  Interest rate risk management.

    (a) The board of directors of Farmer Mac must provide effective 
oversight (direction, controls, and supervision) of interest rate risk 
management and must be knowledgeable of the nature and level of interest 
rate risk taken by Farmer Mac.
    (b) The board of directors of Farmer Mac must adopt an interest rate 
risk management policy that establishes appropriate interest rate risk 
exposure limits based on the Corporation's risk-bearing capacity and 
reporting requirements in accordance with paragraphs (c) and (d) of this 
section. At least annually, the board of directors, or a designated 
committee of the board, must review the policy. Any changes to the 
policy must be approved by the board of directors. You must report any 
changes to the policy to the OSMO within 10 business days of adoption.
    (c) The interest rate risk management policy must, at a minimum:
    (1) Address the purpose and objectives of interest rate risk 
management;
    (2) Identify the causes of interest rate risk and set appropriate 
quantitative limits consistent with a clearly articulated board risk 
tolerance;
    (3) Require management to establish and implement comprehensive 
procedures to measure the potential effect of

[[Page 413]]

these risks on the Corporation's projected earnings and market values by 
conducting interest rate stress tests and simulations of multiple 
economic scenarios at least quarterly. Your stress tests must gauge how 
interest rate fluctuations affect the Corporation's capital, earnings, 
and liquidity position. The methodology that you use must be appropriate 
for the complexity of the structure and cash flows of your on- and off-
balance sheet positions, including the nature and purpose of derivative 
contracts, and establish counterparty risk thresholds and limits for 
derivatives. It must also ensure an appropriate level of consistency 
with the stress-test scenarios considered under Sec. 652.10(f)(4). 
Assumptions applied in stress tests must, to the maximum extent 
practicable, rely on verifiable information. You must document the basis 
for all assumptions that you use.
    (4) Describe and authorize management to implement actions needed to 
achieve Farmer Mac's desired risk management objectives;
    (5) Ensure procedures are established to evaluate and document, at 
least quarterly, whether actions taken have actually met the 
Corporation's desired risk management objectives;
    (6) Identify exception parameters and approvals needed for any 
exceptions to the policy's requirements;
    (7) Describe delegations of authority; and,
    (8) Describe reporting requirements, including exceptions to policy 
limits.
    (d) At least quarterly, management must report to the Corporation's 
board of directors, or a designated committee of the board, describing 
the nature and level of interest rate risk exposure. Any deviations from 
the board's policy on interest rate risk must be specifically identified 
in the report and approved by the board, or a designated committee of 
the board.



Sec. 652.35  Liquidity management.

    (a) Liquidity policy--board responsibilities. Farmer Mac's board of 
directors must adopt a liquidity policy, which may be integrated into a 
comprehensive asset-liability management or enterprise-wide risk 
management policy. The risk tolerance embodied in the liquidity policy 
must be consistent with the investment management policies required by 
Sec. 652.10 of this subpart. The board must ensure that management uses 
adequate internal controls to ensure compliance with its liquidity 
policy. At least annually, the board of directors or a designated 
committee of the board must review the sufficiency of the liquidity 
policy. The board of directors must approve any changes to the policy. 
You must provide a copy of the revised liquidity policy to the OSMO 
within 10 business days of adoption.
    (b) Policy content. Your liquidity policy must contain at a minimum 
the following:
    (1) The purpose and objectives of liquidity reserves;
    (2) Diversification requirements for your liquidity reserve 
portfolio;
    (3) The minimum and target (or optimum) amounts of liquidity that 
the board has established for Farmer Mac, expressed in days of maturing 
obligations;
    (4) The maximum amount of non-program investments that can be held 
for meeting Farmer Mac's liquidity needs, expressed as a percentage of 
program assets and program obligations;
    (5) Exception parameters and approvals needed with respect to the 
liquidity reserve;
    (6) Delegations of authority pertaining to the liquidity reserve;
    (7) Reporting requirements which must comply with the requirements 
under paragraph (c) of this section;
    (c) Reporting requirements--(1) Board reporting--(i) Periodic. At 
least quarterly, Farmer Mac's management must report to Farmer Mac's 
board of directors or a designated committee of the board describing, at 
a minimum, the status of Farmer Mac's compliance with board policy and 
the performance of the liquidity reserve portfolio.
    (ii) Special. Management must report any deviation from Farmer Mac's 
liquidity policy, or failure to meet the board's liquidity targets to 
the board before the end of the quarter if such deviation or failure has 
the potential to cause material loss.
    (2) OSMO reporting. Farmer Mac must report, in writing, to the OSMO 
no

[[Page 414]]

later than the next business day following the discovery of any breach 
of the minimum liquidity reserve requirement in Sec. 652.40 of this 
subpart.
    (d) Liability maturity management plan. Farmer Mac must have a 
liability maturity management plan (LMMP) that its board of directors 
reviews and approves at least once each year. The LMMP must establish a 
funding strategy that provides for effective diversification of the 
sources and tenors of funding, and considers Farmer Mac's risk profile 
and current market conditions. The LMMP must include targets of 
acceptable ranges of the proportion of debt maturing within specific 
time periods.
    (e) Contingency funding plan. (1) General. Farmer Mac must have a 
CFP to ensure sources of liquidity are sufficient to fund normal 
operations under a variety of stress events. Such stress events include, 
but are not limited to market disruptions, rapid increase in 
contractually required loan purchases, unexpected requirements to fund 
commitments or revolving lines of credit or to fulfill guarantee 
obligations, difficulties in renewing or replacing funding with desired 
terms and structures, requirements to pledge collateral with 
counterparties, and reduced market access.
    (2) CFP requirements. Farmer Mac must maintain an adequate level of 
unencumbered and marketable assets (as defined in Sec. 652.40(a) and (b) 
of this subpart) in its liquidity reserve that can be converted into 
cash to meet its net liquidity needs for 30 days based on estimated cash 
inflows and outflows under an acute stress scenario. The board of 
directors must review and approve the CFP at least once each year and 
must make adjustments to reflect changes in the results of stress tests, 
Farmer Mac's risk profile, and market conditions.
    (3) The CFP must:
    (i) Be customized to the financial condition and liquidity risk 
profile of Farmer Mac, the board's liquidity risk tolerance, and Farmer 
Mac's business model;
    (ii) Identify funding alternatives that can be implemented as access 
to funding is impeded;
    (iii) Establish a process for managing events that imperil Farmer 
Mac's liquidity. The process must assign appropriate personnel and 
executable action plans to implement the CFP;
    (iv) Require periodic stress testing that analyzes the possible 
impacts on Farmer Mac's cash flows, liquidity position, profitability, 
and solvency for a wide variety of stress scenarios.

[78 FR 65553, Nov. 1, 2013; 79 FR 29074, May 21, 2014]



Sec. 652.40  Liquidity reserve requirement and supplemental liquidity.

    (a) Unencumbered. All investments that Farmer Mac holds in its 
liquidity reserve and as supplemental liquidity in accordance with this 
section must be unencumbered. For the purposes of this section, an 
investment is unencumbered if it is free of lien, and it is not 
explicitly or implicitly pledged to secure, collateralize, or enhance 
the credit of any transaction. Additionally, an unencumbered investment 
held in the liquidity reserve cannot be used as a hedge against interest 
rate risk if liquidation of that particular investment would expose 
Farmer Mac to a material risk of loss.
    (b) Marketable. All investments that Farmer Mac holds in its 
liquidity reserve in accordance with this section must be readily 
marketable. For purposes of this section, an investment is readily 
marketable if it:
    (1) Can be easily and quickly converted into cash with little or no 
loss in value;
    (2) Exhibits low credit and market risk;
    (3) Has ease and certainty of valuation; and,
    (4) Except for money market instruments, can be easily sold or 
converted to cash through repurchase agreements in active and sizable 
markets without significantly affecting prices.
    (c) Liquidity reserve requirement, supplemental liquidity, and 
discounts. Farmer Mac must maintain at all times a liquidity reserve 
sufficient to fund at least 90 days of the principal portion of maturing 
obligations and other borrowings. Farmer Mac must also hold supplemental 
liquid assets sufficient to fund obligations and other borrowings 
maturing after 90 calendar days to

[[Page 415]]

meet board liquidity policy in accordance with Sec. 652.35. At a 
minimum, Farmer Mac must hold instruments in the liquidity reserve, and 
as supplemental liquidity, that are listed and discounted in accordance 
with the following table, and are sufficient to cover:
    (1) Days 1 through 15 only with Level 1 instruments;
    (2) Days 16 through 30 only with Level 1 and Level 2 instruments; 
and,
    (3) Days 31 through 90 with Level 1, Level 2, and Level 3 
instruments.

                        Table to Sec. 652.40(c)
------------------------------------------------------------------------
                                                             Discount
                                                            (multiply
       Liquidity level               Instruments           market value
                                                               by)
------------------------------------------------------------------------
Level 1.....................    Cash, including  100 percent.
                               cash due from traded but
                               not yet settled debt.
                                Overnight money  100 percent.
                               market instruments,
                               including repurchase
                               agreements secured
                               exclusively by Level 1
                               investments.
                                Obligations of   97 percent.
                               the United States with a
                               final remaining maturity
                               of 3 years or less.
                                Government-      95 percent.
                               sponsored agency senior
                               debt securities that
                               mature within 60 days,
                               excluding securities
                               issued by the Farm
                               Credit System.
                                Diversified      95 percent.
                               investment funds
                               comprised of cash,
                               overnight money market
                               funds, obligations of
                               the United States, and
                               Government-sponsored
                               agency senior debt
                               securities provided that
                               such diversified
                               investment funds meet
                               the requirements of 17
                               CFR 270.2a-7(c)(2).
Level 2.....................    Additional       Discount for
                               Level 1 investments.       each Level 1
                                                          investment
                                                          applies.
                                Obligations of   97 percent.
                               the United States with a
                               final remaining maturity
                               of more than 3 years.
                                Mortgage-backed  95 percent.
                               securities that are
                               explicitly backed by the
                               full faith and credit of
                               the United States as to
                               the timely payment of
                               principal and interest.
                                Diversified      95 percent.
                               investment funds that
                               qualify for Level 1 or
                               are comprised
                               exclusively of Level 2
                               instruments.
Level 3.....................    Additional       Discount for
                               Level 1 or Level 2         each Level 1
                               investments.               or Level 2
                                                          investment
                                                          applies.
                                Government-      93 percent for
                               sponsored agency senior    all
                               debt securities with       instruments in
                               maturities exceeding 60    Level 3.
                               days, excluding senior
                               debt securities of the
                               Farm Credit System.
                                Government-
                               sponsored agency
                               mortgage-backed
                               securities that the
                               timely repayment of
                               principal and interest
                               are not explicitly
                               backed by the full faith
                               and credit of the United
                               States, excluding Farmer
                               Mac mortgage-backed
                               securities.
                                Money market
                               instruments maturing
                               within 90 days.
                                Diversified
                               investment funds
                               comprised exclusively of
                               levels 1, 2, and 3
                               instruments.
                                Qualifying
                               securities backed by
                               Farmer Mac program
                               assets (loans)
                               guaranteed by the United
                               States Department of
                               Agriculture (excluding
                               the portion that would
                               be necessary to satisfy
                               obligations to creditors
                               and equity holders in
                               Farmer Mac II LLC).
Supplemental Liquidity......    Eligible         90 percent
                               investments under Sec. except
                               652.20.                    discounts for
                                                          Level 1, 2 or
                                                          3 investments
                                                          apply to such
                                                          investments
                                                          held as
                                                          supplemental
                                                          liquidity.
------------------------------------------------------------------------


[78 FR 65553, Nov. 1, 2013; 79 FR 29074, May 21, 2014]



Sec. 652.45  Temporary regulatory waivers or modifications for
extraordinary situations.

    Whenever the FCA determines that an extraordinary situation exists 
that necessitates a temporary regulatory waiver or modification, the FCA 
may, in its sole discretion:
    (a) Modify or waive the minimum liquidity reserve requirement in 
Sec. 652.40 of this subpart;
    (b) Modify the amount, qualities, and types of eligible investments 
that you

[[Page 416]]

are authorized to hold pursuant to Sec. 652.20 of this subpart; and/or
    (c) Take other actions as deemed appropriate.



                Subpart B_Risk-Based Capital Requirements

    Source: 71 FR 77253, Dec. 26, 2006, unless otherwise noted.



Sec. 652.50  Definitions.

    For purposes of this subpart, the following definitions will apply:
    AgVantage Plus means both the product by that name used by Farmer 
Mac and other similarly structured program volume that Farmer Mac might 
finance in the future under other names. Those AgVantage securities with 
initial principal amounts under $25 million and whose issuers were part 
of the original AgVantage program are excluded from this definition.
    Farmer Mac, Corporation, you, and your means the Federal 
Agricultural Mortgage Corporation and its affiliates as defined in 
subpart A of this part.
    Our, us, or we means the Farm Credit Administration.
    Regulatory capital means the sum of the following as determined in 
accordance with generally accepted accounting principles:
    (1) The par value of outstanding common stock;
    (2) The par value of outstanding preferred stock;
    (3) Paid-in capital, which is the amount of owner investment in 
Farmer Mac in excess of the par value of stock;
    (4) Retained earnings; and,
    (5) Any allowances for losses on loans and guaranteed securities.
    Risk-based capital means the amount of regulatory capital sufficient 
for Farmer Mac to maintain positive capital during a 10-year period of 
stressful conditions as determined by the risk-based capital stress test 
described in Sec. 652.65.
    Rural utility guarantee fee means the actual guarantee fee charged 
for off-balance sheet volume and the earnings spread over Farmer Mac's 
funding costs for on-balance sheet volume on rural utility loans.

[71 FR 77253, Dec. 26, 2006, as amended at 76 FR 23467, Apr. 27, 2011]



Sec. 652.55  General.

    You must hold risk-based capital in an amount determined in 
accordance with this subpart.



Sec. 652.60  Corporate business planning.

    (a) Farmer Mac's board of directors is responsible for ensuring that 
Farmer Mac maintain capital at a level that is sufficient to ensure 
continued financial viability and provide for growth. In addition, 
Farmer Mac's capital must be sufficient to meet statutory and regulatory 
requirements as well as the goals and objectives required by paragraph 
(b)(5) of this section, including the Tier 1 ratio required in 
Sec. 652.61(c)(2)(ii)(A). Farmer Mac must notify the OSMO within 10 
calendar days of determining that capital is not sufficient to meet 
those goals and objectives.
    (b) No later than 65 days after the end of each calendar year, 
Farmer Mac's board of directors must adopt an operational and strategic 
business plan for at least the next 3 years. The plan must include:
    (1) A mission statement;
    (2) A business and organizational overview and an assessment of 
management capabilities;
    (3) An assessment of Farmer Mac's strengths and weaknesses;
    (4) A review of the internal and external factors that are likely to 
affect Farmer Mac during the planning period;
    (5) Measurable goals and objectives;
    (6) A discussion of how these factors might impact Farmer Mac's 
current financial position and business goals;
    (7) Forecasted income, expense, and balance sheet statements for 
each year of the plan;
    (8) A marketing plan, and
    (9) A capital plan in accordance with Sec. 652.61.

[78 FR 65149, Oct. 31, 2013]

[[Page 417]]



Sec. 652.61  Capital planning.

    (a) Purpose. This section establishes capital planning requirements 
for Farmer Mac.
    (b) Definitions. For purposes of this section and Sec. 652.62, the 
following definitions apply:
    Basel III means the Basel Committee on Banking Supervision's 
document ``Basel III: A Global Regulatory Framework for More Resilient 
Banks and Banking Systems,'' June 2011 and as it may be updated from 
time to time.
    Capital action means any issuance of an equity capital instrument, 
and any capital distribution, as well as any similar action that OSMO 
determines could impact Farmer Mac's consolidated capital.
    Capital distribution means a redemption or repurchase of any equity 
capital instrument, a payment of common or preferred stock dividends, a 
payment that may be temporarily or permanently suspended by the issuer 
on any instrument that is eligible for inclusion in the numerator of any 
minimum capital ratio, and any similar transaction that OSMO determines 
to be in substance a distribution of capital.
    Capital plan means a written presentation of Farmer Mac's capital 
planning strategies and capital adequacy process that includes the 
mandatory elements set forth in paragraph (c)(2) of this section.
    Capital policy means Farmer Mac's written assessment of the 
principles and guidelines used for capital planning, capital issuance, 
usage and distributions, including internal capital goals; the 
quantitative or qualitative guidelines for dividend and stock 
repurchases; the strategies for addressing potential capital shortfalls; 
and the internal governance procedures around capital policy principles 
and guidelines.
    Planning horizon means the period of at least 12 quarters, beginning 
with the quarter preceding the quarter in which Farmer Mac submits its 
capital plan, over which the relevant projections extend.
    Tier 1 Capital means the components meeting the criteria of Common 
Equity Tier 1 Capital and Additional Tier 1 Capital and the regulatory 
adjustments as set forth in Basel III, or Tier 1 Capital as defined in 
regulations of the Office of the Comptroller of the Currency, the Board 
of Governors of the Federal Reserve, or the Federal Deposit Insurance 
Corporation, as revised from time to time; or another measure of high 
quality capital as approved for use under this regulation by the 
Director of OSMO.
    Tier 1 ratio means the ratio of Farmer Mac's Tier 1 Capital to Total 
Risk-Weighted Assets.
    Total Risk-Weighted Assets means a risk-weighting approach that is 
appropriate given Farmer Mac's business activities and consistent with 
broadly accepted banking practices and standards (e.g., one of the 
frameworks of the Basel Committee on Banking Supervision or similar U.S. 
regulations).
    (c) General requirements. (1) Annual capital planning.
    (i) Farmer Mac must develop and maintain a capital plan each year.
    (ii) Farmer Mac must submit its complete annual capital plan to OSMO 
by March 1 or such later date as directed by OSMO, after consultation 
with the FCA Board.
    (iii) Prior to submission of the capital plan under paragraph 
(c)(1)(ii) of this section, Farmer Mac's board of directors must:
    (A) Review the robustness of Farmer Mac's process for assessing 
capital adequacy,
    (B) Ensure that any deficiencies in Farmer Mac's process for 
assessing capital adequacy are appropriately remedied; and
    (C) Approve Farmer Mac's capital plan.
    (2) Mandatory elements of capital plan. The capital plan must 
contain at least the following elements:
    (i) An assessment of the expected uses and sources of capital over 
the planning horizon that reflects Farmer Mac's size, complexity, risk 
profile, and scope of operations, assuming both expected and stressful 
conditions, including:
    (A) Projected revenues, losses, reserves, and pro forma capital 
levels, including the core capital and regulatory capital ratios 
required by sections 8.32 and 8.33 of the Act, the Tier 1 ratio as

[[Page 418]]

defined in this section, and any additional capital measures deemed 
relevant by Farmer Mac, over the planning horizon under expected 
conditions and under a range of at least two progressively severe stress 
scenarios developed by Farmer Mac appropriate to its business model and 
portfolios, as well as any scenarios provided by the Director of OSMO. 
At least 15 calendar days prior to this stress testing, Farmer Mac must 
provide to OSMO a description of the expected and stressed scenarios 
that Farmer Mac intends to use to conduct its annual stress test under 
this section.
    (B) A description of all planned capital actions over the planning 
horizon.
    (ii) A detailed description of Farmer Mac's process for assessing 
capital adequacy, including:
    (A) A discussion of how Farmer Mac will, under expected and stressed 
conditions, maintain capital commensurate with its risks, maintain 
capital above the minimum core capital and regulatory capital ratios and 
above the Tier 1 ratio set in accordance with a well-articulated risk 
tolerance policy established by the board of directors;
    (B) A discussion of how Farmer Mac will, under expected and stressed 
conditions, maintain sufficient capital to continue its operations by 
maintaining ready access to funding, meeting its obligations to 
creditors and other counterparties, and continuing to serve its 
statutory purposes; and
    (C) A discussion of the results of the risk-based stress test 
required by section 8.32 of the Act and the stress tests required by 
this section, as well as any other stress test required by law or 
regulation, and an explanation of how the capital plan takes these 
results into account.
    (iii) Farmer Mac's capital policy; and
    (iv) A discussion of any expected changes to Farmer Mac's business 
plan that are likely to have a material impact on the Corporation's 
capital adequacy or liquidity.
    (d) Review of capital plan by OSMO. (1) OSMO will consider the 
following factors in reviewing Farmer Mac's capital plan:
    (i) The comprehensiveness of the capital plan, including the extent 
to which the analysis underlying the capital plan captures and addresses 
risks stemming from activities across Farmer Mac's business lines and 
operations;
    (ii) The reasonableness of Farmer Mac's assumptions and analysis 
underlying the capital plan and its methodologies for reviewing the 
robustness of its capital adequacy process; and
    (iii) Farmer Mac's ability to maintain capital above the minimum 
core capital and regulatory capital ratios and above a Tier 1 ratio set 
in accordance with a risk tolerance policy established by the board of 
directors on a pro forma basis under expected and stressful conditions 
throughout the planning horizon, including but not limited to any 
stressed scenarios required under paragraphs (c)(2)(i)(A) and (c)(2)(ii) 
of this section.
    (iv) All supervisory information about Farmer Mac and its 
subsidiaries;
    (v) Farmer Mac's regulatory and financial reports, as well as 
supporting data that would allow for an analysis of its loss, revenue, 
and projections;
    (vi) As applicable, OSMO's own pro forma estimates of Farmer Mac's 
potential losses, revenues, and resulting capital adequacy measurements 
under expected and stressful conditions, including but not limited to 
any stressed scenarios required under paragraphs (c)(2)(i)(A) and 
(c)(2)(ii) of this section, as well as the results of any other stress 
tests conducted by Farmer Mac or OSMO; and
    (vii) Other information requested or required by OSMO, as well as 
any other information relevant to Farmer Mac's capital adequacy.
    (e) OSMO action on a capital plan. (1) OSMO will review the capital 
plan and provide an assessment to Farmer Mac of the capital adequacy and 
planning process through its ongoing examination and oversight process.
    (2) Upon a request by OSMO, Farmer Mac must provide OSMO with 
sufficient information regarding its planning assumptions, stress test 
strategies and results and any other relevant qualitative or 
quantitative information requested by OSMO to facilitate review of 
Farmer Mac's capital plan under this section.
    (3) OSMO may require Farmer Mac to revise and re-submit its capital 
plan.

[[Page 419]]

    (f) Farmer Mac response to OSMO's assessment. Regardless of whether 
re-submission is required, Farmer Mac must take the results of the 
stress tests conducted under paragraphs (c)(2)(i)(A) and (c)(2)(ii) of 
this section (including any revisions required under paragraph (e)(3) of 
this section) as well as OSMO's assessment into account in making 
changes, as appropriate, to Farmer Mac's capital structure (including 
the level and composition of capital); its exposures, concentrations, 
and risk positions; any plans for recovery and resolution; and to 
improve overall risk management. Farmer Mac must document in writing its 
actions in response to the stress tests and assessment, as well as 
decisions not to take actions in response to any issues raised in the 
assessment.

[78 FR 65149, Oct. 31, 2013]



Sec. 652.62  Notice to OSMO of capital distributions.

    (a) Farmer Mac must provide OSMO with notice 15 calendar days prior 
to a board consideration of a declaration of a capital distribution or 
any material changes in capital distributions policies.
    (b) Except as provided in paragraph (c), notice under paragraph (a) 
of this section is not required with respect to capital distributions 
set forth (i.e., specifically scheduled as to amount and timing along 
with a discussion of the planned distribution) in the capital plan or a 
regular periodic payment of dividends on common stock and preferred 
stock when there is no change in the amount of payment per share from 
the previous period.
    (c) In the event that OSMO determines a capital plan has not 
adequately taken into account OSMO's assessment as required under 
Sec. 652.61(f), the exception described in paragraph (b) of this section 
shall not apply, and Farmer Mac must provide notification of any and all 
capital distributions as set forth in paragraph (a) of this section.

[78 FR 65149, Oct. 31, 2013]



Sec. 652.65  Risk-based capital stress test.

    You will perform the risk-based capital stress test as described in 
summary form below and as described in detail in appendix A to this 
subpart. The risk-based capital stress test spreadsheet is also 
available electronically at http://www.fca.gov. The risk-based capital 
stress test has five components:
    (a) Data requirements. You will use the following data to implement 
the risk-based capital stress test.
    (1) You will use Corporation loan-level data to implement the credit 
risk component of the risk-based capital stress test.
    (2) You will use Call Report data as the basis for Corporation data 
over the 10-year stress period supplemented with your interest rate risk 
measurements and tax data.
    (3) You will use other data, including the 10-year Constant Maturity 
Treasury (CMT) rate and the applicable Internal Revenue Service 
corporate income tax schedule, as further described in appendix A to 
this subpart.
    (b) Credit risk. The credit risk part estimates loan losses during a 
period of sustained economic stress.
    (1) For each loan in the Farmer Mac I portfolio, you will determine 
a default probability by using the logit functions specified in appendix 
A to this subpart with each of the following variables:
    (i) Borrower's debt-to-asset ratio at loan origination;
    (ii) Loan-to-value ratio at origination, which is the loan amount 
divided by the value of the property;
    (iii) Debt-service-coverage ratio at origination, which is the 
borrower's net income (on- and off-farm) plus depreciation, capital 
lease payments, and interest, less living expenses and income taxes, 
divided by the total term debt payments;
    (iv) The origination loan balance stated in 1997 dollars based on 
the consumer price index; and,
    (v) The worst-case percentage change in farmland values (23.52 
percent).
    (2) You will then calculate the loss rate by multiplying the default 
probability for each loan by the estimated loss-severity rate, which is 
the average loss of the defaulted loans in the data set (20.9 percent).

[[Page 420]]

    (3) You will calculate losses by multiplying the loss rate by the 
origination loan balances stated in 1997 dollars.
    (4) You will adjust the losses for loan seasoning, based on the 
number of years since loan origination, according to the functions in 
appendix A to this subpart.
    (5) You will calculate loss rates on rural utility loans as further 
described in appendix A.
    (6) You will further adjust losses for loans that collateralize the 
general obligation of AgVantage Plus volume, and for loans where the 
program loan counterparty retains a subordinated interest in accordance 
with appendix A to this subpart.
    (7) The losses must be applied in the risk-based capital stress test 
as specified in appendix A to this subpart.
    (c) Interest rate risk. (1) During the first year of the stress 
period, you will adjust interest rates for two scenarios, an increase in 
rates and a decrease in rates. You must determine your risk-based 
capital level based on whichever scenario would require more capital.
    (2) You will calculate the interest rate stress based on changes to 
the quarterly average of the 10-year CMT. The starting rate is the 3-
month average of the most recent CMT monthly rate series. To calculate 
the change in the starting rate, determine the average yield of the 
preceding 12 monthly 10-year CMT rates. Then increase and decrease the 
starting rate by:
    (i) 50 percent of the 12-month average if the average rate is less 
than 12 percent; or
    (ii) 600 basis points if the 12-month average rate is equal to or 
higher than 12 percent.
    (3) Following the first year of the stress period, interest rates 
remain at the new level for the remainder of the stress period.
    (4) You will apply the interest rate changes scenario as indicated 
in appendix A to this subpart.
    (5) You may use other interest rate indices in addition to the 10-
year CMT subject to our concurrence, but in no event can your risk-based 
capital level be less than that determined by using only the 10-year 
CMT.
    (d) Cashflow generator. (1) You must adjust your financial 
statements based on the credit risk inputs and interest rate risk inputs 
described above to generate pro forma financial statements for each year 
of the 10-year stress test. The cashflow generator produces these 
financial statements. You may use the cashflow generator spreadsheet 
that is described in appendix A to this subpart and available 
electronically at http://www.fca.gov. You may also use any reliable 
cashflow program that can develop or produce pro forma financial 
statements using generally accepted accounting principles and widely 
recognized financial modeling methods, subject to our concurrence. You 
may disaggregate financial data to any greater degree than that 
specified in appendix A to this subpart, subject to our concurrence.
    (2) You must use model assumptions to generate financial statements 
over the 10-year stress period. The major assumption is that cashflows 
generated by the risk-based capital stress test are based on a steady-
state scenario. To implement a steady-state scenario, when on- and off-
balance sheet assets and liabilities amortize or are paid down, you must 
replace them with similar assets and liabilities (AgVantage Plus volume 
is not replaced when it matures). Replace amortized assets from 
discontinued loan programs with current loan programs. In general, keep 
assets with small balances in constant proportions to key program 
assets.
    (3) You must simulate annual pro forma balance sheets and income 
statements in the risk-based capital stress test using Farmer Mac's 
starting position, the credit risk and interest rate risk components, 
resulting cashflow outputs, current operating strategies and policies, 
and other inputs as shown in appendix A to this subpart and the 
electronic spreadsheet available at http://www.fca.gov.
    (e) Calculation of capital requirement. The calculations that you 
must use to solve for the starting regulatory capital amount are shown 
in appendix A to this subpart and in the electronic spreadsheet 
available at http://www.fca.gov.

[71 FR 77253, Dec. 26, 2006, as amended at 73 FR 31940, June 5, 2008; 76 
FR 23467, Apr. 27, 2011]

[[Page 421]]



Sec. 652.70  Risk-based capital level.

    The risk-based capital level is the sum of the following amounts:
    (a) Credit and interest rate risk. The amount of risk-based capital 
determined by the risk-based capital test under Sec. 652.65.
    (b) Management and operations risk. Thirty (30) percent of the 
amount of risk-based capital determined by the risk-based capital test 
in Sec. 652.65.



Sec. 652.75  Your responsibility for determining the risk-based
capital level.

    (a) You must determine your risk-based capital level using the 
procedures in this subpart, appendix A to this subpart, and any other 
supplemental instructions provided by us. You will report your 
determination to us as prescribed in Sec. 652.90. At any time, however, 
we may determine your risk-based capital level using the procedures in 
Sec. 652.65 and appendix A to this subpart, and you must hold risk-based 
capital in the amount we determine is appropriate.
    (b) You must at all times comply with the risk-based capital levels 
established by the risk-based capital stress test and must be able to 
determine your risk-based capital level at any time.
    (c) If at any time the risk-based capital level you determine is 
less than the minimum capital requirements set forth in section 8.33 of 
the Act, you must maintain the statutory minimum capital level.



Sec. 652.80  When you must determine the risk-based capital level.

    (a) You must determine your risk-based capital level at least 
quarterly, or whenever changing circumstances occur that have a 
significant effect on capital, such as exposure to a high volume of, or 
particularly severe, problem loans or a period of rapid growth.
    (b) In addition to the requirements of paragraph (a) of this 
section, we may require you to determine your risk-based capital level 
at any time.
    (c) If you anticipate entering into any new business activity that 
could have a significant effect on capital, you must determine a pro 
forma risk-based capital level, which must include the new business 
activity, and report this pro forma determination to the Director, 
Office of Secondary Market Oversight, at least 10-business days prior to 
implementation of the new business program.



Sec. 652.85  When to report the risk-based capital level.

    (a) You must file a risk-based capital report with us each time you 
determine your risk-based capital level as required by Sec. 652.80.
    (b) You must also report to us at once if you identify in the 
interim between quarterly or more frequent reports to us that you are 
not in compliance with the risk-based capital level required by 
Sec. 652.70.
    (c) If you make any changes to the data used to calculate your risk-
based capital requirement that cause a material adjustment to the risk-
based capital level you reported to us, you must file an amended risk-
based capital report with us within 5-business days after the date of 
such changes;
    (d) You must submit your quarterly risk-based capital report for the 
last day of the preceding quarter by the earlier of the reporting 
deadlines for Securities and Exchange Commission Forms 10-K and 10-Q, or 
the 40th day after each of the quarters ending March 31st, June 30th, 
and September 30th, and the 75th day after the quarter ending on 
December 31st.

[71 FR 77253, Dec. 26, 2006, as amended at 73 FR 31940, June 5, 2008]



Sec. 652.90  How to report your risk-based capital determination.

    (a) Your risk-based capital report must contain at least the 
following information:
    (1) All data integral for determining the risk-based capital level, 
including any business policy decisions or other assumptions made in 
implementing the risk-based capital test;
    (2) Other information necessary to determine compliance with the 
procedures for determining risk-based capital as specified in appendix A 
to this subpart; and
    (3) Any other information we may require in written instructions to 
you.
    (b) You must submit each risk-based capital report in such format or 
medium, as we require.

[[Page 422]]



Sec. 652.95  Failure to meet capital requirements.

    (a) Determination and notice. At any time, we may determine that you 
are not meeting your risk-based capital level calculated according to 
Sec. 652.65, your minimum capital requirements specified in section 8.33 
of the Act, or your critical capital requirements specified in section 
8.34 of the Act. We will notify you in writing of this fact and the date 
by which you should be in compliance (if applicable).
    (b) Submission of capital restoration plan. Our determination that 
you are not meeting your required capital levels may require you to 
develop and submit to us, within a specified time period, an acceptable 
plan to reach the appropriate capital level(s) by the date required.



Sec. 652.100  Audit of the risk-based capital stress test.

    You must have a qualified, independent external auditor review your 
implementation of the risk-based capital stress test every 3 years and 
submit a copy of the auditor's opinion to us.



Sec. Appendix A to Subpart B of Part 652--Risk-Based Capital Stress Test

1.0 Introduction.
2.0 Credit Risk.
2.1 Loss-Frequency and Loss-Severity Models for All Types of Loans, 
          Except Rural Utility Loans.
2.2 Loan-Seasoning Adjustment for All Types of Loans, Except Rural 
          Utility Loans.
2.3 Example Calculation of Dollar Loss on One Loan for All Types of 
          Loans, Except Rural Utility Loans.
2.4 Treatment of Loans Backed by an Obligation of the Counterparty and 
          Loans for Which Pledged Loan Collateral Volume Exceeds Farmer 
          Mac-Guaranteed Volume.
2.5 Calculation of Loss Rates for Use in the Stress Test for All Types 
          of Loans, Except Rural Utility Loans.
2.6 Calculation of Loss Rates on Rural Utility Volume for Use in the 
          Stress Test.
3.0 Interest Rate Risk.
3.1 Process for Calculating the Interest Rate Movement.
4.0 Elements Used in Generating Cashflows.
4.1 Data Inputs.
4.2 Assumptions and Relationships.
4.3 Risk Measures.
4.4 Loan and Cashflow Accounts.
4.5 Income Statements.
4.6 Balance Sheets.
4.7 Capital.
5.0 Capital Calculations.
5.1 Method of Calculation.

                            1.0 Introduction

    a. Appendix A provides details about the risk-based capital stress 
test (stress test) for Farmer Mac. The stress test calculates the risk-
based capital level required by statute under stipulated conditions of 
credit risk and interest rate risk. The stress test uses loan-level data 
from Farmer Mac's agricultural mortgage portfolio or proxy data as 
described in section 4.1 d.(3) below, as well as quarterly Call Report 
and related information to generate pro forma financial statements and 
calculate a risk-based capital requirement. The stress test also uses 
historic agricultural real estate mortgage performance data, rural 
utility guarantee fees, relevant economic variables, and other inputs in 
its calculations of Farmer Mac's capital needs over a 10-year period.
    b. Appendix A establishes the requirements for all components of the 
stress test. The key components of the stress test are: Specifications 
of credit risk, interest rate risk, the cashflow generator, and the 
capital calculation. Linkages among the components ensure that the 
measures of credit and interest rate risk pass into the cashflow 
generator. The linkages also transfer cashflows through the financial 
statements to represent values of assets, liabilities, and equity 
capital. The 10-year projection is designed to reflect a steady state in 
the scope and composition of Farmer Mac's assets.

                             2.0 Credit Risk

    Loan loss rates are determined by applying the loss-frequency 
equation and the loss-severity factor to Farmer Mac loan-level data. 
Using this equation and severity factor, you must calculate loan losses 
under stressful economic conditions assuming Farmer Mac's portfolio 
remains at a ``steady state.'' Steady state assumes the underlying 
characteristics and risks of Farmer Mac's portfolio remain constant over 
the 10 years of the stress test. Loss rates discussed in this section 
apply to all loans, unless otherwise indicated. Loss rates are computed 
from estimated dollar losses for use in the stress test. The loan volume 
subject to loss throughout the stress test is then multiplied by the 
loss rate. Lastly, the stress test allocates losses to each of the 10 
years assuming a time pattern for loss occurrence as discussed in 
section 4.3, ``Risk Measures.''

  2.1 Loss-Frequency and Loss-Severity Models for All Types of Loans, 
                       Except Rural Utility Loans

    a. Credit risks are modeled in the stress test using historical time 
series loan-level

[[Page 423]]

data to measure the frequency and severity of losses on agricultural 
mortgage loans. The model relates loss frequency and severity to loan-
level characteristics and economic conditions through appropriately 
specified regression equations to account explicitly for the effects of 
these characteristics on loan losses. Loan losses for Farmer Mac are 
estimated from the resulting loss-frequency equation combined with the 
loss-severity factor by substituting the respective values of Farmer 
Mac's loan-level data or proxy data as described in section 4.1 d.(3) 
below, and applying stressful economic inputs.
    b. The loss-frequency equation and loss-severity factor were 
estimated from historical agricultural real estate mortgage loan data 
from the Farm Credit Bank of Texas (FCBT). Due to Farmer Mac's 
relatively short history, its own loan-level data are insufficiently 
developed for use in estimating the default frequency equation and loss-
severity factor. In the future, however, expansions in both the scope 
and historic length of Farmer Mac's lending operations may support the 
use of its data in estimating the relationships.
    c. To estimate the equations, the data used included FCBT loans, 
which satisfied three of the four underwriting standards Farmer Mac 
currently uses (estimation data). The four standards specify: (1) The 
debt-to-assets ratio (D/A) must be less than 0.50, (2) the loan-to-value 
ratio (LTV) must be less than 0.70, (3) the debt-service-coverage ratio 
(DSCR) must exceed 1.25, (4) and the current ratio (current assets 
divided by current liabilities) must exceed 1.0. Furthermore, the D/A 
and LTV ratios were restricted to be less than or equal to 0.85.
    d. Several limitations in the FCBT loan-level data affect 
construction of the loss-frequency equation. The data contained loans 
that were originated between 1979 and 1992, but there were virtually no 
losses during the early years of the sample period. As a result, losses 
attributable to specific loans are only available from 1986 through 
1992. In addition, no prepayment information was available in the data.
    e. The FCBT data used for estimation also included as performing 
loans, those loans that were re-amortized, paid in full, or merged with 
a new loan. Including these loans may lead to an understatement of loss-
frequency probabilities if some of the re-amortized, paid, or merged 
loans experience default or incur losses. In contrast, when the loans 
that are re-amortized, paid in full, or merged are excluded from the 
analysis, the loss-frequency rates are overstated if a higher proportion 
of loans that are re-amortized, paid in full, or combined (merged) into 
a new loan are non-default loans compared to live loans. \1\
---------------------------------------------------------------------------

    \1\ Excluding loans with defaults, 11,527 loans were active and 
7,515 loans were paid in full, re-amortized or merged as of 1992. A t-
test \2\ of the differences in the means for the group of defaulted 
loans and active loans indicated that active loans had significantly 
higher D/A and LTV ratios, and lower current ratios than defaulted loans 
where loss occurred. These results indicate that, on average, active 
loans have potentially higher risk than loans that were re-amortized, 
paid in full, or merged.
---------------------------------------------------------------------------

    f. The structure of the historical FCBT data supports estimation of 
loss frequency based on origination information and economic conditions. 
Under an origination year approach, each observation is used only once 
in estimating loan default. The underwriting variables at origination 
and economic factors occurring over the life of the loan are then used 
to estimate loan-loss frequency.
    g. The final loss-frequency equation is based on origination year 
data and represents a lifetime loss-frequency model. The final equation 
for loss frequency is:

p = 1/(1 + exp(-(BX))

Where:

BX = (-12.62738) + 1.91259 [middot] X1 + (-0.33830) [middot] 
          X2  (1 + 0.0413299)Periods + (-0.19596) 
          [middot] X3 + 4.55390 [middot] (1-exp((-0.00538178) 
          [middot] X4) + 2.49482 [middot] X5

Where:

  p is the probability that a loan defaults and has positive 
          losses (Pr (Y = 1 [bond] x));
  X1 is the LTV ratio at loan origination raised to 
          the power 5.3914596; \2\
---------------------------------------------------------------------------

    \2\ Loss probability is likely to be more sensitive to changes in 
LTV at higher values of LTV. The power function provides a continuous 
relationship between LTV and defaults.
---------------------------------------------------------------------------

  X2 is the largest annual percentage decline in FCBT 
          farmland values during the life of the loan dampened with a 
          factor of 0.0413299 per year; \3\
---------------------------------------------------------------------------

    \3\ The dampening function reflects the declining effect that the 
maximum land value decline has on the probability of default when it 
occurs later in a loan's life.
---------------------------------------------------------------------------

  X3 is the DSCR at loan origination;
  X4 is 1 minus the exponential of the product of 
          negative 0.00538178 and the original loan balance in 1997 
          dollars expressed in thousands; and
  X5 is the D/A ratio at loan origination.

    h. The estimated logit coefficients and p-values are: \4\
---------------------------------------------------------------------------

    \4\ The nonlinear parameters for the variable transformations were 
simultaneously estimated using SAS version 8e NLIN procedure. The NLIN 
procedure produces estimates of the parameters of a nonlinear 
transformation for LTV, dampening factor, and loan-size variables. To 
implement the NLIN procedure, the loss-frequency equation and its 
variables are declared and initial parameter values supplied. The NLIN 
procedure is an iterative process that uses the initial parameter values 
as the starting values for the first iteration and continues to iterate 
until acceptable parameters are solved. The initial values for the power 
function and dampening function are based on the proposed rule. The 
procedure for the initial values for the size variable parameter is 
provided in an Excel spreadsheet posted at http://www.fca.gov. The 
Gauss-Newton method is the selected iterative solving process. As 
described in the preamble, the loss-frequency function for the nonlinear 
model is the negative of the log-likelihood function, thus producing 
maximum likelihood estimates. In order to obtain statistical properties 
for the loss-frequency equation and verify the logistic coefficients, 
the estimates for the nonlinear transformations are applied to the FCBT 
data and the loss-frequency model is re-estimated using the SAS Logistic 
procedure. The SAS procedures, output reports and Excel spreadsheet used 
to estimate the parameters of the loss-frequency equation are located on 
the Web site http://www.fca.gov.

[[Page 424]]



------------------------------------------------------------------------
                                           Coefficients       p-value
------------------------------------------------------------------------
Intercept...............................       -12.62738         <0.0001
X1: LTV variable........................         1.91259          0.0001
X2: Max land value decline variable.....         0.33830         <0.0001
X3: DSCR................................        -0.19596          0.0002
X4: Loan size variable..................         4.55390         <0.0001
X5: D/A ratio...........................         2.49482         <0.0000
------------------------------------------------------------------------

    i. The low p-values on each coefficient indicate a highly 
significant relationship between the probability ratio of loan-loss 
frequency and the respective independent variables. Other goodness-of-
fit indicators are:

Hosmer and Lemeshow goodness-of-fit p-value................       0.1718
Max-rescaled R\2\..........................................       0.2015
Concordant.................................................        85.2%
Disconcordant..............................................        12.0%
Tied.......................................................         2.8%
 

    j. These variables have logical relationships to the incidence of 
loan default and loss, as evidenced by the findings of numerous credit-
scoring studies in agricultural finance. \5\ Each of the variable 
coefficients has directional relationships that appropriately capture 
credit risk from underwriting variables and, therefore, the incidence of 
loan-loss frequency. The frequency of loan loss was found to differ 
significantly across all of the loan characteristics and lending 
conditions. Farmland values represent an appropriate variable for 
capturing the effects of exogenous economic factors. It is commonly 
accepted that farmland values at any point in time reflect the 
discounted present value of expected returns to the land. \6\ Thus, 
changes in land values, as expressed in the loss-frequency equation, 
represent the combined effects of the level and growth rates of farm 
income, interest rates, and inflationary expectations--each of which is 
accounted for in the discounted, present value process.
---------------------------------------------------------------------------

    \5\ Splett, N.S., P. J. Barry, B. Dixon, and P. Ellinger. ``A Joint 
Experience and Statistical Approach to Credit Scoring,'' Agricultural 
Finance Review, 54(1994):39-54.
    \6\ Barry, P. J., P. N. Ellinger, J. A. Hopkin, and C. B. Baker. 
Financial Management in Agriculture, 5th ed., Interstate Publishers, 
1995.
---------------------------------------------------------------------------

    k. When applying the equation to Farmer Mac's portfolio, you must 
get the input values for X1, X3, X4, 
and X5 for each loan in Farmer Mac's portfolio on the date at 
which the stress test is conducted, using either submitted data or proxy 
data as described in section 4.1 d.(3) below. For the variable 
X2, the stressful input value from the benchmark loss 
experience is -23.52 percent. You must apply this input to all Farmer 
Mac loans subject to loss to calculate loss frequency under stressful 
economic conditions. \7\ The maximum land value decline from the 
benchmark loss experience is the simple average of annual land value 
changes for Iowa, Illinois, and Minnesota for the years 1984 and 1985. 
\8\
---------------------------------------------------------------------------

    \7\ On- and off-balance sheet Farmer Mac I agricultural mortgage 
program assets booked after the 1996 Act amendments are subject to the 
loss calculation.
    \8\ While the worst-case losses, based on origination year, occurred 
during 1983 and 1984, this benchmark was determined using annual land 
value changes that occurred 2 years later.
---------------------------------------------------------------------------

    l. Forecasting with data outside the range of the estimation data 
requires special treatment for implementation. While the estimation data 
embody Farmer Mac values for various loan characteristics, the maximum 
farmland price decline experienced in Texas

[[Page 425]]

was -16.69 percent, a value below the benchmark experience of -23.52 
percent. To control for this effect, you must apply a procedure that 
restricts the slope of all the independent variables to that observed at 
the maximum land value decline observed in the estimation data. 
Essentially, you must approximate the slope of the loss-frequency 
equation at the point -16.69 percent in order to adjust the probability 
of loan default and loss occurrence for data beyond the range in the 
estimating data. The adjustment procedure is shown in step 4 of section 
2.3 entitled, ``Example Calculation of Dollar Loss on One Loan.''
    m. Loss severity was not found to vary systematically and was 
considered constant across the tested loan characteristics and lending 
conditions. Thus, the simple weighted average by loss volume of 20.9 
percent is used in the stress test. \9\ You must multiply loss severity 
with the probability estimate computed from the loss-frequency equation 
to determine the loss rate for a loan.
---------------------------------------------------------------------------

    \9\ We calculated the weighted-average loss severity from the 
estimation data.
---------------------------------------------------------------------------

    n. Using original loan balance results in estimated probabilities of 
loss frequency over the entire life of a loan. To account for loan 
seasoning, you must reduce the loan-loss exposure by the cumulative 
probability of loss already experienced by each loan as discussed in 
section 2.2 entitled, ``Loan-Seasoning Adjustment.'' This subtraction is 
based on loan age and reduces the loss estimated by the loss-frequency 
and loss-severity equations. The result is an age-adjusted lifetime 
dollar loss that can be used in subsequent calculations of loss rates as 
discussed in section 2.4, ``Calculation of Loss Rates for Use in the 
Stress Test.''

   2.2 Loan-Seasoning Adjustment for All Types of Loans, Except Rural 
                              Utility Loans

    a. You must use the seasoning function supplied by FCA to adjust the 
calculated probability of loss for each Farmer Mac loan for the 
cumulative loss exposure already experienced based on the age of each 
loan. The seasoning function is based on the same data used to determine 
the loss-frequency equation and an assumed average life of 14 years for 
agricultural mortgages. If we determine that the relationship between 
the loss experience in Farmer Mac's portfolio over time and the 
seasoning function can be improved, we may augment or replace the 
seasoning function.
    b. The seasoning function is parameterized as a beta distribution 
with parameters of p = 4.288 and q = 5.3185. \10\ How the loan-seasoning 
distribution is used is shown in Step 7 of section 2.3, ``Example 
Calculation of Dollar Loss on One Loan.''
---------------------------------------------------------------------------

    \10\ We estimated the loan-seasoning distribution from portfolio 
aggregate charge-off rates from the estimation data. To do so, we 
arrayed all defaulting loans where loss occurred according to the time 
from origination to default. Then, a beta distribution, [beta](p, q), 
was fit to the estimation data scaled to the maximum time a loan 
survived (14 years).
---------------------------------------------------------------------------

  2.3 Example Calculation of Dollar Loss on One Loan for All Types of 
                    Loans, Except Rural Utility Loans

    Here is an example of the calculation of the dollar losses for an 
individual loan with the following characteristics and input values: 
\11\
---------------------------------------------------------------------------

    \11\ In the examples presented we rounded the numbers, but the 
example calculation is based on a larger number of significant digits. 
The stress test uses additional digits carried at the default precision 
of the software.

Loan Origination Year......................................         1996
Loan Origination Balance...................................   $1,250,000
LTV at Origination.........................................          0.5
D/A at Origination.........................................          0.5
DSCR at Origination........................................       1.3984
Maximum Percentage Land Price Decline (MAX)................       -23.52
 

    Step 1: Convert 1996 Origination Value to 1997 dollar value (LOAN) 
based on the consumer price index and transform as follows:
$1,278,500 = $1,250,000 [middot] 1.0228
0.998972 = 1 - exp((-.00538178) [middot] $1,278,500 / 1000)
    Step 2: Calculate the default probabilities using -16.64 percent and 
-16.74 percent land value declines as follows: \12\

    \12\ This process facilitates the approximation of slope needed to 
adjust the loss probabilities for land value declines greater than 
observed in the estimation data.
---------------------------------------------------------------------------

Where:

Z1 = (-12.62738) + 1.91259 [middot] LTV5.3914596 - 
          0.33830 [middot] (-16.6439443) - 0.19596 [middot] DSCR + 
          4.55390 [middot] 0.998972 + 2.49482 [middot] DA = (-1.428509)
Default Loss Frequency at (-16.64%) =

1 / 1 + exp-(-1.428509) = 0.19333111
And

Z1 = (-12.62738) + 1.91259 [middot] LTV5.3914596 - 
          0.33830 [middot] (-16.7439443) - 0.19596 [middot] DSCR + 
          4.55390 [middot] 0.998972 + 2.49482 [middot] DA = (-1.394679)

Loss Frequency Probability at (-16.74%) =
1 / 1 + exp-(-1.394679) = 0.19866189

    Step 3: Calculate the slope adjustment. You must calculate slope by 
subtracting the difference between ``Loss-Frequency Probability at 
-16.64 percent'' and ``Loss-Frequency Probability at -16.74 percent'' 
and dividing by -0.1 (the difference between

[[Page 426]]

-16.64 percent and -16.74 percent) as follows:

0.05330776 = (0.19333111 - 0.19866189) / -0.1

    Step 4: Make the linear adjustment. You make the adjustment by 
increasing the loss-frequency probability where the dampened stressed 
farmland value input is less than -16.69 percent to reflect the stressed 
farmland value input, appropriately discounted. As discussed previously, 
the stressed land value input is discounted to reflect the declining 
effect that the maximum land value decline has on the probability of 
default when it occurs later in a loan's life. \13\ The linear 
adjustment is the difference between -16.69 percent land value decline 
and the adjusted stressed maximum land value decline input of -23.52 
multiplied by the slope estimated in Step 3 as follows:
---------------------------------------------------------------------------

    \13\ The dampened period is the number of years from the beginning 
of the origination year to the current year (i.e., January 1, 1996 to 
January 1, 2000 is 4 years).

Loss Frequency at -16.69 percent =
Z1 = (-12.62738) + (1.91259)(LTV5.3914596) - 
          (0.33830)(-16.6939443) - (0.19596)(DSCR) + (4.55390)(0.998972) 
          + (2.49482)(DA) = -1.411594
And

1 / 1 + exp-(-1.411594) = 0.19598279
Dampened Maximum Land Price Decline = (-20.00248544) = 
          (-23.52)(1.0413299)-4
Slope Adjustment = 0.17637092 = 0.053312247 [middot] (-16.6939443 - 
          (-20.00248544))
Loan Default Probability = 0.37235371 = 0.19598279 + 0.17637092

    Step 5: Multiply loan default probability times the average severity 
of 0.209 as follows:
0.077821926 = 0.37235371 [middot] 0.209

    Step 6: Multiply the loss rate times the origination loan balance as 
follows:

$97,277 = $1,250,000 [middot] 0.077821926

    Step 7: Adjust the origination based dollar losses for 4 years of 
loan seasoning as follows:

$81,987 = $97,277 - $97,277 [middot] (0.157178762) \14\
---------------------------------------------------------------------------

    \14\ The age of adjustment of 0.157178762 is determined from the 
beta distribution for a 4-year-old loan.
---------------------------------------------------------------------------

 2.4 Treatment of Loans Backed by an Obligation of the Counterparty and 
   Loans for Which Pledged Loan Collateral Volume Exceeds Farmer Mac-
                            Guaranteed Volume

    You must calculate the age-adjusted loss rates for these loans that 
include adjustments to scale losses according to the proportion of total 
submitted collateral to the guaranteed amount as provided for in the 
``Dollar Losses'' column of the transformed worksheets in the Credit 
Loss Module based on new data inputs required in the ``Coefficients'' 
worksheet of the Credit Loss Module. Then, you must adjust the 
calculated loss rates as follows.
    a. For loans in which the seller retains a subordinated interest, 
subtract from the total estimated age-adjusted dollar losses on the pool 
the amount equal to current unpaid principal times the subordinated 
interest percentage.
    b. Some pools of loans underlying specific transactions could 
include loan collateral volume pledged to Farmer Mac in excess of Farmer 
Mac's guarantee amount (``overcollateral''). Overcollateral can be 
either: (i) Contractually required according to the terms of the 
transaction, or (ii) not contractually required, but pledged in addition 
to the contractually required amount at the discretion of the 
counterparty, often for purposes of administrative convenience regarding 
the collateral substitution process, or (iii) both (i) and (ii).
    1. If a pool of loans includes collateral pledged in excess of the 
guaranteed amount, you must adjust the age-adjusted, loan-level dollar 
losses by a factor equal to the ratio of the guarantee amount to total 
submitted collateral. For example, consider a pool of two loans serving 
as security for a Farmer Mac guarantee on a note with a total issuance 
face value of $2 million and on which the counterparty has submitted 10-
percent overcollateral. The two loans in the example have the following 
characteristics and adjustments.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                      Guarantee amount
                                                                   Origination      Age-adjusted     Estimated age-        scaling       Losses adjusted
                             Loan                                    balance          loss rate      adjusted losses   adjustment (2/          for
                                                                                      (percent)                        2.2) (Percent)    overcollateral
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.............................................................        $1,080,000               7.0           $75,600             90.91           $68,727
2.............................................................         1,120,000               5.0            56,000             90.91            50,909
--------------------------------------------------------------------------------------------------------------------------------------------------------

    2. If a pool of loans includes collateral pledged in excess of the 
guaranteed amount that is required under the terms of the transaction, 
you must further adjust the dollar losses as follows. Calculate the 
total losses

[[Page 427]]

on the subject portfolio of loans after age adjustments and any 
adjustments related to total submitted overcollateral as described in 
``1.'' above. Calculate the total dollar amount of contractually 
required overcollateral in the subject pool. Subtract the total dollars 
of contractually required overcollateral from the adjusted total losses 
on the subject pool. If the result is less than or equal to zero, input 
a loss rate of zero for this transaction pool in the Data Inputs 
worksheet of the RBCST. A new category must be created for each such 
transaction in the RBCST. If the loss rate after subtracting 
contractually required overcollateral is greater than zero, proceed to 
additional adjustment for the risk-reducing effects of the 
counterparty's general obligation described in ``3.'' below.
    3. Loans with a positive loss estimate remaining after adjustments 
in ``1.'' and ``2.'' above are further adjusted for the security 
provided by the general obligation of the counterparty. To make this 
adjustment in our example, multiply the estimated dollar losses 
remaining after adjustments in ``1.'' and ``2.'' above by the 
appropriate general obligation adjustment (GOA) factor based on the 
counterparty's whole-letter issuer credit rating by a nationally 
recognized statistical rating organization (NRSRO) and the ratio of the 
counterparty's concentration of risk in the same industry sector as the 
loans backing the AgVantage Plus volume, as determined by the Director.
    A. The Director will make final determinations of concentration 
ratios on a case-by-case basis by using publicly reported data on 
counterparty portfolios, non-public data submitted and certified by 
Farmer Mac as part of its RBCST submissions, and will generally 
recognize rural electric cooperatives and rural telephone cooperatives 
as separate rural utility sectors. The following table sets forth the 
GOA factors and their components by whole-letter credit rating 
(Adjustment Factor = Default Rate  x  Severity Rate  x  3), which may be 
further adjusted for industry sector concentration by the Director.\15\
---------------------------------------------------------------------------

    \15\ Emery, K., Ou S., Tennant, J., Kim F., Cantor R., ``Corporate 
Default and Recovery Rates, 1920--2007,'' published by Moody's Investors 
Service, February 2008--the most recent edition as of March 2008; 
Default Rates, page 24, Recovery Rates (Severity Rate = 1 minus Senior 
Unsecured Average Recovery Rate) page 20.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                            A                                    B               C               D               E               F               G
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                            Factor with
                                                                                                                                           concentration
                                                           Default rate    Severity rate     V3.0 GOA        V4.0 GOA      Concentration   adjustment 1-
                   Whole-letter rating                       (percent)       (percent)        factor       factors (D  x   ratio (e.g.,   ((1-E)  x  (1-
                                                                                             (percent)     3) (percent)   25%) (percent)   F)) (percent)
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
AAA.....................................................           0.897              54            0.48            1.41           25.00           26.06
AA......................................................           2.294              54            1.24            3.70           25.00           27.78
A.......................................................           2.901              54            1.57            5.13           25.00           28.84
BBB.....................................................           7.061              54            3.82           11.48           25.00           33.61
Below BBB and Unrated...................................          26.827              54           14.50           44.52           25.00           58.39
--------------------------------------------------------------------------------------------------------------------------------------------------------

    B. The adjustment factors will be updated annually as Moody's annual 
report on Default and Recovery Rates of Corporate Bond Issuers becomes 
available, normally in January or February of each year. In the event 
that there is an interruption of Moody's publication of this annual 
report, or FCA determines that the format of the report has changed 
enough to prevent or call into question the identification of updated 
factors, the prior year's factors will remain in effect until FCA 
revises the process through rulemaking.
    4. Continuing the previous example, the pool contains two loans on 
which Farmer Mac is guaranteeing a total of $2 million and with total 
submitted collateral of 110 percent of the guaranteed amount. Of the 10-
percent total overcollateral, 5 percent is contractually required under 
the terms of the transaction. The pool consists of two loans of slightly 
over $1 million. Total overcollateral is $200,000 of which $100,000 is 
contractually required. The counterparty has a single ``A'' credit 
rating, a 25-percent concentration ratio, and after adjusting for 
contractually required overcollateral, estimated losses are greater than 
zero. The net loss rate is calculated as described in the steps in the 
table below.

------------------------------------------------------------------------
                                        Loan A              Loan B
------------------------------------------------------------------------
1  Guaranteed Volume............                $2,000,000
                                 ---------------------------------------
2  Origination Balance of 2-Loan  $1,080,000........  $1,120,000
 Portfolio.

[[Page 428]]

 
3  Age-Adjusted Loss Rate.......  7%................  5%
4  Estimated Age-Adjusted Losses  $75,600...........  $56,000
5  Guarantee Volume Scaling       90.91%............  90.91%
 Factor.
6  Losses Adjusted for Total      $68,727...........  $50,909
 Overcollateral.
                                 ---------------------------------------
7  Contractually Required                        $100,000
 Overcollateral on Pool (5%).
8  Net Losses on Pool Adjusted                    $19,636
 for Contractually Required
 Overcollateral.
9  GOA Factor for ``A'' Issuer                    28.84%
 with 25% Concentration Ratio.
10  Losses Adjusted for ``A''                     $5,664
 General Obligation.
11  Loss Rate Input in the RBCST                   0.28%
 for this Pool.
------------------------------------------------------------------------

    A. The net, fully adjusted losses are distributed over time on a 
straight-line basis. When a transaction reaches maturity within the 10-
year modeling horizon, the losses are distributed on a straightline over 
a timepath that ends in the year of the transaction's maturity.
    B. [Reserved]

 2.5 Calculation of Loss Rates for Use in the Stress Test for All Types 
                  of Loans, Except Rural Utility Loans

    a. You must compute the loss rates by state as the dollar weighted 
average seasoned loss rates from the Cash Window and Standby loan 
portfolios by state. The spreadsheet entitled, ``Credit Loss 
Module.XLS'' can be used for these calculations. This spreadsheet is 
available for download on our Web site, www.fca.gov, or will be provided 
upon request. The blended loss rates for each state are copied from the 
``Credit Loss Module'' to the stress test spreadsheet for determining 
Farmer Mac's regulatory capital requirement.
    b. The stress test use of the blended loss rates is further 
discussed in section 4.3, ``Risk Measures.''

  2.6 Calculation of Loss Rates on Rural Utility Volume for-Use in the 
                               Stress Test

    You must submit the outstanding principal, maturity date of the 
loan, maturity date of the AgVantage Plus contract (if applicable), and 
the rural utility guarantee fee percentage for each loan in Farmer Mac's 
rural utility loan portfolio on the date at which the stress test is 
conducted. You must multiply the rural utility guarantee fee by two to 
calculate the loss rate on rural utility loans under stressful economic 
conditions and then multiply the loss rate by the total outstanding 
principal. To arrive at the net rural utility loan losses, you must next 
apply the steps ``5'' through ``11'' of section 2.4.b.4 of this 
Appendix. For loans under an AgVantage Plus-type structure, the 
calculated losses are distributed over time on a straight-line basis. 
For loans that are not part of an AgVantage Plus-type structure, losses 
are distributed over the 10-year modeling horizon, consistent with other 
non-AgVantage Plus loan volume.

                         3.0 Interest Rate Risk

    The stress test explicitly accounts for Farmer Mac's vulnerability 
to interest rate risk from the movement in interest rates specified in 
the statute. The stress test considers Farmer Mac's interest rate risk 
position through the current structure of its balance sheet, reported 
interest rate risk shock-test results, \16\ and other financial 
activities. The stress test calculates the effect of interest rate risk 
exposure through market value changes of interest-bearing assets, 
liabilities, and off-balance sheet transactions, and thereby the effects 
to equity capital. The stress test also captures this exposure through 
the cashflows on rate-sensitive assets and liabilities. We discuss how 
to calculate the dollar impact of interest rate risk in section 4.6, 
``Balance Sheets.''
---------------------------------------------------------------------------

    \16\ See paragraph c. of section 4.1 entitled, ``Data Inputs,'' for 
a description of the interest rate risk shock-reporting requirement.
---------------------------------------------------------------------------

         3.1 Process for Calculating the Interest Rate Movement

    a. The stress test uses the 10-year Constant Maturity Treasury (10-
year CMT) released by the Federal Reserve in HR. 15, ``Selected Interest 
Rates.'' The stress test uses the 10-year CMT to generate earnings 
yields on assets, expense rates on liabilities, and changes in the 
market value of assets and liabilities. For stress test purposes, the 
starting rate for the 10-year CMT is the 3-month average of the most 
recent monthly rate series published by the Federal Reserve. The 3-month 
average is calculated by summing the latest monthly series of the 10-
year CMT and dividing by three. For instance, you would calculate the 
initial rate on June 30, 1999, as:

------------------------------------------------------------------------
                                                                10-year
                                                                  CMT
                          Month end                             monthly
                                                                 series
------------------------------------------------------------------------
04/1999......................................................       5.18
05/1999......................................................       5.54
06/1999......................................................       5.90

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Average......................................................       5.54
------------------------------------------------------------------------

    b. The amount by which the stress test shocks the initial rate up 
and down is determined by calculating the 12-month average of the 10-
year CMT monthly series. If the resulting average is less than 12 
percent, the stress test shocks the initial rate by an amount determined 
by multiplying the 12-month average rate by 50 percent. However, if the 
average is greater than or equal to 12 percent, the stress test shocks 
the initial rate by 600 basis points. For example, determine the amount 
by which to increase and decrease the initial rate for June 30, 1999, as 
follows:

------------------------------------------------------------------------
                                                                10-year
                                                                  CMT
                          Month end                             monthly
                                                                 series
------------------------------------------------------------------------
07/1998......................................................       5.46
08/1998......................................................       5.34
09/1998......................................................       4.81
10/1998......................................................       4.53
11/1998......................................................       4.83
12/1998......................................................       4.65
01/1999......................................................       4.72
02/1999......................................................       5.00
03/1999......................................................       5.23
04/1999......................................................       5.18
05/1999......................................................       5.54
06/1999......................................................       5.90
12-Month Average.............................................       5.10
------------------------------------------------------------------------


------------------------------------------------------------------------
          Calculation of shock amount
------------------------------------------------------------------------
12-Month Average Less than 12%................  Yes.
12-Month Average..............................  5.10.
Multiply the 12-Month Average by..............  50%.
Shock in basis points equals..................  255.
------------------------------------------------------------------------

    c. You must run the stress test for two separate changes in interest 
rates: (i) An immediate increase in the initial rate by the shock 
amount; and (ii) immediate decrease in the initial rate by the shock 
amount. The stress test then holds the changed interest rate constant 
for the remainder of the 10-year stress period. For example, at June 30, 
1999, the stress test would be run for an immediate and sustained (for 
10 years) upward movement in interest rates to 8.09 percent (5.54 
percent plus 255 basis points) and also for an immediate and sustained 
(for 10 years) downward movement in interest rates to 2.99 percent (5.54 
percent minus 255 basis points). The movement in interest rates that 
results in the greatest need for capital is then used to determine 
Farmer Mac's risk-based capital requirement.

                4.0 Elements Used in Generating Cashflows

    a. This section describes the elements that are required for 
implementation of the stress test and assessment of Farmer Mac capital 
performance through time. An Excel spreadsheet named FAMC RBCST, 
available at http://www.fca.gov, contains the stress test, including the 
cashflow generator. The spreadsheet contains the following seven 
worksheets:
    (1) Data Input;
    (2) Assumptions and Relationships;
    (3) Risk Measures (credit risk and interest rate risk);
    (4) Loan and Cash Flow Accounts;
    (5) Income Statements;
    (6) Balance Sheets; and
    (7) Capital.
    b. Each of the components is described in further detail below with 
references where appropriate to the specific worksheets within the Excel 
spreadsheet. The stress test may be generally described as a set of 
linked financial statements that evolve over a period of 10 years using 
generally accepted accounting conventions and specified sets of stressed 
inputs. The stress test uses the initial financial condition of Farmer 
Mac, including earnings and funding relationships, and the credit and 
interest rate stressed inputs to calculate Farmer Mac's capital 
performance through time. The stress test then subjects the initial 
financial conditions to the first period set of credit and interest rate 
risk stresses, generates cashflows by asset and liability category, 
performs necessary accounting postings into relevant accounts, and 
generates an income statement associated with the first interval of 
time. The stress test then uses the income statement to update the 
balance sheet for the end of period 1 (beginning of period 2). All 
necessary capital calculations for that point in time are then 
performed.
    c. The beginning of the period 2 balance sheet then serves as the 
departure point for the second income cycle. The second period's 
cashflows and resulting income statement are generated in similar 
fashion as the first period's except all inputs (i.e., the periodic loan 
losses, portfolio balance by category, and liability balances) are 
updated appropriately to reflect conditions at that point in time. The 
process evolves forward for a period of 10 years with each pair of 
balance sheets linked by an intervening set of cashflow and income 
statements. In this and the following sections, additional details are 
provided about the specification of the income-generating model to be 
used by Farmer Mac in calculating the risk-based capital requirement.

[[Page 430]]

                             4.1 Data Inputs

    The stress test requires the initial financial statement conditions 
and income generating relationships for Farmer Mac. The worksheet named 
``Data Inputs'' contains the complete data inputs and the data form used 
in the stress test. The stress test uses these data and various 
assumptions to calculate pro forma financial statements. For stress test 
purposes, Farmer Mac is required to supply:
    a. Call Report Schedules RC: Balance Sheet and RI: Income Statement. 
These schedules form the starting financial position for the stress 
test. In addition, the stress test calculates basic financial 
relationships and assumptions used in generating pro forma annual 
financial statements over the 10-year stress period. Financial 
relationships and assumptions are in section 4.2, ``Assumptions and 
Relationships.''
    b. Cashflow Data for Asset and Liability Account Categories. The 
necessary cashflow data for the spreadsheet-based stress test are book 
value, weighted average yield, weighted average maturity, conditional 
prepayment rate, weighted average amortization, and weighted average 
guarantee fees and rural utility guarantee fees. The spreadsheet uses 
this cashflow information to generate starting and ending account 
balances, interest earnings, guarantee fees, rural utility guarantee 
fees, and interest expense. Each asset and liability account category 
identified in this data requirement is discussed in section 4.2 
``Assumptions and Relationships.''
    c. Interest Rate Risk Measurement Results. The stress test uses the 
results from Farmer Mac's interest rate risk model to represent changes 
in the market value of assets, liabilities, and off-balance sheet 
positions during upward and downward instantaneous shocks in interest 
rates of 300, 250, 200, 150, and 100 basis points. The stress test uses 
these data to calculate a schedule of estimated effective durations 
representing the market value effects from a change in interest rates. 
The stress test uses a linear interpolation of the duration schedule to 
relate a change in interest rates to a change in the market value of 
equity. This calculation is described in section 4.4 entitled, ``Loan 
and Cashflow Accounts,'' and is illustrated in the referenced worksheet 
of the stress test.
    d. Loan-Level Data for all Farmer Mac I Program Assets.
    (1) The stress test requires loan-level data for all Farmer Mac I 
program assets to determine lifetime age-adjusted loss rates. The 
specific loan data fields required for running the credit risk component 
are:

                  Farmer Mac I Program Loan Data Fields

Loan Number
Ending Scheduled Balance
Group
Pre/Post Act
Property State
Product Type
Origination Date
Loan Cutoff Date
Original Loan Balance
Original Scheduled P&I
Original Appraised Value
Loan-to-Value Ratio
Debt-to-Assets Ratio
Current Assets
Current Liabilities
Total Assets
Total Liabilities
Gross Farm Revenue
Net Farm Income
Depreciation
Interest on Capital Debt
Capital Lease Payments
Living Expenses
Income & FICA Taxes
Net Off-Farm Income
Total Debt Service
Guarantee/Commitment Fee
Seasoned Loan Flag
    (2) From the loan-level data, you must identify the geographic 
distribution by state of Farmer Mac's loan portfolio and enter the 
current loan balance for each state in the ``Data Inputs'' worksheet. 
The lifetime age-adjustment of origination year loss rates was discussed 
in section 2.0, ``Credit Risk.'' The lifetime age-adjusted loss rates 
are entered in the ``Risk Measures'' worksheet of the stress test. The 
stress test application of the loss rates is discussed in section 4.3, 
``Risk Measures.''
    (3) Under certain circumstances, described below, you must 
substitute the following data proxies for the variables LTV, DSCR, and 
D/A: LTV = 0.70, DSCR = 1.25, and D/A = 0.50. The substitution must be 
done whenever any of these data are missing, i.e., cells are blank, or 
one or more of the conditions in the following table is true.

------------------------------------------------------------------------
                 Condition                              Apply
------------------------------------------------------------------------
1. Total Assets = 0........................  Proxy D/A.
2. Total Liabilities = 0...................  Proxy D/A.
3. Total assets less total liabilities <0..  Proxy D/A.
4. Total debt service = 0 or not calculable  Proxy DSCR.
5. Net farm income = 0.....................  Proxy DSCR.
6. LTV ratio = 0...........................  Proxy LTV.
7. Total assets less than original           Proxy LTV, D/A.
 appraised value.
8. Total liabilities less than the original  Proxy D/A.
 loan amount.
9. Total debt service is less than original  Proxy DSCR.
 scheduled principal and interest payment.

[[Page 431]]

 
10. Depreciation, interest on capital debt,  Proxy DSCR.
 capital lease payments, or living expenses
 are reported as less than zero.
11. Original Scheduled Principal and         Proxy DSCR.
 Interest is greater than Total Debt
 Service.
12. Calculated LTV (original loan amount     The greater of the two LTV
 divided by original appraised value) does    ratios.
 not equal the submitted LTV ratio.
13. Any of the fields referenced in ``1.''   Proxy all related ratios.
 through ``12.'' above are blank or contain
 spaces, periods, zeros, negative amounts,
 or fonts formatted to any setting other
 than numbers.
------------------------------------------------------------------------

    In addition, the following loan data adjustments must be made in 
response to the situations listed below:

------------------------------------------------------------------------
               Situation                         Data adjustment
------------------------------------------------------------------------
Original loan balance is less than       Substitute scheduled balance
 scheduled loan balance.                  for origination.
Purchase (commitment) date (a.k.a.       Insert the quarter end ``as
 ``cutoff'' date) field and Origination   of'' date of the RBCST
 date field are both blank.               submission.
Origination date field is blank........  Model based on Cutoff date.
Seasoned Standby loans that include      Proxy data applied.*
 loan data.
------------------------------------------------------------------------
* Application of proxy data recognizes that underwriting data on
  seasoned Standby loans are not reviewed by Farmer Mac in favor of
  other criteria and frequently not origination data.

    Further, because it would not be possible to compile an exhaustive 
list of loan data anomalies, FCA reserves the authority to require an 
explanation on other data anomalies it identifies and to apply the loan 
data proxies on such cases until the anomaly is adequately addressed by 
the Corporation.
    e. Loan-Level Data for All Rural Utility Program Volume. The stress 
test requires loan-level data for all rural utility program volume. The 
specific loan data fields required for calculating the credit risk are 
outstanding principal, maturity date of the loan, maturity date of the 
AgVantage Plus contract (if applicable), and the rural utility guarantee 
fee percentage for each loan in Farmer Mac's rural utility loan 
portfolio on the date at which the stress test is conducted.
    f. Weighted Haircuts for Non-Program Investments. For non-program 
investments, the stress test adjusts the weighted average yield data 
referenced in section 4.1.b. to reflect counterparty risk. Non-program 
investments are defined in Sec. 652.5. The Corporation must calculate 
the haircut to be applied to each investment based on the lowest whole-
letter credit rating the investment received from an NRSRO using the 
haircut levels in effect at the time. Haircut levels shall be the same 
amounts calculated for the GOA factor in section 2.4.b.3 above. The 
first table provides the mappings of NRSRO ratings to whole-letter 
ratings for purposes of applying haircuts. Any `` + '' or ``-'' signs 
appended to NRSRO ratings that are not shown in the table should be 
ignored for purposes of mapping NRSRO ratings to FCA whole-letter 
ratings. The second table provides the haircut levels by whole-letter 
rating category.

                                         FCA Whole-Letter Credit Ratings Mapped to Rating Agency Credit Ratings
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
FCA Ratings Category...............  AAA...................  AA....................  A....................  BBB..................  Below BBB and
                                                                                                                                    Unrated.
Standard & Poor's Long-Term........  AAA...................  AA....................  A....................  BBB..................  Below BBB and
                                                                                                                                    Unrated.
Fitch Long-Term....................  AAA...................  AA....................  A....................  BBB..................  Below BBB and
                                                                                                                                    Unrated.
Standard & Poor's Short-Term.......  A-1 +.................  A-1...................  A-2..................  A-3..................  SP-3, B, or Below and
                                     SP-1 +................  SP-1..................  SP-2.................                          Unrated.
Fitch Short-Term...................  F-1 +.................  F-1...................  F-2..................  F-3..................  Below F-3 and
                                                                                                                                    Unrated.
Moody's............................  ......................  Prime-MIG12...........  Prime-2 MIG2 VMIG2...  Prime-3 MIG3 VMIG3...  Not Prime, SG and
                                                             VMIg1.................                                                 Unrated.
Fitch Bank Ratings.................  A.....................  B.....................  C....................  D....................  E.
                                                             A/B...................  B/C..................  C/D..................  D/E.

[[Page 432]]

 
Moody's Bank Financial Strength      A.....................  B.....................  C....................  D....................  E.
 Rating.
--------------------------------------------------------------------------------------------------------------------------------------------------------


       Farmer Mac RBCST Maximum Haircut by Ratings Classification
------------------------------------------------------------------------
                                                           Non-program
                                                           investment
                                                         counterparties
                Ratings classification                     (excluding
                                                          derivatives)
                                                            (percent)
------------------------------------------------------------------------
Cash..................................................              0.00
AAA...................................................              1.41
AA....................................................              3.70
A.....................................................              5.13
BBB...................................................             11.48
Below BBB or Unrated..................................             44.52
------------------------------------------------------------------------

    1. Certain special cases will receive the following treatment. For 
an investment structured as a collateralized obligation backed by the 
issuer's general obligation and, in turn, a pool of collateral, 
reference the Issuer Rating or Financial Strength Rating of that issuer 
as the credit rating applicable to the security. Unrated securities that 
are fully guaranteed by Government-sponsored enterprises (GSE) such as 
the Federal National Mortgage Corporation (Fannie Mae) will receive the 
same treatment as AAA securities. Unrated securities backed by the full 
faith and credit of the U.S. Government will not receive a haircut. 
Unrated securities that are not fully guaranteed by a GSE will receive 
the haircut level in place at that time for ``Below BBB and Unrated'' 
investments unless the Director, at the Director's discretion, 
determines to apply a lesser haircut. In making this determination, the 
Director will consider the risk characteristics associated with the 
structure of individual instruments.
    2. If portions of investments are later sold by Farmer Mac according 
to their specific risk characteristics, the Director will take 
reasonable measures to adjust the haircut level applied to the 
investment to recognize the change in the risk characteristics of the 
retained portion. The Director will consider relevant similar methods 
for dealing with capital requirements adopted by other Federal financial 
institution regulators in similar situations.
    3. Individual investment haircuts must then be aggregated into 
weighted-average haircuts by investment category and submitted in the 
``Data Inputs'' worksheet. The spreadsheet uses these inputs to reduce 
the weighted-average yield on the investment category to account for 
counterparty insolvency according to a 10-year linear phase-in of the 
haircuts. Each asset account category identified in this data 
requirement is discussed in section 4.2, ``Assumptions and 
Relationships.''

                    4.2 Assumptions and Relationships

    a. The stress test assumptions are summarized on the worksheet 
called ``Assumptions and Relationships.'' Some of the entries on this 
page are direct user entries. Other entries are relationships generated 
from data supplied by Farmer Mac or other sources as discussed in 
section 4.1, ``Data Inputs.'' After current financial data are entered, 
the user selects the date for running the stress test. This action 
causes the stress test to identify and select the appropriate data from 
the ``Data Inputs'' worksheet. The next section highlights the degree of 
disaggregation needed to maintain reasonably representative financial 
characterizations of Farmer Mac in the stress test. Several specific 
assumptions are established about the future relationships of account 
balances and how they evolve.
    b. From the data and assumptions, the stress test computes pro forma 
financial statements for 10 years. The stress test must be run as a 
``steady state'' with regard to program balances (with the exception of 
AgVantage Plus volume, in which case maturities are recognized by the 
model), and where possible, will use information gleaned from recent 
financial statements and other data supplied by Farmer Mac to establish 
earnings and cost relationships on major program assets that are applied 
forward in time. As documented in the stress test, entries of ``1'' 
imply no growth and/or no change in account balances or proportions 
relative to initial conditions with the exception of pre-1996 loan 
volume being transferred to post-1996 loan volume. The interest rate 
risk and credit loss components are applied to the stress test through 
time. The individual sections of that worksheet are:
    (1) Elements related to cashflows, earnings rates, and disposition 
of discontinued program assets.
    (A) The stress test accounts for earnings rates by asset class and 
cost rates on funding. The stress test aggregates investments into the 
categories of: Cash and money market securities; commercial paper; 
certificates of deposit; agency mortgage-backed securities and 
collateralized mortgage obligations; and other investments. With FCA's 
concurrence, Farmer Mac is permitted to further disaggregate these 
categories. Similarly, we may require new categories for future 
activities to be added to the stress test.

[[Page 433]]

Loan items requiring separate accounts include the following:
    (i) Farmer Mac I program assets post-1996 Act;
    (ii) Farmer Mac I program assets post-1996 Act Swap balances;
    (iii) Farmer Mac I program assets pre-1996 Act;
    (iv) Farmer Mac I AgVantage securities;
    (v) Loans held for securitization;
    (vi) Farmer Mac II program assets; and
    (vii) Rural Utility program volume on balance sheet.
    (B) The stress test also uses data elements related to amortization 
and prepayment experience to calculate and process the implied rates at 
which asset and liability balances terminate or ``roll off'' through 
time. Further, for each category, the stress test has the capacity to 
track account balances that are expected to change through time for each 
of the above categories. For purposes of the stress test, all assets are 
assumed to maintain a ``steady state'' with the implication that any 
principal balances retired or prepaid are replaced with new balances. 
The exceptions are that expiring pre-1996 Act program assets are 
replaced with post-1996 Act program assets and AgVantage Plus volume 
maturities are recognized by the model.
    (2) Elements related to other balance sheet assumptions through 
time. As well as interest earning assets, the other categories of the 
balance sheet that are modeled through time include interest receivable, 
guarantee fees receivable, rural utility guarantee fees receivable, 
prepaid expenses, accrued interest payable, accounts payable, accrued 
expenses, reserves for losses (loans held and guaranteed securities), 
and other off-balance sheet obligations. The stress test is consistent 
with Farmer Mac's existing reporting categories and practices. If 
reporting practices change substantially, the above list will be 
adjusted accordingly. The stress test has the capacity to have the 
balances in each of these accounts determined based upon existing 
relationships to other earning accounts, to keep their balances either 
in constant proportions of loan or security accounts, or to evolve 
according to a user-selected rule. For purposes of the stress test, 
these accounts are to remain constant relative to the proportions of 
their associated balance sheet accounts that generated the accrued 
balances.
    (3) Elements related to income and expense assumptions. Several 
other parameters that are required to generate pro forma financial 
statements may not be easily captured from historic data or may have 
characteristics that suggest that they be individually supplied. These 
parameters are the gain on agricultural mortgage-backed securities 
(AMBS) sales, miscellaneous income, operating expenses, reserve 
requirement, guarantee fees, rural utility guarantee fees, and loan loss 
resolution timing.
    (A) The stress test applies the actual weighted average gain rate on 
sales of AMBS over the most recent 3 years to the dollar amount of AMBS 
sold during the most recent four quarters in order to estimate gain on 
sale of AMBS over the stress period.
    (B) The stress test assumes miscellaneous income at a level equal to 
the average of the most recent 3-year's actual miscellaneous income as a 
percent of the sum of; cash, investments, guaranteed securities, and 
loans held for investment.
    (C) The stress test assumes that short-term cost of funds is 
incurred in relation to the amount of defaulting loans purchased from 
off-balance sheet pools. The remaining unpaid principal balance on this 
loan volume is the origination amount reduced by the proportion of the 
total portfolio that has amortized as of the end of the most recent 
quarter. This volume is assumed to be funded at the short-term cost of 
funds and this expense continues for a period equal to the loan loss 
resolution timing period (LLRT) period minus 1. We will calculate the 
LLRT period from Farmer Mac data. In addition, during the LLRT period, 
all guarantee income associated with the loan volume ceases.
    (D) The stress test generates no interest income on the estimated 
volume of defaulted on-balance sheet loan volume required to be carried 
during the LLRT period, but continues to accrue funding costs during the 
remainder of the LLRT period.
    (E) You must update the LLRT period in response to changes in the 
Corporation's actual experience with each quarterly submission.
    (F) Operating costs are determined in the model using weighted 
moving average of operating expenses as a percentage of the sum of on-
balance sheet assets and off-balance sheet program activities over the 
previous four quarters inclusive of the current submission date. The 
share will then be applied forward to the balances of the same 
categories throughout the 10-year period of the RBCST model. As 
additional data accumulate, the specification will be re-examined and 
modified if we deem changing the specification results in a more 
appropriate representation of operating expenses.
    (G) The reserve requirement as a fraction of loan assets can also be 
specified. However, the stress test is run with the reserve requirement 
set to zero. Setting the parameter to zero causes the stress test to 
calculate a risk-based capital level that is comparable to regulatory 
capital, which includes reserves. Thus, the risk-based capital 
requirement contains the regulatory capital required, including 
reserves. The amount of total capital that is allocated to the reserve 
account is determined by GAAP. The stress

[[Page 434]]

test applies quarterly updates of the weighted average guarantee rates 
for post-1996 Farmer Mac I assets, pre-1996 Farmer Mac I assets, and 
Farmer Mac II assets.
    (4) Elements related to earnings rates and funding costs.
    (A) The stress test can accommodate numerous specifications of 
earnings and funding costs. In general, both relationships are tied to 
the 10-year CMT interest rate. Specifically, each investment account, 
each loan item, and each liability account can be specified as fixed 
rate, or fixed spread to the 10-year CMT with initial rates determined 
by actual data. The stress test calculates specific spreads (weighted 
average yield less initial 10-year CMT) by category from the weighted 
average yield data supplied by Farmer Mac as described earlier. For 
example, the fixed spread for Farmer Mac I program post-1996 Act 
mortgages is calculated as follows:

Fixed Spread = Weighted Average Yield less 10-year CMT 0.014 = 0.0694--
          0.0554

    (B) The resulting fixed spread of 1.40 percent is then added to the 
10-year CMT when it is shocked to determine the new yield. For instance, 
if the 10-year CMT is shocked upward by 300 basis points, the yield on 
Farmer Mac I program post-1996 Act loans would change as follows:

Yield = Fixed Spread + 10-year CMT .0994 = .014 + .0854

    (C) The adjusted yield is then used for income calculations when 
generating pro forma financial statements. All fixed-spread asset and 
liability classes are computed in an identical manner using starting 
yields provided as data inputs from Farmer Mac. The fixed-yield option 
holds the starting yield data constant for the entire 10-year stress 
test period. You must run the stress test using the fixed-spread option 
for all accounts except for discontinued program activities, such as 
Farmer Mac I program loans made before the 1996 Act. For discontinued 
loans, the fixed-rate specification must be used if the loans are 
primarily fixed-rate mortgages.
    (5) Elements related to interest rate shock test. As described 
earlier, the interest rate shock test is implemented as a single set of 
forward interest rates. The stress test applies the up-rate scenario and 
down-rate scenario separately. The stress test also uses the results of 
Farmer Mac's shock test, as described in paragraph c. of section 4.1, 
``Data Inputs,'' to calculate the impact on equity from a stressful 
change in interest rates as discussed in section 3.0 titled, ``Interest 
Rate Risk.'' The stress test uses a schedule relating a change in 
interest rates to a change in the market value of equity. For instance, 
if interest rates are shocked upward so that the percentage change is 
262 basis points, the linearly interpolated effective estimated duration 
of equity is -6.7405 years given Farmer Mac's interest rate measurement 
results at 250 and 300 basis points of -6.7316 and 76.7688 years, 
respectively found on the effective duration schedule. The stress test 
uses the linearly interpolated estimated effective duration for equity 
to calculate the market value change by multiplying duration by the base 
value of equity before any rate change from Farmer Mac's interest rate 
risk measurement results with the percentage change in interest rates.

                            4.3 Risk Measures

    a. This section describes the elements of the stress test in the 
worksheet named ``Risk Measures'' that reflect the interest rate shock 
and credit loss requirements of the stress test.
    b. As described in section 3.1, the stress test applies the 
statutory interest rate shock to the initial 10-year CMT rate. It then 
generates a series of fixed annual interest rates for the 10-year stress 
period that serve as indices for earnings yields and cost of funds rates 
used in the stress test. (See the ``Risk Measures'' worksheet for the 
resulting interest rate series used in the stress test.)
    c. The Credit Loss Module's state-level loss rates, as described in 
section 2.4 entitled, ``Calculation of Loss Rates for Use in the Stress 
Test,'' are entered into the ``Risk Measures'' worksheet and applied to 
the loan balances that exist in each state. The distribution of loan 
balances by state is used to allocate new loans that replace loan 
products that roll off the balance sheet through time. The loss rates 
are applied both to the initial volume and to new loan volume that 
replaces expiring loans. The total life of loan losses that are expected 
at origination are then allocated through time based on a set of user 
entries describing the time-path of losses.
    d. The loss rates estimated in the credit risk component of the 
stress test are based on an origination year concept, adjusted for loan 
seasoning. All losses arising from loans originated in a particular year 
are expressed as lifetime age-adjusted losses irrespective of when the 
losses actually occur. The fraction of the origination year loss rates 
that must be used to allocate losses through time are 43 percent to year 
1, 17 percent to year 2, 11.66 percent to year 3, and 4.03 percent for 
the remaining years. The total allocated losses in any year are 
expressed as a percent of loan volume in that year to reflect the 
conversion to exposure year.
    e. The credit loss exposure on rural utility volume, described in 
section 2.6, ``Calculation of Loss Rates on Rural Utility Volume for Use 
in the Stress Test,'' is entered into the ``Risk Measures'' worksheet 
applied to the volume balance. All losses arising from rural utility 
loans are expressed as annual loss rates and distributed over the 
weighted

[[Page 435]]

average maturity of the rural utility AgVantage Plus Volume, or as 
annual loss across the full 10-year modeling horizon in the case of 
rural utility Cash Window loans.

                     4.4 Loan and Cashflow Accounts

    The worksheet labeled ``Loan and Cashflow Data'' contains the 
categorized loan data and cashflow accounting relationships that are 
used in the stress test to generate projections of Farmer Mac's 
performance and condition. The steady-state formulation results in 
account balances that remain constant except for the effects of 
discontinued programs, maturing AgVantage Plus positions, and the LLRT 
adjustment. For assets with maturities under 1 year, the results are 
reported for convenience as though they matured only one time per year 
with the additional convention that the earnings/cost rates are 
annualized. For the pre-1996 Act assets, maturing balances are added 
back to post-1996 Act account balances. The liability accounts are used 
to satisfy the accounting identity, which requires assets to equal 
liabilities plus owner equity. In addition to the replacement of 
maturities under a steady state, liabilities are increased to reflect 
net losses or decreased to reflect resulting net gains. Adjustments must 
be made to the long- and short-term debt accounts to maintain the same 
relative proportions as existed at the beginning period from which the 
stress test is run with the exception of changes associated with the 
funding of defaulted loans during the LLRT period. The primary 
receivable and payable accounts are also maintained on this worksheet, 
as is a summary balance of the volume of loans subject to credit losses.

                          4.5 Income Statements

    a. Information related to income performance through time is 
contained on the worksheet named ``Income Statements.'' Information from 
the first period balance sheet is used in conjunction with the earnings 
and cost-spread relationships from Farmer Mac supplied data to generate 
the first period's income statement. The same set of accounts is 
maintained in this worksheet as ``Loan and Cashflow Accounts'' for 
consistency in reporting each annual period of the 10-year stress period 
of the test with the exception of the line item labeled ``Interest 
reversals to carry loan losses'' which incorporates the LLRT adjustment 
to earnings from the ``Risk Measures'' worksheet. Loans that defaulted 
do not earn interest or guarantee and commitment fees during LLRT 
period. The income from each interest-bearing account is calculated, as 
are costs of interest-bearing liabilities. In each case, these entries 
are the associated interest rate for that period multiplied by the 
account balances.
    b. The credit losses described in section 2.0, ``Credit Risk,'' are 
transmitted through the provision account, as is any change needed to 
re-establish the target reserve balance. For determining risk-based 
capital, the reserve target is set to zero as previously indicated in 
section 4.2. Under the income tax section, it must first be determined 
whether it is appropriate to carry forward tax losses or recapture tax 
credits. The tax section then establishes the appropriate income tax 
liability that permits the calculation of final net income (loss), which 
is credited (debited) to the retained earnings account.

                           4.6 Balance Sheets

    a. The worksheet named ``Balance Sheets'' is used to construct pro 
forma balance sheets from which the capital calculations can be 
performed. As can be seen in the Excel spreadsheet, the worksheet is 
organized to correspond to Farmer Mac's normal reporting practices. 
Asset accounts are built from the initial financial statement 
conditions, and loan and cashflow accounts. Liability accounts including 
the reserve account are likewise built from the previous period's 
results to balance the asset and equity positions. The equity section 
uses initial conditions and standard accounts to monitor equity through 
time. The equity section maintains separate categories for increments to 
paid-in-capital and retained earnings and for mark-to-market effects of 
changes in account values. The process described below in the 
``Capital'' worksheet uses the initial retained earnings and paid-in-
capital account to test for the change in initial capital that permits 
conformance to the statutory requirements. Therefore, these accounts 
must be maintained separately for test solution purposes.
    b. The market valuation changes due to interest rate movements must 
be computed utilizing the linearly interpolated schedule of estimated 
equity effects due to changes in interest rates, contained in the 
``Assumptions & Relationships'' worksheet. The stress test calculates 
the dollar change in the market value of equity by multiplying the base 
value of equity before any rate change from Farmer Mac's interest rate 
risk measurement results, the linearly interpolated estimated effective 
duration of equity, and the percentage change in interest rates. In 
addition, the earnings effect of the measured dollar change in the 
market value of equity is estimated by multiplying the dollar change by 
the blended cost of funds rate found on the ``Assumptions & 
Relationships'' worksheet. Next, divide by 2 the computed earnings 
effect to approximate the impact as a theoretical shock in the interest 
rates that occurs at the mid-point of the income cycle from period t 
0 to period t 1. The measured dollar change in the 
market value of equity

[[Page 436]]

and related earnings effect are then adjusted to reflect any tax-related 
benefits. Tax adjustments are determined by including the measured 
dollar change in the market value of equity and the earnings effect in 
the tax calculations found in the ``Income Statements'' worksheet. This 
approach ensures that the value of equity reflects the economic loss or 
gain in value of Farmer Mac's capital position from a change in interest 
rates and reflects any immediate tax benefits that Farmer Mac could 
realize. Any tax benefits in the module are posted through the income 
statement by adjusting the net taxes due before calculating final net 
income. Final net income is posted to accumulated unretained earnings in 
the shareholders' equity portion of the balance sheet. The tax section 
is also described in section 4.5 entitled, ``Income Statements.''
    c. After one cycle of income has been calculated, the balance sheet 
as of the end of the income period is then generated. The ``Balance 
Sheet'' worksheet shows the periodic pro forma balance sheets in a 
format convenient to track capital shifts through time.
    d. The stress test considers Farmer Mac's balance sheet as subject 
to interest rate risk and, therefore, the capital position reflects 
mark-to-market changes in the value of equity. This approach ensures 
that the stress test captures interest rate risk in a meaningful way by 
addressing explicitly the loss or gain in value resulting from the 
change in interest rates required by the statute.

                               4.7 Capital

    The ``Capital'' worksheet contains the results of the required 
capital calculations as described below, and provides a method to 
calculate the level of initial capital that would permit Farmer Mac to 
maintain positive capital throughout the 10-year stress test period.

                         5.0 Capital Calculation

    a. The stress test computes regulatory capital as the sum of the 
following:
    (1) The par value of outstanding common stock;
    (2) The par value of outstanding preferred stock;
    (3) Paid-in capital;
    (4) Retained earnings; and
    (5) Reserve for loan and guarantee losses.
    b. Inclusion of the reserve account in regulatory capital is an 
important difference compared to minimum capital as defined by the 
statute. Therefore, the calculation of reserves in the stress test is 
also important because reserves are reduced by loan and guarantee 
losses. The reserve account is linked to the income statement through 
the provision for loan-loss expense (provision). Provision expense 
reflects the amount of current income necessary to rebuild the reserve 
account to acceptable levels after loan losses reduce the account or as 
a result of increases in the level of risky mortgage positions, both on- 
and off-balance sheet. Provision reversals represent reductions in the 
reserve levels due to reduced risk of loan losses or loan volume of 
risky mortgage positions. The liabilities section of the ``Balance 
Sheets'' worksheet also includes separate line items to disaggregate the 
Guarantee and commitment obligation related to the Financial Accounting 
Standards Board Accounting Standards Codification Topic 460, Guarantees. 
This item is disaggregated to permit accurate calculation of regulatory 
capital post-adoption of FIN 45. When calculating the stress test, the 
reserve is maintained at zero to result in a risk-based capital 
requirement that includes reserves, thereby making the requirement 
comparable to the statutory definition of regulatory capital. By setting 
the reserve requirement to zero, the capital position includes all 
financial resources Farmer Mac has at its disposal to withstand risk.

                        5.1 Method of Calculation

    a. Risk-based capital is calculated in the stress test as the 
minimum initial capital that would permit Farmer Mac to remain solvent 
for the ensuing 10 years. To this amount, an additional 30 percent is 
added to account for managerial and operational risks not reflected in 
the specific components of the stress test.
    b. The relationship between the solvency constraint (i.e., future 
capital position not less than zero) and the risk-based capital 
requirement reflects the appropriate earnings and funding cost rates 
that may vary through time based on initial conditions. Therefore, the 
minimum capital at a future point in time cannot be directly used to 
determine the risk-based capital requirement. To calculate the risk-
based capital requirement, the stress test includes a section to solve 
for the minimum initial capital value that results in a minimum capital 
level over the 10 years of zero at the point in time that it would 
actually occur. In solving for initial capital, it is assumed that 
reductions or additions to the initial capital accounts are made in the 
retained earnings accounts, and balanced in the debt accounts at terms 
proportionate to initial balances (same relative proportion of long- and 
short-term debt at existing initial rates). Because the initial capital 
position affects the earnings, and hence capital positions and 
appropriate discount rates through time, the initial and future capital 
are simultaneously determined and must be solved iteratively. The 
resulting minimum initial capital from the stress test is then reported 
on the ``Capital'' worksheet of the stress test. The ``Capital'' 
worksheet

[[Page 437]]

includes an element that uses Excel's ``solver'' or ``goal seek'' 
capability to calculate the minimum initial capital that, when added 
(subtracted) from initial capital and replaced with debt, results in a 
minimum capital balance over the following 10 years of zero.

[71 FR 77253, Dec. 26, 2006, as amended at 73 FR 31940, June 5, 2008; 76 
FR 23467, Apr. 27, 2011; 78 FR 21037, Apr. 9, 2013]



PART 653_FEDERAL AGRICULTURAL MORTGAGE CORPORATION RISK MANAGEMENT
--Table of Contents



Sec.
653.1  Definitions.
653.2  General.
653.3  Risk management.
653.4  Internal controls.

    Authority: Secs. 8.3, 8.4, 8.6, 8.8, and 8.10 of Pub. L. 92-181, 85 
Stat. 583 (12 U.S.C. 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-8, and 2279aa-
10).

    Source: 81 FR 49154, July 27, 2016, unless otherwise noted.



Sec. 653.1  Definitions.

    The following definitions apply to this part:
    Corporation means the Federal Agricultural Mortgage Corporation and 
its affiliates.
    FCA means the Farm Credit Administration, an independent Federal 
agency of the executive branch.
    OSMO means the FCA Office of Secondary Market Oversight, which is 
responsible for the general supervision of the safe and sound exercise 
of the Corporation's powers, functions, and duties and compliance with 
laws and regulations.



Sec. 653.2  General.

    The Corporation's board of directors must approve the overall risk-
appetite of the Corporation and regularly monitor internal controls to 
provide reasonable assurance that risk-taking activities are conducted 
in a safe and sound manner.



Sec. 653.3  Risk management.

    (a) Risk management program. The Corporation's board of directors 
must establish, maintain, and periodically update an enterprise-wide 
risk management program addressing how the Corporation's activities are 
exercised in a safe and sound manner. The implementation of the risk 
management program may reside with senior management. The risk 
management program at a minimum must:
    (1) Periodically assess and document the Corporation's risk profile.
    (2) Align the Corporation's risk profile with the board-approved 
risk appetite and the Corporation's operational planning strategies and 
objectives.
    (3) Specify management's authority to carry out risk management 
responsibilities.
    (4) Integrate risk management and control objectives into management 
goals and compensation structures.
    (5) Comply with all applicable FCA regulations and policies.
    (b) Risk committee. The Corporation's board-level risk committee 
assists the full board of directors in the oversight of the enterprise-
wide risk management program of the Corporation.
    (1) The risk committee must have at least one member with an 
understanding of risk management commensurate with the Corporation's 
capital structure, risk profile, complexity, activities, size, and other 
appropriate risk-related factors.
    (2) The responsibilities of the risk committee include, but are not 
limited to:
    (i) Periodically assessing management's implementation of the 
enterprise-wide risk management program;
    (ii) Recommending changes to the risk management program to keep the 
program commensurate with the Corporation's capital structure, risk 
appetite, complexity, activities, size, and other appropriate risk-
related factors; and
    (iii) Receiving and reviewing regular reports directly from 
personnel responsible for implementing the Corporation's risk management 
program.
    (c) Management of risk. The Corporation must have a risk officer, 
however styled, who is responsible for implementing and maintaining the 
enterprise-wide risk management practices of the Corporation. The risk 
officer must have risk management experience commensurate with the 
Corporation's capital structure, risk appetite,

[[Page 438]]

complexity, activities, and size. The responsibilities of the risk 
officer include, but are not limited to:
    (1) Identifying and monitoring compliance with risk limits, 
exposures, and controls;
    (2) Implementing risk management policies, procedures, and risk 
controls;
    (3) Developing appropriate processes and systems for identifying and 
reporting risks, including emerging risks;
    (4) Reporting on risk management issues, emerging risks, and 
compliance concerns; and
    (5) Making recommendations on adjustments to the risk management 
policies, procedures, and risk controls of the Corporation.



Sec. 653.4  Internal controls.

    (a) The Corporation's board of directors must adopt an internal 
controls policy that provides adequate directions for, and identifies 
expectations in, establishing effective safety and soundness control 
over, and accountability for, the Corporation's operations, programs, 
and resources.
    (b) The internal controls system must address:
    (1) The efficiency and effectiveness of the Corporation's 
activities;
    (2) Safeguarding the assets of the Corporation;
    (3) Evaluating the reliability, completeness, and timely reporting 
of financial and management information;
    (4) Compliance with applicable laws, regulations, regulatory 
directives, and the policies of the Corporation's board of directors and 
senior management;
    (5) The appropriate segregation of duties among the Corporation 
personnel so that personnel are not assigned conflicting 
responsibilities; and
    (6) The completeness and quality of information provided to the 
Corporation's board of directors.
    (c) The Corporation is responsible for establishing and implementing 
an effective system to identify internal controls weaknesses and taking 
action to correct detected weaknesses. The Corporation must document:
    (1) The process used to identify weaknesses,
    (2) Any found weaknesses, and
    (3) How identified weaknesses were addressed.

                           PART 654 [RESERVED]



PART 655_FEDERAL AGRICULTURAL MORTGAGE CORPORATION DISCLOSURE 
AND REPORTING REQUIREMENTS--Table of Contents



                            Subpart A_General

Sec.
655.1  Definitions.

  Subpart B_Reports of Condition of the Federal Agricultural Mortgage 
                               Corporation

655.10  Reports of condition.
655.15  Interim reports, notices, and proxy statements.

   Subpart C_Reports Relating to Securities Activities of the Federal 
                    Agricultural Mortgage Corporation

655.20  Securities not registered under the Securities Act.
655.21  Filings and communications with the U.S. Treasury, the SEC, and 
          NYSE.

    Authority: Secs. 5.9, 8.3, 8.11, and 8.12 of Pub. L. 92-181, 85 
Stat. 583 (12 U.S.C. 2243, 2279aa-3, 2279aa-11, 2279aa-12).

    Source: 81 FR 49155, July 27, 2016, unless otherwise noted.



                            Subpart A_General



Sec. 655.1  Definitions.

    The following definitions apply to this part:
    Act or authorizing statute means the Farm Credit Act of 1971, as 
amended.
    Business day means a day the Corporation is open for business, 
excluding the legal public holidays identified in 5 U.S.C. 6103(a).
    Corporation means the Federal Agricultural Mortgage Corporation and 
its affiliates.
    FCA means the Farm Credit Administration, an independent Federal 
agency of the executive branch.
    Material, when used to qualify a requirement to furnish information 
as to any subject, means the information required for those matters to 
which there is a substantial likelihood that a reasonable person would 
attach importance in making investor decisions or determining the 
financial condition of the Corporation.

[[Page 439]]

    NYSE means the New York Stock Exchange, a listing exchange.
    OSMO means the FCA Office of Secondary Market Oversight, which is 
responsible for the general supervision of the safe and sound exercise 
of the Corporation's powers, functions, and duties and compliance with 
laws and regulations.
    Our or us means the FCA or OSMO, as appropriate to the context of 
the provision employing the term.
    Person means individual or entity.
    SEC means the Securities and Exchange Commission.
    Securities Act means the Securities Act of 1933 (15 U.S.C. 77a et 
seq.) or the Exchange Act of 1934 (15 U.S.C. 78a et seq.), or both, as 
appropriate to the context of the provision employing the term.
    Signed, when referring to paper form, means a manual signature, and, 
when referring to electronic form, means marked in a manner that 
authenticates each signer's identity.



  Subpart B_Reports of Condition of the Federal Agricultural Mortgage 
                               Corporation



Sec. 655.10  Reports of condition.

    (a) General. The Corporation must prepare and publish annual reports 
to its shareholders of its condition, including financial statements and 
related schedules, exhibits, and other documents that are part of the 
reports. The contents of each report must be equivalent in content to 
the annual report to shareholders required by the Securities Act unless 
we issue instructions otherwise.
    (b) Signatures and certification. Each report issued under this 
subpart must be signed. The Corporation must designate the 
representatives who will sign each report. The name and position title 
of each person signing the report must be printed beneath his or her 
signature. The signatories must certify the report by using the SEC 
rules on certifications for disclosures in annual reports to 
shareholders.
    (c) Distribution. The Corporation must distribute the signed annual 
report of condition to its shareholders within 120 days of its fiscal 
year-end. Within 5 days of signing, the Corporation must provide us one 
paper and one electronic copy of every signed report that is distributed 
to its shareholders. If the report is the same as that filed with the 
SEC, the Corporation may instead provide the signed reports to us only 
in electronic form and simultaneous with filing the report with the SEC.
    (1) The Corporation must publish on its Web site a copy of each 
annual report to shareholders within 3 business days of filing the 
report with us. The report must remain on the Web site until the next 
report is posted. When the reports are the same as those filed with the 
SEC, electronic links to the SEC filings Web site may be used in 
satisfaction of this requirement.
    (2) Upon receiving a request for an annual report of condition from 
a stockholder, investor, or the public, the Corporation must promptly 
provide the requester the most recent annual report issued in compliance 
with this section.



Sec. 655.15  Interim reports, notices, and proxy statements.

    (a) The Corporation must provide to us one paper and one electronic 
copy of every interim report, notice, and proxy statement filed with the 
SEC within 1 business day of filing the item with the SEC, including all 
papers and documents that are a part of the report, notice, or 
statement.
    (b) The Corporation must publish a copy of each interim report, 
notice, and proxy statement on its Web site within 5 business days of 
filing the document(s) with the SEC. The Corporation may omit from these 
postings confidential, non-public information contained in the interim 
report, notice, or proxy statement. The interim report, notice, or proxy 
statement must remain on the Web site for 6 months or until the next 
annual report of condition is posted, whichever is later. Electronic 
links to the SEC filings Web site may be used in satisfaction of this 
requirement.
      
  


[[Page 440]]



   Subpart C_Reports Relating to Securities Activities of the Federal 
                    Agricultural Mortgage Corporation



Sec. 655.20  Securities not registered under the Securities Act.

    The Corporation must make special filings with the Director of OSMO 
for securities either issued or guaranteed by the Corporation that are 
not registered under the Securities Act. These filings include, but are 
not limited to:
    (a) Either one paper or one electronic copy of any offering 
circular, private placement memorandum, or information statement 
prepared in connection with the securities offering at or before the 
time of the securities offering.
    (b) For securities backed by qualified loans as defined in section 
8.0(9)(A) of the Act, either one paper or one electronic copy of the 
following within 1 business day of the finalization of the transaction:
    (1) The private placement memoranda for securities sold to 
investors; and
    (2) The final agreement and all supporting documents material to the 
Corporation's purchase of a security under section 8.6(e) of the Act.
    (c) For securities backed by qualified loans as defined in section 
8.0(9)(B) of the Act, the Corporation must provide summary information 
on such securities issued during each calendar quarter in the form 
prescribed by us. Such summary information must be provided with each 
report of condition and performance (Call report) filed pursuant to 
Sec. 621.12, and at such other times as we may require.



Sec. 655.21  Filings and communications with the U.S. Treasury,
the SEC, and NYSE.

    (a) The Corporation must send us one paper and one electronic copy 
of every filing made with U.S. Treasury, the SEC, or NYSE, including 
financial statements and related schedules, exhibits, and other 
documents that are a part of the filing. Such items must be filed with 
us no later than 1 business day after the U.S. Treasury, SEC, or NYSE 
filing. For those filings with the NYSE that duplicate ones made to the 
SEC, the Corporation may send only the SEC filing to us. If the filing 
is one addressed in subpart B of this part, no action under this 
paragraph is required.
    (b) The Corporation must send us, within 3 business days and 
according to instructions provided by us, copies of all substantive 
correspondence between the Corporation and the U.S. Treasury, the SEC, 
or NYSE that are directed at the activities of the Corporation.
    (c) The Corporation must notify us within 1 business day if it 
becomes exempt or claims exemption from the filing requirements of the 
Securities Act. Notice is not required when the Corporation claims an 
exemption that is generally available under SEC rules and regulations to 
similarly situated filers.

                        PARTS 656	699 [RESERVED]

[[Page 441]]



            CHAPTER VII--NATIONAL CREDIT UNION ADMINISTRATION




  --------------------------------------------------------------------


  Editorial Note: For Federal Register citations to interpretations and 
policy statements to chapter VII, see the List of CFR Sections Affected, 
which appears in the Finding Aids section of the printed volume and at 
www.fdsys.gov.

            SUBCHAPTER A--REGULATIONS AFFECTING CREDIT UNIONS
Part                                                                Page
700             Definitions.................................         443
701             Organization and operation of Federal credit 
                    unions..................................         444
702             Capital adequacy............................         728
703             Investment and deposit activities...........         782
704             Corporate credit unions.....................         806
705             Community Development Revolving Loan Fund 
                    access for credit unions................         860
706             [Reserved]

707             Truth in savings............................         866
708a            Bank conversions and mergers................         922
708b            Mergers of federally-insured credit unions; 
                    voluntary termination or conversion of 
                    insured status..........................         943
709             Involuntary liquidation of Federal credit 
                    unions and adjudication of creditor 
                    claims involving federally insured 
                    credit unions in liquidation............         958
710             Voluntary liquidation.......................         968
711             Management official interlocks..............         970
712             Credit union service organizations (CUSOs)..         975
713             Fidelity bond and insurance coverage for 
                    Federal credit unions...................         981
714             Leasing.....................................         983
715             Supervisory Committee audits and 
                    verifications...........................         985
716             Privacy of consumer financial information...         992
717             Fair credit reporting.......................         992
721             Incidental powers...........................        1025
722             Appraisals..................................        1030
723             Member business loans; commercial lending...        1034
724             Trustees and custodians of certain tax-
                    advantaged savings plans................        1043

[[Page 442]]

725             National Credit Union Administration Central 
                    Liquidity Facility......................        1044
740             Accuracy of advertising and notice of 
                    insured status..........................        1051
741             Requirements for insurance..................        1054
745             Share insurance and appendix................        1086
747             Administrative actions, adjudicative 
                    hearings, rules of practice and 
                    procedure, and investigations...........        1104
748             Security program, report of suspected 
                    crimes, suspicious transactions, 
                    catastrophic acts and Bank Secrecy Act 
                    compliance..............................        1153
749             Records Preservation Program and 
                    Appendices--record retention guidelines; 
                    Catastrophic Act preparedness guidelines        1162
750             Golden parachute and indemnification 
                    payments................................        1165
760             Loans in areas having special flood hazards.        1171
761             Registration of residential mortgage loan 
                    originators.............................        1178
   SUBCHAPTER B--REGULATIONS AFFECTING THE OPERATIONS OF THE NATIONAL 
                       CREDIT UNION ADMINISTRATION
790             Description of NCUA; requests for agency 
                    action..................................        1179
791             Rules of NCUA Board procedure; promulgation 
                    of NCUA rules and regulations; public 
                    observation of NCUA Board meetings......        1183
792             Requests for information under the Freedom 
                    of Information Act and Privacy Act, and 
                    by subpoena; security procedures for 
                    classified information..................        1191
793             Tort claims against the Government..........        1216
794             Enforcement of nondiscrimination on the 
                    basis of handicap in programs or 
                    activities conducted by the National 
                    Credit Union Administration.............        1220
796             Post-employment restrictions for certain 
                    NCUA examiners..........................        1226
797             Procedures for debt collection..............        1227
798-799         [Reserved]

[[Page 443]]



            SUBCHAPTER A_REGULATIONS AFFECTING CREDIT UNIONS





PART 700_DEFINITIONS--Table of Contents



Sec.
700.1  Scope.
700.2  Definitions.

    Authority: 12 U.S.C. 1752, 1757(6), 1766.



Sec. 700.1  Scope.

    The definitions in Sec. 700.2 apply to terms used in this chapter 
unless the context indicates otherwise. Many additional definitions 
appear in the parts where the terms are used.

[78 FR 32543, May 31, 2013]



Sec. 700.2  Definitions.

    As used in this chapter:
    Act means the Federal Credit Union Act (73 Stat. 628, 84 Stat. 944, 
12 U.S.C. 1751 through 1790).
    Administration means the National Credit Union Administration.
    Board means the Board of the National Credit Union Administration.
    Credit Union means a credit union chartered under the Federal Credit 
Union Act or, as the context permits, under the laws of any State.
    Insolvency. (1) A credit union will be determined to be insolvent 
when the total amount of its shares exceeds the present cash value of 
its assets after providing for liabilities unless:
    (i) It is determined by the Board that the facts that caused the 
deficient share-asset ratio no longer exist; and
    (ii) The likelihood of further depreciation of the share-asset ratio 
is not probable; and
    (iii) The return of the share-asset ratio to its normal limits 
within a reasonable time for the credit union concerned is probable; and
    (iv) The probability of a further potential loss to the insurance 
fund is negligible.
    (2) For purposes of this section, the following definitions are 
used:
    (i) Cash value of assets. Recorded value will be considered the cash 
value of any asset account providing accepted accounting principles and 
practices are followed and the provisions of law, regulation, and bylaws 
are met.
    (ii) Liabilities. Recorded liabilities which are due and payable, 
excluding shares of members and non-members, are considered liabilities.
    Net worth. Unless otherwise noted, the term ``net worth,'' as 
applied to credit unions, has the same meaning as set forth in 
Sec. 702.2(f) of this chapter.
    Paid-in and unimpaired capital and surplus means shares plus post-
closing, undivided earnings. This does not include regular reserves or 
special reserves required by law, regulation or special agreement 
between the credit union and its regulator or share insurer. ``Paid-in 
and unimpaired capital and surplus'' for purposes of the Central 
Liquidity Facility is defined in Sec. 725.2(o) of this chapter.
    Regional Director means the representative of the Administration in 
the designated geographical area in which the office of the federal 
credit union is located or, for federal credit unions with $10 billion 
or more in assets, the Director of the Office of National Examinations 
and Supervision.
    Regional Office means the office of the Administration located in 
the designated geographical areas in which the office of the federal 
credit union is located or, for federal credit unions with $10 billion 
or more in assets, the Office of National Examinations and Supervision.
    State means a state of the United States, the District of Columbia, 
any of the several territories and possessions of the United States, and 
the Commonwealth of Puerto Rico.
    Troubled condition means: (1) In the case of an insured natural 
person credit union:
    (i) A federal credit union that has been assigned a 4 or 5 CAMEL 
composite rating by NCUA; or
    (ii) A federally insured, state-chartered credit union that has been 
assigned a 4 or 5 CAMEL composite rating by either NCUA, after an on-
site contact, or its state supervisor; or
    (iii) A federal credit union or a federally insured, state-chartered 
credit union that has been granted assistance under section 208 of the 
Federal Credit

[[Page 444]]

Union Act, 12 U.S.C. 1788, that remains outstanding and unextinguished.
    (2) In the case of an insured corporate credit union:
    (i) A Federal credit union that has been assigned a 4 or 5 CAMEL 
rating by NCUA; or
    (ii) A federally insured, state-chartered credit union that has been 
assigned a 4 or 5 CAMEL rating by either NCUA, after an on-site contact, 
or its state supervisor; or
    (iii) A Federal credit union or a federally insured, state-chartered 
credit union that has been granted assistance under section 208 of the 
Federal Credit Union Act, 12 U.S.C 1788, that remains outstanding and 
unextinguished.
    Unimpaired capital and surplus means the same as ``paid-in and 
unimpaired capital and surplus,'' as defined in paragraph (f) of this 
section.

[36 FR 23794, Dec. 15, 1971; 37 FR 329, Jan. 11, 1972, as amended at 37 
FR 10342, May 20, 1972; 45 FR 47121, July 14, 1980; 54 FR 48234, Nov. 
22, 1989; 54 FR 52015, Dec. 20, 1989; 55 FR 1794, Jan. 19, 1990; 57 FR 
47985, Oct. 21, 1992; 58 FR 40042, July 27, 1993; 65 FR 44966, July 20, 
2000. Redesignated and amended at 66 FR 65624, Dec. 20, 2001; 73 FR 
30477, May 28, 2008; 76 FR 60366, Sept. 29, 2011; 78 FR 4029, Jan. 18, 
2013; 78 FR 32544, May 31, 2013; 78 FR 77564, Dec. 26, 2013]

    Effective Date Note: At 80 FR 66706, Oct. 29, 2015, Sec. 700.2 was 
amended in the definition of ``net worth'' by removing ``Sec. 702.2(f)'' 
and adding ``Sec. 702.2'' in its place, effective Jan. 1, 2019.



PART 701_ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS--
Table of Contents



Sec.
701.1  Federal credit union chartering, field of membership 
          modifications, and conversions.
701.2  Federal credit union bylaws.
701.3  Member inspection of credit union books, records, and minutes.
701.4  General authorities and duties of Federal credit union directors.
701.5  [Reserved]
701.6  Fees paid by Federal credit unions.
701.7-701.13  [Reserved]
701.14  Change in official or senior executive officer in credit unions 
          that are newly chartered or are in troubled condition.
701.15-701.18  [Reserved]
701.19  Benefits for employees of Federal credit unions.
701.20  Suretyship and guaranty.
701.21  Loans to members and lines of credit to members.
701.22  Loan participations.
701.23  Purchase, sale, and pledge of eligible obligations.
701.24  Refund of interest.
701.25  [Reserved]
701.26  Credit union service contracts.
701.27-701.29  [Reserved]
701.30  Services for nonmembers within the field of membership.
701.31  Nondiscrimination requirements.
701.32  Payment on shares by public units and nonmembers.
701.33  Reimbursement, insurance, and indemnification of officials and 
          employees.
701.34  Designation of low income status; Acceptance of secondary 
          capital accounts by low-income designated credit unions.
701.35  Share, share draft, and share certificate accounts.
701.36  Federal credit union occupancy, planning, and disposal of 
          acquired and abandoned premises.
701.37  Treasury tax and loan depositaries; depositaries and financial 
          agents of the Government.
701.38  Borrowed funds from natural persons.
701.39  Statutory lien.

Appendix A to Part 701--Federal Credit Union Bylaws
Appendix B to Part 701--Chartering and Field of Membership Manual

    Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1758, 1759, 1761a, 
1761b, 1766, 1767, 1782, 1784, 1786, 1787, 1789. Section 701.6 is also 
authorized by 15 U.S.C. 3717. Section 701.31 is also authorized by 15 
U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3610. Section 701.35 is 
also authorized by 42 U.S.C. 4311-4312.

    Effective Date Note: At 81 FR 93580, Dec. 21, 2016, the authority 
citation for part 701 was revised, effective Jan. 20, 2017. For the 
convenience of the user, the revised text is set forth as follows:
    Authority: 12 U.S.C. 1752(5), 1757, 1765, 1766, 1781, 1782, 1787, 
1789; Title V, Pub. L. 109-351, 120 Stat. 1966.



Sec. 701.1  Federal credit union chartering, field of membership 
modifications, and conversions.

    National Credit Union Administration policies concerning chartering, 
field of membership modifications, and conversions, also known as the 
Chartering and Field of Membership Manual, are set forth in appendix B 
to this part and are available on-line at http://www.ncua.gov.

[ 75 FR 36263, June 25, 2010]

[[Page 445]]



Sec. 701.2  Federal credit union bylaws.

    (a) Federal credit unions must operate in accordance with their 
approved bylaws. The Federal Credit Union Bylaws are hereby published as 
appendix A to part 701 pursuant to 5 U.S.C. 552(a)(1) and accompanying 
regulations. Federal credit unions may adopt amendments to their bylaws 
as provided in the Bylaws, with the approval of the Board.
    (b) Copies of the Federal Credit Union Bylaws may be obtained at 
http://www.ncua.gov or by request addressed to [email protected] or 
National Credit Union Administration, 1775 Duke Street, Alexandria, VA 
22314.
    (c) The National Credit Union Administration may issue revisions or 
amendments of the Federal Credit Union Bylaws from time to time. An 
historic file of amendments or revisions is maintained and made 
available for inspection at the National Credit Union Administration, 
1775 Duke Street, Alexandria, VA 22314.

[72 FR 61500, Oct. 31, 2007]



Sec. 701.3  Member inspection of credit union books, records, 
and minutes.

    (a) Member inspection rights. A group of members of a Federal credit 
union has the right, upon submission of a petition to the credit union 
as described in paragraph (b) of this section, to inspect and copy 
nonconfidential portions of the credit union's:
    (1) Accounting books and records; and
    (2) Minutes of the proceedings of the credit union's members, board 
of directors, and committees of directors.
    (b) Petition for inspection. The petition must describe the 
particular records to be inspected and state a proper purpose for the 
inspection, that is, a purpose related to the protection of the members' 
financial interests in the credit union. The petition must state that 
the petitioners as a whole, or certain named petitioners, agree to pay 
the direct and reasonable costs associated with search and duplication 
of requested material. The petition must also state that the inspection 
is not desired for any purpose other than the stated purpose; that the 
members signing the petition will not sell or offer for sale any 
information obtained from the credit union; and that the members signing 
the petition have not within five years preceding the signature date 
sold or offered for sale any information acquired from the credit union 
or aided or abetted any person in procuring any information from the 
credit union for purposes of sale. The petition must name one member, 
and one alternate member, who will represent the petitioners on issues 
such as inspection procedures, costs, and potential disputes. At least 
one percent of the credit union's members, with a minimum of 20 members 
and a maximum of 500 members, must sign the petition. Each member who 
signs the petition must have been a member of the credit union for at 
least 180 days at the time the petitioners submit the petition to the 
credit union.
    (c) Inspection procedures. (1) A Federal credit union must respond 
to petitioners within 14 days of receiving a petition. In its response, 
a credit union must inform petitioners either that it will provide 
inspection of the requested material and, if so, when, or, if a credit 
union is going to withhold all or part of the requested material, it 
must inform petitioners what part of the requested material it intends 
to withhold and the reasons for withholding the requested material. As 
soon as possible after receiving a petition, a credit union must 
schedule inspection and copying of nonconfidential requested material it 
determines petitioners may inspect and copy.
    (2) Inspection may be made in person or by agent or attorney and at 
any reasonable time or times. The credit union may, at its option, skip 
inspection and deliver copies of requested documents directly to the 
petitioners. Member inspection rights under this section are in addition 
to any other member inspection rights afforded by the credit union's 
charter or bylaws or other Federal law or Federal regulation.
    (3) If the credit union denies inspection because the petitioners 
have failed to obtain the minimum number of valid signatures, the credit 
union must inform the petitioners which signatures were not valid and 
why.
    (d) Confidential books, records, and minutes. Members do not have 
the right

[[Page 446]]

to inspect any portion of the books, records, or minutes of a Federal 
credit union if:
    (1) Federal law or regulation prohibits disclosure of that portion;
    (2) The publication of that portion could cause the credit union 
predictable and substantial financial harm;
    (3) That portion contains nonpublic personal information as defined 
in 12 CFR 1016.3; or
    (4) That portion contains information about credit union employees 
or officials the disclosure of which would constitute a clearly 
unwarranted invasion of personal privacy.
    (e) Costs. A Federal credit union may charge petitioners the direct 
and reasonable costs associated with search and duplication. The credit 
union may not charge for other costs, including indirect costs or 
attorney's fees.
    (f) Dispute resolution. (1) In the event of a dispute between a 
federal credit union and its members concerning a petition for 
inspection or the associated costs, either party may submit the dispute 
to the regional director. The regional director, after obtaining the 
views of both parties, will direct the credit union either to withhold 
the disputed materials or to make them available for member inspection 
and copying. The regional director may place conditions upon release. 
The decision of the regional director is a final agency decision and is 
not appealable to the Board.
    (2) The regional director has the discretion to refer any dispute to 
the credit union's supervisory committee for review and resolution. If 
petitioners are not satisfied with the supervisory committee's response, 
they may resubmit the dispute to the regional director.

[72 FR 56253, Oct. 3, 2007, as amended at 78 FR 32544, May 31, 2013]



Sec. 701.4  General authorities and duties of Federal credit union
directors.

    (a) General direction and control of a Federal credit union. The 
board of directors is responsible for the general direction and control 
of the affairs of each Federal credit union. While a Federal credit 
union board of directors may delegate the execution of operational 
functions to Federal credit union personnel, the ultimate responsibility 
of each Federal credit union's board of directors for that Federal 
credit union's direction and control is non-delegable.
    (b) Duties of Federal credit union directors. Each Federal credit 
union director has the duty to:
    (1) Carry out his or her duties as a director in good faith, in a 
manner such director reasonably believes to be in the best interests of 
the membership of the Federal credit union as a whole, and with the 
care, including reasonable inquiry, as an ordinarily prudent person in a 
like position would use under similar circumstances;
    (2) Administer the affairs of the Federal credit union fairly and 
impartially and without discrimination in favor of or against any 
particular member;
    (3) At the time of election or appointment, or within a reasonable 
time thereafter, not to exceed six months, have at least a working 
familiarity with basic finance and accounting practices, including the 
ability to read and understand the Federal credit union's balance sheet 
and income statement and to ask, as appropriate, substantive questions 
of management and the internal and external auditors; and
    (4) Direct management's operations of the Federal credit union in 
conformity with the requirements set forth in the Federal Credit Union 
Act, this chapter, other applicable law, and sound business practices.
    (c) Authority regarding staff and outside consultants. (1) In 
carrying out its duties and responsibilities, each Federal credit 
union's board of directors and all its committees have authority to 
retain staff and outside counsel, independent accountants, financial 
advisors, and other outside consultants at the expense of the Federal 
credit union.
    (2) Federal credit union staff providing services to the board of 
directors or any committee of the board under paragraph (c)(1) of this 
section may be required by the board of directors or such committee to 
report directly to the board or such committee, as appropriate.
    (3) In discharging board or committee duties a director who does not 
have

[[Page 447]]

knowledge that makes reliance unwarranted is entitled to rely on 
information, opinions, reports or statements, including financial 
statements and other financial data, prepared or presented by any of the 
persons specified in paragraph (d).
    (d) Reliance. A director may rely on:
    (1) One or more officers or employees of the Federal credit union 
who the director reasonably believes to be reliable and competent in the 
functions performed or the information, opinions, reports or statements 
provided;
    (2) Legal counsel, independent public accountants, or other persons 
retained by the Federal credit union as to matters involving skills or 
expertise the director reasonably believes are matters:
    (i) Within the particular person's professional or expert 
competence, and
    (ii) As to which the particular person merits confidence; and
    (3) A committee of the board of directors of which the director is 
not a member if the director reasonably believes the committee merits 
confidence.

[75 FR 81385, Dec. 28, 2010]



Sec. 701.5  [Reserved]



Sec. 701.6  Fees paid by Federal credit unions.

    (a) Basis for assessment. Each calendar year or as otherwise 
directed by the Board, each Federal credit union shall pay to the 
Administration for the current National Credit Union Administration 
fiscal year (January 1 to December 31) an operating fee in accordance 
with a schedule as fixed from time to time by the National Credit Union 
Administration Board based on the total assets of each Federal credit 
union as of December 31 of the preceding year or as otherwise determined 
pursuant to paragraph (b) of this section. The operating fee is 
determined based on total assets less the assets created on the books of 
a natural person Federal credit union by investments made in a corporate 
credit union under the Credit Union System Investment Program or the 
Credit Union Homeowners Affordability Relief Program.
    (b) Coverage. The operating fee shall be paid by each Federal credit 
union engaged in operations as of January 1 of each calendar year, 
except as otherwise provided by this paragraph.
    (1) New charters. A newly chartered Federal credit union will not 
pay an operating fee until the year following the first full calendar 
year after the date chartered.
    (2) Conversions. A state chartered credit union that converts to 
Federal charter will pay an operating fee in the year following the 
conversion. Federal credit unions converting to state charter will not 
receive a refund of the operating fee paid to the Administration in the 
year in which the conversion takes place.
    (3) Mergers. A continuing Federal credit union that has merged with 
another credit union will pay an operating fee in the following year 
based on the combined total assets of the merged credit union and the 
continuing Federal credit union as of December 31 of the year in which 
the merger took place. For purposes of this requirement, a purchase and 
assumption transaction wherein the continuing Federal credit union 
purchases all or essentially all of the assets of another credit union 
shall be deemed a merger. Federal credit unions merging with other 
Federal or state credit unions will not receive a refund of the 
operating fee paid to the Administration in the year in which the merger 
took place.
    (4) Liquidations. A Federal credit union placed in liquidation will 
not pay any operating fee after the date of liquidation.
    (c) Notification. Each Federal credit union shall be notified at 
least 30 days in advance of the schedule of fees to be paid. A Federal 
credit union may submit written comments to the Board for consideration 
regarding the existing fee schedule. Any subsequent revision to the 
schedule shall be provided to each Federal credit union at least 15 days 
before payment is due.
    (d) Assessment of Administrative Fee and Interest for Delinquent 
Payment. Each Federal credit union shall pay to the Administration an 
administrative fee, the costs of collection, and interest

[[Page 448]]

on any delinquent payment of its operating fee. A payment will be 
considered delinquent if it is postmarked later than the date stated in 
the notice to the credit union provided under Sec. 701.6(c). The 
National Credit Union Administration may waive or abate charges or 
collection of interest if circumstances warrant.
    (1) The administrative fee for a delinquent payment shall be an 
amount fixed from time to time by the National Credit Union 
Administration Board and based upon the administrative costs of such 
delinquent payments to the Administration in the preceding year.
    (2) The costs of collection shall be the actual hours expended by 
Administration personnel multiplied by the average hourly salary and 
benefits costs of such personnel as determined by the National Credit 
Union Administration Board.
    (3) The interest rate charged on any delinquent payment shall be the 
U.S. Department of the Treasury Tax and Loan Rate in effect on the date 
when the payment is due as provided in 31 U.S.C. 3717.
    (4) If a credit union makes a combined payment of its operating fee 
and its share insurance deposit as provided in Sec. 741.4 of this 
chapter and such payment is delinquent, only one administrative fee will 
be charged and interest will be charged on the total combined payment.

[44 FR 27380, May 10, 1979, as amended at 50 FR 20745, May 20, 1985; 55 
FR 1799, Jan. 19, 1990; 59 FR 33421, June 29, 1994; 60 FR 58503, Nov. 
28, 1995; 74 FR 29936, June 24, 2009]



Secs. 701.7-701.13  [Reserved]



Sec. 701.14  Change in official or senior executive officer in credit
unions that are newly chartered or are in troubled condition.

    (a) Statement of scope and purpose. Section 212 of the Federal 
Credit Union Act (12 U.S.C. 1790a) sets forth conditions under which a 
credit union must notify NCUA in writing of any proposed changes in its 
board of directors, committee members or senior executive staff. The 
regulation only applies in cases of newly chartered credit unions and 
credit unions in troubled condition.
    (b) Definitions. For the purposes of this section:
    (1) Committee member means any individual who serves as an official 
of the credit union in the capacity of a credit committee member or 
supervisory committee member.
    (2) Senior executive officer means a credit union's chief executive 
officer (typically this individual holds the title of president or 
treasurer/manager), any assistant chief executive officer (e.g., any 
assistant president, any vice president or any assistant treasurer/
manager) and the chief financial officer (controller). The term ``senior 
executive officer'' also includes employees of an entity, such as a 
consulting firm, hired to perform the functions of positions covered by 
the regulation.
    (3) In the case of an insured natural person credit union, Troubled 
condition means:
    (i) A federal credit union that has been assigned a 4 or 5 CAMEL 
composite rating by NCUA; or
    (ii) A federally insured, state-chartered credit union that has been 
assigned a 4 or 5 CAMEL composite rating by either NCUA, after an on-
site contact, or its state supervisor; or
    (iii) A federal credit union or a federally insured, state-chartered 
credit union that has been granted assistance under section 208 of the 
Federal Credit Union Act, 12 U.S.C. 1788, that remains outstanding and 
unextinguished.
    (4) In the case of an insured corporate credit union, Troubled 
condition means:
    (i) A Federal credit union that has been assigned a 4 or 5 CAMEL 
rating by NCUA; or
    (ii) A federally insured, state-chartered credit union that has been 
assigned a 4 or 5 CAMEL rating by either NCUA, after an on-site contact, 
or its state supervisor; or
    (iii) A Federal credit union or a federally insured, state-chartered 
credit union that has been granted assistance under section 208 of the 
Federal Credit Union Act, 12 U.S.C. 1788, that remains outstanding and 
unextinguished.
    (c) Procedures for Notice of Proposed Change in Official or Senior 
Executive Officer--(1) Prior Notice Requirement. An insured credit union 
must give NCUA written notice at least 30 days before

[[Page 449]]

the effective date of any addition or replacement of a member of the 
board of directors or committee member or the employment or change in 
responsibilities of any individual to a position of senior executive 
officer if:
    (i) The credit union has been chartered for less than two years; or
    (ii) The credit union meets the definition of troubled condition in 
paragraph (b)(3) or (4) of this section.
    (2) Waiver of Prior Notice--(i) Waiver requests. Parties may 
petition the appropriate Regional Director for a waiver of the prior 
notice required under this section. Waiver may be granted if it is found 
that delay could harm the credit union or the public interest.
    (ii) Automatic waiver. In the case of the election of a new member 
of the board of directors or credit committee member at a meeting of the 
members of a federally insured credit union, the prior 30-day notice is 
automatically waived and the individual may immediately begin serving, 
provided that a complete notice is filed with the appropriate Regional 
Director within 48 hours of the election. If NCUA disapproves a director 
or credit committee member, the board of directors of the credit union 
may appoint its own alternate, to serve until the next annual meeting, 
contingent on NCUA approval.
    (iii) Effect on disapproval authority. A waiver does not affect the 
authority of NCUA to issue a Notice of Disapproval within 30 days of the 
waiver or within 30 days of any subsequent required notice.
    (3) Filing procedures--(i) Where to file. Notices will be filed with 
the appropriate Regional Director or, in the case of a corporate credit 
union, with the Director of the Office of National Examinations and 
Supervision. All references to Regional Director will, for corporate 
credit unions, mean the Director of Office of National Examinations and 
Supervision. State-chartered federally insured credit unions will also 
file a copy of the notice with their state supervisor.
    (ii) Contents. The notice must contain information about the 
competence, experience, character, or integrity of the individual on 
whose behalf the notice is submitted. The Regional Director or his or 
her designee may require additional information. The information 
submitted must include the identity, personal history, business 
background, and experience of the individual, including material 
business activities and affiliations during the past five years, and a 
description of any material pending legal or administrative proceedings 
in which the individual is a party and any criminal indictment or 
conviction of the individual by a state or federal court. Each 
individual on whose behalf the notice is filed must attest to the 
validity of the information filed. At the option of the individual, the 
information may be forwarded to the Regional Director by the individual; 
however, in such cases, the credit union must file a notice to that 
effect.
    (iii) Processing. Within ten calendar days after receiving the 
notice, the Regional Director will inform the credit union either that 
the notice is complete or that additional, specified information is 
needed and must be submitted within 30 calendar days. If the initial 
notice is complete, the Regional Director will issue a written decision 
of approval or disapproval to the individual and the credit union within 
30 calendar days of receipt of the notice. If the initial notice is not 
complete, the Regional Director will issue a written decision within 30 
calendar days of receipt of the original notice plus the amount of time 
the credit union takes to provide the requested additional information. 
If the additional information is not submitted within 30 calendar days 
of the Regional Director's request, the Regional Director may either 
disapprove the proposed individual or review the notice based on the 
information provided. If the credit union and the individual have 
submitted all requested information and the Regional Director has not 
issued a written decision within the applicable time period, the 
individual is approved.
    (d) Commencement of Service. A proposed director, committee member, 
or senior executive officer may begin service after the end of the 30-
day period or any other additional period as provided under paragraph 
(c)(3)(iii) of

[[Page 450]]

this section, unless the NCUA disapproves the notice before the end of 
the period.
    (e) Notice of disapproval. NCUA may disapprove the individual's 
serving as a director, committee member or senior executive officer if 
it finds that the competence, experience, character, or integrity of the 
individual with respect to whom a notice under this section is submitted 
indicates that it would not be in the best interests of the members of 
the credit union or of the public to permit the individual to be 
employed by, or associated with, the credit union. The Notice of 
Disapproval will advise the parties of their rights of appeal pursuant 
to 12 CFR part 747 subpart J, of NCUA's Regulations.

[55 FR 43086, Oct. 26, 1990, as amended at 59 FR 36042, July 15, 1994; 
60 FR 31911, June 19, 1995; 64 FR 28717, May 27, 1999; 66 FR 65624, Dec. 
20, 2001; 69 FR 62562, Oct. 27, 2004; 75 FR 34620, June 18, 2010; 78 FR 
4029, Jan. 18, 2013; 78 FR 32544, May 31, 2013; 78 FR 77564, Dec. 26, 
2013]



Secs. 701.15-701.18  [Reserved]



Sec. 701.19  Benefits for employees of Federal credit unions.

    (a) General authority. A federal credit union may provide employee 
benefits, including retirement benefits, to its employees and officers 
who are compensated in conformance with the Act and the bylaws, 
individually or collectively with other credit unions. The kind and 
amount of these benefits must be reasonable given the federal credit 
union's size, financial condition, and the duties of the employees.
    (b) Plan trustees and custodians. Where a federal credit union is 
the benefit plan trustee or custodian, the plan must be authorized and 
maintained in accordance with the provisions of part 724 of this 
chapter. Where the benefit plan trustee or custodian is a party other 
than a federal credit union, the benefit plan must be maintained in 
accordance with applicable laws governing employee benefit plans, 
including any applicable rules and regulations issued by the Secretary 
of Labor, the Secretary of the Treasury, or any other federal or state 
authority exercising jurisdiction over the plan.
    (c) Investment authority. A federal credit union investing to fund 
an employee benefit plan obligation is not subject to the investment 
limitations of the Act and part 703 or, as applicable, part 704, of this 
chapter and may purchase an investment that would otherwise be 
impermissible if the investment is directly related to the federal 
credit union's obligation or potential obligation under the employee 
benefit plan and the federal credit union holds the investment only for 
as long as it has an actual or potential obligation under the employee 
benefit plan.
    (d) Defined benefit plans. Under paragraph (c) of this section, a 
federal credit union may invest to fund a defined benefit plan if the 
investment meets the conditions provided in that paragraph. If a federal 
credit union invests to fund a defined benefit plan that is not subject 
to the fiduciary responsibility provisions of part 4 of the Employee 
Retirement Income Security Act of 1974, it should diversify its 
investment portfolio to minimize the risk of large losses unless it is 
clearly prudent not to do so under the circumstances.
    (e) Liability insurance. No federal credit union may occupy the 
position of a fiduciary, as defined in the Employee Retirement Income 
Security Act of 1974 and the rules and regulations issued by the 
Secretary of Labor, unless it has obtained appropriate liability 
insurance as described and permitted by Section 410(b) of the Employee 
Retirement Income Security Act of 1974.
    (f) Definitions. For this section, defined benefit plan has the same 
meaning as in 29 U.S.C. 1002(35) and employee benefit plan has the same 
meaning as in 29 U.S.C. 1002(3).

[68 FR 23027, Apr. 30, 2003]



Sec. 701.20  Suretyship and guaranty.

    (a) Scope. This section authorizes a federal credit union to enter 
into a suretyship or guaranty agreement as an incidental powers 
activity. This section does not apply to the guaranty of public deposits 
or the assumption of liability for member accounts.
    (b) Definitions. A suretyship binds a federal credit union with its 
principal to pay or perform an obligation to a third person. Under a 
guaranty agreement, a federal credit union agrees to

[[Page 451]]

satisfy the obligation of the principal only if the principal fails to 
pay or perform. The principal is the person primarily liable, for whose 
performance of his obligation the surety or guarantor has become bound.
    (c) Requirements. The suretyship or guaranty agreement must be for 
the benefit of a principal that is a member and is subject to the 
following conditions:
    (1) The federal credit union limits its obligations under the 
agreement to a fixed dollar amount and a specified duration;
    (2) The federal credit union's performance under the agreement 
creates an authorized loan that complies with the applicable lending 
regulations, including the limitations on loans to one member or 
associated members or officials for purposes of Secs. 701.21(c)(5), (d); 
723.2 and 723.8; and
    (3) The federal credit union obtains a segregated deposit from the 
member that is sufficient in amount to cover the federal credit union's 
total potential liability.
    (d) Collateral. A segregated deposit under this section includes 
collateral:
    (1) In which the federal credit union has perfected its security 
interest (for example, if the collateral is a printed security, the 
federal credit union must have obtained physical control of the 
security, and, if the collateral is a book entry security, the federal 
credit union must have properly recorded its security interest); and
    (2) That has a market value, at the close of each business day, 
equal to 100 percent of the federal credit union's total potential 
liability and is composed of:
    (i) Cash;
    (ii) Obligations of the United States or its agencies;
    (iii) Obligations fully guaranteed by the United States or its 
agencies as to principal and interest; or
    (iv) Notes, drafts, or bills of exchange or banker's acceptances 
that are eligible for rediscount or purchase by a Federal Reserve Bank; 
or
    (3) That has a market value equal to 110 percent of the federal 
credit union's total potential liability and is composed of:
    (i) Real estate, the value of which is established by a signed 
appraisal or evaluation in accordance with part 722 of this chapter. In 
determining the value of the collateral, the federal credit union must 
factor in the value of any existing senior mortgages, liens or other 
encumbrances on the property except those held by the principal to the 
suretyship or guaranty agreement; or
    (ii) Marketable securities that the federal credit union is 
authorized to invest in. The federal credit union must ensure that the 
value of the security is 110 percent of the obligation at all times 
during the term of the agreement.

[69 FR 8547, Feb. 25, 2004]



Sec. 701.21  Loans to members and lines of credit to members.

    (a) Statement of scope and purpose. Section 701.21 complements the 
provisions of section 107(5) of the Federal Credit Union Act (12 U.S.C. 
1757(5)) authorizing Federal credit unions to make loans to members and 
issue lines of credit (including credit cards) to members. Section 
107(5) of the Act contains limitations on matters such as loan maturity, 
rate of interest, security, and prepayment penalties. Section 701.21 
interprets and implements those provisions. In addition, Sec. 701.21 
states the NCUA Board's intent concerning preemption of state laws, and 
expands the authority of Federal credit unions to enforce due-on-sale 
clauses in real property loans. Also, while Sec. 701.21 generally 
applies to Federal credit unions only, certain provisions apply to loans 
made by federally insured, state-chartered credit unions as specified in 
Sec. 741.203 of this chapter. Part 722 of this chapter sets forth 
requirements for appraisals for certain real estate secured loans made 
under Sec. 701.21 and any other applicable lending authority. Finally, 
it is noted that Sec. 701.21 does not apply to loans by Federal credit 
unions to other credit unions (although certain statutory limitations in 
section 107 of the Act apply), nor to loans to credit union 
organizations which are governed by section 107(5)(D) of the Act and 
part 712 of this chapter.

[[Page 452]]

    (b) Relation to other laws--(1) Preemption of state laws. Section 
701.21 is promulgated pursuant to the NCUA Board's exclusive authority 
as set forth in section 107(5) of the Federal Credit Union Act (12 U.S.C 
1757(5)) to regulate the rates, terms of repayment and other conditions 
of Federal credit union loans and lines of credit (including credit 
cards) to members. This exercise of the Board's authority preempts any 
state law purporting to limit or affect:
    (i)(A) Rates of interest and amounts of finance charges, including:
    (1) The frequency or the increments by which a variable interest 
rate may be changed;
    (2) The index to which a variable interest rate may be tied;
    (3) The manner or timing of notifying the borrower of a change in 
interest rate;
    (4) The authority to increase the interest rate on an existing 
balance;
    (B) Late charges; and
    (C) Closing costs, application, origination, or other fees;
    (ii) Terms of repayment, including:
    (A) The maturity of loans and lines of credit;
    (B) The amount, uniformity, and frequency of payments, including the 
accrual of unpaid interest if payments are insufficient to pay all 
interest due;
    (C) Balloon payments; and
    (D) Prepayment limits;
    (iii) Conditions related to:
    (A) The amount of the loan or line of credit;
    (B) The purpose of the loan or line of credit;
    (C) The type or amount of security and the relation of the value of 
the security to the amount of the loan or line of credit;
    (D) Eligible borrowers; and
    (E) The imposition and enforcement of liens on the shares of 
borrowers and accommodation parties.
    (2) Matters not preempted. Except as provided by paragraph (b)(1) of 
this section, it is not the Board's intent to preempt state laws that do 
not affect rates, terms of repayment and other conditions described 
above concerning loans and lines of credit, for example:
    (i) Insurance laws;
    (ii) Laws related to transfer of and security interests in real and 
personal property (see, however, paragraph (g)(6) of this section 
concerning the use and exercise of due-on-sale clauses);
    (iii) Conditions related to:
    (A) Collection costs and attorneys' fees;
    (B) Requirements that consumer lending documents be in ``plain 
language;'' and
    (C) The circumstances in which a borrower may be declared in default 
and may cure default.
    (3) Other Federal law. Except as provided by paragraph (b)(1) of 
this section, it is not the Board's intent to preempt state laws 
affecting aspects of credit transactions that are primarily regulated by 
Federal law other than the Federal Credit Union Act, for example, state 
laws concering credit cost disclosure requirements, credit 
discrimination, credit reporting practices, unfair credit practices, and 
debt collection practices. Applicability of state law in these instances 
should be determined pursuant to the preemption standards of the 
relevant Federal law and regulations.
    (4) Examination and enforcement. Except as otherwise agreed by the 
NCUA Board, the Board retains exclusive examination and administrative 
enforcement jurisdiction over Federal credit unions. Violations of 
Federal or applicable state laws related to the lending activities of a 
Federal credit union should be referred to the appropriate NCUA regional 
office.
    (5) Definition of State law. For purposes of paragraph (b) of this 
section ``state law'' means the constitution, laws, regulations and 
judicial decisions of any state, the District of Columbia, the several 
territories and possessions of the United States, and the Commonwealth 
of Puerto Rico.
    (c) General rules--(1) Scope. The following general rules apply to 
all loans to members and, where indicated, all lines of credit 
(including credit cards) to members, except as otherwise provided in the 
remaining provisions of Sec. 701.21.
    (2) Written policies. The board of directors of each Federal credit 
union shall establish written policies for loans and

[[Page 453]]

lines of credit consistent with the relevant provisions of the Act, 
NCUA's regulations, and other applicable laws and regulations.
    (3) Credit applications and overdrafts. Consistent with policies 
established by the board of directors, the credit committee or loan 
officer shall ensure that a credit application is kept on file for each 
borrower supporting the decision to make a loan or establish a line of 
credit. A credit union may advance money to a member to cover an account 
deficit without having a credit application from the borrower on file if 
the credit union has a written overdraft policy. The policy must: set a 
cap on the total dollar amount of all overdrafts the credit union will 
honor consistent with the credit union's ability to absorb losses; 
establish a time limit not to exceed forty-five calendar days for a 
member either to deposit funds or obtain an approved loan from the 
credit union to cover each overdraft; limit the dollar amount of 
overdrafts the credit union will honor per member; and establish the fee 
and interest rate, if any, the credit union will charge members for 
honoring overdrafts.
    (4) Maturity. The maturity of a loan to a member may not exceed 15 
years. Lines of credit are not subject to a statutory or regulatory 
maturity limit. Amortization of line of credit balances and the type and 
amount of security on any line of credit shall be as determined by 
contract between the Federal credit union and the member/borrower.
    (5) Ten percent limit. No loan or line of credit advance may be made 
to any member if such loan or advance would cause that member to be 
indebted to the Federal credit union upon loans and advances made to the 
member in an aggregate amount exceeding 10% of the credit union's total 
unimpaired capital and surplus. In the case of member business loans as 
defined in Sec. 723.1 of this chapter, additional limitations apply as 
set forth in Secs. 723.8 and 723.9 of this chapter.
    (6) Early payment. A member may repay a loan, or outstanding balance 
on a line of credit, prior to maturity in whole or in part on any 
business day without penalty.
    (7) Loan interest rates--(i) General. Except when the Board 
establishes a higher maximum rate, federal credit unions may not extend 
credit to members at rates exceeding 15 percent per year on the unpaid 
balance inclusive of all finance charges. Federal credit unions may use 
variable rates of interest but only if the effective rate over the term 
of a loan or line of credit does not exceed the maximum permissible 
rate.
    (ii) Temporary rates. (A) At least every 18 months, the Board will 
determine if federal credit unions may extend credit to members at an 
interest rate exceeding 15 percent. After consultation with appropriate 
congressional committees, the Department of Treasury, and other federal 
financial institution regulatory agencies, the Board may establish a 
rate exceeding the 15 percent per year rate, if it determines money 
market interest rates have risen over the preceding six-month period and 
prevailing interest rate levels threaten the safety and soundness of 
individual federal credit unions as evidenced by adverse trends in 
liquidity, capital, earnings, and growth.
    (B) When the Board establishes a higher maximum rate, the Board will 
provide notice to federal credit unions of the adjusted rate by issuing 
a Letter to Federal Credit Unions, as well as providing information in 
other NCUA publications and in a statement for the press.
    (C) Federal credit unions may continue to charge rates exceeding the 
established maximum rate only on existing loans or lines of credit made 
before the effective date of any lowering of the maximum rate.
    (iii) Payday alternative Loans (PAL loans). (A) Notwithstanding the 
provisions in Sec. 701.21(c)(7)(ii), a Federal credit union may charge 
an interest rate of 1000 basis points above the maximum interest rate as 
established by the Board, provided the Federal credit union is making a 
closed-end loan in accordance with the following conditions:
    (1) The principal of the loan is not less than $200 or more than 
$1000;
    (2) The loan has a minimum maturity term of one month and a maximum 
maturity term of six months;

[[Page 454]]

    (3) The Federal credit union does not make more than three PAL loans 
in any rolling six-month period to any one borrower and makes no more 
than one payday alternative loan at a time to a borrower;
    (4) The Federal credit union must not roll-over any PAL loan;
    (A) The prohibition against roll-overs does not apply to an 
extension of the loan term within the maximum loan terms in paragraph 
(c)(7)(iii)(3) provided the Federal credit union does not charge any 
additional fees or extend any new credit.
    (B) [Reserved]
    (5) The Federal credit union fully amortizes the loan;
    (6) The Federal credit union sets a minimum length of membership 
requirement of at least one month;
    (7) The Federal credit union charges an application fee to all 
members applying for a new loan that reflects the actual costs 
associated with processing the application, but in no case may the 
application fee exceed $20; and
    (8) The Federal credit union includes, in its written lending 
policies, a limit on the aggregate dollar amount of loans made under 
this section of a maximum of 20% of net worth and implements appropriate 
underwriting guidelines to minimize risk; for example, requiring a 
borrower to verify employment by producing at least two recent pay 
stubs.
    (B) PAL Loan Program guidance and best practices. In developing a 
successful PAL loan program, a Federal credit union should consider how 
the program will help benefit a member's financial well-being while 
considering the higher degree of risk associated with this type of 
lending. The guidance and best practices are intended to help Federal 
credit unions minimize risk and develop a successful program, but are 
not an exhaustive checklist and do not guarantee a successful program 
with a low degree of risk.
    (1) Program features. Several features that may increase the success 
of a PAL loan program and enhance member benefit include adding a 
savings component, financial education, reporting of members' payment of 
PAL loans to credit bureaus, or electronic loan transactions as part of 
a PAL program. In addition, although a Federal credit union cannot 
require members to authorize a payroll deduction, a Federal credit union 
should encourage or incentivize members to utilize payroll deduction.
    (2) Underwriting. Federal credit unions need to develop minimum 
underwriting standards that account for a member's need for quickly 
available funds, while adhering to principles of responsible lending. 
Underwriting standards should address required documentation for proof 
of employment or income, including at least two recent paycheck stubs. 
FCUs should be able to use a borrower's proof of recurring income as the 
key criterion in developing standards for maturity lengths and loan 
amounts so a borrower can manage repayment of the loan. For members with 
established accounts, FCUs should only need to review a member's account 
records and proof of recurring income or employment.
    (3) Risk avoidance. Federal credit unions need to consider risk 
avoidance strategies, including: requiring members to participate in 
direct deposit and conducting a thorough evaluation of the Federal 
credit union's resources and ability to engage in a PAL loan program.
    (8)(i) Except as otherwise provided herein, no official or employee 
of a Federal credit union, or immediate family member of an official or 
employee of a Federal credit union, may receive, directly or indirectly, 
any commission, fee, or other compensation in connection with any loan 
made by the credit union.
    (ii) For the purposes of this section:
    Compensation includes non-monetary items, except those of nominal 
value.
    Immediate family member means a spouse or other family member living 
in the same household.
    Loan includes line of credit.
    Official means any member of the board of directors or a volunteer 
committee.
    Person means an individual or an organization.
    Senior management employee means the credit union's chief executive 
officer (typically, this individual holds the

[[Page 455]]

title of President or Treasurer/Manager), any assistant chief executive 
officers (e.g., Assistant President, Vice President, or Assistant 
Treasurer/Manager), and the chief financial officer (Comptroller).
    Volunteer official means an official of a credit union who does not 
receive compensation from the credit union solely for his or her service 
as an official.
    (iii) This section does not prohibit:
    (A) Payment, by a Federal credit union, of salary to employees;
    (B) Payment, by a Federal credit union, of an incentive or bonus to 
an employee based on the credit union's overall financial performance;
    (C) Payment, by a Federal credit union, of an incentive or bonus to 
an employee, other than a senior management employee, in connection with 
a loan or loans made by the credit union, provided that the board of 
directors of the credit union establishes written policies and internal 
controls in connection with such incentive or bonus and monitors 
compliance with such policies and controls at least annually.
    (D) Receipt of compensation from a person outside a Federal credit 
union by a volunteer official or non-senior-management employee of the 
credit union, or an immediate family member of a volunteer official or 
employee of the credit union, for a service or activity performed 
outside the credit union, provided that no referral has been made by the 
credit union or the official, employee, or family member.
    (d) Loans and lines of credit to officials--(1) Purpose. Sections 
107(5)(A) (iv) and (v) of the Act require the approval of the board of 
directors of the Federal credit union in any case where the aggregate of 
loans to an official and loans on which the official serves as endorser 
or guarantor exceeds $20,000 plus pledged shares. This paragraph 
implements the requirement by establishing procedures for determining 
whether board of directors's approval is required. The section also 
prohibits preferential treatment of officials.
    (2) Official. An ``official'' is any member of the board of 
directors, credit committee or supervisory committee.
    (3) Initial approval. All applications for loans or lines of credit 
on which an official will be either a direct obligor or an endorser, 
cosigner or guarantor shall be initially acted upon by either the board 
of directors, the credit committee or a loan officer, as specified in 
the Federal credit union's bylaws.
    (4) Board of Directors' review. The board of directors shall, in any 
case, review and approve or deny an application on which an official is 
a direct obligor, endorser, cosigner or guarantor if the following 
computation produces a total in excess of $20,000:
    (i) Add:
    (A) The amount of the current application.
    (B) The outstanding balances of loans, including the used portion of 
an approved line of credit, extended to or endorsed, cosigned or 
guaranteed by the official.
    (C) The total unused portion of approved lines of credit extended to 
or endorsed, cosigned or guaranteed by the official.
    (ii) From the above total subtract:
    (A) The amount of shares pledged by the official on loans or lines 
of credit extended to or endorsed, cosigned or guaranteed by the 
official.
    (B) The amount of shares to be pledged by the official on the loan 
or line of credit applied for.
    (5) Nonpreferential treatment. The rates, terms and conditions on 
any loan or line of credit either made to, or endorsed or guaranteed 
by--
    (i) An official,
    (ii) An immediate family member of an official, or
    (iii) Any individual having a common ownership, investment or other 
pecuniary interest in a business enterprise with an official or with an 
immediate family member of an official

shall not be more favorable than the rates, terms and conditions for 
comparable loans or lines of credit to other credit union members. 
``Immediate family member'' means a spouse or other family member living 
in the same household.
    (e) Insured, Guaranteed and Advance Commitment Loans. A loan 
secured, in full or in part, by the insurance or guarantee of, or with 
an advance commitment to purchase the loan, in full or in part, by the 
Federal Government, a State government or any agency of

[[Page 456]]

either, may be made for the maturity and under the terms and conditions, 
including rate of interest, specified in the law, regulations or program 
under which the insurance, guarantee or commitment is provided.
    (f) 20-Year Loans. (1) Notwithstanding the general 15-year maturity 
limit on loans to members, a federal credit union may make loans with 
maturities of up to 20 years in the case of:
    (i) A loan to finance the purchase of a mobile home if the mobile 
home will be used as the member-borrower's residence and the loan is 
secured by a first lien on the mobile home, and the mobile home meets 
the requirements for the home mortgage interest deduction under the 
Internal Revenue Code,
    (ii) A second mortgage loan (or a nonpurchase money first mortgage 
loan in the case of a residence on which there is no existing first 
mortgage) if the loan is secured by a residential dwelling which is the 
residence of the member-borrower, and
    (iii) A loan to finance the repair, alteration, or improvement of a 
residential dwelling which is the residence of the member-borrower.
    (2) For purposes of this paragraph (f), mobile home may include a 
recreational vehicle, house trailer or boat.
    (3) Notwithstanding the general 20-year maturity limit on second 
mortgage loans, a federal credit union participating in the Department 
of the Treasury's Making Home Affordable Program may extend the term of 
a modified second mortgage to match the term of a modified first 
mortgage, in accordance with applicable program guidelines.
    (g) Long-Term Mortgage Loans--(1) Authority. A federal credit union 
may make residential real estate loans to members, including loans 
secured by manufactured homes permanently affixed to the land, with 
maturities of up to 40 years, or such longer period as may be permitted 
by the NCUA Board on a case-by-case basis, subject to the conditions of 
this paragraph (g).
    (2) Statutory limits. The loan shall be made on a one to four family 
dwelling that is or will be the principal residence of the member-
borrower and the loan shall be secured by a perfected first lien in 
favor of the credit union on such dwelling (or a perfected first 
security interest in the case of either a residential cooperative or a 
leasehold or ground rent estate).
    (3) Loan application. The loan application shall be a completed 
standard Federal Housing Administration, Veterans Administration, 
Federal Home Loan Mortgage Corporation, Federal National Mortgage 
Association or Federal Home Loan Mortgage Corporation/Federal National 
Mortgage Association application form. In lieu of use of a standard 
application the Federal credit union may have a current attorney's 
opinion on file stating that the forms in use meet the requirements of 
applicable Federal, state and local laws.
    (4) Security instrument and note. The security instrument and note 
shall be executed on the most current version of the FHA, VA, FHLMC, 
FNMA, or FHLMC/FNMA Uniform Instruments for the jurisdiction in which 
the property is located. No prepayment penalty shall be allowed, 
although a Federal credit union may require that any partial prepayments 
be made on the date monthly installments are due and be in the amount of 
that part of one or more monthly installments that would be applicable 
to principal. In lieu of use of a standard security instrument and note, 
the Federal credit union may have a current attorney's opinion on file 
stating that the security instrument and note in use meet the 
requirements of applicable Federal, state and local laws.
    (5) First lien, territorial limits. The loan shall be secured by a 
perfected first lien or first security interest in favor of the credit 
union supported by a properly executed and recorded security instrument. 
No loan shall be secured by a residence located outside the United 
States of America, its territories and possessions, or the Commonwealth 
of Puerto Rico.
    (6) Due-on-sale clauses. (i) Except as otherwise provided herein, 
the exercise of a due-on-sale clause by a Federal credit union is 
governed exclusively by section 341 of Pub. L. 97-320 and by any 
regulations issued by the Federal Home Loan Bank Board implementing 
section 341.
    (ii) In the case of a contract involving a long-term (greater than 
fifteen

[[Page 457]]

years), fixed rate first mortgage loan which was made or assumed, 
including a transfer of the liened property subject to the loan, during 
the period beginning on the date a State adopted a constitutional 
provision or statute prohibiting the exercise of due-on-sale clauses, or 
the date on which the highest court of such state has rendered a 
decision (or if the highest court has not so decided, the date on which 
the next highest court has rendered a decision resulting in a final 
judgment if such decision applies statewide) prohibiting such exercise, 
and ending on October 15, 1982, a Federal credit union may exercise a 
due-on-sale clause in the case of a transfer which occurs on or after 
November 18, 1982, unless exercise of the due-on-sale clause would be 
based on any of the following:
    (A) The creation of a lien or other encumbrance subordinate to the 
lender's security instrument which does not relate to a transfer of 
rights of occupancy in the property;
    (B) The creation of a purchase money security interest for household 
appliances;
    (C) A transfer by devise, descent, or operation of law on the death 
of a joint tenant or tenant by the entirety;
    (D) The granting of a leasehold interest of 3 years or less not 
containing an option to purchase;
    (E) A transfer to a relative resulting from the death of a borrower;
    (F) A transfer where the spouse or children of the borrower become 
an owner of the property;
    (G) A transfer resulting from a decree of a dissolution of marriage, 
a legal separation agreement, or from an incidental property settlement 
agreement, by which the spouse of the borrower becomes an owner of the 
property;
    (H) A transfer into an inter vivos trust in which the borrower is 
and remains a beneficiary and which does not relate to a transfer of 
rights of occupancy in the property; or
    (I) Any other transfer or disposition described in regulations 
promulgated by the Federal Home Loan Bank Board.
    (7) Assumption of real estate loans by nonmembers. A Federal credit 
union may permit a nonmember to assume a member's mortgage loan in 
conjunction with the nonmember's purchase of the member's principal 
residence, provided that the nonmember assumes only the remaining unpaid 
balance of the loan, the terms of the loan remain unchanged, and there 
is no extension of the original maturity date specified in the loan 
agreement with the member. An assumption is impermissible if the 
original loan was made with the intent of having a nonmember assume the 
loan.
    (h) Third-party servicing of indirect vehicle loans. (1) A 
federally-insured credit union must not acquire any vehicle loan, or any 
interest in a vehicle loan, serviced by a third-party servicer if the 
aggregate amount of vehicle loans and interests in vehicle loans 
serviced by that third-party servicer and its affiliates would exceed:
    (i) 50 percent of the credit union's net worth during the initial 
thirty months of that third-party servicing relationship; or
    (ii) 100 percent of the credit union's net worth after the initial 
thirty months of that third-party servicing relationship.
    (2) Regional directors may grant a waiver of the limits in paragraph 
(h)(1) of this section to permit greater limits upon written application 
by a credit union. In determining whether to grant or deny a waiver, a 
regional director will consider:
    (i) The credit union's understanding of the third-party servicer's 
organization, business model, financial health, and the related program 
risks;
    (ii) The credit union's due diligence in monitoring and protecting 
against program risks;
    (iii) If contracts between the credit union and the third-party 
servicer grant the credit union sufficient control over the servicer's 
actions and provide for replacing an inadequate servicer; and
    (iv) Other factors relevant to safety and soundness.
    (3) A regional director will provide a written determination on a 
waiver request within 45 calendar days after receipt of the request; 
however, the 45-day period will not begin until the requesting credit 
union has submitted all necessary information to the regional director. 
If the regional director does not provide a written determination

[[Page 458]]

within the 45-day period the request is deemed denied. A credit union 
may appeal any part of the determination to the NCUA Board. Appeals must 
be submitted through the regional director within 30 days of the date of 
the determination.
    (4) For purposes of paragraph (h) of this section:
    (i) The term ``third-party servicer'' means any entity, other than a 
federally-insured depository institution or a wholly-owned subsidiary of 
a federally-insured depository institution, that receives any scheduled, 
periodic payments from a borrower pursuant to the terms of a loan and 
distributes payments of principal and interest and any other payments 
with respect to the amounts received from the borrower as may be 
required pursuant to the terms of the loan. The term also excludes any 
servicing entity that meets the following three requirements:
    (A) Has a majority of its voting interests owned by federally-
insured credit unions;
    (B) Includes in its servicing agreements with credit unions a 
provision that the servicer will provide NCUA with complete access to 
its books and records and the ability to review its internal controls as 
deemed necessary by NCUA in carrying out NCUA's responsibilities under 
the Act; and
    (C) Has its credit union clients provide a copy of the servicing 
agreement to their regional directors.
    (ii) The term ``its affiliates,'' as it relates to the third-party 
servicer, means any entities that:
    (A) Control, are controlled by, or are under common control with, 
that third-party servicer; or
    (B) Are under contract with that third-party servicer or other 
entity described in paragraph (h)(4)(ii)(A) of this section.
    (iii) The term ``vehicle loan'' means any installment vehicle sales 
contract or its equivalent that is reported as an asset under generally 
accepted accounting principles. The term does not include:
    (A) Loans made directly by a credit union to a member, or
    (B) Loans in which neither the third-party servicer nor any of its 
affiliates are involved in the origination, underwriting, or insuring of 
the loan or the process by which the credit union acquires its interest 
in the loan.
    (iv) The term ``net worth'' means the retained earnings balance of 
the credit union at quarter end as determined under generally accepted 
accounting principles and as further defined in Sec. 702.2(f) of this 
chapter.
    (i) Put option purchases in managing increased interest-rate risk 
for real estate loans produced for sale on the secondary market--(1) 
Definitions. For purposes of Sec. 701.21(i):
    (i) Financial options contract means an agreement to make or take 
delivery of a standardized financial instrument upon demand by the 
holder of the contract at any time prior to the expiration date 
specified in the agreement, under terms and conditions established 
either by:
    (A) A contract market designated for trading such contracts by the 
Commodity Futures Trading Commission, or
    (B) By a Federal credit union and a primary dealer in Government 
securities that are counterparties in an over-the-counter transaction.
    (ii) FHLMC security means obligations or other securities which are 
or ever have been sold by the Federal Home Loan Mortgage Corporation 
pursuant to section 305 or 306 of the Federal Home Loan Mortgage 
Corporation Act (12 U.S.C. 1454 and 1455).
    (iii) FNMA security means an obligation, participation, or any 
instrument of or issued by, or fully guaranteed as to principal and 
interest by, the Federal National Mortgage Association.
    (iv) GNMA security means an obligation, participation, or any 
instrument of or issued by, or fully guaranteed as to principal and 
interest by, the Government National Mortgage Association.
    (v) Long position means the holding of a financial options contract 
with the option to make or take delivery of a financial instrument.
    (vi) Primary dealer in Government securities means:
    (A) A member of the Association of Primary Dealers in United States 
Government Securities; or
    (B) Any parent, subsidiary, or affiliated entity of such primary 
dealer

[[Page 459]]

where the member guarantees (to the satisfaction of the FCU's board of 
directors) over-the-counter sales of financial options contracts by the 
parent, subsidiary, or affiliated entity to a Federal credit union.
    (vii) Put means a financial options contract which entitles the 
holder to sell, entirely at the holder's option, a specified quantity of 
a security at a specified price at any time until the stated expiration 
date of the contract.
    (2) Permitted options transactions. A Federal credit union may, to 
manage risk of loss through a decrease in value of its commitments to 
originate real estate loans at specified interest rates, enter into long 
put positions on GNMA, FNMA, and FHLMC securities:
    (i) If the real estate loans are to be sold on the secondary market 
within ninety (90) days of closing;
    (ii) If the positions are entered into:
    (A) Through a contract market designated by the Commodity Futures 
Trading Commission for trading such contracts, or
    (B) With a primary dealer in Government securities;
    (iii) If the positions are entered into pursuant to written policies 
and procedures which are approved by the Federal credit union's board of 
directors, and include, at a minimum:
    (A) The Federal credit union's strategy in using financial options 
contracts and its analysis of how the strategy will reduce sensitivity 
to changes in price or interest rates in its commitments to originate 
real estate loans at specified interest rates;
    (B) A list of brokers or other intermediaries through which 
positions may be entered into;
    (C) Quantitative limits (e.g., position and stop loss limits) on the 
use of financial options contracts;
    (D) Identification of the persons involved in financial options 
contract transactions, including a description of these persons' 
qualifications, duties, and limits of authority, and description of the 
procedures for segregating these persons' duties,
    (E) A requirement for written reports for review by the Federal 
credit union's board of directors at its monthly meetings, or by a 
committee appointed by the board on a monthly basis, of:
    (1) The type, amount, expiration date, correlation, cost of, and 
current or projected income or loss from each position closed since the 
last board review, each position currently open and current gains or 
losses from such positions, and each position planned to be entered into 
prior to the next board review;
    (2) Compliance with limits established on the policies and 
procedures; and
    (3) The extent to which the positions described contributed to 
reduction of sensitivity to changes in prices or interest rates in the 
Federal credit union's commitments to originate real estate loans at a 
specified interest rate; and
    (iv) If the Federal credit union has received written permission 
from the appropriate NCUA Regional Director to engage in financial 
options contracts transactions in accordance with this Sec. 701.21(i) 
and its policies and procedures as written.
    (3) Recordkeeping and reporting. (i) The reports described in 
Sec. 701.21(i)(2)(iii)(E) for each month must be submitted to the 
appropriate NCUA Regional Office by the end of the following month. This 
monthly reporting requirement may be waived by the appropriate NCUA 
Regional Director on a case-by-case basis for those Federal credit 
unions with a proven record of responsible use of permitted financial 
options contracts.
    (ii) The records described in Sec. 701.21(i)(2)(iii)(E) must be 
retained for two years from the date the financial options contracts are 
closed.
    (4) Accounting. A federal credit union must account for financial 
options contracts transactions in accordance with generally accepted 
accounting principles.

[49 FR 30685, Aug. 1, 1984]

    Editorial Note: For Federal Register citations affecting 
Sec. 701.21, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.fdsys.gov.

    Effective Date Note: At 80 FR 66706, Oct. 29, 2015, Sec. 701.21 was 
amended in paragraph (h)(4)(iv) by removing ``Sec. 702.2(f)'' and adding 
``Sec. 702.2'' in its place, effective Jan. 1, 2019.

[[Page 460]]



Sec. 701.22  Loan participations.

    This section applies only to loan participations as defined in 
paragraph (a) of this section. It does not apply to the purchase of an 
investment interest in a pool of loans. This section establishes the 
requirements a federally insured credit union must satisfy to purchase a 
participation in a loan. This section applies only to a federally 
insured credit union's purchase of a loan participation where the 
borrower is not a member of that credit union and where a continuing 
contractual obligation between the seller and purchaser is contemplated. 
Generally, a federal credit union's purchase of all or part of a loan 
made to one of its own members, subject to a limited exception for 
certain well capitalized federal credit unions in Sec. 701.23(b)(2), 
where no continuing contractual obligation between the seller and 
purchaser is contemplated, is governed by Sec. 701.23 of this part. 
Federally insured, state-chartered credit unions are required by 
Sec. 741.225 of this chapter to comply with the loan participation 
requirements of this section. This section does not apply to corporate 
credit unions, as that term is defined in Sec. 704.2 of this chapter.
    (a) For purposes of this section, the following definitions apply:
    Associated borrower means any other person or entity with a shared 
ownership, investment, or other pecuniary interest in a business or 
commercial endeavor with the borrower. This means any person or entity 
named as a borrower or debtor in a loan or extension of credit, or any 
other person or entity, such as a drawer, endorser, or guarantor, 
engaged in a common enterprise with the borrower, or deriving a direct 
benefit from the loan to the borrower. Exceptions to this definition for 
partnerships, joint ventures and associations are as follows:
    (1) If the borrower is a partnership, joint venture or association, 
and the other person with a shared ownership, investment, or other 
pecuniary interest in a business or commercial endeavor with the 
borrower is a member or partner of the borrower, and neither a direct 
benefit nor a common enterprise exists, such other person is not an 
associated borrower.
    (2) If the borrower is a member or partner of a partnership, joint 
venture, or association, and the other entity with a shared ownership, 
investment, or other pecuniary interest in a business or commercial 
endeavor with the borrower is the partnership, joint venture, or 
association and the borrower is a limited partner of that other entity, 
and by the terms of a partnership or membership agreement valid under 
applicable law, the borrower is not held generally liable for the debts 
or actions of that other entity, such other entity is not an associated 
borrower.
    (3) If the borrower is a member or partner of a partnership, joint 
venture, or association, and the other person with a shared ownership, 
investment, or other pecuniary interest in a business or commercial 
endeavor with the borrower is another member or partner of the 
partnership, joint venture, or association, and neither a direct benefit 
nor a common enterprise exists, such other person is not an associated 
borrower.
    Common enterprise means:
    (1) The expected source of repayment for each loan or extension of 
credit is the same for each borrower and no individual borrower has 
another source of income from which the loan (together with the 
borrower's other obligations) may be fully repaid. An employer will not 
be treated as a source of repayment because of wages and salaries paid 
to an employee, unless the standards described in paragraph (2) are met;
    (2) Loans or extensions of credit are made:
    (i) To borrowers who are related directly or indirectly through 
common control, including where one borrower is directly or indirectly 
controlled by another borrower; and
    (ii) Substantial financial interdependence exists between or among 
the borrowers. Substantial financial interdependence means 50 percent or 
more of one borrower's gross receipts or gross expenditures (on an 
annual basis) are derived from transactions with another borrower. Gross 
receipts and expenditures include gross revenues or expenses, 
intercompany loans, dividends, capital contributions, and similar 
receipts or payments; or

[[Page 461]]

    (3) Separate borrowers obtain loans or extensions of credit to 
acquire a business enterprise of which those borrowers will own more 
than 50 percent of the voting securities or voting interests.
    Control means a person or entity directly or indirectly, or acting 
through or together with one or more persons or entities:
    (1) Owns, controls, or has the power to vote 25 percent or more of 
any class of voting securities of another person or entity;
    (2) Controls, in any manner, the election of a majority of the 
directors, trustees, or other persons exercising similar functions of 
another person or entity; or
    (3) Has the power to exercise a controlling influence over the 
management or policies of another person or entity.
    Credit union means any federal or state-chartered credit union.
    Credit union organization means any credit union service 
organization meeting the requirements of part 712 of this chapter. This 
term does not include trade associations or membership organizations 
principally composed of credit unions.
    Direct benefit means the proceeds of a loan or extension of credit 
to a borrower, or assets purchased with those proceeds, that are 
transferred to another person or entity, other than in a bona fide 
arm's-length transaction where the proceeds are used to acquire 
property, goods, or services.
    Eligible organization means a credit union, credit union 
organization, or financial organization.
    Financial organization means any federally chartered or federally 
insured financial institution; and any state or federal government 
agency and its subdivisions.
    Loan participation means a loan where one or more eligible 
organizations participate pursuant to a written agreement with the 
originating lender, and the written agreement requires the originating 
lender's continuing participation throughout the life of the loan.
    Originating lender means the participant with which the borrower 
initially or originally contracts for a loan and who, thereafter or 
concurrently with the funding of the loan, sells participations to other 
lenders.
    (b) A federally insured credit union may purchase a participation 
interest in a loan from an eligible organization only if the loan is one 
the purchasing credit union is empowered to grant and the following 
additional conditions are satisfied:
    (1) The purchase complies with all regulatory requirements to the 
same extent as if the purchasing federally insured credit union had 
originated the loan, including, for example, the loans-to-one-borrower 
provisions in Sec. 701.21(c)(5) of this part for federal credit unions 
and Sec. 723.8 of the member business loans rule in part 723 of this 
chapter for all federally insured credit unions;
    (2) The purchasing federally insured credit union has executed a 
written loan participation agreement with the originating lender and the 
agreement meets the minimum requirements for a loan participation 
agreement as described in paragraph (d) of this section;
    (3) The originating lender retains an interest in each participated 
loan. If the originating lender is a federal credit union, the retained 
interest must be at least 10 percent of the outstanding balance of the 
loan through the life of the loan. If the originating lender is any 
other type of eligible organization, the retained interest must be at 
least 5 percent of the outstanding balance of the loan through the life 
of the loan, unless a higher percentage is required under applicable 
state law;
    (4) The borrower becomes a member of one of the participating credit 
unions before the purchasing federally insured credit union purchases a 
participation interest in the loan; and
    (5) The purchase complies with the purchasing federally insured 
credit union's internal written loan participation policy, which, at a 
minimum, must:
    (i) Establish underwriting standards for loan participations;
    (ii) Establish a limit on the aggregate amount of loan 
participations that may be purchased from any one originating lender, 
not to exceed the greater of $5,000,000 or 100 percent of the federally 
insured credit union's net worth, unless this amount is waived by

[[Page 462]]

the appropriate regional director, and, in the case of a federally 
insured, state-chartered credit union, with prior written concurrence of 
the appropriate state supervisory authority;
    (iii) Establish limits on the amount of loan participations that may 
be purchased by each loan type, not to exceed a specified percentage of 
the federally insured credit union's net worth; and
    (iv) Establish a limit on the aggregate amount of loan 
participations that may be purchased with respect to a single borrower, 
or group of associated borrowers, not to exceed 15 percent of the 
federally insured credit union's net worth, unless waived by the 
appropriate regional director, and, in the case of a federally insured, 
state-chartered credit union, with prior written concurrence of the 
appropriate state supervisory authority.
    (c) To seek a waiver from any of the limitations in paragraph (b) of 
this section, a federally insured credit union must submit a written 
request to its regional director with a full and detailed explanation of 
why it is requesting the waiver. Within 45 days of receipt of a 
completed waiver request, including all necessary supporting 
documentation and, if appropriate, any written concurrence, the regional 
director will provide the federally insured credit union a written 
response. The regional director's decision will be based on safety and 
soundness and other considerations; however, the regional director will 
not grant a waiver to a federally insured, state-chartered credit union 
without the prior written concurrence of the appropriate state 
supervisory authority. A federally insured credit union may appeal any 
part of the waiver determination to the NCUA Board. Appeals must be 
submitted through the regional director within 60 days of the date of 
the determination.
    (d) A loan participation agreement must:
    (1) Be properly executed by authorized representatives of all 
parties under applicable law;
    (2) Be properly authorized by the federally insured credit union's 
board of directors or, if the board has so delegated in its policy, a 
designated committee or senior management official, under the federally 
insured credit union's bylaws and all applicable law;
    (3) Be retained in the federally insured credit union's office 
(original or copies); and
    (4) Include provisions which, at a minimum, address the following:
    (i) Prior to purchase, the identification of the specific loan 
participation(s) being purchased, either directly in the agreement or 
through a document which is incorporated by reference into the 
agreement;
    (ii) The interest that the originating lender will retain in the 
loan to be participated. If the originating lender is a federal credit 
union, the retained interest must be at least 10 percent of the 
outstanding balance of the loan through the life of the loan. If the 
originating lender is any other type of eligible organization, the 
retained interest must be at least 5 percent of the outstanding balance 
of the loan through the life of the loan, unless a higher percentage is 
required under state law;
    (iii) The location and custodian for original loan documents;
    (iv) An explanation of the conditions under which parties to the 
agreement can gain access to financial and other performance information 
about a loan, the borrower, and the servicer so the parties can monitor 
the loan;
    (v) An explanation of the duties and responsibilities of the 
originating lender, servicer, and participants with respect to all 
aspects of the participation, including servicing, default, foreclosure, 
collection, and other matters involving the ongoing administration of 
the loan; and
    (vi) Circumstances and conditions under which participants may 
replace the servicer.

[78 FR 37956, June 25, 2013, as amended at 81 FR 13553, Mar. 14, 2016]



Sec. 701.23  Purchase, sale, and pledge of eligible obligations.

    This section governs a federal credit union's purchase, sale, or 
pledge of all or part of a loan to one of its own members, subject to a 
limited exception for certain well capitalized federal credit unions, 
where no continuing contractual obligation between the seller and 
purchaser is contemplated.

[[Page 463]]

For purchases of eligible obligations, except as described in paragraph 
(b)(2) of this section, the borrower must be a member of the purchasing 
federal credit union before the purchase is made. A federal credit union 
may not purchase a non-member loan to hold in its portfolio.
    (a) For purposes of this section:
    (1) Eligible obligation means a loan or group of loans.
    (2) Student loan means a loan granted to finance the borrower's 
attendance at an institution of higher education or at a vocational 
school, which is secured by and on which payment of the outstanding 
principal and interest has been deferred in accordance with the 
insurance or guarantee of the Federal Government, of a State government, 
or any agency of either.
    (b) Purchase. (1) A Federal credit union may purchase, in whole or 
in part, within the limitations of the board of directors' written 
purchase policies:
    (i) Eligible obligations of its members, from any source, if either: 
(A) They are loans it is empowered to grant or (B) they are refinanced 
with the consent of the borrowers, within 60 days after they are 
purchased, so that they are loans it is empowered to grant;
    (ii) Eligible obligations of a liquidating credit union's individual 
members, from the liquidating credit union;
    (iii) Student loans, from any source, if the purchaser is granting 
student loans on an ongoing basis and if the purchase will facilitate 
the purchasing credit union's packaging of a pool of such loans to be 
sold or pledged on the secondary market; and
    (iv) Real estate-secured loans, from any source, if the purchaser is 
granting real estate-secured loans pursuant to Sec. 701.21 on an ongoing 
basis and if the purchase will facilitate the purchasing credit union's 
packaging of a pool of such loans to be sold or pledged on the secondary 
mortage market. A pool must include a substantial portion of the credit 
union's members' loans and must be sold promptly.
    (2) Purchase of obligations from a FICU. A federal credit union that 
received a composite CAMEL rating of ``1'' or ``2'' for the last two (2) 
full examinations and maintained a net worth classification of ``well 
capitalized'' under part 702 of this chapter for the six (6) immediately 
preceding quarters or, if subject to a risk-based net worth (RBNW) 
requirement under part 702 of this chapter, has remained ``well 
capitalized'' for the six (6) immediately preceding quarters after 
applying the applicable RBNW requirement may purchase and hold the 
following obligations, provided that it would be empowered to grant 
them:
    (i) Eligible obligations. Eligible obligations without regard to 
whether they are obligations of its members, provided they are purchased 
from a federally-insured credit union and the obligations are either:
    (A) Loans the purchasing credit union is empowered to grant; or
    (B) Loans refinanced with the consent of the borrowers, within 60 
days after they are purchased, so that they are loans the purchasing 
credit union is empowered to grant;
    (ii) Eligible obligations of a liquidating credit union. Eligible 
obligations of a liquidating credit union without regard to whether they 
are obligations of the liquidating credit union's members.
    (iii) Student loans. Student loans provided they are purchased from 
a federally-insured credit union only;
    (iv) Real estate-secured loans. Real estate-secured loans provided 
they are purchased from a federally-insured credit union only;
    (3) A Federal credit union may make purchases in accordance with 
this paragraph (b), provided:
    (i) The board of directors or investment committee approves the 
purchase;
    (ii) A written agreement and a schedule of the eligible obligations 
covered by the agreement are retained in the purchasers office; and
    (iii) For purchases under paragraph (b)(1)(ii) of this section, any 
advance written approval required by Sec. 741.8 of this chapter is 
obtained before consummation of such purchase.
    (4) The aggregate of the unpaid balance of eligible obligations 
purchased under paragraphs (b)(1) and (b)(2)(ii) of this section shall 
not exceed 5 percent of the unimpaired capital and surplus of the 
purchaser. The following can be

[[Page 464]]

exculded in calculating this 5 percent limitation:
    (i) Student loans purchased in accordance with paragraph (b)(1)(iii) 
of this section;
    (ii) Real estate loans purchased in accordance with paragraph 
(b)(1)(iv) of this section;
    (iii) Eligible obligations purchased in accordance with paragraph 
(b)(1)(i) of this section that are refinanced by the purchaser so that 
it is a loan it is empowered to grant;
    (iv) An indirect lending or indirect leasing arrangement that is 
classified as a loan and not the purchase of an eligible obligation 
because the Federal credit union makes the final underwriting decision 
and the sales or lease contract is assigned to the Federal credit union 
very soon after it is signed by the member and the dealer or leasing 
company.
    (5) Grandfathered purchases. Subject to safety and soundness 
considerations, a federal credit union may hold any of the loans 
described in paragraph (b)(2) of this section provided it was authorized 
to purchase the loan and purchased the loan before July 2, 2012.
    (c) Sale. A Federal credit union may sell, in whole or in part, to 
any source, eligible obligations of its members, eligible obligations 
purchased in accordance with paragraph (b)(1)(ii) of this section, 
student loans purchased in accordance with paragraph (b)(1)(iii) of this 
section, and real estate loans purchased in accordance with paragraph 
(b)(1)(iv) of this section, within the limitations of the board of 
directors' written sale policies, Provided:
    (1) The board of directors or investment committee approves the 
sale; and
    (2) A written agreement and a schedule of the eligible obligations 
covered by the agreement are retained in the seller's office.
    (d) Pledge. (1) A Federal credit union may pledge, in whole or in 
part, to any source, eligible obligations of its members, eligible 
obligations purchased in accordance with paragraph (b)(1)(ii) of this 
section, student loans purchased in accordance with paragraph 
(b)(1)(iii) of this section, and real estate loans purchased in 
accordance with paragraph (b)(1)(iv) of this section, within the 
limitations of the board of directors' written pledge policies, 
Provided:
    (i) The board of directors or investment committee approves the 
pledge;
    (ii) Copies of the original loan documents are retained; and
    (iii) A written agreement covering the pledging arrangement is 
retained in the office of the credit union that pledges the eligible 
obligations.
    (2) The pledge agreement shall identify the eligible obligations 
covered by the agreement.
    (e) Servicing. A Federal credit union may agree to service any 
eligible obligation it purchases or sells in whole or in part.
    (f) 10 Percent limitation. The total indebtedness owing to any 
Federal credit union by any person, inclusive of retained and reacquired 
interests, shall not exceed 10 percent of its unimpaired capital and 
surplus.
    (g)(1) Conflicts of interest. No federal credit union official, 
employee, or their immediate family member may receive, directly or 
indirectly, any compensation in connection with that credit union's 
purchase, sale, or pledge of an eligible obligation under the provisions 
of Sec. 701.23.
    (2) Permissible payments. This section does not prohibit:
    (i) A federal credit union's payment of salary to employees;
    (ii) A federal credit union's payment of an incentive or bonus to an 
employee based on the credit union's overall financial performance;
    (iii) A federal credit union's payment of an incentive or bonus to 
an employee, other than a senior management employee, in connection with 
that credit union's purchase, sale or pledge of an eligible obligation. 
This payment is permissible if the board of directors establishes a 
written policy and internal controls for the incentive or bonus program 
and monitors compliance with the policy and controls at least annually; 
and
    (iv) Payment by a person other than the federal credit union of 
compensation to a volunteer official, non-senior management employee, or 
their immediate family member, for a service or activity performed 
outside the credit union provided that the federal credit union, the 
official, employee, or their

[[Page 465]]

immediate family member has not made a referral.
    (3) Business associates and family members. All transactions under 
this section with business associates or family members not specifically 
prohibited by paragraph (g)(1) of this section must be conducted at 
arm's length and in the interest of the federal credit union.
    (4) Definitions. The definitions in Sec. 701.21(c)(8)(ii) of this 
part apply to this section.
    (h) Additional authority. (1) A federal credit union may submit a 
written request to its regional director seeking expanded authority to 
purchase loans described in paragraph (b)(2) of this section, if it is 
not otherwise authorized by this section. The written request must 
include the following:
    (i) A copy of the credit union's purchase policy;
    (ii) The types of eligible obligations under paragraph (b)(2) of 
this section that the credit union seeks to purchase;
    (iii) An explanation of the need for additional authority; and
    (iv) An analysis of the credit union's prior experience with the 
purchase of eligible obligations.
    (2) Approval process. A regional director will provide a written 
determination on a request for expanded authority within 60 calendar 
days after receipt of the request; however, the 60-day period will not 
begin until the requesting credit union has submitted all necessary 
information to the regional director. The regional director will inform 
the requesting credit union, in writing, of the date the request was 
received and of any additional documentation that the regional director 
requires in support of the request. If the regional director approves 
the request, the regional director will establish a limit on loan 
purchases as appropriate and subject to the limitations in this section. 
If the regional director does not notify the credit union of the action 
taken on its request within 60 calendar days of the receipt of the 
request or the receipt of additional requested supporting information, 
whichever occurs later, the credit union may purchase loans it requested 
under paragraph (b)(2) of this section.
    (3) Appeal to NCUA Board. A federal credit union may appeal any part 
of the determination made under this paragraph to the NCUA Board by 
submitting its appeal through the regional director within 30 days of 
the date of the determination.

[44 FR 27071, May 9, 1979, as amended at 46 FR 38680, July 29, 1981. 
Redesignated at 49 FR 30688, Aug. 1, 1984, and amended at 53 FR 4844, 
Feb. 18, 1988; 56 FR 15036, Apr. 15, 1991; 56 FR 35811, July 29, 1991; 
60 FR 58504, Nov. 28, 1995; 63 FR 70998, Dec. 23, 1998; 72 FR 65442, 
Nov. 21, 2007; 77 FR 31990, May 31, 2012; 78 FR 37958, June 25, 2013]

    Effective Date Note: At 80 FR 66706, Oct. 29, 2015, Sec. 701.23 was 
amended in paragraph (b)(2) by removing the words ``net worth'' and 
adding the word ``capital'' in their place and by removing the words 
``or, if subject to a risk-based net worth (RBNW) requirement under part 
702 of this chapter, has remained `well capitalized' for the six (6) 
immediately preceding quarters after applying the applicable RBNW 
requirement'', effective Jan. 1, 2019.



Sec. 701.24  Refund of interest.

    (a) The board of directors of a Federal credit union may authorize 
an interest refund to members who paid interest to the credit union 
during any dividend period and who are members of record at the close of 
business on the last day of such dividend period. Interest refunds may 
be made for a dividend period only if dividends on share accounts have 
been declared and paid for that period.
    (b) The amount of interest refund to each member shall be determined 
as a percentage of the interest paid by the member. Such percentage may 
vary according to the type of extension of credit and the interest rate 
charged.
    (c) The board of directors may exclude from an interest refund:
    (1) A particular type of extension of credit;
    (2) Any extension of credit made at a particular interest rate; and
    (3) Any extension of credit that is presently delinquent or has been 
delinquent within the period for which the refund is being made.

[53 FR 19747, May 31, 1988]

[[Page 466]]



Sec. 701.25  [Reserved]



Sec. 701.26  Credit union service contracts.

    A Federal credit union may act as a representative of and enter into 
a contractual agreement with one or more credit unions or other 
organizations for the purpose of sharing, utilizing, renting, leasing, 
purchasing, selling, and/or joint ownership of fixed assets or engaging 
in activities and/or services which relate to the daily operations of 
credit unions. Agreements must be in writing, and shall advise all 
parties subject to the agreement that the goods and services provided 
shall be subject to examination by the NCUA Board to the extent 
permitted by law.

[47 FR 30462, July 14, 1982, as amended at 63 FR 10756, Mar. 5, 1998]



Secs. 701.27-701.29  [Reserved]



Sec. 701.30  Services for nonmembers within the field of membership.

    Federal credit unions may provide the following services to persons 
within their fields of membership, regardless of membership status:
    (a) Selling negotiable checks including travelers checks, money 
orders, and other similar money transfer instruments (including 
international and domestic electronic fund transfers and remittance 
transfers, as defined in section 919 of the Electronic Fund Transfer 
Act); and
    (b) Cashing checks and money orders for a fee.

[71 FR 62876, Oct. 27, 2006, as amended at 76 FR 44762, July 27, 2011]



Sec. 701.31  Nondiscrimination requirements.

    (a) Definitions. As used in this part, the term:
    (1) Application carries the meaning of that term as defined in 12 
CFR 1002.2(f) (Regulation B)
    (2) Dwelling carries the meaning of that term as defined in 42 
U.S.C. 3602(b) (Fair Housing Act), which is as follows: ``Any building, 
structure, or portion thereof which is occupied as, or designed or 
intended for occupancy as, a residence by one or more families, and any 
vacant land which is offered for sale or lease for the construction or 
location thereon of any building, structure, or portion thereof''; and
    (3) Real estate-related loan means any loan for which application is 
made to finance or refinance the purchase, construction, improvement, 
repair, or maintenance of a dwelling.
    (b) Nondiscrimination in Lending. (1) A Federal credit union may not 
deny a real estate-related loan, nor may it discriminate in setting or 
exercising its rights pursuant to the terms or conditions of such a 
loan, nor may it discourage an application for such a loan, on the basis 
of the race, color, national origin, religion, sex, handicap, or 
familial status (having children under the age of 18) of:
    (i) Any applicant or joint applicant;
    (ii) Any person associated, in connection with a real estate-related 
loan application, with an applicant or joint applicant;
    (iii) The present or prospective owners, lessees, tenants, or 
occupants of the dwelling for which a real estate-related loan is 
requested;
    (iv) The present or prospective owners, lessees, tenants, or 
occupants of other dwellings in the vicinity of the dwelling for which a 
real estate-related loan is requested.
    (2) With regard to a real estate-related loan, a Federal credit 
union may not consider a lending criterion or exercise a lending policy 
which has the effect of discriminating on the basis of race, color, 
national origin, religion, sex, handicap, or familial status (having 
children under the age of 18). Guidelines concerning possible exceptions 
to this provision appear in paragraph (e)(1) of this section.
    (3) Consideration of any of the following factors in connection with 
a real estate-related loan is not necessary to a Federal credit union's 
business, generally has a discriminatory effect, and is therefore 
prohibited:
    (i) The age or location of the dwelling;
    (ii) Zip code of the applicant's current residence;
    (iii) Previous home ownership;
    (iv) The age or location of dwellings in the neighborhood of the 
dwelling;
    (v) The income level of residents in the neighborhood of the 
dwelling.


[[Page 467]]



Guidelines concerning possible exceptions to this provision appear in 
paragraph (e)(2) of this section.
    (c) Nondiscrimination in appraisals. (1) A Federal credit union may 
not rely upon an appraisal of a dwelling if it knows or should know that 
the appraisal is based upon consideration of the race, color, national 
origin, religion, sex, handicap, or familial status (having children 
under the age of 18) of:
    (i) Any applicant or joint applicant;
    (ii) Any person associated, in connection with a real estate-related 
loan application, with an applicant or joint applicant;
    (iii) The present or prospective owners, lessees, tenants, or 
occupants of the dwelling for which a real estate-related loan is 
requested;
    (iv) The present or prospective owners, lessees, tenants, or 
occupants of other dwellings in the vicinity of the dwelling for which a 
real estate-related loan is requested.
    (2) With respect to a real-estate related loan, a Federal credit 
union may not rely upon an appraisal of a dwelling if it knows or should 
know that the appraisal is based upon consideration of a criterion which 
has the effect of discriminating on the basis of race, color, national 
origin, religion, sex, handicap, or familial status (having children 
under the age of 18). Guidelines concerning possible exceptions to this 
provision appear in paragraph (e)(1) of this section.
    (3) A Federal credit union may not rely upon an appraisal that it 
knows or should know is based upon consideration of any of the following 
criteria, for such criteria generally have a discriminatory effect, and 
are not necessary to a Federal credit union's business:
    (i) The age or location of the dwelling;
    (ii) The age or location of dwellings in the neighborhood of the 
dwelling;
    (iii) The income level of the residents in the neighborhood of the 
dwelling.
    (4) Notwithstanding paragraph (c)(3) of this section, it is 
recognized that there may be factors concerning location of the dwelling 
which can be properly considered in an appraisal. If any such factor(s) 
is relied upon, it must be specifically documented in the appraisal, 
accompanied by a brief statement demonstrating the necessity of using 
such factor(s). Guidelines concerning the consideration of location 
factors appear in paragraph (e)(3) of this section.
    (5) Each Federal credit union shall make available, to any 
requesting member/applicant, a copy of the appraisal used in connection 
with that member's application for a loan to be secured by a subordinate 
lien on a dwelling. The appraisal shall be available for a period of 25 
months after the applicant has received notice from the Federal credit 
union of the action taken by the Federal credit union on the application 
for a loan to be secured by a subordinate lien on a dwelling.
    (d) Nondiscrimination in advertising. No federal credit union may 
engage in any form of advertising of real estate-related loans that 
indicates the credit union discriminates on the basis of race, color, 
religion, national origin, sex, handicap, or familial status in 
violation of the Fair Housing Act. Advertisements must not contain any 
words, symbols, models or other forms of communication that suggest a 
discriminatory preference or policy of exclusion in violation of the 
Fair Housing Act or the Equal Credit Opportunity Act.
    (1) Advertising notice of nondiscrimination compliance. Any federal 
credit union that advertises real estate-related loans must prominently 
indicate in such advertisement, in a manner appropriate to the 
advertising medium and format used, that the credit union makes such 
loans without regard to race, color, religion, national origin, sex, 
handicap, or familial status.
    (i) With respect to written and visual advertisements, a credit 
union may satisfy the notice requirement by including in the 
advertisement a copy of the logotype, with the legend ``Equal Housing 
Lender,'' from the poster described in paragraph (d)(3) of this section 
or a copy of the logotype, with the legend ``Equal Housing 
Opportunity,'' from the poster described in Sec. 110.25(a) of the United 
States Department of Housing and Urban Development's (HUD) regulations 
(24 CFR 110.25(a)).
    (ii) With respect to oral advertisements, a credit union may satisfy 
the

[[Page 468]]

notice requirement by a spoken statement that the credit union is an 
``Equal Housing Lender'' or an ``Equal Opportunity Lender.''
    (iii) When an oral advertisement is used in conjunction with a 
written or visual advertisement, the use of either of the methods 
specified in paragraphs (d)(1)(i) or (ii) of this section will satisfy 
the notice requirement.
    (iv) A credit union may use any other method reasonably calculated 
to satisfy the notice requirement.
    (2) Lobby notice of nondiscrimination. Every federal credit union 
that engages in real estate-related lending must display a notice of 
nondiscrimination. The notice must be placed in the public lobby of the 
credit union and in the public area of each office where such loans are 
made and must be clearly visible to the general public. The notice must 
incorporate either a facsimile of the logotype and language appearing in 
paragraph (d)(3) of this section or the logotype and language appearing 
at 24 CFR 110.25(a). Posters containing the logotype and language 
appearing in paragraph (d)(3) of this section may be obtained from the 
regional offices of the National Credit Union Administration.
    (3) Logotype and notice of nondiscrimination compliance. The 
logotype and text of the notice required in paragraph (d)(2) of this 
section shall be as follows:

[[Page 469]]

[GRAPHIC] [TIFF OMITTED] TR21MR12.003

    (e) Guidelines. (1) Compliance with the Fair Housing Act is achieved 
when each loan applicant's creditworthiness is evaluated on an 
individual basis, without presuming that the applicant has certain 
characteristics of a group.

[[Page 470]]

If certain lending policies or procedures do presume group 
characteristics, they may violate the Fair Housing Act, even though the 
characteristics are not based upon race, color, sex, national origin, 
religion, handicap, or familial status. Such a violation occurs when 
otherwise facially nondiscriminatory lending procedures (either general 
lending policies or specific criteria used in reviewing loan 
applications) have the effect of making real estate-related loans 
unavailable or less available on the basis of race, color, sex, national 
origin, religion, handicap, or familial status. Note, however, that a 
policy or criterion which has a discriminatory effect is not a violation 
of the Fair Housing Act if its use achieves a legitimate business 
necessity which cannot be achieved by using less discriminatory 
standards. It is also important to note that the Equal Credit 
Opportunity Act and Regulation B prohibit discrimination, either per se 
or in effect, on the basis of the applicant's age, marital status, 
receipt of public assistance, or the exercise of any rights under the 
Consumer Credit Protection Act.
    (2) Paragraph (b)(3) of this section prohibits consideration of 
certain factors because of their likely discriminatory effect and 
because they are not necessary to make sound real estate-related loans. 
For purposes of clarification, the prohibited use of location factors in 
this section is intended to prevent abandonment of areas in which a 
Federal credit union's members live or want to live. It is not intended 
to require loans in those areas that are geographically remote from the 
FCU's main or branch offices or that contravene the parameters of a 
Federal credit union's charter. Further, this prohibition does not 
preclude requiring a borrower to obtain flood insurance protection 
pursuant to the National Flood Insurance Act and part 760 of NCUA's 
Rules and Regulations, nor does it preclude involvement with Federal or 
state housing insurance programs which provide for lower interest rates 
for the purchase of homes in certain urban or rural areas. Also, the 
legitimate use of location factors in an appraisal does not constitute a 
violation of the provision of paragraph (b)(3) of this section, which 
prohibits consideration of location of the dwelling. Finally, the 
prohibited use of prior home ownership does not preclude a Federal 
credit union from considering an applicant's payment history on a loan 
which was made to obtain a home. Such action entails consideration of 
the payment record on a previous loan in determining creditworthiness; 
it does not entail consideration of prior home ownership.
    (3)(i) Paragraph (c)(3) of this section prohibits consideration of 
the age or location of a dwelling in a real estate-related loan 
appraisal. These restrictions are intended to prohibit the use of 
unfounded or unsubstantiated assumptions regarding the effect upon loan 
risk of the age of a dwelling or the physical or economic 
characteristics of an area. Appraisals should be based on the present 
market value of the property offered as security (including 
consideration of specific improvements to be made by the borrower) and 
the likelihood that the property will retain an adequate value over the 
term of the loan.
    (ii) The term ``age of the dwelling'' does not encompass structural 
soundness. In addition, the age of the dwelling may be used by an 
appraiser as a basis for conducting further inspections of certain 
structural aspects of the dwelling. Paragraph (c)(3) of this section 
does, however, prohibit an unsubstantiated determination that a house 
over X years in age is not structurally sound.
    (iii) With respect to location factors, paragraph (c)(4) of this 
section recognizes that there may be location factors which may be 
considered in an appraisal, and requires that the use of any such 
factors be specifically documented in the appraisal. These factors will 
most often be those location factors which may negatively affect the 
short range future value (up to 3-5 years) of a property. Factors which 
in some cases may cause the market value of a property to decline are 
recent zoning changes or a significant number of abandoned homes in the 
immediate vicinity of the property. However, not all zoning changes will 
cause a decline in property values, and proximity to abandoned buildings 
may not

[[Page 471]]

affect the market value of a property because the cause of abandonment 
is unrelated to high risk. Proper considerations include the condition 
and utility of the improvement and various physical factors such as 
street conditions, amenities such as parks and recreation areas, 
availability of public utilities and municipal services, and exposure to 
flooding and land faults.

[54 FR 46223, Nov. 2, 1989, as amended at 59 FR 36041, July 15, 1994; 66 
FR 48206, Sept. 19, 2001; 77 FR 16426, Mar. 21, 2012; 77 FR 71084, Nov. 
29, 2012; 79 FR 75748, Dec. 19, 2014]



Sec. 701.32  Payment on shares by public units and nonmembers.

    (a) Authority. A Federal credit union may, to the extent permitted 
under Section 107(6) of the Act and this section, receive payments on 
shares, (regular shares, share certificates, and share draft accounts) 
from public units and political subdivisions thereof (as those terms are 
defined in Sec. 745.1) and nonmember credit unions, and to the extent 
permitted under the Act, this section and Sec. 701.34, receive payments 
on shares (regular shares, share certificates, and share draft accounts) 
from other nonmembers.
    (b) Limitations. (1) Unless a greater amount has been approved by 
the Regional Director, the maximum amount of all public unit and 
nonmember shares shall not, at any given time, exceed 20% of the total 
shares of the federal credit union or $3 million, whichever is greater.
    (2) Before accepting any public unit or nonmember shares in excess 
of 20% of total shares, the board of directors must adopt a specific 
written plan concerning the intended use of these shares and forward a 
copy of the plan to the Regional Director. The plan must include:
    (i) A statement of the credit union's needs, sources and intended 
uses of public unit and nonmember shares;
    (ii) Provision for matching maturities of public unit and nonmember 
shares with corresponding assets, or justification for any mismatch; and
    (iii) Provision for adequate income spread between public unit and 
nonmember shares and corresponding assets.
    (3) A federal credit union seeking an exemption from the limits of 
paragraph (b)(1) of this section must submit to the Regional Director a 
written request including:
    (i) The new maximum level of public unit and nonmember shares 
requested, either as a dollar amount or a percentage of total shares;
    (ii) The current plan adopted by the credit union's board of 
directors concerning the use of new public unit and nonmember shares;
    (iii) A copy of the credit union's latest financial statement; and
    (iv) A copy of the credit union's loan and investment policies.
    (4) Where the financial condition and management of the credit union 
are sound and the credit union's plan for the funds is reasonable, there 
will be a presumption in favor of granting the request. When granted, 
exemptions will normally be for a two-year period. The Regional Director 
will provide a written explanation for an exemption that is granted for 
a lesser time period.
    (5) The Regional Director will provide a written determination on an 
exemption request within 30 calendar days after receipt of the request. 
The 30 day period will not begin to run until all necessary information 
has been submitted to the Regional Director. All denials may be appealed 
to the NCUA Board in a timely manner. Appeals should be submitted 
through the Regional Director.
    (6) Upon expiration of an exemption, nonmember shares currently in 
the credit union in excess of the limits established pursuant to (b)(1) 
of this section will continue to be insured by the National Credit Union 
Insurance Fund within applicable limits. No new shares in excess of the 
limits established pursuant to (b)(1) of this section shall be accepted. 
Existing share certificates in excess of the limits established pursuant 
to (b)(1) of this section may remain in the credit union only until 
maturity.
    (c) The limitations herein do not apply to accounts maintained in 
accordance with Sec. 701.37 (Treasury Tax and Loan Depositaries; 
Depositaries and Financial Agents of the Government) and matching funds 
required by

[[Page 472]]

Sec. 705.5(g) (Community Development Revolving Loan Program for Credit 
Unions). Once a loan granted pursuant to part 705 is repaid, nonmember 
share deposits accepted to meet the matching requirement are subject to 
this section.

[54 FR 31184, July 27, 1989, as amended at 54 FR 51384, Dec. 15, 1989; 
55 FR 1794, Jan. 19, 1990; 58 FR 21645, Apr. 23, 1993; 59 FR 26102, May 
19, 1994; 61 FR 3790, Feb. 2, 1996; 76 FR 67587, Nov. 2, 2011; 77 FR 
31991, May 31, 2012]



Sec. 701.33  Reimbursement, insurance, and indemnification of officials
and employees.

    (a) Official. An official is a person who is or was a member of the 
board of directors, credit committee or supervisory committee, or other 
volunteer committee established by the board of directors.
    (b) Compensation. (1) Only one board officer, if any, may be 
compensated as an officer of the board. The bylaws must specify the 
officer to be compensated, if any, as well as the specific duties of 
each of the board officers. No other official may receive compensation 
for performing the duties or responsibilities of the board or committee 
position to which the person has been elected or appointed.
    (2) For purposes of this section, the term compensation specifically 
excludes:
    (i) Payment (by reimbursement to an official or direct credit union 
payment to a third party) for reasonable and proper costs incurred by an 
official in carrying out the responsibilities of the position to which 
that person has been elected or appointed, if the payment is determined 
by the board of directors to be necessary or appropriate in order to 
carry out the official business of the credit union, and is in 
accordance with written policies and procedures, including documentation 
requirements, established by the board of directors. Such payments may 
include the payment of travel costs for officials and one guest per 
official;
    (ii) Provision of reasonable health, accident and related types of 
personal insurance protection, supplied for officials at the expense of 
the credit union: Provided, that such insurance protection must exclude 
life insurance; must be limited to areas of risk, including accidental 
death and dismemberment, to which the official is exposed by reason of 
carrying out the duties or responsibilities of the official's credit 
union position; must cease immediately upon the insured person's leaving 
office, without providing residual benefits other than from pending 
claims, if any; except that a credit union must comply with federal and 
state laws providing departing officials the right to maintain health 
insurance coverage at their own expense and
    (iii) Indemnification and related insurance consistent with 
paragraph (c) of this section.
    (c) Indemnification. (1) A Federal credit union may indemnify its 
officials and current and former employees for expenses reasonably 
incurred in connection with judicial or administrative proceedings to 
which they are or may become parties by reason of the performance of 
their official duties.
    (2) Indemnification shall be consistent either with the standards 
applicable to credit unions generally in the state in which the 
principal or home office of the credit union is located, or with the 
relevant provisions of the Model Business Corporation Act. A Federal 
credit union that elects to provide indemnification shall specify 
whether it will follow the relevant state law or the Model Business 
Corporation Act. Indemnification and the method of indemnification may 
be provided for by charter or bylaw amendment, contract or board 
resolution, consistent with the procedural requirements of the 
applicable state law or the Model Business Corporation Act, as 
specified. A charter or bylaw amendment must be approved by the National 
Credit Union Administration.
    (3) A Federal credit union may purchase and maintain insurance on 
behalf of its officials and employees against any liability asserted 
against them and expenses incurred by them in their official capacities 
and arising out of the performance of their official duties to the 
extent such insurance is permitted by the applicable state law or the 
Model Business Corporation Act.
    (4) Notwithstanding paragraphs (c)(1) through (3) of this section, a 
federal credit union may not indemnify a dual

[[Page 473]]

employee for duties performed for any employer other than the federal 
credit union. For purposes of this subsection, a dual employee is a 
federal credit union employee who also performs work functions for 
another entity as part of a sharing arrangement between the federal 
credit union and the other entity.
    (5) Notwithstanding paragraphs (c)(1) through (3) of this section, a 
Federal credit union may not indemnify an official or employee for 
personal liability related to any decision made by that individual on a 
matter significantly affecting the fundamental rights and interests of 
the Federal credit union's members where the decision giving rise to the 
claim for indemnification is determined by a court to have constituted 
gross negligence, recklessness, or willful misconduct. Matters affecting 
the fundamental rights and interests of Federal credit union members 
include charter and share insurance conversions and terminations.
    (6) A Federal credit union may, before final disposition of a 
proceeding referred to in paragraph (c)(5) of this section, advance 
funds to pay for or reimburse the expenses, including legal fees, 
reasonably incurred in connection with the proceeding by an official or 
employee who is a party to the proceeding because that individual is or 
was an official or employee of the credit union if:
    (i) The disinterested members of the credit union's board of 
directors (or in the event there are fewer than two disinterested 
directors, the supervisory committee), in good faith, determine in 
writing after due investigation and consideration that the official or 
employee acted in good faith and in a manner he or she reasonably 
believed to be in the best interests of the credit union's members;
    (ii) The disinterested members of the credit union's board of 
directors (or the supervisory committee, as the case may be), in good 
faith, determine in writing after due investigation and consideration 
that the payment or reimbursement of the expenses will not materially 
adversely affect the credit union's safety and soundness; and
    (iii) The official or employee provides:
    (A) A written affirmation of the individual's reasonable good faith 
belief that the relevant standard of conduct described in Sec. 701.4(b) 
of this chapter has been met by the individual; and
    (B) A written undertaking to repay the credit union for any funds 
advanced or reimbursed, to the extent not covered by payments from 
insurance, if the official or employee is not entitled to 
indemnification under paragraph (c)(5) of this section.
    (7) To the extent a Federal credit union has elected to follow State 
law or the Model Business Corporation Act in accordance with paragraph 
(c)(2) of this section, the credit union must substitute the phrase ``in 
the best interests of the members'' for any language indicating that 
fiduciary duties are owed to persons or entities other than the members 
of the credit union, including, but not limited to, language such as 
``in the best interests of the credit union'' or ``in the best interests 
of the corporation.''

[53 FR 29642, Aug. 8, 1988, as amended at 57 FR 54503, Nov. 19, 1992; 66 
FR 65629, Dec. 20, 2001; 72 FR 30246, May 31, 2007; 75 FR 81386, Dec. 
28, 2010]



Sec. 701.34  Designation of low income status; Acceptance of secondary
capital accounts by low-income designated credit unions.

    (a) Designation of low-income status. (1) Based on data obtained 
through examinations, NCUA will notify a federal credit union that it 
qualifies for designation as a low-income credit union if a majority of 
its membership qualifies as low-income members. A federal credit union 
that wishes to receive the designation must notify NCUA in writing 
within 90 days of receipt of any NCUA notifications.
    (2) Low-income members are those members whose family income is 80% 
or less than the median family income for the metropolitan area where 
they live or national metropolitan area, whichever is greater, or those 
members who earn 80% or less than the total median earnings for 
individuals for the metropolitan area where they live or national 
metropolitan area, whichever is greater. NCUA will use the statewide

[[Page 474]]

or national, non-metropolitan area median family income instead of the 
metropolitan area or national metropolitan area median family income for 
members living outside a metropolitan area. Member earnings will be 
estimated based on data reported by the U.S. Census Bureau for the 
geographic area where the member lives. The term ``low-income members'' 
also includes those members enrolled as students in a college, 
university, high school, or vocational school.
    (3) Federal credit unions that do not receive notification that they 
qualify for a low-income credit union designation but believe they 
qualify may submit information to NCUA to demonstrate they qualify for a 
low-income credit union designation. For example, federal credit unions 
may provide actual member income from loan applications or surveys to 
demonstrate a majority of their membership is low-income members. Actual 
member income data must be compared to a like category of statistical 
data, for example, actual individual member income may only be compared 
to total median earnings for individuals for the metropolitan area where 
they live or national metropolitan area, whichever is greater. A Federal 
credit union may rely on a sample of membership income data drawn from 
loan files or a member survey provided the Federal credit union can 
demonstrate the sample is a statistically valid, random sample by 
submitting with its data a narrative describing its sampling technique 
and evidence supporting the validity of the analysis, including the 
actual data set used in the analysis. The random sample must be 
representative of the membership, must be sufficient in both number and 
scope on which to base conclusions, and must have a minimum confidence 
level of 95% and a confidence interval of 5%. A Federal credit union 
must draw the sample either entirely from loan files or entirely from 
the survey, and must not combine a loan file review with a survey. NCUA 
will provide a response to the Federal credit union within 60 days of 
its submission.
    (4) If NCUA determines a low-income designated federal credit union 
no longer meets the criteria for the designation, NCUA will notify the 
federal credit union in writing, and the federal credit union must, 
within five years, meet the criteria for the designation or come into 
compliance with the regulatory requirements applicable to federal credit 
unions that do not have a low-income designation. The designation will 
remain in effect during the five-year period. If a federal credit union 
does not requalify and has secondary capital or nonmember deposit 
accounts with a maturity beyond the five-year period, NCUA may extend 
the time for a federal credit union to come into compliance with 
regulatory requirements to allow the federal credit union to satisfy the 
terms of any account agreements. A federal credit union may appeal 
NCUA's determination that the credit union no longer meets the criteria 
for a low-income designation to the Board within 60 days of the date of 
the notice from NCUA. An appeal must be submitted through NCUA.
    (5) Any credit union with a low-income credit union designation on 
January 1, 2009 will have five years from that date to meet the criteria 
for low-income designation under paragraph (a)(1) of this section, 
unless NCUA determines a longer time is required to allow the low-income 
credit union to satisfy the terms of a secondary capital or nonmember 
deposit account agreement.
    (6) Definitions. The following definitions apply to this section:
    Median family income and total median earnings for individuals are 
income statistics reported by the U.S. Census Bureau. The applicable 
income data can be obtained via the American FactFinder on the Census 
Bureau's webpage at http://factfinder.census.gov/home/saff/
main.html?_lang=en.
    Metropolitan area means an area designated by the Office of 
Management and Budget pursuant to 31 U.S.C. 1104(d), 44 U.S.C. 3504(c), 
and Executive Order 10253, 16 FR 5605 (June 13, 1951) (as amended).
    (b) Acceptance of secondary capital accounts by low-income 
designated credit unions. A federal credit union having a designation of 
low-income status pursuant to paragraph (a) of this section may accept 
secondary capital accounts

[[Page 475]]

from nonnatural person members and nonnatural person nonmembers subject 
to the following conditions:
    (1) Secondary capital plan. Before accepting secondary capital, a 
low-income credit union (``LICU'') shall adopt, and forward to NCUA for 
approval, a written ``Secondary Capital Plan'' that, at a minimum:
    (i) States the maximum aggregate amount of uninsured secondary 
capital the LICU plans to accept;
    (ii) Identifies the purpose for which the aggregate secondary 
capital will be used, and how it will be repaid;
    (iii) Explains how the LICU will provide for liquidity to repay 
secondary capital upon maturity of the accounts;
    (iv) Demonstrates that the planned uses of secondary capital conform 
to the LICU's strategic plan, business plan and budget; and
    (v) Includes supporting pro forma financial statements, including 
any off-balance sheet items, covering a minimum of the next two years.
    (2) Decision on plan. If a LICU is not notified within 45 days of 
receipt of a Secondary Capital Plan that the plan is approved or 
disapproved, the LICU may proceed to accept secondary capital accounts 
pursuant to the plan.
    (3) Nonshare account. The secondary capital account must be 
established as an uninsured secondary capital account or other form of 
non-share account.
    (4) Minimum maturity. The maturity of the secondary capital account 
must be a minimum of five years.
    (5) Uninsured account. The secondary capital account will not be 
insured by the National Credit Union Share Insurance Fund or any 
governmental or private entity.
    (6) Subordination of claim. The secondary capital account investor's 
claim against the LICU must be subordinate to all other claims including 
those of shareholders, creditors and the National Credit Union Share 
Insurance Fund.
    (7) Availability to cover losses. Funds deposited into a secondary 
capital account, including interest accrued and paid into the secondary 
capital account, must be available to cover operating losses realized by 
the LICU that exceed its net available reserves (exclusive of secondary 
capital and allowance accounts for loan and lease losses), and to the 
extent funds are so used, the LICU must not restore or replenish the 
account under any circumstances. The LICU may, in lieu of paying 
interest into the secondary capital account, pay accrued interest 
directly to the investor or into a separate account from which the 
secondary capital investor may make withdrawals. Losses must be 
distributed pro-rata among all secondary capital accounts held by the 
LICU at the time the losses are realized. In instances where a LICU 
accepted secondary capital from the United States Government or any of 
its subdivisions under the Community Development Capital Initiative of 
2010 (``CDCI secondary capital'') and matching funds were required under 
the Initiative and are on deposit in the form of secondary capital at 
the time a loss is realized, a LICU must apply either of the following 
pro-rata loss distribution procedures to its secondary capital accounts 
with respect to the loss:
    (i) If not inconsistent with any agreements governing other 
secondary capital on deposit at the time a loss is realized, the CDCI 
secondary capital may be excluded from the calculation of the pro-rata 
loss distribution until all of its matching secondary capital has been 
depleted, thereby causing the CDCI secondary capital to be held as 
senior to all other secondary capital until its matching secondary 
capital is exhausted. The CDCI secondary capital should be included in 
the calculation of the pro-rata loss distribution and is available to 
cover the loss only after all of its matching secondary capital has been 
depleted.
    (ii) Regardless of any agreements applicable to other secondary 
capital, the CDCI secondary capital and its matching secondary capital 
may be considered a single account for purposes of determining a pro-
rata share of the loss and the amount determined as the pro-rata share 
for the combined account must first be applied to the matching secondary 
capital account, thereby causing the CDCI secondary capital to be held 
as senior to its matching secondary capital. The CDCI secondary capital 
is available to cover

[[Page 476]]

the loss only after all of its matching secondary capital has been 
depleted.
    (8) Security. The secondary capital account may not be pledged or 
provided by the account investor as security on a loan or other 
obligation with the LICU or any other party.
    (9) Merger or dissolution. In the event of merger or other voluntary 
dissolution of the LICU, other than merger into another LICU, the 
secondary capital accounts will be closed and paid out to the account 
investor to the extent they are not needed to cover losses at the time 
of merger or dissolution.
    (10) Contract agreement. A secondary capital account contract 
agreement must be executed by an authorized representative of the 
account investor and of the LICU reflecting the terms and conditions 
mandated by this section and any other terms and conditions not 
inconsistent with this section.
    (11) Disclosure and acknowledgement. An authorized representative of 
the LICU and of the secondary capital account investor each must execute 
a ``Disclosure and Acknowledgment'' as set forth in the appendix to this 
section at the time of entering into the account agreement. The LICU 
must retain an original of the account agreement and the ``Disclosure 
and Acknowledgment'' for the term of the agreement, and a copy must be 
provided to the account investor.
    (12) Prompt corrective action. As provided in Secs. 702.204(b)(11), 
702.304(b) and 702.305(b) of this chapter, the NCUA Board may prohibit a 
LICU classified ``critically undercapitalized'' or, if ``new,'' as 
``moderately capitalized'', ``marginally capitalized'', ``minimally 
capitalized'' or ``uncapitalized'', as the case may be, from paying 
principal, dividends or interest on its uninsured secondary capital 
accounts established after August 7, 2000, except that unpaid dividends 
or interest will continue to accrue under the terms of the account to 
the extent permitted by law.
    (c) Accounting treatment; Recognition of net worth value of 
accounts--(1) Equity account. A LICU that issues secondary capital 
accounts pursuant to paragraph (b) of this section must record the funds 
on its balance sheet in an equity account entitled ``uninsured secondary 
capital account.''
    (2) Schedule for recognizing net worth value. The LICU's reflection 
of the net worth value of the accounts in its financial statement may 
never exceed the full balance of the secondary capital on deposit after 
any early redemptions and losses. For accounts with remaining maturities 
of less than five years, the LICU must reflect the net worth value of 
the accounts in its financial statement in accordance with the lesser 
of:
    (i) The remaining balance of the accounts after any redemptions and 
losses; or
    (ii) The amounts calculated based on the following schedule:

------------------------------------------------------------------------
                                                              Net worth
                                                               value of
                     Remaining maturity                        original
                                                               balance
                                                              (percent)
------------------------------------------------------------------------
Four to less than five years...............................           80
Three to less than four years..............................           60
Two to less than three years...............................           40
One to less than two years.................................           20
Less than one year.........................................            0
------------------------------------------------------------------------

    (3) Financial statement. The LICU must reflect the full amount of 
the secondary capital on deposit in a footnote to its financial 
statement.
    (d) Redemption of secondary capital. With the written approval of 
NCUA, secondary capital that is not recognized as net worth under 
paragraph (c)(2) of this section (``discounted secondary capital'' 
recategorized as subordinated debt) may be redeemed according to the 
remaining maturity schedule in paragraph (d)(3) of this section.
    (1) Request to redeem secondary capital. A request for approval to 
redeem discounted secondary capital may be submitted in writing at any 
time, must specify the increment(s) to be redeemed and the schedule for 
redeeming all any part of each eligible increment, and must demonstrate 
to the satisfaction of NCUA that:
    (i) The LICU will have a post-redemption net worth classification of 
``adequately capitalized'' under part 702 of this chapter;
    (ii) The discounted secondary capital has been on deposit at least 
two years;
    (iii) The discounted secondary capital will not be needed to cover 
losses prior to final maturity of the account;

[[Page 477]]

    (iv) The LICU's books and records are current and reconciled;
    (v) The proposed redemption will not jeopardize other current 
sources of funding, if any, to the LICU; and
    (vi) The request to redeem is authorized by resolution of the LICU's 
board of directors.
    (2) Decision on request. A request to redeem discounted secondary 
capital may be granted in whole or in part. If a LICU is not notified 
within 45 days of receipt of a request for approval to redeem secondary 
capital that its request is either granted or denied, the LICU may 
proceed to redeem secondary capital accounts as proposed.
    (3) Schedule for redeeming secondary capital.

------------------------------------------------------------------------
                                                              Redemption
                                                               limit as
                     Remaining maturity                       percent of
                                                               original
                                                               balance
------------------------------------------------------------------------
Four to less than five years...............................           20
Three to less than four years..............................           40
Two to less than three years...............................           60
One to less than two years.................................           80
------------------------------------------------------------------------

    (4) Early redemption exception. Subject to the written approval of 
NCUA obtained pursuant to the requirements of paragraphs (d)(1) and (2) 
of this section, a LICU can redeem all or part of secondary capital 
accepted from the United States Government or any of its subdivisions at 
any time after the secondary capital has been on deposit for two years. 
If the secondary capital was accepted under conditions that required 
matching secondary capital from a source other than the Federal 
Government, the matching secondary capital may also be redeemed in the 
manner set forth in the preceding sentence. For purposes of obtaining 
NCUA's approval, all secondary capital a LICU accepts from the United 
States Government or any of its subdivisions, as well as its matching 
secondary capital, if any, is eligible for early redemption regardless 
of whether any part of the secondary capital has been discounted 
pursuant to paragraph (c)(2) of this section.

                         Appendix to Sec. 701.34

    A LICU that is authorized to accept uninsured secondary capital 
accounts and each investor in such an account shall execute and date the 
following ``Disclosure and Acknowledgment'' form, a signed original of 
which must be retained by the credit union:

                      Disclosure and Acknowledgment

    [Name of CU] and [Name of investor] hereby acknowledge and agree 
that [Name of investor] has committed [amount of funds] to a secondary 
capital account with [name of credit union] under the following terms 
and conditions:
    1. Term. The funds committed to the secondary capital account are 
committed for a period of __ years.
    2. Redemption prior to maturity. Subject to the conditions set forth 
in 12 CFR 701.34, the funds committed to the secondary capital account 
are redeemable prior to maturity only at the option of the LICU and only 
with the prior approval of NCUA.
    3. Uninsured, non-share account. The secondary capital account is 
not a share account and the funds committed to the secondary capital 
account are not insured by the National Credit Union Share Insurance 
Fund or any other governmental or private entity.
    4. Prepayment risk. Redemption of U.S.C. prior to the account's 
original maturity date may expose the account investor to the risk of 
being unable to reinvest the repaid funds at the same rate of interest 
for the balance of the period remaining until the original maturity 
date. The investor acknowledges that it understands and assumes 
responsibility for prepayment risk associated with the [name of credit 
union]'s redemption of the investor's U.S.C. account prior to the 
original maturity date.
    5. Availability to cover losses. The funds committed to the 
secondary capital account and any interest paid into the account may be 
used by [name of credit union] to cover any and all operating losses 
that exceed the credit union's net worth exclusive of allowance accounts 
for loan losses, and in the event the funds are so used, (name of credit 
union) will under no circumstances restore or replenish those funds to 
[name of institutional investor]. Dividends are not considered operating 
losses and are not eligible to be paid out of secondary capital.
    6. Accrued interest. By initialing below, [name of credit union] and 
[name of institutional investor] agree that accrued interest will be:

__Paid into and become part of the secondary capital account;
__Paid directly to the investor;
__Paid into a separate account from which the investor may make 
          withdrawals; or
__Any combination of the above provided the details are specified and 
          agreed to in writing.

    7. Subordination of claims. In the event of liquidation of [name of 
credit union], the funds committed to the secondary capital

[[Page 478]]

account will be subordinate to all other claims on the assets of the 
credit union, including claims of member shareholders, creditors and the 
National Credit Union Share Insurance Fund.
    8. Prompt Corrective Action. Under certain net worth classifications 
(see 12 CFR 702.204(b)(11), 702.304(b) and 702.305(b), as the case may 
be), the NCUA Board may prohibit [name of credit union] from paying 
principal, dividends or interest on its uninsured secondary capital 
accounts established after August 7, 2000, except that unpaid dividends 
or interest will continue to accrue under the terms of the account to 
the extent permitted by law.

ACKNOWLEDGED AND AGREED TO this __ day of [month and year] by:
________________________________________________________________________
[name of investor's official]
[title of official]
[name of investor]
[address and phone number of investor]
[investor's tax identification number]

________________________________________________________________________
[name of credit union official]
[title of official]

[61 FR 3790, Feb. 2, 1996, as amended at 61 FR 50695, 50697, Sept. 27, 
1996; 64 FR 72270, Dec. 27, 1999; 65 FR 21131, Apr. 20, 2000; 71 FR 
4238, Jan. 26, 2006; 73 FR 71912, Nov. 26, 2008; 75 FR 7342, Feb. 19, 
2010; 75 FR 47172, Aug. 5, 2010; 75 FR 57843, Sept. 23, 2010; 76 FR 
36979, June 24, 2011; 76 FR 80227, Dec. 23, 2011; 78 FR 4032, Jan. 18, 
2013]

    Effective Date Note: At 80 FR 66706, Oct. 29, 2015, Sec. 701.34 was 
amended by: 1. in paragraph (b)(12), removing the words 
``Secs. 702.204(b)(11), 702.304(b) and 702.305(b)'' and adding in their 
place the words ``part 702''; 2. in paragraph (d)(1)(i), removing the 
words ``net worth'' and adding in their place the word ``capital''; and 
3. in the appendix to Sec. 701.34, amending the paragraph beginning ``8. 
Prompt Corrective Action'' by removing the words ``net worth 
classifications (see 12 CFR 702.204(b)(11), 702.304(b) and 702.305(b), 
as the case may be)'' and adding in their place the words ``capital 
classifications (see 12 CFR part 702)'', effective Jan. 1, 2019.



Sec. 701.35  Share, share draft, and share certificate accounts.

    (a) Federal credit unions may offer share, share draft, and share 
certificate accounts in accordance with section 107(6) of the Act (12 
U.S.C. 1757(6)) and the board of directors may declare dividends on such 
accounts as provided in section 117 of the Act (12 U.S.C. 1763).
    (b) A Federal credit union shall accurately represent the terms and 
conditions of its share, share draft, and share certificate accounts in 
all advertising, disclosures, or agreements, whether written or oral
    (c) A Federal credit union may, consistent with this section, parts 
707 and 740 of this subchapter, other federal law, and its contractual 
obligations, determine the types of fees or charges and other matters 
affecting the opening, maintaining and closing of a share, share draft 
or share certificate account. State laws regulating such activities are 
not applicable to federal credit unions.
    (d) For purposes of this section, ``state law'' means the 
constitution, statutes, regulations, and judicial decisions of any 
state, the District of Columbia, the several territories and possessions 
of the United States, and the Commonwealth of Puerto Rico.

[47 FR 17979, Apr. 27, 1982, as amended at 50 FR 4637, Feb. 1, 1985; 59 
FR 50445, Sept. 27, 1993]



Sec. 701.36  Federal credit union occupancy, planning, and disposal
of acquired and abandoned premises.

    (a) Scope. Section 107(4) of the Federal Credit Union Act (12 U.S.C. 
1757(4)) authorizes a federal credit union to purchase, hold, and 
dispose of property necessary or incidental to its operations. This 
section interprets and implements that provision by establishing 
occupancy, planning, and disposal requirements for acquired and 
abandoned premises, and by prohibiting certain transactions. This 
section applies only to federal credit unions.
    (b) Definitions. For purposes of this section:
    Abandoned premises means real property previously used to transact 
credit union business but no longer used for that purpose. It also means 
real property originally acquired for future credit union expansion but 
no longer intended for that purpose.
    Immediate family member means a spouse or other family member living 
in the same household.
    Partially occupy means occupation, on a full-time basis, of a 
portion of the premises that is:
    (1) Consistent with the federal credit union's usage plan for the 
premises;
    (2) Significant enough that the federal credit union is deriving 
practical

[[Page 479]]

utility from the occupied portion, relative to the scope of the usage 
plan; and
    (3) Sufficient to show that the federal credit union will fully 
occupy the premises within a reasonable time.
    Premises means any office, branch office, suboffice, service center, 
parking lot, other facility, or real estate where the federal credit 
union transacts or will transact business.
    Senior management employee means the federal credit union's chief 
executive officer, any assistant chief executive officers, and the chief 
financial officer. For example, these individuals typically hold the 
title of President or Treasurer/Manager, Assistant President, Vice 
President or Assistant Treasurer/Manager, and Comptroller.
    Unimproved land or unimproved real property means:
    (1) Raw land or land without development, significant buildings, 
structures, or site preparation;
    (2) Land that has never had improvements;
    (3) Land that was improved at one time but has functionally reverted 
to its unimproved state; or
    (4) Land that has been improved, but the improvements serve no 
purpose for the federal credit union's planned use of the property.
    (c) Premises not currently used to transact credit union business. 
(1) If a federal credit union acquires premises for future expansion and 
does not fully occupy them within one year, it must have a board 
resolution in place by the end of that year with definitive plans for 
full occupation. Premises are fully occupied when the federal credit 
union (or the federal credit union and a credit union service 
organization or a vendor) uses the entire space on a full-time basis. 
Credit union service organizations and vendors must use the space 
primarily to support the federal credit union or to serve the federal 
credit union's members. The federal credit union must make its plans for 
full occupation available to NCUA upon request.
    (2) If a federal credit union acquires premises for future 
expansion, including unimproved land or unimproved real property, it 
must partially occupy them within a reasonable period, but no later than 
six years after the date of acquisition. NCUA may waive the partial 
occupation requirements. To seek a waiver, a federal credit union must 
submit a written request to its Regional Office and fully explain why it 
needs the waiver. The Regional Director will provide the federal credit 
union a written response, either approving or disapproving the request. 
The Regional Director's decision will be based on safety and soundness 
considerations.
    (3) A federal credit union must make diligent efforts to dispose of 
abandoned premises and any other real property it does not intend to use 
in transacting business. The federal credit union must seek fair market 
value for the property, and record its efforts to dispose of abandoned 
premises. After premises have been abandoned for four years, the federal 
credit union must publicly advertise the property for sale. The federal 
credit union must complete the sale within five years of abandonment, 
unless NCUA waives this requirement. To seek a waiver, a federal credit 
union must submit a written request to its Regional Office and fully 
explain why it needs the waiver. The Regional Director will provide the 
federal credit union a written response, either approving or 
disapproving the request. The Regional Director's decision will be based 
on safety and soundness considerations.
    (d) Prohibited transactions. (1) A federal credit union must not 
acquire, or lease for one year or longer, premises from any of the 
following, unless NCUA waives this prohibition:
    (i) A member of the federal credit union's board of directors, 
credit committee, supervisory committee, or senior management, or an 
immediate family member of such individual;
    (ii) A corporation in which a member of the federal credit union's 
board of directors, credit committee, supervisory committee, or senior 
management, or an immediate family member of such individual, is an 
officer or director, or has a stock interest of 10 percent or more; or
    (iii) A partnership, limited liability company, or other entity in 
which a member of the federal credit union's board of directors, credit 
committee,

[[Page 480]]

supervisory committee, or senior management, or an immediate family 
member of such individual, is a general partner, or a limited partner or 
entity member with an interest of 10 percent or more.
    (2) A federal credit union must not lease for one year or longer 
premises from any of its employees if the employee is directly involved 
in acquiring premises, unless the federal credit union's board of 
directors determines the employee's involvement is not a conflict of 
interest.
    (3) All transactions with business associates or family members not 
specifically prohibited by this section must be conducted at arm's 
length and in the interest of the federal credit union.
    (4) To seek a waiver from any of the prohibitions in this paragraph 
(d), a federal credit union must submit a written request to its 
Regional Office and fully explain why it needs the waiver. Within 45 
days of the receipt of the waiver request or all necessary 
documentation, whichever is later, the Regional Director will provide 
the federal credit union a written response, either approving or 
disapproving its request. The Regional Director's decision will be based 
on safety and soundness considerations and a determination as to whether 
a conflict of interest exists.

[78 FR 57252, Sept. 18, 2013, as amended at 80 FR 45850, Aug. 3, 2015]

    Effective Date Note: At 81 FR 93580, Dec. 21, 2016, effective Jan. 
20, 2017, Sec. 701.36 was amended by:
    a. Revising the section heading,
    b. Revising paragraph (a),
    c. Amending paragraph (b) by revising the definitions of Abandoned 
premises and Partially occupy,
    d. Removing paragraph (c)(1),
    e. Redesignating paragraphs (c)(2) and (3) as (c)(1) and (2), 
respectively, and
    f. Revising newly redesignated paragraph (c)(1).
    For the convenience of the user, the revised text is set forth as 
follows:



Sec. 701.36  Federal credit union occupancy and disposal of acquired and 
          abandoned premises.

    (a) Scope. Section 107(4) of the Federal Credit Union Act (12 U.S.C. 
1757(4)) authorizes a federal credit union to purchase, hold, and 
dispose of property necessary or incidental to its operations. This 
section interprets and implements that provision by establishing 
occupancy and disposal requirements for acquired and abandoned premises, 
and by prohibiting certain transactions. This section applies only to 
federal credit unions.
    (b) * * *
    Abandoned premises means premises previously used to transact credit 
union business but no longer used for that purpose. It also means 
premises originally acquired to transact future credit union business 
but no longer intended for that purpose.

                                * * * * *

    Partially occupy means occupation and use, on a full-time basis, of 
at least fifty percent of each of the premises by the federal credit 
union, or the federal credit union and a credit union service 
organization in which the federal credit union has a controlling 
interest in accordance with Generally Accepted Accounting Principles 
(GAAP).

                                * * * * *

    (c) Premises not currently used to transact credit union business. 
(1) If a federal credit union acquires premises, including unimproved 
land or unimproved real property, it must partially occupy each of them 
within a reasonable period, but no later than six years after the date 
of acquisition. NCUA may waive the partial occupation requirements. To 
seek a waiver, a federal credit union must submit a written request to 
its Regional Office and fully explain why it needs the waiver. The 
Regional Director will provide the federal credit union a written 
response, either approving or disapproving the request. The Regional 
Director's decision will be based on safety and soundness 
considerations.

                                * * * * *



Sec. 701.37  Treasury tax and loan depositaries; depositaries and 
financial agents of the Government.

    (a) Definitions. (1) Treasury Tax and Loan (TT&L) Remittance Account 
means a nondividend-paying account, the balance of which is subject to 
the right of immediate withdrawal, established for receipt of payments 
of Federal taxes and certain United States obligations under United 
States Treasury Department regulations.
    (2) TT&L Note Account means an account subject to the right of 
immediate call, evidencing funds held by depositaries electing the note 
option under United States Treasury Department regulations.
    (3) Treasury General Account means an account, established under 
United

[[Page 481]]

States Treasury Department regulations, in which a zero balance may be 
maintained and from which the entire balance may be withdrawn by the 
depositor immediately under all circumstances except closure of the 
credit union.
    (4) U.S. Treasury Time Deposit--Open Account means a nondividend-
bearing account, established under United States Treasury Department 
regulations, which generally may not be withdrawn until the expiration 
of 14 days after the date of the United States Treasury Department's 
written notice of intent to withdraw.
    (b) Subject to regulation of the United States Treasury Department, 
a Federal credit union may serve as a Treasury tax and loan depositary, 
a depositary of Federal taxes, a depositary of public money, and a 
financial agent of the United States Government. In serving in these 
capacities, a Federal credit union may maintain the accounts defined in 
subsection (a), pledge collateral, and perform the services described 
under United States Treasury Department regulations for institutions 
acting in these capacities.
    (c) Funds held in a TT&L Remittance Account, a TT&L Note Account, a 
Treasury General Account, and a U.S. Treasury Time Deposit--Open Account 
shall be considered deposits of public funds. Funds held in a TT&L 
Remittance Account and a TT&L Note Account shall be added together and 
insured up to a maximum of $250,000 in the aggregate. Funds held in a 
Treasury General Account and a U.S. Treasury Time Deposit--Open Account 
shall be added together and insured up to a maximum of $250,000 in the 
aggregate.
    (d) Funds held in a TT&L Remittance Account, a TT&L Note Account, a 
Treasury General Account, and U.S. Treasury Time Deposit--Open Account 
are not subject to the 60-day notice requirement of Article III, section 
5(a) of the Federal Credit Union Bylaws.

[54 FR 18471, May 1, 1989, as amended at 78 FR 4030, Jan. 18, 2013]



Sec. 701.38  Borrowed funds from natural persons.

    (a) Federal credit unions may borrow from a natural person, 
provided:
    (1) The borrowing is evidenced by a signed promissory note which 
sets forth the terms and conditions regarding maturity, prepayment, 
interest rate, method of computation, and method of payment;
    (2) The promissory note and any advertisement for such funds 
contains conspicuous langauge indicating that:
    (i) The note represents money borrowed by the credit union;
    (ii) The note does not represent shares and, therefore, is not 
insured by the National Credit Union Share Insurance Fund.
    (b) Federal credit unions must comply with the maximum borrowing 
authority of Sec. 741.2 of this chapter.

[45 FR 29271, May 2, 1980, as amended at 47 FR 17979, Apr. 27, 1982; 72 
FR 30246, May 31, 2007]



Sec. 701.39  Statutory lien.

    (a) Definitions. Within this section, each of the following terms 
has the meaning prescribed below:
    (1) Except as otherwise provided by law or except as otherwise 
provided by federal law is a qualifying phrase referring to a federal 
and/or state law, as the case may be, which supersedes a requirement of 
this section. It is the responsibility of the credit union to ascertain 
whether such statutory or case law exists and is applicable;
    (2) Impress means to attach to a member's account and is the act 
which makes the lien enforceable against that account;
    (3) Member means any member who is primarily, secondarily or 
otherwise responsible for an outstanding financial obligation to the 
credit union, including without limitation an obligor, maker, co-maker, 
guarantor, co-signer, endorser, surety or accommodation party;
    (4) Notice means written notice to a member disclosing, in plain 
language, that the credit union has the right to impress and enforce a 
statutory lien against the member's shares and dividends in the event of 
failure to satisfy a financial obligation, and may enforce the right 
without further notice to the member. Such notice must be given at the 
time, or at any time before, the member incurs the financial obligation;

[[Page 482]]

    (5) Statutory lien means the right granted by section 107(11) of the 
Federal Credit Union Act, 12 U.S.C. 1757(11), to a federal credit union 
to establish a right in or claim to a member's shares and dividends 
equal to the amount of that member's outstanding financial obligation to 
the credit union, as that amount varies from time to time.
    (b) Superior claim. Except as otherwise provided by law, a statutory 
lien gives the federal credit union priority over other creditors when 
claims are asserted against a member's account(s).
    (c) Impressing a statutory lien. Except as otherwise provided by 
federal law, a credit union can impress a statutory lien on a member's 
account(s)--
    (1) Account records. By giving notice thereof in the member's 
account agreement(s) or other account opening documentation; or
    (2) Loan documents. In the case of a loan, by giving notice thereof 
in a loan document signed or otherwise acknowledged by the member(s); or
    (3) By-Law or policy. Through a duly adopted credit union by-law or 
policy of the board of directors, of which the member is given notice.
    (d) Enforcing a statutory lien--(1) Application of funds. Except as 
otherwise provided by federal law, a federal credit union may enforce 
its statutory lien against a member's account(s) by debiting funds in 
the account and applying them to the extent of any of the member's 
outstanding financial obligations to the credit union.
    (2) Default required. A federal credit union may enforce its 
statutory lien against a member's account(s) only when the member fails 
to satisfy an outstanding financial obligation due and payable to the 
credit union.
    (3) Neither judgment nor set-off required. A federal credit union 
need not obtain a court judgment on the member's debt, nor exercise the 
equitable right of set-off, prior to enforcing its statutory lien 
against the member's account.

[64 FR 56956, Oct. 22, 1999]



        Sec. Appendix A to Part 701--Federal Credit Union Bylaws

                              Introduction

    A. Effective date. After consideration of public comment, the 
National Credit Union Administration (NCUA) Board adopted these Bylaws 
and incorporated them as appendix A to part 701 of NCUA's regulations on 
November 30, 2007. Unless a federal credit union has adopted bylaws 
before November 30, 2007, it must adopt these revised bylaws.
    B. Adoption of all or part of these bylaws. Although federal credit 
unions may retain any previously approved version of the bylaws, the 
NCUA Board encourages federal credit unions to adopt the revised bylaws 
because it believes they provide greater clarity and flexibility for 
credit unions and their officials and members. Federal credit unions may 
also adopt portions of the revised bylaws and retain the remainder of 
previously approved bylaws, but the NCUA Board cautions federal credit 
unions to be extremely careful. Federal credit unions must be careful 
because they run the risk of having inconsistent or conflicting 
provisions because of the various options the revised bylaws provide as 
well as other revisions in the text.
    C. Bylaw amendments. 1. The FCU Bylaws contain several provisions 
allowing FCU boards to select from an option or range of options and 
fill in a blank. Changes to ``fill-in-the-blank'' provisions are, in 
fact, changes to the FCU's bylaws and require a two-thirds vote of the 
board. As long as the FCU selects from the permissible options for 
completing the blank, the FCU need not submit the change for NCUA 
approval using the process outlined below.
    2. Federal credit unions continue to have the flexibility to request 
other bylaw amendments if the need arises. NCUA must approve any bylaw 
amendments; federal credit unions may no longer adopt amendments from 
the ``Standard Bylaw Amendments'' booklet because the 1999 revisions to 
the bylaws included sufficient flexibility to make the separate list of 
standard bylaw amendments superfluous. Thus, NCUA no longer 
differentiates between ``standard'' and ``nonstandard'' bylaw 
amendments.
    3. The procedure for approval of bylaw amendments is as follows:
    a. The federal credit union wishing to adopt a bylaw amendment must 
file a request with its regional director.
    b. The request must include the section of the bylaws to be amended; 
the reason for or purpose of the amendment, including an explanation of 
why the amendment is desirable and what it will accomplish for the 
credit union; and the specific, proposed wording of the amendment.
    c. After review by the regional director and consultation within the 
agency, the regional

[[Page 483]]

director will advise the credit union if a proposed amendment is 
approved.
    4. Federal credit unions considering an amendment may find it useful 
to review the bylaws section of the agency Web site, which includes 
Office of General Counsel opinions about proposed bylaw amendments. 
Opinions issued after April 2006 will include the language of approved 
amendments. Even if an amendment has been previously approved, the 
credit union must submit a proposed amendment to NCUA for review under 
the procedure listed above to ensure the amendment is identical. Credit 
unions requesting previously approved amendments will receive notice of 
the regional office's decision within 15 business days of the receipt of 
the request.
    D. The nature of the bylaws. 1. The Federal Credit Union Act 
requires the NCUA Board to prepare bylaws for federal credit unions. 12 
U.S.C. 1758. The bylaws address a broad range of matters concerning a 
credit union's organization and governance, the relationship of the 
credit union to its members, and the procedures and rules a credit union 
follows. The bylaws supplement the broad provisions of: A federal credit 
union's charter, which establishes the existence of a federal credit 
union; the Federal Credit Union Act, which establishes the powers of 
federal credit unions; and NCUA regulations, which implement the Federal 
Credit Union Act. As a legal matter, a federal credit union's bylaws 
must conform to and cannot be inconsistent with any provision of its 
charter, the Federal Credit Union Act, NCUA regulations or other laws or 
regulations applicable to its operations.
    2. NCUA expects federal credit unions and their members will make 
every effort to resolve bylaw disputes using the credit union's internal 
member complaint resolution process. If a bylaw dispute cannot be 
resolved internally, however, credit union officials or members should 
contact the regional office with jurisdiction for the credit union for 
assistance in resolving the dispute.
    3. NCUA has discretion to take administrative actions when a credit 
union is not in compliance with its bylaws. If a potential violation is 
identified, NCUA will carefully consider all of the facts and 
circumstances in deciding whether to take enforcement action. NCUA will 
not take action against minor or technical violations, but emphasizes 
that it retains discretion to enforce the bylaws in appropriate cases, 
such as safety and soundness concerns or threats to fundamental, 
material credit union member rights.

                            Table of Contents

                                  Page

Article I. Name--Purposes
Article II. Qualifications for Membership
Article III. Shares of Members
Article IV. Meetings of Members
Article V. Elections
Article VI. Board of Directors
Article VII. Board Officers, Management Officials and Executive 
Committee
Article VIII. Credit Committee or Loan Officers
Article IX. Supervisory Committee
Article X. Organization Meeting
Article XI. Loans and Lines of Credit to Members
Article XII. Dividends
Article XIII. Reserved
Article XIV. Expulsion and Withdrawal
Article XV. Minors
Article XVI. General
Article XVII. Amendments of Bylaws and Charter
Article XVIII. Definitions

                                 BYLAWS

                 Federal Credit Union, Charter No.______

      (A corporation chartered under the laws of the United States)

                        Article I. Name--Purposes

    Section 1. Name. The name of this credit union is as stated in 
Section 1 of the charter (approved organization certificate) of this 
credit union.
    Section 2. Purposes. This credit union is a member-owned, 
democratically operated, not-for-profit organization managed by a 
volunteer board of directors, with the specified mission of meeting the 
credit and savings needs of consumers, especially persons of modest 
means. The purpose of this credit union is to promote thrift among its 
members by affording them an opportunity to accumulate their savings and 
to create for them a source of credit for provident or productive 
purposes. The credit union may add business as one of its purposes by 
placing a comma after ``provident'' and inserting ``business.''

                Article II. Qualifications for Membership

    Section 1. Field of membership. The field of membership of this 
credit union is limited to that stated in Section 5 of its charter.
    Section 2. Membership application procedures. Applications for 
membership from persons eligible for membership under Section 5 of the 
charter must be signed by the applicant on forms approved by the board. 
The applicant is admitted to membership after approval of an application 
by a majority of the directors, a majority of the members of a duly 
authorized executive committee, or by a membership officer, and after 
subscription to at least one share of this credit union and the payment 
of the initial installment, and

[[Page 484]]

the payment of a uniform entrance fee if required by the board. If a 
person whose membership application is denied makes a written request, 
the credit union must explain the reasons for the denial in writing.
    Section 3. Maintenance of membership share required. A member who 
withdraws all shareholdings or fails to comply with the time 
requirements for restoring his or her account balance to par value in 
Article III, Section 3, ceases to be a member. By resolution, the board 
may require persons readmitted to membership to pay another entrance 
fee.
    Section 4. Continuation of membership. Once a member becomes a 
member that person may remain a member until the person or organization 
chooses to withdraw or is expelled in accordance with the Act and 
Article XIV of these bylaws. A member who is disruptive to credit union 
operations may be subject to limitations on services and access to 
credit union facilities. A credit union that wishes to restrict services 
to members no longer within the field of membership should specify the 
restrictions in this section.
    Staff commentary on qualifications for membership:
    Entrance fee--FCUs may not vary the entrance fee among different 
classes of members because the Act requires a uniform fee. FCUs may, 
however, eliminate the entrance fee for all applicants.

                     Article III. Shares of Members

    Section 1. Par value. The par value of each share will be $___. 
Subscriptions to shares are payable at the time of subscription, or in 
installments of at least $___ per month.
    Section 2. Cap on shares held by one person. The board may 
establish, by resolution, the maximum amount of shares that any one 
member may hold.
    Section 3. Time periods for payment and maintenance of membership 
share. A member who fails to complete payment of one share within ___ of 
admission to membership, or within ___ from the increase in the par 
value of shares, or a member who reduces the share balance below the par 
value of one share and does not increase the balance to at least the par 
value of one share within ___ of the reduction will be terminated from 
membership.
    Section 4. Transferability. Shares may only be transferred from one 
member to another by an instrument in a form as the board may prescribe. 
Shares that accrue credits for unpaid dividends retain those credits 
when transferred.
    Section 5. Withdrawals. Money paid in on shares or installments of 
shares may be withdrawn as provided in these bylaws or regulation on any 
day when payment on shares may be made, provided, however, that;
    (a) The board has the right, at any time, to require members to give 
up to 60 days written notice of intention to withdraw the whole or any 
part of the amounts paid in by them.
    (b) Reserved.
    (c) No member may withdraw any shareholdings below the amount of the 
member's primary or contingent liability to the credit union if the 
member is delinquent as a borrower, or if borrowers for whom the member 
is comaker, endorser, or guarantor are delinquent, without the written 
approval of the credit committee or loan officer. Coverage of overdrafts 
under an overdraft protection policy does not constitute delinquency for 
purposes of this paragraph. Shares issued in an irrevocable trust as 
provided in Section 6 of this article are not subject to withdrawal 
restrictions except as stated in the trust agreement.
    (d) The share account of a deceased member (other than one held in 
joint tenancy with another member) may be continued until the close of 
the dividend period in which the administration of the deceased's estate 
is completed.
    (e) The board will have the right, at any time, to impose a fee for 
excessive share withdrawals from regular share accounts. The number of 
withdrawals not subject to a fee and the amount of the fee will be 
established by board resolution and will be subject to regulations 
applicable to the advertising and disclosure of terms and conditions on 
member accounts.
    Section 6. Trusts. Shares may be issued in a revocable or 
irrevocable trust, subject to the following:
    When shares are issued in a revocable trust, the settlor must be a 
member of this credit union in his or her own right. When shares are 
issued in an irrevocable trust, either the settlor or the beneficiary 
must be a member of this credit union. The name of the beneficiary must 
be stated in both a revocable and irrevocable trust. For purposes of 
this section, shares issued pursuant to a pension plan authorized by the 
rules and regulations will be treated as an irrevocable trust unless 
otherwise indicated in the rules and regulations.
    Section 7. Joint accounts and membership requirements. Select one 
option and check the box corresponding to that option.
    -- Option A--Separate account not required to establish membership
    Owners of a joint account may both be members of the credit union 
without opening separate accounts. For joint membership, both owners are 
required to fulfill all of the membership requirements including each 
member purchasing and maintaining at least one share in the account.
    -- Option B--Separate account required to establish membership

[[Page 485]]

    Each member must purchase and maintain at least one share in a share 
account that names the member as the sole or primary owner. Being named 
as a joint owner of a joint account is insufficient to establish 
membership.
    Staff commentary on shares:
    i. Installments--FCUs may insert zero for the number of 
installments. The FCU Act allows membership upon the payment of the 
initial installment of a membership share, but NCUA no longer views this 
provision as requiring FCUs to offer the option of paying for the 
membership share in installments.
    ii. Par value--FCUs may establish differing par values for different 
classes of members or types of accounts, provided this action does not 
violate any federal, state or local antidiscrimination laws. For 
example, an FCU may want to establish a higher par value for recent 
credit union members, without requiring long-time members to bring their 
accounts up to the new par value. A differing par value may also be 
permissible for different types of accounts, such as requiring a higher 
par value for a member with only a share draft account. If a credit 
union adopts differing par values, all of the possible par values should 
be stated in Section 1.
    iii. Reduction in share balance below par value--When a member's 
account balance falls below the par value, Section 3 requires FCUs to 
allow members a minimum time period to restore their account balance to 
the par value before membership is terminated. FCUs may not delete this 
requirement or delete references to this requirement in Article II, 
Section 3.

                     Article IV. Meetings of Members

    Section 1. Annual meeting. The annual meeting of the members must be 
held [insert time for annual meeting, for example, ``during the month of 
March/on the third Saturday of April/ no later than March 31''], in the 
county in which any office of the credit union is located or within a 
radius of 100 miles of an office, at the time and place as the board 
determines and announces in the notice of the annual meeting.
    Section 2. Notice of meetings required. a. At least 30 but no more 
than 75 days before the date of any annual meeting or at least 7 days 
before the date of any special meeting of the members, the secretary 
must give written notice to each member. Notice may be by written notice 
delivered in person or by mail to the member's address, or, for members 
who have opted to receive statements and notices electronically, by 
electronic mail. Notice of the annual meeting may be given by posting 
the notice in a conspicuous place in the office of this credit union 
where it may be read by the members, at least 30 days before the 
meeting, if the annual meeting is to be held during the same month as 
that of the previous annual meeting and if this credit union maintains 
an office that is readily accessible to members where regular business 
hours are maintained. Any meeting of the members, whether annual or 
special, may be held without prior notice, at any place or time, if all 
the members entitled to vote, who are not present at the meeting, waive 
notice in writing, before, during, or after the meeting.
    b. Notice of any special meeting must state the purpose for which it 
is to be held, and no business other than that related to this purpose 
may be transacted at the meeting.
    Section 3. Special meetings. a. Special meetings of the members may 
be called by the chair or the board of directors upon a majority vote, 
or by the supervisory committee as provided in these bylaws. The chair 
must call a special meeting, meaning the meeting must be held, within 30 
days of the receipt of a written request of 25 members or 5% of the 
members as of the date of the request, whichever number is larger. 
However, a request of no more than 750 members may be required to call a 
special meeting.
    b. The notice of a special meeting must be given as provided in 
Section 2 of this article. Special meetings may be held at any location 
permitted for the annual meeting.
    Section 4. Items of business for annual meeting and rules of order 
for annual and special meetings. The suggested order of business at 
annual meetings of members is--
    (a) Ascertainment that a quorum is present.
    (b) Reading and approval or correction of the minutes of the last 
meeting.
    (c) Report of directors, if there is one. For credit unions 
participating in the Community Development Revolving Loan Program, the 
directors must report on the credit union's progress on providing needed 
community services, if required by NCUA Regulations.
    (d) Report of the financial officer or the chief management 
official.
    (e) Report of the credit committee, if there is one.
    (f) Report of the supervisory committee, as required by Section 115 
of the Act.
    (g) Unfinished business.
    (h) New business other than elections.
    (i) Elections, as required by Section 111 of the Act.
    (j) Adjournment.
    (k) To the extent consistent with these bylaws, all meetings of the 
members will be conducted according to ______. The order of business for 
the annual meeting may vary from the suggested order, provided it 
includes all required items and complies with the rules of procedure 
adopted by the credit union.
    The credit union must fill in the blank with one of the following 
authorities, noting the edition to be used: Democratic Rules of Order, 
The

[[Page 486]]

Modern Rules of Order, Robert's Rules of Order, or Sturgis' Standard 
Code of Parliamentary Procedure.
    Section 5. Quorum. Except as otherwise provided, 15 members 
constitute a quorum at annual or special meetings. If no quorum is 
present, an adjournment may be taken to a date at least 7 but not more 
than 14 days thereafter. The members present at any adjourned meeting 
will constitute a quorum, regardless of the number of members present. 
The same notice must be given for the adjourned meeting as is prescribed 
in Section 2 of this article for the original meeting, except that the 
notice must be given at least 5 days before the date of the meeting as 
fixed in the adjournment.

                          Article V. Elections

    The Credit Union must select one of the four voting options. This 
may be done by printing the credit union's bylaws with the option 
selected or retaining this copy and checking the box of the option 
selected. All options continue with Section 3 of this article.

  Option A1--In-Person Elections; Nominating Committee and Nominations 
                               From Floor

    Section 1. Nomination procedures. At least 30 days before each 
annual meeting, the chair will appoint a nominating committee of three 
or more members. It is the duty of the nominating committee to nominate 
at least one member for each vacancy, including any unexpired term 
vacancy, for which elections are being held, and to determine that the 
members nominated are agreeable to the placing of their names in 
nomination and will accept office if elected.
    Section 2. Election procedures. After the nominations of the 
nominating committee have been placed before the members, the chair 
calls for nominations from the floor. When nominations are closed, the 
chair appoints the tellers, ballots are distributed, the vote is taken 
and tallied by the tellers, and the results announced. All elections are 
determined by plurality vote and will be by ballot except where there is 
only one nominee for the office.

Option A2--In-Person Elections; Nominating Committee and Nominations by 
                                Petition

    Section 1. Nomination procedures. a. At least 120 days before each 
annual meeting the chair will appoint a nominating committee of three or 
more members. It is the duty of the nominating committee to nominate at 
least one member for each vacancy, including any unexpired term vacancy, 
for which elections are being held, and to determine that the members 
nominated are agreeable to the placing of their names in nomination and 
will accept office if elected.
    b. The nominating committee files its nominations with the secretary 
of the credit union at least 90 days before the annual meeting, and the 
secretary notifies in writing all members eligible to vote at least 75 
days before the annual meeting that nominations for vacancies may also 
be made by petition signed by 1% of the members with a minimum of 20 and 
a maximum of 500. The secretary may use electronic mail to notify 
members who have opted to receive notices or statements electronically.
    c. The written notice must indicate that the election will not be 
conducted by ballot and there will be no nominations from the floor when 
the number of nominees equals the number of positions to be filled. A 
brief statement of qualifications and biographical data in a form 
approved by the board of directors will be included for each nominee 
submitted by the nominating committee with the written notice to all 
eligible members. Each nominee by petition must submit a similar 
statement of qualifications and biographical data with the petition. The 
written notice must state the closing date for receiving nominations by 
petition. In all cases, the period for receiving nominations by petition 
must extend at least 30 days from the date that the petition requirement 
and the list of nominating committee's nominees are mailed to all 
members. To be effective, nominations by petition must be accompanied by 
a signed certificate from the nominee or nominees stating that they are 
agreeable to nomination and will serve if elected to office. Nominations 
by petition must be filed with the secretary of the credit union at 
least 40 days before the annual meeting and the secretary will ensure 
that nominations by petition, along with those of the nominating 
committee, are posted in a conspicuous place in each credit union office 
at least 35 days before the annual meeting.
    Section 2. Election procedures. a. All persons nominated by either 
the nominating committee or by petition must be placed before the 
members. When nominations are closed, the chair appoints the tellers, 
ballots are distributed, the vote is taken and tallied by the tellers, 
and the results announced. All elections are determined by plurality 
vote and will be by ballot except where there is only one nominee for 
each position to be filled.
    b. If sufficient nominations are made by the nominating committee or 
by petition to provide at least as many nominees as positions to be 
filled, nominations cannot be made from the floor. In the event 
nominations from the floor are permitted and result in more nominees 
than positions to be filled, when nominations have been closed, the 
chair appoints the tellers, ballots are distributed, the vote is taken 
and tallied by the tellers, and the results announced. When the number 
of nominees equals the number of positions to be filled, the chair may 
take a voice vote or declare each nominee elected

[[Page 487]]

by general consent or acclamation at the annual meeting.

   Option A3--Election by Ballot Boxes or Voting Machine; Nominating 
                  Committee and Nomination by Petition

    Section 1. Nomination procedures. a. At least 120 days before each 
annual meeting, the chair will appoint a nominating committee of three 
or more members. It is the duty of the nominating committee to nominate 
at least one member for each vacancy, including any unexpired term 
vacancy, for which elections are being held, and to determine that the 
members nominated are agreeable to the placing of their names in 
nomination and will accept office if elected.
    b. The nominating committee files its nominations with the secretary 
of the credit union at least 90 days before the annual meeting, and the 
secretary notifies in writing all members eligible to vote at least 75 
days before the annual meeting that nominations for vacancies may also 
be made by petition signed by 1% of the members with a minimum of 20 and 
a maximum of 500. The secretary may use electronic mail to notify 
members who have opted to receive notices or statements electronically.
    c. The written notice must indicate that the election will not be 
conducted by ballot and there will be no nominations from the floor when 
the number of nominees equals the number of positions to be filled. A 
brief statement of qualifications and biographical data in a form 
approved by the board of directors will be included for each nominee 
submitted by the nominating committee with the written notice to all 
eligible members. Each nominee by petition must submit a similar 
statement of qualifications and biographical data with the petition. The 
written notice must state the closing date for receiving nominations by 
petition. In all cases, the period for receiving nominations by petition 
must extend at least 30 days from the date of the petition requirement 
and the list of nominating committee's nominees are mailed to all 
members. To be effective, nominations by petition must be accompanied by 
a signed certificate from the nominee or nominees stating that they are 
agreeable to nomination and will serve if elected to office. Nominations 
by petition must be filed with the secretary of the credit union at 
least 40 days before the annual meeting and the secretary will ensure 
that nominations by petition along with those of the nominating 
committee are posted in a conspicuous place in each credit union office 
at least 35 days before the annual meeting.
    Section 2. Election procedures. All elections are determined by 
plurality vote. The election will be conducted by ballot boxes or voting 
machines, subject to the following conditions:
    (a) The board of directors will appoint the election tellers;
    (b) If sufficient nominations are made by the nominating committee 
or by petition to provide more nominees than positions to be filled, the 
secretary, at least 10 days before the annual meeting, will cause ballot 
boxes and printed ballots, or voting machines, to be placed in 
conspicuous locations, as determined by the board of directors with the 
names of the candidates posted near the boxes or voting machines. The 
name of each candidate will be followed by a brief statement of 
qualifications and biographical data in a form approved by the board of 
directors;
    (c) After the members have been given 24 hours to vote at 
conspicuous locations as determined by the board of directors, the 
ballot boxes or voting machines will be opened, the vote tallied by the 
tellers, the tallies placed in the ballot boxes, and the ballot boxes 
resealed. The tellers are responsible at all times for the ballot boxes 
or voting machines and the integrity of the vote. A record must be kept 
of all persons voting and the tellers must assure themselves that each 
person voting is entitled to vote; and
    (d) The tellers will take the ballot boxes to the annual meeting. At 
the annual meeting, printed ballots will be distributed to those in 
attendance who have not voted and their votes will be deposited in the 
ballot boxes placed by the tellers, before the beginning of the meeting, 
in conspicuous locations with the names of the candidates posted near 
them. After those members have been given an opportunity to vote at the 
annual meeting, balloting will be closed, the ballot boxes opened, the 
vote tallied by the tellers and added to the previous count, and the 
chair will announce the result of the vote.

 Option A4--Election by Electronic Device (Including But Not Limited To 
Telephone and Electronic Mail) or Mail Ballot; Nominating Committee and 
                         Nominations by Petition

    Section 1. Nomination procedures. a. At least 120 days before each 
annual meeting, the chair will appoint a nominating committee of three 
or more members. It is the duty of the nominating committee to nominate 
at least one member for each vacancy, including any unexpired term 
vacancy, for which elections are being held, and to determine that the 
members nominated are agreeable to the placing of their names in 
nomination and will accept office if elected.
    b. The nominating committee files its nominations with the secretary 
of the credit union at least 90 days before the annual meeting, and the 
secretary notifies in writing all members eligible to vote at least 75 
days before the annual meeting that nominations for vacancies may also 
be made by petition signed by 1% of the members with a minimum of 20 and 
a maximum of 500. The secretary may use electronic mail to notify

[[Page 488]]

members who have opted to receive notices or statements electronically.
    c. The notice must indicate that the election will not be conducted 
by ballot and there will be no nominations from the floor when the 
number of nominees equals the number of positions to be filled. A brief 
statement of qualifications and biographical data in a form approved by 
the board of directors will be included for each nominee submitted by 
the nominating committee with the notice to all eligible members. Each 
nominee by petition must submit a similar statement of qualifications 
and biographical data with the petition. The notice must state the 
closing date for receiving nominations by petition. In all cases, the 
period for receiving nominations by petition must extend at least 30 
days from the date of the petition requirement and the list of 
nominating committee's nominees are mailed to all members. To be 
effective, nominations by petition must be accompanied by a signed 
certificate from the nominee or nominees stating that they are agreeable 
to nomination and will serve if elected to office. Nominations by 
petition must be filed with the secretary of the credit union at least 
40 days before the annual meeting and the secretary will ensure that 
nominations by petition, along with those of the nominating committee, 
are posted in a conspicuous place in each credit union office at least 
35 days before the annual meeting.
    Section 2. Election procedures. All elections are determined by 
plurality vote. All elections will be by electronic device or mail 
ballot, subject to the following conditions:
    (a) The board of directors will appoint the election tellers;
    (b) If sufficient nominations are made by the nominating committee 
or by petition to provide more nominees than positions to be filled, the 
secretary, at least 30 days before the annual meeting, will cause either 
a printed ballot or notice of ballot to be mailed to all members 
eligible to vote. Electronic mail may be used to provide the notice of 
ballot to members who have opted to receive notices or statements 
electronically;
    (c) If the credit union is conducting its elections electronically, 
the secretary will cause the following materials to be transmitted to 
each eligible voter and the following procedures will be followed:
    (1) One notice of balloting stating the names of the candidates for 
the board of directors and the candidates for other separately 
identified offices or committees. The name of each candidate must be 
followed by a brief statement of qualifications and biographical data in 
a form approved by the board of directors. Electronic mail may be used 
to provide the notice of ballot to members who have opted to receive 
notices or statements electronically.
    (2) One mail ballot that conforms to Section 2(d) of this article 
and one instruction sheet stating specific instructions for the 
electronic election procedure, including how to access and use the 
system, and the period of time in which votes will be taken. The 
instruction will state that members without the requisite electronic 
device necessary to vote on the system may vote by submitting the 
enclosed mail ballot and specify the date the mail ballot must be 
received by the credit union. For members who have opted to receive 
notices or statements electronically, the mail ballot is not required 
and electronic mail may be used to provide the instructions for the 
electronic election procedure.
    (3) It is the duty of the tellers of election to verify, or cause to 
be verified the name of the voter and the credit union account number as 
they are registered in the electronic balloting system. It is the duty 
of the teller to test the integrity of the balloting system at regular 
intervals during the election period.
    (4) Ballots must be received no later than midnight, 5 calendar days 
before the annual meeting.
    (5) The vote will be tallied by the tellers. The result must be 
verified at the annual meeting and the chair will make the result of the 
vote public at the annual meeting.
    (6) In the event of malfunction of the electronic balloting system, 
the board of directors may in its discretion order elections be held by 
mail ballot only. The mail ballots must conform to Section 2(d) of this 
article and must be mailed once more to all eligible members 30 days 
before the annual meeting. The board may make reasonable adjustments to 
the voting time frames above, or postpone the annual meeting when 
necessary, to complete the elections before the annual meeting.
    (d) If the credit union is conducting its election by mail ballot, 
the secretary will cause the following materials to be mailed to each 
member and the following procedures will be followed:
    (1) One ballot, clearly identified as the ballot on which the names 
of the candidates for the board of directors and the candidates for 
other separately identified offices or committees are printed in random 
order. The name of each candidate will be followed by a brief statement 
of qualifications and biographical data in a form approved by the board 
of directors;
    (2) One ballot envelope clearly marked with instructions that the 
completed ballot must be placed in that envelope and sealed;
    (3) One identification form to be completed so as to include the 
name, address, signature and credit union account number of the voter;
    (4) One mailing envelope in which the voter, following instructions 
provided with the mailing envelope, must insert the sealed

[[Page 489]]

ballot envelope and the identification form, and which must have postage 
prepaid and be preaddressed for return to the tellers;
    (5) When properly designed with features that preserve the secrecy 
of the ballot, one form can be printed that represents a combined ballot 
and identification form, and postage prepaid and preaddressed return 
envelope;
    (6) It is the duty of the tellers to verify, or cause to be 
verified, the name and credit union account number of the voter as 
appearing on the identification form; to place the verified 
identification form and the sealed ballot envelope in a place of 
safekeeping pending the count of the vote; in the case of a questionable 
or challenged identification form, to retain the identification form and 
sealed ballot envelope together until the verification or challenge has 
been resolved;
    (7) Ballots mailed to the tellers must be received by the tellers no 
later than midnight 5 days before the date of the annual meeting;
    (8) The vote will be tallied by the tellers. The result will be 
verified at the annual meeting and the chair will make the result of the 
vote public at the annual meeting.

                        All Options Continue Here

    Section 3. Order of nominations. Nominations may be in the following 
order:
    (a) Nominations for directors.
    (b) Nominations for credit committee members, if applicable. 
Elections may be by separate ballots following the same order as the 
above nominations or, if preferred, may be by one ballot for all 
offices.
    Section 4. Proxy and agent voting. Members cannot vote by proxy. A 
member other than a natural person may vote through an agent designated 
in writing for the purpose.
    Section 5. One vote per member. Irrespective of the number of 
shares, no member has more than one vote.
    Section 6. Submission of information regarding credit union 
officials to NCUA. The names and addresses of members of the board, 
board officers, executive committee, and members of the credit 
committee, if applicable, and supervisory committees must be forwarded 
to the Administration in accordance with the Act and regulations in the 
manner as may be required by the Administration.
    Section 7. Minimum age requirement. Members must be at least _ years 
of age by the date of the meeting (or for appointed offices, the date of 
appointment) in order to vote at meetings of the members, hold elective 
or appointive office, sign nominating petitions, or sign petitions 
requesting special meetings.
    The Credit Union's board should adopt a resolution inserting an age 
no greater than 18, or the age of majority under the state law 
applicable to the credit union, in the blank space.
    The Credit Union may select the absentee ballot provision in 
conjunction with the voting procedure it has selected. This may be done 
by printing the credit union's bylaws with this provision or by 
retaining this copy and checking the box.
    -- Section 8. Absentee ballots. The board of directors may authorize 
the use of absentee ballots in conjunction with the other procedures 
authorized in this article, subject to the following conditions:
    (a) The board of directors will appoint the election tellers;
    (b) If sufficient nominations are made by the nominating committee 
or by petition to provide more than one nominee for any position to be 
filled, the secretary, at least 30 days before the annual meeting, will 
cause printed ballots to be mailed to all members of the credit union 
who are eligible to vote and who have submitted a written or electronic 
request for an absentee ballot;
    (c) The secretary will cause the following materials to be mailed to 
each eligible voter who has submitted a written or electronic request 
for an absentee ballot:
    (1) One ballot, clearly identified as the ballot on which the names 
of the candidates for the board of directors and the candidates for 
other separately identified offices or committees are printed in random 
order. The name of each candidate will be followed by a brief statement 
of qualifications and biographical data in a form approved by the board 
of directors;
    (2) One ballot envelope clearly marked with instructions that the 
completed ballot must be placed in that envelope and sealed;
    (3) One identification form to be completed so as to include the 
name, address, signature and credit union account number of the voter;
    (4) One mailing envelope in which the voter, pursuant to 
instructions provided with the envelope, must insert the sealed ballot 
envelope and the identification form, and which must have postage 
prepaid and be preaddressed for return to the tellers;
    (5) When properly designed with features that preserve the secrecy 
of the ballot, one form can be printed that represents a combined ballot 
and identification form, and postage prepaid and preaddressed return 
envelope;
    (d) It is the duty of the election tellers to verify, or cause to be 
verified, the name and credit union account number of the voter as 
appearing on the identification form; to place the verified 
identification and the sealed ballot envelope in a place of safekeeping 
pending the count of the vote; in the case of a questionable or 
challenged identification form, to retain the identification form and 
the sealed ballot envelope together until the verification or challenge 
has been resolved; and in the event that more than one voting procedure 
is used, to verify that

[[Page 490]]

no eligible voter has voted more than one time;
    (e) Ballots mailed to the tellers must be received by the tellers no 
later than midnight 5 days before the date of the annual meeting;
    (f) Absentee ballots will be deposited in the ballot boxes to be 
taken to the annual meeting or included in a precount in accordance with 
procedures specified in Article V, Section 2; and
    (g) If a member has chosen to receive statements and notices 
electronically, the credit union may provide notices required in this 
section by email and provide instructions for voting via electronic 
means instead of mail ballots.
    Staff commentary on the election process:
    i. Eligibility Requirements: The Act and the FCU Bylaws contain the 
only eligibility requirements for membership on an FCU's board of 
directors, which are as follows:
    (a) The individual must be a member of the FCU before distribution 
of ballots;
    (b) the individual cannot have been convicted of a crime involving 
dishonesty or breach of trust unless the NCUA Board has waived the 
prohibition for the conviction; and
    (c) the individual meets the minimum age requirement established 
under Article V, Section 7 of the FCU Bylaws.
    Anyone meeting the three eligibility requirements may run for a seat 
on the board of directors if properly nominated. It is the nominating 
committee's duty to ascertain that all nominated candidates, including 
those nominated by petition, meet the eligibility requirements.
    ii. Nomination Criteria for Nominating Committee: The FCU Act and 
the FCU Bylaws do not prohibit a board of directors from establishing 
reasonable criteria, in addition to the eligibility requirements, for a 
nominating committee to follow in making its nominations, such as 
financial experience, years of membership, or conflict of interest 
provisions. The board's nomination criteria, however, applies only to 
individuals nominated by the nominating committee; they cannot be 
imposed on individuals who meet the eligibility requirements and are 
properly nominated from the floor or by petition.
    iii. Candidates' Names on Ballots: When producing an election 
ballot, the FCU's secretary may order the names of the candidates on the 
ballot using any method for selection provided it is random and used 
consistently from year to year so as to avoid manipulation or 
favoritism.
    iv. Secret Ballots: An FCU must establish an election process that 
assures members their votes remain confidential and secret from all 
interested parties. If the election process does not separate the 
member's identity from the ballot, FCUs should use a third-party teller 
that has sole control over completed ballots. If the ballots are 
designed so that members' identities remain secret and are not disclosed 
on the ballot, FCUs may use election tellers from the FCU. In any case, 
FCU employees, officials, and members must not have access to ballots 
identifying members or to information that links members' votes to their 
identities.
    v. Plurality Voting: At least one nominee must be nominated for each 
vacant seat. When there are more nominees than seats open for election, 
the nominees who receive the greatest number of votes are elected to the 
vacant seats.
    vi. Minimum Age Requirement: The age the board selects may not be 
greater than the age of majority under the state law applicable to the 
credit union.

                     Article VI. Board of Directors

    Section 1. Number of members. The board consists of ___members, all 
of whom must be members of this credit union. The number of directors 
may be changed to an odd number not fewer than 5 nor more than 15 by 
resolution of the board. No reduction in the number of directors may be 
made unless corresponding vacancies exist as a result of deaths, 
resignations, expiration of terms of office, or other actions provided 
by these bylaws. A copy of the resolution of the board covering any 
increase or decrease in the number of directors must be filed with the 
official copy of the bylaws of this credit union.
    Section 2. Composition of board. ___(Fill in the number, which may 
be zero) directors or committee members may be a paid employee of the 
credit union. ___(Fill in the number, which may be zero) immediate 
family members of a director or committee member may be a paid employee 
of the credit union. In no case may employees, family members, or 
employees and family members constitute a majority of the board. The 
board may appoint a management official who ___(may or may not) be a 
member of the board and one or more assistant management officials who 
___(may or may not) be a member of the board. If the management official 
or assistant management official is permitted to serve on the board, he 
or she may not serve as the chair.
    Section 3. Terms of office. Regular terms of office for directors 
must be for periods of either 2 or 3 years as the board determines. All 
regular terms must be for the same number of years and until the 
election and qualification of successors. Regular terms must be fixed at 
the first meeting, or upon any increase or decrease in the number of 
directors, so that approximately an equal number of regular terms must 
expire at each annual meeting.
    Section 4. Vacancies. Any vacancy on the board, credit committee, if 
applicable, or supervisory committee will be filled as soon as

[[Page 491]]

possible by vote of a majority of the directors then holding office. If 
all director positions become vacant simultaneously, the supervisory 
committee immediately becomes the temporary board of directors and must 
follow the procedures in Article IX, Section 3. Directors and credit 
committee members appointed to fill a vacancy will hold office only 
until the next annual meeting, at which any unexpired terms will be 
filled by vote of the members, and until the qualification of their 
successors. Members of the supervisory committee appointed to fill a 
vacancy will hold office until the first regular meeting of the board 
following the next annual meeting of members, at which the regular term 
expires, and until the appointment and qualification of their 
successors.
    Section 5. Regular and special meetings. A regular meeting of the 
board must be held each month at the time and place fixed by resolution 
of the board. One regular meeting each calendar year must be conducted 
in person. If a quorum is present in person for the annual in person 
meeting, the remaining board members may participate using audio or 
video teleconference methods. The other regular meetings may be 
conducted using audio or video teleconference methods. The chair, or in 
the chair's absence the ranking vice chair, may call a special meeting 
of the board at any time and must do so upon written request of a 
majority of the directors then holding office. Unless the board 
prescribes otherwise, the chair, or in the chair's absence the ranking 
vice chair, will fix the time and place of special meetings. Notice of 
all meetings will be given in the manner the board may from time to time 
by resolution prescribe. Special meetings may be conducted using audio 
or video teleconference methods.
    Section 6. Board responsibilities. The board has the general 
direction and control of the affairs of this credit union and is 
responsible for performing all the duties customarily performed by 
boards of directors. This includes but is not limited to the following:
    (a) Directing the affairs of the credit union in accordance with the 
Act, these bylaws, the rules and regulations and sound business 
practices.
    (b) Establishing programs to achieve the purposes of this credit 
union as stated in Article I, Section 2, of these bylaws.
    (c) Establishing a loan collection program and authorizing the 
chargeoff of uncollectible loans.
    (d) Establishing a policy to address training for newly elected and 
incumbent directors and volunteer officials, in areas such as ethics and 
fiduciary responsibility, regulatory compliance, and accounting and 
determining that all persons appointed or elected by this credit union 
to any position requiring the receipt, payment or custody of money or 
other property of this credit union, or in its custody or control as 
collateral or otherwise, are properly bonded in accordance with the Act 
and regulations.
    (e) Performing additional acts and exercising additional powers as 
may be required or authorized by applicable law.
    If the credit union has an elected credit committee, you do not need 
to check a box. If the credit union has no credit committee check Option 
1 and if it has an appointed credit committee check Option 2.
    -- Option 1 No Credit Committee.
    (f) Reviewing denied loan applications of members who file written 
requests for review.
    (g) Appointing one or more loan officers and delegating to those 
officers the power to approve or disapprove loans, lines of credit or 
advances from lines of credit.
    (h) In its discretion, appointing a loan review committee to review 
loan denials and delegating to the committee the power to overturn 
denials of loan applications. The committee will function as a mid-level 
appeal committee for the board. Any denial of a loan by the committee 
must be reviewed by the board upon written request of the member. The 
committee must consist of three members and the regular term of office 
of the committee member will be for two years. Not more than one member 
of the committee may be appointed as a loan officer.
    -- Option 2. Appointed Credit Committee.
    (f) Appointing an odd number of credit committee members as provided 
in Article VIII of these bylaws.
    Section 7. Quorum. A majority of the number of directors, including 
any vacant positions, constitutes a quorum for the transaction of 
business at any meeting, except that vacancies may be filled by a quorum 
consisting of a majority of the directors holding office as provided in 
Section 4 of this article. Fewer than a quorum may adjourn from time to 
time until a quorum is in attendance.
    Section 8. Attendance and removal. a. If a director or a credit 
committee member, if applicable, fails to attend regular meetings of the 
board or credit committee, respectively, for 3 consecutive months, or 4 
meetings within a calendar year, or otherwise fails to perform any of 
the duties as a director or a credit committee member, the office may be 
declared vacant by the board and the vacancy filled as provided in the 
bylaws.
    b. The board may remove any board officer from office for failure to 
perform the duties thereof, after giving the officer reasonable notice 
and opportunity to be heard.
    When any board officer, membership officer, executive committee 
member or investment committee member is absent, disqualified, or 
otherwise unable to perform the duties of the office, the board may by 
resolution designate another member of this credit

[[Page 492]]

union to fill the position temporarily. The board may also, by 
resolution, designate another member or members of this credit union to 
act on the credit committee when necessary in order to obtain a quorum.
    Section 9. Suspension of supervisory committee members. Any member 
of the supervisory committee may be suspended by a majority vote of the 
board of directors. The members of this credit union will decide, at a 
special meeting held not fewer than 7 nor more than 14 days after any 
suspension, whether the suspended committee member will be removed from 
or restored to the supervisory committee.

    Article VII. Board Officers, Management Officials and Executive 
                                Committee

    Section 1. Board officers. The board officers of this credit union 
are comprised of a chair, one or more vice chairs, a financial officer, 
and a secretary, all of whom are elected by the board and from their 
number. The board determines the title and rank of each board officer 
and records them in the addendum to this article. One board officer, the 
______, may be compensated for services as determined by the board. If 
more than one vice chair is elected, the board determines their rank as 
first vice chair, second vice chair, and so on. The offices of the 
financial officer and secretary may be held by the same person. If a 
management official or assistant management official is permitted to 
serve on the board, he or she may not serve as the chair. Unless removed 
as provided in these bylaws, the board officers elected at the first 
meeting of the board hold office until the first meeting of the board 
following the first annual meeting of the members and until the election 
and qualification of their respective successors.
    Section 2. Election and term of office. Board officers elected at 
the meeting of the board next following the annual meeting of the 
members, which must be held not later than 7 days after the annual 
meeting, hold office for a term of 1 year and until the election and 
qualification of their respective successors: provided, however, that 
any person elected to fill a vacancy caused by the death, resignation, 
or removal of an officer is elected by the board to serve only for the 
unexpired term of that officer and until a successor is duly elected and 
qualified.
    Section 3. Duties of Chair. The chair presides at all meetings of 
the members and at all meetings of the board, unless disqualified 
through suspension by the supervisory committee. The chair also performs 
other duties customarily assigned to the office of the chair or duties 
he or she is directed to perform by resolution of the board not 
inconsistent with the Act and regulations and these bylaws.
    Section 4. Approval required. The board must approve all individuals 
who are authorized to sign all notes of this credit union and all 
checks, drafts and other orders for disbursement of credit union funds.
    Section 5. Vice chair. The ranking vice chair has and may exercise 
all the powers, authority, and duties of the chair during the chair's 
absence or inability to act.
    Section 6. Duties of financial officer. i. The financial officer 
manages this credit union under the control and direction of the board 
unless the board has appointed a management official to act as general 
manager. Subject to limitations, controls and delegations the board may 
impose, the financial officer will:
    (a) Have custody of all funds, securities, valuable papers and other 
assets of this credit union.
    (b) Provide and maintain full and complete records of all the assets 
and liabilities of this credit union in accordance with forms and 
procedures prescribed in regulations and other guidance approved by the 
Administration, including, for small credit unions, the Accounting 
Manual for Federal Credit Unions.
    (c) Within 20 days after the close of each month, ensure that a 
financial statement showing the condition of this credit union as of the 
end of the month, including a summary of delinquent loans is prepared 
and submitted to the board and post a copy of the statement in a 
conspicuous place in the office of the credit union where it will remain 
until replaced by the financial statement for the next succeeding month.
    (d) Ensure that financial and other reports the Administration may 
require are prepared and sent.
    (e) Within standards and limitations prescribed by the board, employ 
tellers, clerks, bookkeepers, and other office employees, and have the 
power to remove these employees.
    (f) Perform other duties customarily assigned to the office of the 
financial officer or duties he or she is directed to perform by 
resolution of the board not inconsistent with the Act, regulations and 
these bylaws.
    ii. The board may employ one or more assistant financial officers, 
none of whom may also hold office as chair or vice chair, and may 
authorize them, under the direction of the financial officer, to perform 
any of the duties devolving on the financial officer, including the 
signing of checks. When designated by the board, any assistant financial 
officer may also act as financial officer during the financial officer's 
temporary absence or temporary inability to act.
    Section 7. Duties of management official and assistant management 
official. The board may appoint a management official who is under the 
direction and control of the board or of the financial officer as 
determined by the board. The management official may be assigned any or 
all of the responsibilities of the financial officer described in 
Section 6 of

[[Page 493]]

this article. The board will determine the title and rank of each 
management official and record them in the addendum to this article. The 
board may employ one or more assistant management officials. The board 
may authorize assistant management officials under the direction of the 
management official, to perform any of the duties devolving on the 
management official, including the signing of checks. When designated by 
the board, any assistant management official may also act as management 
official during the management official's temporary absence or temporary 
inability to act.
    Section 8. Board powers regarding employees. The board employs, 
fixes the compensation, and prescribes the duties of employees as 
necessary, and has the power to remove employees, unless it has 
delegated these powers to the financial officer or management official. 
Neither the board, the financial officer, nor the management official 
has the power or duty to employ, prescribe the duties of, or remove 
necessary clerical and auditing assistance employed or used by the 
supervisory committee and, if there is a credit committee, the power or 
duty to employ, prescribe the duties of, or remove any loan officer 
appointed by the credit committee.
    Section 9. Duties of secretary. The secretary prepares and maintains 
full and correct records of all meetings of the members and of the 
board, which records will be prepared within 7 days after the respective 
meetings. The secretary must promptly inform the Administration in 
writing of any change in the address of the office of this credit union 
or the location of its principal records. The secretary will give or 
cause to be given, in the manner prescribed in these bylaws, proper 
notice of all meetings of the members, and perform other duties he or 
she may be directed to perform by resolution of the board not 
inconsistent with the Act, regulations and these bylaws. The board may 
employ one or more assistant secretaries, none of whom may also hold 
office as chair, vice chair, or financial officer, and may authorize 
them under direction of the secretary to perform any of the duties 
assigned to the secretary.
    Section 10. Executive committee. As authorized by the Act, the board 
may appoint an executive committee of not fewer than three directors to 
serve at its pleasure, to act for it with respect to the board's 
specifically delegated functions. When making delegations to the 
executive committee, the board must be specific with regard to the 
committee's authority and limitations related to the particular 
delegation. The board may also authorize any of the following to approve 
membership applications under conditions the board and these bylaws may 
prescribe: an executive committee; a membership officer(s) appointed by 
the board from the membership, other than a board member paid as an 
officer; the financial officer; any assistant to the paid officer of the 
board or to the financial officer; or any loan officer. No executive 
committee member or membership officer may be compensated as such.
    Section 11. Investment committee. The board may appoint an 
investment committee composed of not less than two, to serve at its 
pleasure to have charge of making investments under rules and procedures 
established by the board. No member of the investment committee may be 
compensated as such. Addendum: The board must list the positions of the 
board officers and management officials of this credit union. They are 
as follows:
    Select Option 1 if the credit union has a credit committee and 
Option 2 if it does not have a credit committee.

                 Article VIII. Option 1 Credit Committee

    Section 1. Credit committee members. The credit committee consists 
of ___ members. All the members of the credit committee must be members 
of this credit union. The number of members of the credit committee must 
be an odd number and may be changed to not fewer than 3 nor more than 7 
by resolution of the board. No reduction in the number of members may be 
made unless corresponding vacancies exist as a result of deaths, 
resignations, expiration of terms of office, or other actions provided 
by these bylaws. A copy of the resolution of the board covering any 
increase or decrease in the number of committee members must be filed 
with the official copy of the bylaws of this credit union.
    Section 2. Terms of office. Regular terms of office for elected 
credit committee members are for periods of either 2 or 3 years as the 
board determines: provided, however, that all regular terms are for the 
same number of years and until the election and qualification of 
successors. The regular terms are fixed at the beginning, or upon any 
increase or decrease in the number of committee members, that 
approximately an equal number of regular terms expire at each annual 
meeting. Regular terms of office for appointed credit committee members 
are for periods as determined by the board and as noted in the board's 
minutes.
    Section 3. Officers of credit committee. The credit committee 
chooses from their number a chair and a secretary. The secretary of the 
committee prepares and maintains full and correct records of all actions 
taken by it, and those records must be prepared within 3 days after the 
action. The offices of the chair and secretary may be held by the same 
person.
    Section 4. Credit committee powers. The credit committee may, by 
majority vote of its members, appoint one or more loan officers to serve 
at its pleasure, and delegate to them the power to approve application 
for loans or lines of credit, share withdrawals,

[[Page 494]]

releases and substitutions of security, within limits specified by the 
committee and within limits of applicable law and regulations. Not more 
than one member of the committee may be appointed as a loan officer. 
Each loan officer must furnish to the committee a record of each 
approved or not approved transaction within 7 days of the date of the 
filing of the application or request, and this record becomes a part of 
the records of the committee. All applications or requests not approved 
by a loan officer must be acted upon by the committee. No individual may 
disburse funds of this credit union for any application or share 
withdrawal which the individual has approved as a loan officer.
    Section 5. Credit committee meetings. The credit committee holds 
meetings as the business of this credit union may require, and not less 
frequently than once a month. Notice of meetings will be given to 
members of the committee in a manner as the committee may from time to 
time, by resolution, prescribe.
    Section 6. Credit committee duties. For each loan or line of credit, 
the credit committee or loan officer must inquire into the character and 
financial condition of the applicant and the applicant's sureties, if 
any, to ascertain their ability to repay fully and promptly the 
obligations incurred by them and to determine whether the loan or line 
of credit will be of probable benefit to the borrower. The credit 
committee and its appointed loan officers should endeavor diligently to 
assist applicants in solving their financial problems.
    Section 7. Unapproved loans prohibited. No loan or line of credit 
may be made unless approved by the committee or a loan officer in 
accordance with applicable law and regulations.
    Section 8. Lending procedures. Subject to the limits imposed by 
applicable law and regulations, these bylaws, and the general policies 
of the board, the credit committee, or a loan officer, determines the 
security, if any, required for each application and the terms of 
repayment. The security furnished must be adequate in quality and 
character and consistent with sound lending practices. When funds are 
not available to make all the loans and lines of credit for which there 
are applications, preference should be given, in all cases, to the 
smaller applications if the need and credit factors are nearly equal.

       Article VIII. Option 2 Loan Officers (No Credit Committee)

    Section 1. Records of loan officer; prohibition on loan officer 
disbursing funds. Each loan officer must maintain a record of each 
approved or not approved transaction within 7 days of the filing of the 
application or request, and that record becomes a part of the records of 
the credit union. No individual may disburse funds of this credit union 
for any application or share withdrawal which the individual has 
approved as a loan officer.
    Section 2. Duties of loan officer. For each loan or line of credit, 
the loan officer must inquire into the character and financial condition 
of the applicant and the applicant's sureties, if any, to ascertain 
their ability to repay fully and promptly the obligations incurred by 
them and to determine whether the loan or line of credit will be of 
probable benefit to the borrower. The loan officers should endeavor 
diligently to assist applicants in solving their financial problems.
    Section 3. Unapproved loans prohibited. No loan or line of credit 
may be made unless approved by a loan officer in accordance with 
applicable law and regulations.
    Section 4. Lending procedures. Subject to the limits imposed by law 
and regulations, these bylaws, and the general policies of the board, a 
loan officer determines the security if any required for each 
application and the terms of repayment. The security furnished must be 
adequate in quality and character and consistent with sound lending 
practices. When funds are not available to make all the loans and lines 
of credit for which there are applications, preference should be given, 
in all cases, to the applications for lesser amounts if the need and 
credit factors are nearly equal.

                    Article IX. Supervisory Committee

    Section 1. Appointment and membership. The supervisory committee is 
appointed by the board from among the members of this credit union, one 
of whom may be a director other than the financial officer or the 
compensated officer of the board. The board determines the number of 
members on the committee, which may not be fewer than 3 nor more than 5. 
No member of the credit committee, if applicable, or any employee of 
this credit union may be appointed to the committee. Regular terms of 
committee members are for periods of 1, 2, or 3 years as the board 
determines: Provided, however, that all regular terms are for the same 
number of years and until the appointment and qualification of 
successors. The regular terms are fixed at the beginning, or upon any 
increase or decrease in the number of committee members, so that 
approximately an equal number of regular terms expires at each annual 
meeting.
    Section 2. Officers of supervisory committee. The supervisory 
committee members choose from among their number a chair and a 
secretary. The secretary of the supervisory committee prepares, 
maintains, and has custody of full and correct records of all actions 
taken by it. The offices of chair and secretary may be held by the same 
person.
    Section 3. Duties of supervisory committee. a. The supervisory 
committee makes, or causes to be made, the audits, and prepares and 
submits the written reports required by the Act

[[Page 495]]

and regulations. The committee may employ and use clerical and auditing 
assistance required to carry out its responsibilities prescribed by this 
article, and may request the board to provide compensation for this 
assistance. It will prepare and forward to the Administration required 
reports.
    b. If all director positions become vacant simultaneously, the 
supervisory committee immediately assumes the role of the board of 
directors. The supervisory committee acting as the board must generally 
call and hold a special meeting to elect a board that will serve until 
the next annual meeting. The special meeting must occur at least 7 but 
no more than 14 days after all director positions became vacant, and 
candidates for the board at the special meeting may be nominated by 
petition or from the floor. However, if the next annual meeting has been 
scheduled and will occur within 45 days after all the director positions 
become vacant, the supervisory committee may decide to forego the 
special meeting and continue serving as the board until the election of 
new directors at the annual meeting.
    c. If the next annual meeting has not been scheduled, but the month 
and day of the previous year's meeting plus 7 days falls within 45 days 
after all the director positions become vacant, the supervisory 
committee acting as the board may decide to forego the special meeting 
to elect new directors. In this case, the supervisory committee must 
schedule the annual meeting within 7 days before or after the month and 
day of the previous annual meeting and continue to serve as the board 
until directors are elected at the annual meeting.
    d. The supervisory committee acting as the board may not act on 
policy matters. However, directors elected at a special meeting have the 
same powers as directors elected at the annual meeting.
    Section 4. Verification of accounts. The supervisory committee will 
cause the verification of the accounts of members with the records of 
the financial officer from time to time and not less frequently than as 
required by the Act and regulations. The committee must maintain a 
record of this verification.
    Section 5. Powers of supervisory committee--removal of directors and 
credit committee members. By unanimous vote, the supervisory committee 
may suspend until the next meeting of the members any director, board 
officer, or member of the credit committee. In the event of any 
suspension, the supervisory committee must call a special meeting of the 
members to act on the suspension, which meeting must be held not fewer 
than 7 nor more than 14 days after the suspension. The chair of the 
committee acts as chair of the meeting unless the members select another 
person to act as chair.
    Section 6. Powers of supervisory committee--special meetings. By the 
affirmative vote of a majority of its members, the supervisory committee 
may call a special meeting of the members to consider any violation of 
the provisions of the Act, the regulations, or of the charter or the 
bylaws of this credit union, or to consider any practice of this credit 
union which the committee deems to be unsafe or unauthorized.

                     Article X. Organization Meeting

    Section 1. Initial meeting. When application is made for a federal 
credit union charter, the subscribers to the organization certificate 
must meet for the purpose of electing a board of directors and a credit 
committee, if applicable. Failure to commence operations within 60 days 
following receipt of the approved organization certificate is cause for 
revocation of the charter unless a request for an extension of time has 
been submitted to and approved by the Regional Director.
    Section 2. Election of directors and credit committee. The 
subscribers elect a chair and a secretary for the meeting. The 
subscribers then elect from their number, or from those eligible to 
become members of this credit union, a board of directors and a credit 
committee, if applicable, all to hold office until the first annual 
meeting of the members and until the election and qualification of their 
respective successors. If not already a member, every person elected 
under this section or appointed under Section 3 of this article, must 
qualify within 30 days by becoming a member. If any person elected as a 
director or committee member or appointed as a supervisory committee 
member does not qualify as a member within 30 days of election or 
appointment, the office will automatically become vacant and be filled 
by the board.
    Section 3. Election of board officers. Promptly following the 
elections held under the provisions of Section 2 of this article, the 
board must meet and elect the board officers who will hold office until 
the first meeting of the board of directors following the first annual 
meeting of the members and until the election and qualification of their 
respective successors. The board also appoints a supervisory committee 
at this meeting as provided in Article IX, Section 1, of these bylaws 
and a credit committee, if applicable. The members so appointed hold 
office until the first regular meeting of the board following the first 
annual meeting of the members and until the appointment and 
qualification of their respective successors.

            Article XI. Loans and Lines of Credit to Members

    Section 1. Loan purposes. Loans may only be made to members and for 
provident or productive purposes in accordance with applicable law and 
regulations.

[[Page 496]]

    The credit union may add business as one of its purposes by placing 
a comma after ``provident'' and inserting ``business.''
    Section 2. Delinquency. Any member whose loan is delinquent may be 
required to pay a late charge as determined by the board of directors.

                         Article XII. Dividends

    Section 1. Power of board to declare dividends. The board 
establishes dividend periods and declares dividends as permitted by the 
Act and applicable regulations.

                         Article XIII. Reserved

                  Article XIV. Expulsion and Withdrawal

    Section 1. Expulsion procedure; expulsion or withdrawal does not 
affect members' liability or shares. A member may be expelled by a two-
thirds vote of the members present at special meeting called for that 
purpose, but only after the member has been given the opportunity to be 
heard. A member also may be expelled under a nonparticipation policy 
adopted by the board of directors and provided to each member in 
accordance with the Act. Expulsion or withdrawal will not operate to 
relieve a member of any liability to this credit union. All amounts paid 
in on shares by expelled or withdrawing members, before their expulsion 
or withdrawal, will be paid to them in the order of their withdrawal or 
expulsion, but only as funds become available and only after deducting 
any amounts due to this credit union.

                           Article XV. Minors

    Section 1. Minors permitted to own shares. Shares may be issued in 
the name of a minor. State law governs the rights of minors to transact 
business with this credit union.

                          Article XVI. General

    Section 1. Compliance with law and regulation. All power, authority, 
duties, and functions of the members, directors, officers, and employees 
of this credit union, pursuant to the provisions of these bylaws, must 
be exercised in strict conformity with the provisions of applicable law 
and regulations, and of the charter and the bylaws of this credit union.
    Section 2. Confidentiality. The officers, directors, members of 
committees and employees of this credit union must hold in confidence 
all transactions of this credit union with its members and all 
information respecting their personal affairs, except when permitted by 
state or federal law.
    Section 3. Removal of directors and committee members. 
Notwithstanding any other provisions in these bylaws, any director or 
committee member of this credit union may be removed from office by the 
affirmative vote of a majority of the members present at a special 
meeting called for the purpose, but only after an opportunity has been 
given to be heard. If member votes at a special meeting result in the 
removal of all directors, the supervisory committee immediately becomes 
the temporary board of directors and must follow the procedures in 
Article IX, Section 3.
    Section 4. Conflicts of interest prohibited. No director, committee 
member, officer, agent, or employee of this credit union may participate 
in any manner, directly or indirectly, in the deliberation upon or the 
determination of any question affecting his or her pecuniary or personal 
interest or the pecuniary interest of any corporation, partnership, or 
association (other than this credit union) in which he or she is 
directly or indirectly interested. In the event of the disqualification 
of any director respecting any matter presented to the board for 
deliberation or determination, that director must withdraw from the 
deliberation or determination; and if the remaining qualified directors 
present at the meeting plus the disqualified director or directors 
constitute a quorum, the remaining qualified directors may exercise with 
respect to this matter, by majority vote, all the powers of the board. 
In the event of the disqualification of any member of the credit 
committee, if applicable, or the supervisory committee, that committee 
member must withdraw from the deliberation or determination.
    Section 5. Records. Copies of the organization certificate of this 
credit union, its bylaws and any amendments to the bylaws, and any 
special authorizations by the Administration must be preserved in a 
place of safekeeping. Copies of the organization certificate and field 
of membership amendments should be attached as an appendix to these 
bylaws. Returns of nominations and elections and proceedings of all 
regular and special meetings of the members and directors must be 
recorded in the minute books of this credit union. The minutes of the 
meetings of the members, the board, and the committees must be signed by 
their respective chairmen or presiding officers and by the persons who 
serve as secretaries of those meetings.
    Section 6. Availability of credit union records. All books of 
account and other records of this credit union must be available at all 
times to the directors and committee members of this credit union 
provided they have a proper purpose for obtaining the records. The 
charter and bylaws of this credit union must be made available for 
inspection by any member and, if the member requests a copy, it will be 
provided for a reasonable fee.
    Section 7. Member contact information. Members must keep the credit 
union informed of their current address.

[[Page 497]]

    Section 8. Indemnification. (a) Subject to the limitations in 
Sec. 701.33(c)(5) through (c)(7) of the regulations, the credit union 
may elect to indemnify to the extent authorized by (check one)

[ ] Law of the State of ____:
[ ] Model Business Corporation Act:

the following individuals from any liability asserted against them and 
expenses reasonably incurred by them in connection with judicial or 
administrative proceedings to which they are or may become parties by 
reason of the performance of their official duties (check as 
appropriate).

[ ] Current officials
[ ] Former officials
[ ] Current employees
[ ] Former employees

    (b) The credit union may purchase and maintain insurance on behalf 
of the individuals indicated in (a) above against any liability asserted 
against them and expenses reasonably incurred by them in their official 
capacities and arising out of the performance of their official duties 
to the extent such insurance is permitted by the applicable State law or 
the Model Business Corporation Act.
    (c) The term ``official'' in this bylaw means a person who is a 
member of the board of directors, credit committee, supervisory 
committee, other volunteer committee (including elected or appointed 
loan officers or membership officers), established by the board of 
directors.

             Article XVII. Amendments of Bylaws and Charter

    Section 1. Amendment procedures. Amendments of these bylaws may be 
adopted and amendments of the charter requested by the affirmative vote 
of two-thirds of the authorized number of members of the board at any 
duly held meeting of the board if the members of the board have been 
given prior written notice of the meeting and the notice has contained a 
copy of the proposed amendment or amendments. No amendment of these 
bylaws or of the charter may become effective, however, until approved 
in writing by the NCUA Board.

                       Article XVIII. Definitions

    Section 1. General definitions. When used in these bylaws the terms:
    ``Act'' means the Federal Credit Union Act, as amended.
    ``Administration'' means the National Credit Union Administration.
    ``Applicable law and regulations'' means the Federal Credit Union 
Act and rules and regulations issued thereunder or other applicable 
federal and state statutes and rules and regulations issued thereunder 
as the context indicates (such as The Higher Education Act of 1965).
    ``Board'' means board of directors of the federal credit union.
    ``Immediate family member'' means spouse, child, sibling, parent, 
grandparent, grandchild, stepparents, stepchildren, stepsiblings, and 
adoptive relationships.
    ``NCUA Board'' means the Board of the National Credit Union 
Administration.
    ``Regulation'' or ``regulations'' means rules and regulations issued 
by the NCUA Board.
    ``Share'' or ``shares'' means all classes of shares and share 
certificates that may be held in accordance with applicable law and 
regulations.

[72 FR 61500, Oct. 31, 2007, as amended at 75 FR 34620, June 18, 2010; 
75 FR 81386, Dec. 28, 2010]



 Sec. Appendix B to Part 701--Chartering and Field of Membership Manual

                                Chapter 1

                     Federal Credit Union Chartering

                   I--Goals of NCUA Chartering Policy

    The National Credit Union Administration's (NCUA) chartering and 
field of membership policies are directed toward achieving the following 
goals:
      To encourage the formation of credit unions;
      To uphold the provisions of the Federal Credit Union Act;
      To promote thrift and credit extension;
      To promote credit union safety and soundness; and
      To make quality credit union service available to all 
eligible persons.
    NCUA may grant a charter to single occupational/associational 
groups, multiple groups, or communities if:
      The occupational, associational, or multiple groups 
possess an appropriate common bond or the community represents a well-
defined local community, neighborhood, or rural district;
      The subscribers are of good character and are fit to 
represent the proposed credit union; and
      The establishment of the credit union is economically 
advisable.
    Generally, these are the primary criteria that NCUA will consider. 
In unusual circumstances, however, NCUA may examine other factors, such 
as other federal law or public policy, in deciding if a charter should 
be approved.
    Unless otherwise noted, the policies outlined in this manual apply 
only to federal credit unions.

                          II--Types of Charters

    The Federal Credit Union Act recognizes three types of federal 
credit union charters--single common bond (occupational and

[[Page 498]]

associational), multiple common bond (more than one group each having a 
common bond of occupation or association), and community.
    The requirements that must be met to charter a federal credit union 
are described in Chapter 2. Special rules for credit unions serving low-
income groups are described in Chapter 3.
    If a federal credit union charter is granted, Section 5 of the 
charter will describe the credit union's field of membership, which 
defines those persons and entities eligible for membership. Generally, 
federal credit unions are only able to grant loans and provide services 
to persons within the field of membership who have become members of the 
credit union.

                            III--Subscribers

    Federal credit unions are generally organized by persons who 
volunteer their time and resources and are responsible for determining 
the interest, commitment, and economic advisability of forming a federal 
credit union. The organization of a successful federal credit union 
takes considerable planning and dedication.
    Persons interested in organizing a federal credit union should 
contact one of the credit union trade associations or the NCUA regional 
office serving the state in which the credit union will be organized. 
Lists of NCUA offices and credit union trade associations are shown in 
the appendices. NCUA will provide information to groups interested in 
pursuing a federal charter and will assist them in contacting an 
organizer.
    While anyone may organize a credit union, a person with training and 
experience in chartering new federal credit unions is generally the most 
effective organizer. However, extensive involvement by the group 
desiring credit union service is essential.
    The functions of the organizer are to provide direction, guidance, 
and advice on the chartering process. The organizer also provides the 
group with information about a credit union's functions and purpose as 
well as technical assistance in preparing and submitting the charter 
application. Close communication and cooperation between the organizer 
and the proposed members are critical to the chartering process.
    The Federal Credit Union Act requires that seven or more natural 
persons--the ``subscribers''--present to NCUA for approval a sworn 
organization certificate stating at a minimum:
      The name of the proposed federal credit union;
      The location of the proposed federal credit union and the 
territory in which it will operate;
      The names and addresses of the subscribers to the 
certificate and the number of shares subscribed by each;
      The initial par value of the shares;
      The detailed proposed field of membership; and
      The fact that the certificate is made to enable such 
persons to avail themselves of the advantages of the Federal Credit 
Union Act.
    False statements on any of the required documentation filed in 
obtaining a federal credit union charter may be grounds for federal 
criminal prosecution.

                        IV--Economic Advisability

                              IV.A--General

    Before chartering a federal credit union, NCUA must be satisfied 
that the institution will be viable and that it will provide needed 
services to its members. Economic advisability, which is a determination 
that a potential charter will have a reasonable opportunity to succeed, 
is essential in order to qualify for a credit union charter.
    NCUA will conduct an independent on-site investigation of each 
charter application to ensure that the proposed credit union can be 
successful. In general, the success of any credit union depends on: (a) 
The character and fitness of management; (b) the depth of the members' 
support; and (c) present and projected market conditions.

            IV.B--Proposed Management's Character and Fitness

    The Federal Credit Union Act requires NCUA to ensure that the 
subscribers are of good ``general character and fitness.'' Prospective 
officials and employees will be the subject of credit and background 
investigations. The investigation report must demonstrate each 
applicant's ability to effectively handle financial matters. Employees 
and officials should also be competent, experienced, honest and of good 
character. Factors that may lead to disapproval of a prospective 
official or employee include criminal convictions, indictments, and acts 
of fraud and dishonesty. Further, factors such as serious or unresolved 
past due credit obligations and bankruptcies disclosed during credit 
checks may disqualify an individual.
    NCUA also needs reasonable assurance that the management team will 
have the requisite skills--particularly in leadership and accounting--
and the commitment to dedicate the time and effort needed to make the 
proposed federal credit union a success.
    Section 701.14 of NCUA's Rules and Regulations sets forth the 
procedures for NCUA approval of officials of newly chartered credit 
unions. If the application of a prospective official or employee to 
serve is not acceptable to the regional director, the group can propose 
an alternate to act in that individual's

[[Page 499]]

place. If the charter applicant feels it is essential that the 
disqualified individual be retained, the individual may appeal the 
regional director's decision to the NCUA Board. If an appeal is pursued, 
action on the application may be delayed. If the appeal is denied by the 
NCUA Board, an acceptable new applicant must be provided before the 
charter can be approved.

                          IV.C--Member Support

    Economic advisability is a major factor in determining whether the 
credit union will be chartered. An important consideration is the degree 
of support from the field of membership. The charter applicant must be 
able to demonstrate that membership support is sufficient to ensure 
viability.
    NCUA has not set a minimum field of membership size for chartering a 
federal credit union. Consequently, groups of any size may apply for a 
credit union charter and be approved if they demonstrate economic 
advisability. However, it is important to note that often the size of 
the group is indicative of the potential for success. For that reason, a 
charter application with fewer than 3,000 primary potential members 
(e.g., employees of a corporation or members of an association) may not 
be economically advisable. Therefore, a charter applicant with a 
proposed field of membership of fewer than 3,000 primary potential 
members may have to provide more support than an applicant with a larger 
field of membership. For example, a small occupational or associational 
group may be required to demonstrate a commitment for long-term support 
from the sponsor.

        IV.D--Present and Future Market Conditions--Business Plan

    The ability to provide effective service to members, compete in the 
marketplace, and to adapt to changing market conditions are key to the 
survival of any enterprise. Before NCUA will charter a credit union, a 
business plan based on realistic and supportable projections and 
assumptions must be submitted.
    The business plan should contain, at a minimum, the following 
elements:
      Mission statement;
      Analysis of market conditions, including if applicable, 
geographic, demographic, employment, income, housing, and other economic 
data;
      Evidence of member support;
      Goals for shares, loans, and for number of members;
      Financial services needed/desired;
      Financial services to be provided to members of all 
segments within the field of membership;
      How/when services are to be implemented;
      Organizational/management plan addressing qualification 
and planned training of officials/employees;
      Continuity plan for directors, committee members and 
management staff;
      Operating facilities, to include office space/equipment 
and supplies, safeguarding of assets, insurance coverage, etc.;
      Type of record keeping and data processing system;
      Detailed semiannual pro forma financial statements 
(balance sheet, income and expense projections) for 1st and 2nd year, 
including assumptions--e.g., loan and dividend rates;
      Plans for operating independently;
      Written policies (shares, lending, investments, funds 
management, capital accumulation, dividends, collections, etc.);
      Source of funds to pay expenses during initial months of 
operation, including any subsidies, assistance, etc., and terms or 
conditions of such resources; and
      Evidence of sponsor commitment (or other source of 
support) if subsidies are critical to success of the federal credit 
union. Evidence may be in the form of letters, contracts, financial 
statements from the sponsor, and any other such document on which the 
proposed federal credit union can substantiate its projections.
    While the business plan may be prepared with outside assistance, the 
subscribers and proposed officials must understand and support the 
submitted business plan.

              V--Steps in Organizing a Federal Credit Union

                          V.A--Getting Started

    Following the guidance contained throughout this policy, the 
organizers should submit wording for the proposed field of membership 
(the persons, organizations and other legal entities the credit union 
will serve) to NCUA early in the application process for written 
preliminary approval. The proposed field of membership must meet all 
common bond or community requirements.
    Once the field of membership has been given preliminary approval, 
and the organizer is satisfied the application has merit, the organizer 
should conduct an organizational meeting to elect seven to ten persons 
to serve as subscribers. The subscribers should locate willing 
individuals capable of serving on the board of directors, credit 
committee, supervisory committee, and as chief operating officer/manager 
of the proposed credit union.
    Subsequent organizational meetings may be held to discuss the 
progress of the charter investigation, to announce the proposed slate of 
officials, and to respond to any questions posed at these meetings.
    If NCUA approves the charter application, the subscribers, as their 
final duty, will elect

[[Page 500]]

the board of directors of the proposed federal credit union. The new 
board of directors will then appoint the supervisory committee.

                 V.B--Charter Application Documentation

                             V.B.1--General

    As discussed previously in this Chapter, the organizer of a federal 
credit union charter must, at a minimum, provide evidence that:
      The group(s) possess an appropriate common bond or the 
geographical area to be served is a well-defined local community, 
neighborhood, or rural district;
      The subscribers, prospective officials, and employees are 
of good character and fitness; and
      The establishment of the credit union is economically 
advisable.
    As part of the application process, the organizer must submit the 
following forms, which are available in appendix 4 of this Manual:
      Federal Credit Union Investigation Report, NCUA 4001;
      Organization Certificate, NCUA 4008;
      Report of Official and Agreement To Serve, NCUA 4012;
      Application and Agreements for Insurance of Accounts, NCUA 
9500; and
      Certification of Resolutions, NCUA 9501.
    Each of these forms is described in more detail in the following 
sections.

       V.B.2--Federal Credit Union Investigation Report, NCUA 4001

    The application for a new federal credit union will be submitted on 
NCUA 4001. State-chartered credit unions applying for conversion to a 
federal charter will use NCUA 4000. (See Chapter 4 for a full 
discussion.) The organizer is required to certify the information and 
recommend approval or disapproval, based on the investigation of the 
request.

               V.B.3--Organization Certificate, NCUA 4008

    This document, which must be completed by the subscribers, includes 
the seven criteria established by the Federal Credit Union Act. NCUA 
staff assigned to the case will assist in the proper completion of this 
document.

       V.B.4--Report of Official and Agreement To Serve, NCUA 4012

    This form documents general background information of each official 
and employee of the proposed federal credit union. Each official and 
employee must complete and sign this form. The organizer must review 
each of the NCUA 4012s for elements that would prevent the prospective 
official or employee from serving. Further, such factors as serious, 
unresolved past due credit obligations and bankruptcies disclosed during 
credit checks may disqualify an individual.

 V.B.5--Application and Agreements for Insurance of Accounts, NCUA 9500

    This document contains the agreements with which federal credit 
unions must comply in order to obtain National Credit Union Share 
Insurance Fund (NCUSIF) coverage of member accounts. The document must 
be completed and signed by both the chief executive officer and chief 
financial officer. A federal credit union must qualify for federal share 
insurance.

             V.B.6--Certification of Resolutions, NCUA 9501

    This document certifies that the board of directors of the proposed 
federal credit union has resolved to apply for NCUSIF insurance of 
member accounts and has authorized the chief executive officer and 
recording officer to execute the Application and Agreements for 
Insurance of Accounts. Both the chief executive officer and recording 
officer of the proposed federal credit union must sign this form.

                           VI--Name Selection

    It is the responsibility of the federal credit union organizers or 
officials of an existing credit union to ensure that the proposed 
federal credit union name or federal credit union name change does not 
constitute an infringement on the name of any corporation in its trade 
area. This responsibility also includes researching any service marks or 
trademarks used by any other corporation (including credit unions) in 
its trade area. NCUA will ensure, to the extent possible, that the 
credit union's name:
      Is not already being officially used by another federal 
credit union;
      Will not be confused with NCUA or another federal or state 
agency, or with another credit union; and
      Does not include misleading or inappropriate language.
    The last three words in the name of every credit union chartered by 
NCUA must be ``Federal Credit Union.''
    The word ``community,'' while not required, can only be included in 
the name of federal credit unions that have been granted a community 
charter.

                            VII--NCUA Review

                             VII.A--General

    Once NCUA receives a complete charter application package, an 
acknowledgment of receipt will be sent to the organizer. At some point 
during the review process, a staff member will be assigned to perform an 
on-site

[[Page 501]]

contact with the proposed officials and others having an interest in the 
proposed federal credit union.
    NCUA staff will review the application package and verify its 
accuracy and reasonableness. A staff member will inquire into the 
financial management experience and the suitability and commitment of 
the proposed officials and employees, and will make an assessment of 
economic advisability. The staff member will also provide guidance to 
the subscribers in the proper completion of the Organization 
Certificate, NCUA 4008.
    Credit and background investigations may be conducted concurrently 
by NCUA with other work being performed by the organizer and subscribers 
to reduce the likelihood of delays in the chartering process.
    The staff member will analyze the prospective credit union's 
business plan for realistic projections, attainable goals, adequate 
service to all segments of the field of membership, sufficient start-up 
capital, and time commitment by the proposed officials and employees. 
Any concerns will be reviewed with the organizer and discussed with the 
prospective credit union's officials. Additional on-site contacts by 
NCUA staff may be necessary. The organizer and subscribers will be 
expected to take the steps necessary to resolve any issues or concerns. 
Such resolution efforts may delay processing the application.
    NCUA staff will then make a recommendation to the regional director 
regarding the charter application. The recommendation may include 
specific provisions to be included in a Letter of Understanding and 
Agreement. In most cases, NCUA will require the prospective officials to 
adhere to certain operational guidelines. Generally, the agreement is 
for a limited term of two to four years. A sample Letter of 
Understanding and Agreement is found in appendix 2.

                    VII.B--Regional Director Approval

    Once approved, the board of directors of the newly formed federal 
credit union will receive a signed charter and standard bylaws from the 
regional director. Additionally, the officials will be advised of the 
name of the examiner assigned responsibility for supervising and 
examining the credit union.

                  VII.C--Regional Director Disapproval

    When a regional director disapproves any charter application, in 
whole or in part, the organizer will be informed in writing of the 
specific reasons for the disapproval. Where applicable, the regional 
director will provide information concerning options or suggestions that 
the applicant could consider for gaining approval or otherwise acquiring 
credit union service. The letter of denial will include the procedures 
for appealing the decision.

               VII.D--Appeal of Regional Director Decision

    If the regional director denies a charter application, in whole or 
in part, that decision may be appealed to the NCUA Board. An appeal must 
be sent to the appropriate regional office within 60 days of the date of 
denial and must address the specific reasons for denial. The regional 
director will then forward the appeal to the NCUA Board. NCUA central 
office staff will make an independent review of the facts and present 
the appeal with a recommendation to the NCUA Board.
    Before appealing, the prospective group may, within 30 days of the 
denial, provide supplemental information to the regional director for 
reconsideration. A reconsideration will contain new and material 
evidence addressing the reasons for the initial denial. The regional 
director will have 30 days from the date of the receipt of the request 
for reconsideration to make a final decision. If the request is again 
denied, the applicant may proceed with the appeal process within 60 days 
of the date of the last denial. A second request for reconsideration 
will be treated as an appeal to the NCUA Board.

                    VII.E--Commencement of Operations

    Assistance in commencing operations is generally available through 
the various credit union trade organizations listed in appendix 5.
    All new federal credit unions are also encouraged to establish a 
mentor relationship with a knowledgeable, experienced credit union 
individual or an existing, well-operated credit union. The mentor should 
provide guidance and assistance to the new credit union through 
attendance at meetings and general oversight. Upon request, NCUA will 
provide assistance in finding a qualified mentor.

                        VIII--Future Supervision

    Each federal credit union will be examined regularly by NCUA to 
determine that it remains in compliance with applicable laws and 
regulations and to determine that it does not pose undue risk to the 
NCUSIF. The examiner will contact the credit union officials shortly 
after approval of the charter in order to arrange for the initial 
examination (usually within the first six months of operation).
    The examiner will be responsible for monitoring the progress of the 
credit union and providing the necessary advice and guidance to ensure 
it is in compliance with applicable laws and regulations. The examiner 
will also monitor compliance with the terms of any required Letter of 
Understanding and Agreement. Typically, the examiner will require the 
credit union to submit copies of monthly board minutes and financial 
statements.
    The Federal Credit Union Act requires all newly chartered credit 
unions, up to two

[[Page 502]]

years after the charter anniversary date, to obtain NCUA approval prior 
to appointment of any new board member, credit or supervisory committee 
member, or senior executive officer. Section 701.14 of the NCUA Rules 
and Regulations sets forth the notice and application requirements. If 
NCUA issues a Notice of Disapproval, the newly chartered credit union is 
prohibited from making the change.
    NCUA may disapprove an individual serving as a director, committee 
member or senior executive officer if it finds that the competence, 
experience, character, or integrity of the individual indicates it would 
not be in the best interests of the members of the credit union or of 
the public to permit the individual to be employed by or associated with 
the credit union. If a Notice of Disapproval is issued, the credit union 
may appeal the decision to the NCUA Board.

                   IX--Corporate Federal Credit Unions

    A corporate federal credit union is one that is operated primarily 
for the purpose of serving other credit unions. Corporate federal credit 
unions operate under and are administered by the NCUA Office of National 
Examinations and Supervision.

                 X--Groups Seeking Credit Union Service

    NCUA will attempt to assist any group in chartering a credit union 
or joining an existing credit union. If the group is not eligible for 
federal credit union service, NCUA will refer the group to the 
appropriate state supervisory authority where different requirements may 
apply.

                  XI--Field of Membership Designations

    NCUA will designate a credit union based on the following criteria:
    Single Occupational: If a credit union serves a single occupational 
sponsor, such as ABC Corporation, it will be designated as an 
occupational credit union. A single occupational common bond credit 
union may also serve a trade, industry, or profession (TIP), such as all 
teachers.
    Single Associational: If a credit union serves a single 
associational sponsor, such as the Knights of Columbus, it will be 
designated as an associational credit union.
    Multiple Common Bond: If a credit union serves more than one group, 
each of which has a common bond of occupation and/or association, it 
will be designated as a multiple common bond credit union.
    Community: All community credit unions will be designated as such, 
followed by a description of their geographic boundaries (e.g., city or 
county).
    Credit unions desiring to confirm or submit an application to change 
their designations should contact the appropriate NCUA regional office.

                         XII--Foreign Branching

    Federal credit unions are permitted to serve foreign nationals 
within their fields of membership wherever they reside provided they 
have the ability, resources, and management expertise to serve such 
persons. Before a credit union opens a branch outside the United States, 
it must submit an application to do so and have prior written approval 
of the regional director. A federal credit union may establish a service 
facility on a United States military installation or United States 
embassy without prior NCUA approval.

                                Chapter 2

       Field of Membership Requirements for Federal Credit Unions

                             I--Introduction

                             I.A.1--General

    As set forth in Chapter 1, the Federal Credit Union Act provides for 
three types of federal credit union charters--single common bond 
(occupational or associational), multiple common bond (multiple groups), 
and community. Section 109 (12 U.S.C. 1759) of the Federal Credit Union 
Act sets forth the membership criteria for each of these three types of 
credit unions.
    The field of membership, which is specified in Section 5 of the 
charter, defines those persons and entities eligible for membership. A 
single common bond federal credit union consists of one group having a 
common bond of occupation or association. A multiple common bond federal 
credit union consists of more than one group, each of which has a common 
bond of occupation or association. A community federal credit union 
consists of persons or organizations within a well-defined local 
community, neighborhood, or rural district.
    Once chartered, a federal credit union can amend its field of 
membership; however, the same common bond or community requirements for 
chartering the credit union must be satisfied. Since there are 
differences in the three types of charters, special rules, which are 
fully discussed in the following sections of this Chapter, may apply to 
each.

                     I.A.2--Special Low-Income Rules

    Generally, federal credit unions can only grant loans and provide 
services to persons who have joined the credit union. The Federal Credit 
Union Act states that one of the purposes of federal credit unions is 
``to serve the productive and provident credit needs of individuals of 
modest means.'' Although field of membership requirements are 
applicable, special rules set forth in Chapter 3 may apply to low-income 
designated credit unions and those credit unions assisting low-income 
groups or to a federal credit union

[[Page 503]]

that adds an underserved community to its field of membership.

                      II--Occupational Common Bond

                             II.A.1--General

    A single occupational common bond federal credit union may include 
in its field of membership all persons and entities who share that 
common bond. NCUA permits a person's membership eligibility in a single 
occupational common bond group to be established in five ways:
      Employment (or a long-term contractual relationship 
equivalent to employment) in a single corporation or other legal entity 
makes that person part of a single occupational common bond;
      Employment in a corporation or other legal entity with a 
controlling ownership interest (which shall not be less than 10 percent) 
in or by another legal entity makes that person part of a single 
occupational common bond;
      Employment in a corporation or other legal entity which is 
related to another legal entity (such as a company under contract and 
possessing a strong dependency relationship with another company) makes 
that person part of a single occupational common bond;
      Employment or attendance at a school makes that person 
part of a single occupational common bond (see Chapter 2, Section 
III.A.1); or
      Employment in the same Trade, Industry, or Profession 
(TIP) (see Chapter 2, Section II.A.2).
    A geographic limitation is not a requirement for a single 
occupational common bond. However, for purposes of describing the field 
of membership, the geographic areas being served may be included in the 
charter. For example:
      Employees, officials, and persons who work regularly under 
contract in Miami, Florida for ABC Corporation and subsidiaries;
      Employees of ABC Corporation who are paid from * * *;
      Employees of ABC Corporation who are supervised from * * 
*;
      Employees of ABC Corporation who are headquartered in * * 
*; and/or
      Employees of ABC Corporation who work in the United 
States.
    The corporation or other legal entity (i.e., the employer) may also 
be included in the common bond--e.g., ``ABC Corporation.'' The 
corporation or legal entity will be defined in the last clause in 
Section 5 of the credit union's charter.
    A charter applicant must provide documentation to establish that the 
single occupational common bond requirement has been met.
    Some examples of single occupational common bonds are:
      Employees of the Hunt Manufacturing Company who work in 
West Chester, Pennsylvania. (common bond--same employer with geographic 
definition);
      Employees of the Buffalo Manufacturing Company who work in 
the United States. (common bond--same employer with geographic 
definition);
      Employees, elected and appointed officials of municipal 
government in Parma, Ohio. (common bond--same employer with geographic 
definition);
      Employees of Johnson Soap Company and its majority owned 
subsidiary, Johnson Toothpaste Company, who work in, are paid from, are 
supervised from, or are headquartered in Augusta and Portland, Maine. 
(common bond--parent and subsidiary company with geographic definition);
      Employees of MMLLJS contractor who work regularly at the 
U.S. Naval Shipyard in Bremerton, Washington. (common bond--employees of 
contractors with geographic definition);
      Employees, doctors, medical staff, technicians, medical 
and nursing students who work in or are paid from the Newport Beach 
Medical Center, Newport Beach, California. (single corporation with 
geographic definition);
      Employees of JLS, Incorporated and MJM, Incorporated 
working for the LKM Joint Venture Company in Catalina Island, 
California. (common bond--same employer--ongoing dependent 
relationship);
      Employees of and students attending Georgetown University. 
(common bond--same occupation);
      Employees of all the schools supervised by the Timbrook 
Board of Education in Timbrook, Georgia. (common bond--same employer); 
or
      All licensed nurses in Fairfax County, Virginia. 
(occupational common bond TIP).
    Some examples of insufficiently defined single occupational common 
bonds are:
      Employees of manufacturing firms in Seattle, Washington. 
(no defined occupational sponsor; overly broad TIP);
      Persons employed or working in Chicago, Illinois. (no 
occupational common bond).

                 II.A.2--Trade, Industry, or Profession

    A common bond based on employment in a trade, industry, or 
profession can include employment at any number of corporations or other 
legal entities that--while not under common ownership--have a common 
bond by virtue of producing similar products, providing similar 
services, or participating in the same type of business.
    While proposed or existing single common bond credit unions have 
some latitude in defining a trade, industry, or profession occupational 
common bond, it cannot be defined

[[Page 504]]

so broadly as to include groups in fields which are not closely related. 
For example, the manufacturing industry, energy industry, communications 
industry, retail industry, or entertainment industry would not qualify 
as a TIP because each industry lacks the necessary commonality. However, 
textile workers, realtors, nurses, teachers, police officers, or U.S. 
military personnel are closely related and each would qualify as a TIP.
    The common bond relationship must be one that demonstrates a narrow 
commonality of interests within a specific trade, industry, or 
profession. If a credit union wants to serve a physician TIP, it can 
serve all physicians, but that does not mean it can also serve all 
clerical staff in the physicians' offices. However, if the TIP is based 
on the health care industry, then clerical staff would be able to be 
served by the credit union because they work in the same industry and 
have the same commonality of interests.
    If a credit union wants to include the airline services industry, it 
can serve airline and airport personnel but not passengers. Clients or 
customers of the TIP are not eligible for credit union membership (e.g., 
patients in hospitals). Any company that is involved in more than one 
industry cannot be included in an industry TIP (e.g., a company that 
makes tobacco products, food products, and electronics). However, 
employees of these companies may be eligible for membership in a variety 
of trade/profession occupational common bond TIPs.
    Since a TIP must be narrowly defined, it cannot include third party 
vendors and other suppliers. For example, the steel suppliers to the 
automobile industry would not be part of the automobile industry TIP. 
However, the automobile industry includes manufacturers and their 
automobile dealerships.
    In general, except for credit unions currently serving a national 
field of membership or operating in multiple states, a geographic 
limitation is required for a TIP credit union. The geographic limitation 
will be part of the credit union's charter and generally correspond to 
its current or planned operational area. More than one federal credit 
union may serve the same trade, industry, or profession, even if both 
credit unions are in the same geographic location.
    This type of occupational common bond is only available to single 
common bond credit unions. A TIP cannot be added to a multiple common 
bond or community field of membership.
    To obtain a TIP designation, the proposed or existing credit union 
must submit a request to the regional director. New charter applicants 
must follow the documentation requirements in Chapter 1. New charter 
applicants and existing credit unions must submit a business plan on how 
the credit union will serve the group with the request to serve the TIP. 
The business plan also must address how the credit union will verify the 
TIP. Examples of such verification include state licenses, professional 
licenses, organizational memberships, pay statements, union membership, 
or employer certification. The regional director must approve this type 
of field of membership before a credit union can serve a TIP. Credit 
unions converting to a TIP can retain members of record but cannot add 
new members from its previous group or groups, unless it is part of the 
TIP.
    Section II.B on Occupational Common Bond Amendments does not apply 
to a TIP common bond. Removing or changing a geographical limitation 
will be processed as a housekeeping amendment. If safety and soundness 
concerns are present, the regional director may require additional 
information before the request can be processed.
    Section II.H, on Other Persons Eligible for Credit Union Membership, 
applies to TIP based credit unions except for the corporate account 
provision which only applies to industry based TIPs. Credit unions with 
industry based TIPs may include corporations as members because they 
have the same commonality of interests as all employees in the industry. 
For example, an airline service TIP (industry) can serve an airline 
carrier (corporate account); however, a nurses TIP (profession) could 
not serve a hospital (corporate account) because not everyone working in 
the hospital shares the same profession.
    If a TIP designated credit union wishes to convert to a different 
TIP or employer-based occupational common bond, or different charter 
type, it only retains members of record after the conversion. The 
regional director, for safety and soundness reasons, may approve a TIP 
designated credit union to convert to its original field of membership.

                II.B--Occupational Common Bond Amendments

                             II.B.1--General

    Section 5 of every single occupational federal credit union's 
charter defines the field of membership the credit union can legally 
serve. Only those persons or legal entities specified in the field of 
membership can be served. There are a number of instances in which 
Section 5 must be amended by NCUA.
    First, a group sharing the credit union's common bond is added to 
the field of membership. This may occur through various ways including 
agreement between the group and the credit union directly, or through a 
merger, corporate acquisition, purchase and assumption (P&A), or spin-
off.
    Second, if the entire field of membership is acquired by another 
corporation, the credit union can serve the employees of the new

[[Page 505]]

corporation and any subsidiaries after receiving NCUA approval.
    Third, a federal credit union qualifies to change its common bond 
from:
      A single occupational common bond to a single 
associational common bond;
      A single occupational common bond to a community charter; 
or
      A single occupational common bond to a multiple common 
bond.
    Fourth, a federal credit union removes a portion of the group from 
its field of membership through agreement with the group, a spin-off, or 
because a portion of the group is no longer in existence.
    An existing single occupational common bond federal credit union 
that submits a request to amend its charter must provide documentation 
to establish that the occupational common bond requirement has been met. 
The regional director must approve all amendments to an occupational 
common bond credit union's field of membership.

                     II.B.2--Corporate Restructuring

    If the single common bond group that comprises a federal credit 
union's field of membership undergoes a substantial restructuring, the 
result is often that portions of the group are sold or spun off. This 
requires a change to the credit union's field of membership. NCUA will 
not permit a single common bond credit union to maintain in its field of 
membership a sold or spun-off group to which it has been providing 
service unless the group otherwise qualifies for membership in the 
credit union or the credit union converts to a multiple common bond 
credit union.
    If the group comprising the single common bond of the credit union 
merges with, or is acquired by, another group, the credit union can 
serve the new group resulting from the merger or acquisition after 
receiving a housekeeping amendment.

                      II.B.3--Economic Advisability

    Prior to granting a common bond expansion, NCUA will examine the 
amendment's likely effect on the credit union's operations and financial 
condition. In most cases, the information needed for analyzing the 
effect of adding a particular group will be available to NCUA through 
the examination and financial and statistical reports; however, in 
particular cases, a regional director may require additional information 
prior to making a decision.

                   II.B.4--Documentation Requirements

    A federal credit union requesting a common bond expansion must 
submit an Application for Field of Membership Amendment (NCUA 4015-EZ) 
to the appropriate NCUA regional director. An authorized credit union 
representative must sign the request.

      II.C--NCUA's Procedures for Amending the Field of Membership

                             II.C.1--General

    All requests for approval to amend a federal credit union's charter 
must be submitted to the appropriate regional director.

                  II.C.2--Regional Director's Decision

    NCUA staff will review all amendment requests in order to ensure 
compliance with NCUA policy.
    Before acting on a proposed amendment, the regional director may 
require an on-site review. In addition, the regional director may, after 
taking into account the significance of the proposed field of membership 
amendment, require the applicant to submit a business plan addressing 
specific issues.
    The financial and operational condition of the requesting credit 
union will be considered in every instance. NCUA will carefully consider 
the economic advisability of expanding the field of membership of a 
credit union with financial or operational problems.
    In most cases, field of membership amendments will only be approved 
for credit unions that are operating satisfactorily. Generally, if a 
federal credit union is having difficulty providing service to its 
current membership, or is experiencing financial or other operational 
problems, it may have more difficulty serving an expanded field of 
membership.
    Occasionally, however, an expanded field of membership may provide 
the basis for reversing current financial problems. In such cases, an 
amendment to expand the field of membership may be granted 
notwithstanding the credit union's financial or operational problems. 
The applicant credit union must clearly establish that the expanded 
field of membership is in the best interest of the members and will not 
increase the risk to the NCUSIF.

                   II.C.3--Regional Director Approval

    If the regional director approves the requested amendment, the 
credit union will be issued an amendment to Section 5 of its charter.

                  II.C.4--Regional Director Disapproval

    When a regional director disapproves any application, in whole or in 
part, to amend the field of membership under this chapter, the applicant 
will be informed in writing of the:
      Specific reasons for the action;
      Options to consider, if appropriate, for gaining approval; 
and
      Appeal procedure.

[[Page 506]]

              II.C.5--Appeal of Regional Director Decision

    If a field of membership expansion request, merger, or spin-off is 
denied by the regional director, the federal credit union may appeal the 
decision to the NCUA Board. An appeal must be sent to the appropriate 
regional office within 60 days of the date of denial, and must address 
the specific reason(s) for the denial. The regional director will then 
forward the appeal to the NCUA Board. NCUA central office staff will 
make an independent review of the facts and present the appeal to the 
Board with a recommendation.
    Before appealing, the credit union may, within 30 days of the 
denial, provide supplemental information to the regional director for 
reconsideration. A reconsideration will contain new and material 
evidence addressing the reasons for the initial denial. The regional 
director will have 30 days from the date of the receipt of the request 
for reconsideration to make a final decision. If the request is again 
denied, the applicant may proceed with the appeal process within 60 days 
of the date of the last denial. A second request for reconsideration 
will be treated as an appeal to the NCUA Board.

         II.D--Mergers, Purchase and Assumptions, and Spin-Offs

    In general, other than the addition of common bond groups, there are 
three additional ways a federal credit union with a single occupational 
common bond can expand its field of membership:
      By taking in the field of membership of another credit 
union through a common bond or emergency merger;
      By taking in the field of membership of another credit 
union through a common bond or emergency purchase and assumption (P&A); 
or
      By taking a portion of another credit union's field of 
membership through a common bond spin-off.

                             II.D.1--Mergers

    Generally, the requirements applicable to field of membership 
expansions found in this chapter apply to mergers where the continuing 
credit union has a federal charter. That is, the two credit unions must 
share a common bond.
    Where the merging credit union is state-chartered, the common bond 
rules applicable to a federal credit union apply.
    Mergers must be approved by the NCUA regional director where the 
continuing credit union is headquartered, with the concurrence of the 
regional director of the merging credit union, and, as applicable, the 
state regulators.
    If a single occupational credit union wants to merge into a multiple 
common bond or community credit union, Section IV.D or Section V.D of 
this Chapter, respectively, should be reviewed.

                        II.D.2--Emergency Mergers

    An emergency merger may be approved by NCUA without regard to common 
bond or other legal constraints. An emergency merger involves NCUA's 
direct intervention and approval. The credit union to be merged must 
either be insolvent or in danger of insolvency, as defined in the 
Glossary, and NCUA must determine that:
      An emergency requiring expeditious action exists;
      Other alternatives are not reasonably available; and
      The public interest would best be served by approving the 
merger.
    If not corrected, conditions that could lead to insolvency include, 
but are not limited to:
      Abandonment by management;
      Loss of sponsor;
      Serious and persistent recordkeeping problems; or
      Serious and persistent operational concerns.
    In an emergency merger situation, NCUA will take an active role in 
finding a suitable merger partner (continuing credit union). NCUA is 
primarily concerned that the continuing credit union has the financial 
strength and management expertise to absorb the troubled credit union 
without adversely affecting its own financial condition and stability.
    As a stipulated condition to an emergency merger, the field of 
membership of the merging credit union may be transferred intact to the 
continuing federal credit union without regard to any common bond 
restrictions. Under this authority, therefore, a single occupational 
common bond federal credit union may take into its field of membership 
any dissimilar charter type.
    The common bond characteristic of the continuing credit union in an 
emergency merger does not change. That is, even though the merging 
credit union is a multiple common bond or community, the continuing 
credit union will remain a single common bond credit union. Similarly, 
if the merging credit union is also an unlike single common bond, the 
continuing credit union will remain a single common bond credit union. 
Future common bond expansions will be based on the continuing credit 
union's original single common bond.
    Emergency mergers involving federally insured credit unions in 
different NCUA regions must be approved by the regional director where 
the continuing credit union is headquartered, with the concurrence of 
the regional director of the merging credit union and, as applicable, 
the state regulators.

[[Page 507]]

                  II.D.3--Purchase and Assumption (P&A)

    Another alternative for acquiring the field of membership of a 
failing credit union is through a consolidation known as a P&A. A P&A 
has limited application because, in most cases, the failing credit union 
must be placed into involuntary liquidation. In the few instances where 
a P&A may be appropriate, the assuming federal credit union, as with 
emergency mergers, may acquire the entire field of membership if the 
emergency merger criteria are satisfied. However, if the P&A does not 
meet the emergency merger criteria, it must be processed under the 
common bond requirements.
    In a P&A processed under the emergency criteria, specified loans, 
shares, and certain other designated assets and liabilities, without 
regard to common bond restrictions, may also be acquired without 
changing the character of the continuing federal credit union for 
purposes of future field of membership amendments.
    If the purchased and/or assumed credit union's field of membership 
does not share a common bond with the purchasing and/or assuming credit 
union, then the continuing credit union's original common bond will be 
controlling for future common bond expansions.
    P&As involving federally insured credit unions in different NCUA 
regions must be approved by the regional director where the continuing 
credit union is headquartered, with the concurrence of the regional 
director of the purchased and/or assumed credit union and, as 
applicable, the state regulators.

                            II.D.4--Spin-Offs

    A spin-off occurs when, by agreement of the parties, a portion of 
the field of membership, assets, liabilities, shares, and capital of a 
credit union are transferred to a new or existing credit union. A spin-
off is unique in that usually one credit union has a field of membership 
expansion and the other loses a portion of its field of membership.
    All common bond requirements apply regardless of whether the spun-
off group becomes a new credit union or goes to an existing federal 
charter.
    The request for approval of a spin-off must be supported with a plan 
that addresses, at a minimum:
      Why the spin-off is being requested;
      What part of the field of membership is to be spun off;
      Whether the affected credit unions have a common bond 
(applies only to single occupational credit unions);
      Which assets, liabilities, shares, and capital are to be 
transferred;
      The financial impact the spin-off will have on the 
affected credit unions;
      The ability of the acquiring credit union to effectively 
serve the new members;
      The proposed spin-off date; and
      Disclosure to the members of the requirements set forth 
above.
    The spin-off request must also include current financial statements 
from the affected credit unions and the proposed voting ballot.
    For federal credit unions spinning off a group, membership notice 
and voting requirements and procedures are the same as for mergers (see 
part 708 of the NCUA Rules and Regulations), except that only the 
members directly affected by the spin-off--those whose shares are to be 
transferred--are permitted to vote. Members whose shares are not being 
transferred will not be afforded the opportunity to vote. All members of 
the group to be spun off (whether they voted in favor, against, or not 
at all) will be transferred if the spin-off is approved by the voting 
membership. Voting requirements for federally insured state credit 
unions are governed by state law.
    Spin-offs involving federally insured credit unions in different 
NCUA regions must be approved by all regional directors where the credit 
unions are headquartered and the state regulators, as applicable. Spin-
offs in the same region also require approval by the state regulator, as 
applicable.

                             II.E--Overlaps

                             II.E.1--General

    An overlap exists when a group of persons is eligible for membership 
in two or more credit unions. NCUA will permit single occupational 
federal credit unions to overlap any other charter without performing an 
overlap analysis.

                  II.E.2--Organizational Restructuring

    A federal credit union's field of membership will always be governed 
by the common bond descriptions contained in Section 5 of its charter. 
Where a sponsor organization expands its operations internally, by 
acquisition or otherwise, the credit union may serve these new entrants 
to its field of membership if they are part of the common bond described 
in Section 5. NCUA will permit a complete overlap of the credit unions' 
fields of membership.
    If a sponsor organization sells off a group, new members can no 
longer be served unless they otherwise qualify for membership in the 
credit union or it converts to a multiple common bond charter.
    Credit unions must submit documentation explaining the restructuring 
and providing information regarding the new organizational structure.

                      II.E.3--Exclusionary Clauses

    An exclusionary clause is a limitation precluding the credit union 
from serving the primary members of a portion of a group

[[Page 508]]

otherwise included in its field of membership. NCUA no longer grants 
exclusionary clauses. Those granted prior to the adoption of this new 
chartering manual will remain in effect unless the credit unions agree 
to remove them or one of the affected credit unions submits a 
housekeeping amendment to have it removed.

                        II.F--Charter Conversion

    A single occupational common bond federal credit union may apply to 
convert to a community charter provided the field of membership 
requirements of the community charter are met. Groups within the 
existing charter which cannot qualify in the new charter cannot be 
served except for members of record, or groups or communities obtained 
in an emergency merger or P&A. A credit union must notify all groups 
that will be removed from the field of membership as a result of 
conversion. Members of record can continue to be served. Also, in order 
to support a case for a conversion, the applicant federal credit union 
may be required to develop a detailed business plan as specified in 
Chapter 2, Section V.A.3.
    A single occupational common bond federal credit union may apply to 
convert to a multiple common bond charter by adding a non-common bond 
group that is within a reasonable proximity of a service facility. 
Groups within the existing charter may be retained and continue to be 
served. However, future amendments, including any expansions of the 
original single common bond group, must be done in accordance with 
multiple common bond policy.

          II.G--Removal of Groups From the Field of Membership

    A credit union may request removal of a portion of the common bond 
group from its field of membership for various reasons. The most common 
reasons for this type of amendment are:
      The group is within the field of membership of two credit 
unions and one wishes to discontinue service;
      The federal credit union cannot continue to provide 
adequate service to the group;
      The group has ceased to exist;
      The group does not respond to repeated requests to contact 
the credit union or refuses to provide needed support; or
      The group initiates action to be removed from the field of 
membership.
    When a federal credit union requests an amendment to remove a group 
from its field of membership, the regional director will determine why 
the credit union desires to remove the group. If the regional director 
concurs with the request, membership will continue for those who are 
already members under the ``once a member, always a member'' provision 
of the Federal Credit Union Act.

        II.H--Other Persons Eligible for Credit Union Membership

    A number of persons, by virtue of their close relationship to a 
common bond group, may be included, at the charter applicant's option, 
in the field of membership. These include the following:
      Spouses of persons who died while within the field of 
membership of this credit union;
      Employees of this credit union;
      Persons retired as pensioners or annuitants from the above 
employment;
      Volunteers;
      Members of the immediate family or household;
      Organizations of such persons; and
      Corporate or other legal entities in this charter.
    Immediate family is defined as spouse, child, sibling, parent, 
grandparent, or grandchild. This includes stepparents, stepchildren, 
stepsiblings, and adoptive relationships.
    Household is defined as persons living in the same residence 
maintaining a single economic unit.
    Membership eligibility is extended only to individuals who are 
members of an ``immediate family or household'' of a credit union 
member. It is not necessary for the primary member to join the credit 
union in order for the immediate family or household member of the 
primary member to join, provided the immediate family or household 
clause is included in the field of membership. However, it is necessary 
for the immediate family member or household member to first join in 
order for that person's immediate family member or household member to 
join the credit union. A credit union can adopt a more restrictive 
definition of immediate family or household.
    Volunteers, by virtue of their close relationship with a sponsor 
group, may be included. Examples include volunteers working at a 
hospital or school.
    Under the Federal Credit Union Act, once a person becomes a member 
of the credit union, such person may remain a member of the credit union 
until the person chooses to withdraw or is expelled from the membership 
of the credit union. This is commonly referred to as ``once a member, 
always a member.'' The ``once a member, always a member'' provision does 
not prevent a credit union from restricting services to members who are 
no longer within the field of membership.

[[Page 509]]

                     III--Associational Common Bond

                            III.A.1--General

    A single associational federal credit union may include in its field 
of membership, regardless of location, all members and employees of a 
recognized association. A single associational common bond consists of 
individuals (natural persons) and/or groups (non-natural persons) whose 
members participate in activities developing common loyalties, mutual 
benefits, and mutual interests. Separately chartered associational 
groups can establish a single common bond relationship if they are 
integrally related and share common goals and purposes. For example, two 
or more churches of the same denomination, Knights of Columbus Councils, 
or locals of the same union can qualify as a single associational common 
bond.
    Individuals and groups eligible for membership in a single 
associational credit union can include the following:
      Natural person members of the association (for example, 
members of a union or church members);
      Non-natural person members of the association;
      Employees of the association (for example, employees of 
the labor union or employees of the church); and
      The association.
    Generally, a single associational common bond does not include a 
geographic definition and can operate nationally. However, a proposed or 
existing federal credit union may limit its field of membership to a 
single association or geographic area. NCUA may impose a geographic 
limitation if it is determined that the applicant credit union does not 
have the ability to serve a larger group or there are other operational 
concerns. All single associational common bonds should include a 
definition of the group that may be served based on the association's 
charter, bylaws, and any other equivalent documentation.
    Applicants for a single associational common bond federal credit 
union charter or a field of membership amendment to include an 
association must provide, at the request of NCUA, a copy of the 
association's charter, bylaws, or other equivalent documentation, 
including any legal documents required by the state or other governing 
authority.
    The associational sponsor itself may also be included in the field 
of membership--e.g., ``Sprocket Association''--and will be shown in the 
last clause of the field of membership.

  III.A.1.a--Threshold Requirement Regarding the Purpose for Which an 
  Associational Group Is Formed and the Totality of the Circumstances 
                                Criteria

    As a threshold matter, when reviewing an application to include an 
association in a federal credit union's field of membership, NCUA will 
determine if the association has been formed primarily for the purpose 
of expanding credit union membership. If NCUA makes such a 
determination, then the analysis ends and the association is denied 
inclusion in the federal credit union's field of membership. If NCUA 
determines that the association was formed to serve some other separate 
function as an organization, then NCUA will apply the following totality 
of the circumstances test to determine if the association satisfies the 
associational common bond requirements. The totality of the 
circumstances test consists of the following factors:
    1. Whether the association provides opportunities for members to 
participate in the furtherance of the goals of the association;
    2. Whether the association maintains a membership list;
    3. Whether the association sponsors other activities;
    4. Whether the association's membership eligibility requirements are 
authoritative;
    5. Whether members pay dues;
    6. Whether the members have voting rights; To meet this requirement, 
members need not vote directly for an officer, but may vote for a 
delegate who in turn represents the members' interests;
    7. The frequency of meetings; and
    8. Separateness--NCUA reviews if there is corporate separateness 
between the group and the federal credit union. The group and the 
federal credit union must operate in a way that demonstrates the 
separate corporate existence of each entity. Specifically, this means 
the federal credit union's and the group's respective business 
transactions, accounts, and corporate records are not intermingled.
    No one factor alone is determinative of membership eligibility as an 
association. The totality of the circumstances controls over any 
individual factor in the test. However, NCUA's primary focus will be on 
factors 1-4.

                     III.A.1.b--Pre-Approved Groups

    NCUA automatically approves the below groups as satisfying the 
associational common bond provisions. NCUA only approves regular members 
of an approved group. Honorary, affiliate, or non-regular members do not 
qualify.
    These groups are:
    (1) Alumni associations;
    (2) Religious organizations, including churches or groups of related 
churches;
    (3) Electric cooperatives;
    (4) Homeowner associations;
    (5) Labor unions;
    (6) Scouting groups;
    (7) Parent teacher associations (PTAs) organized at the local level 
to serve a single school district;

[[Page 510]]

    (8) Chamber of commerce groups (members only and not employees of 
members);
    (9) Athletic booster clubs whose members have voting rights;
    (10) Fraternal organizations or civic groups with a mission of 
community service whose members have voting rights;
    (11) Organizations having a mission based on preserving or 
furthering the culture of a particular national or ethnic origin; and
    (12) Organizations promoting social interaction or educational 
initiatives among persons sharing a common occupational profession.

                    III.A.1.d--Additional Information

    A support group whose members are continually changing or whose 
duration is temporary may not meet the single associational common bond 
criteria. Each class of member will be evaluated based on the totality 
of the circumstances. Individuals or honorary members who only make 
donations to the association are not eligible to join the credit union.
    Student groups (e.g., students enrolled at a public, private, or 
parochial school) may constitute either an associational or occupational 
common bond. For example, students enrolled at a church sponsored school 
could share a single associational common bond with the members of that 
church and may qualify for a federal credit union charter. Similarly, 
students enrolled at a university, as a group by itself, or in 
conjunction with the faculty and employees of the school, could share a 
single occupational common bond and may qualify for a federal credit 
union charter.
    Tenant groups, consumer groups, and other groups of persons having 
an ``interest in'' a particular cause and certain consumer cooperatives 
may also qualify as an association.
    Associations based primarily on a client-customer relationship do 
not meet associational common bond requirements. Health clubs are an 
example of a group not meeting associational common bond requirements, 
including YMCAs. However, having an incidental client-customer 
relationship does not preclude an associational charter as long as the 
associational common bond requirements are met. For example, a fraternal 
association that offers insurance, which is not a condition of 
membership, may qualify as a valid associational common bond.

           III.A.2--Subsequent Changes to Association's Bylaws

    If the association's membership or geographical definitions in its 
charter and bylaws are changed subsequent to the effective date stated 
in the field of membership, the credit union must submit the revised 
charter or bylaws for NCUA's consideration and approval prior to serving 
members of the association added as a result of the change.

            III.A.3--Sample Single Associational Common Bonds

    Some examples of associational common bonds are:
      Regular members of Locals 10 and 13, IBEW, in Florida, who 
qualify for membership in accordance with their charter and bylaws in 
effect on May 20, 2001;
      Members of the Hoosier Farm Bureau in Grant, Logan, or Lee 
Counties of Indiana, who qualify for membership in accordance with its 
charter and bylaws in effect on March 7, 1997;
      Members of the Shalom Congregation in Chevy Chase, 
Maryland;
      Regular members of the Corporate Executives Association, 
located in Westchester, New York, who qualify for membership in 
accordance with its charter and bylaws in effect on December 1, 1997;
      Members of the University of Wisconsin Alumni Association, 
located in Green Bay, Wisconsin;
      Members of the Marine Corps Reserve Officers Association; 
or
      Members of St. John's Methodist Church and St. Luke's 
Methodist Church, located in Toledo, Ohio.
    Some examples of insufficiently defined single associational common 
bonds are:
      All Lutherans in the United States (too broadly defined); 
or
      Veterans of U.S. military service (group is too broadly 
defined; no formal association of all members of the group).
    Some examples of unacceptable single associational common bonds are:
      Alumni of Amos University (no formal association);
      Customers of Fleetwood Insurance Company (policyholders or 
primarily customer/client relationships do not meet associational 
standards);
      Employees of members of the Reston, Virginia, Chamber of 
Commerce (not a sufficiently close tie to the associational common 
bond); or
      Members of St. John's Lutheran Church and St. Mary's 
Catholic Church located in Anniston, Alabama (churches are not of the 
same denomination).

               III.B--Associational Common Bond Amendments

                            III.B.1--General

    Section 5 of every associational federal credit union's charter 
defines the field of membership the credit union can legally serve. Only 
those persons who, or legal entities that, join the credit union and are 
specified in the field of membership can be served.

[[Page 511]]

There are three instances in which Section 5 must be amended by NCUA.
    First, a group that shares the credit union's common bond is added 
to the field of membership. This may occur through various ways 
including agreement between the group and the credit union directly, or 
through a merger, purchase and assumption (P&A), or spin-off.
    Second, a federal credit union qualifies to change its common bond 
from:
      A single associational common bond to a single 
occupational common bond;
      A single associational common bond to a community charter; 
or
      A single associational common bond to a multiple common 
bond.
    Third, a federal credit union removes a portion of the group from 
its field of membership through agreement with the group, a spin-off, or 
a portion of the group that is no longer in existence.
    An existing single associational federal credit union that submits a 
request to amend its charter must provide documentation to establish 
that the associational common bond requirement has been met. The 
regional director must approve all amendments to an associational common 
bond credit union's field of membership.

                  III.B.2--Organizational Restructuring

    If the single common bond group that comprises a federal credit 
union's field of membership undergoes a substantial restructuring, the 
result is often that portions of the group are sold or spun off. This is 
an event requiring a change to the credit union's field of membership. 
NCUA may not permit a single associational credit union to maintain in 
its field of membership a sold or spun-off group to which it has been 
providing service unless the group otherwise qualifies for membership in 
the credit union or the credit union converts to a multiple common bond 
credit union.
    If the group comprising the single common bond of the credit union 
merges with, or is acquired by, another group, the credit union can 
serve the new group resulting from the merger or acquisition after 
receiving a housekeeping amendment.

                     III.B.3--Economic Advisability

    Prior to granting a common bond expansion, NCUA will examine the 
amendment's likely impact on the credit union's operations and financial 
condition. In most cases, the information needed for analyzing the 
effect of adding a particular group will be available to NCUA through 
the examination and financial and statistical reports; however, in 
particular cases, a regional director may require additional information 
prior to making a decision.

                   III.B.4--Documentation Requirements

    A federal credit union requesting a common bond expansion must 
submit an Application for Field of Membership Amendment (NCUA 4015-EZ) 
to the appropriate NCUA regional director. An authorized credit union 
representative must sign the request.

       III.C--NCUA Procedures for Amending the Field of Membership

                            III.C.1--General

    All requests for approval to amend a federal credit union's charter 
must be submitted to the appropriate regional director.

                  III.C.2--Regional Director's Decision

    NCUA staff will review all amendment requests in order to ensure 
conformance to NCUA policy.
    Before acting on a proposed amendment, the regional director may 
require an on-site review. In addition, the regional director may, after 
taking into account the significance of the proposed field of membership 
amendment, require the applicant to submit a business plan addressing 
specific issues.
    The financial and operational condition of the requesting credit 
union will be considered in every instance. The economic advisability of 
expanding the field of membership of a credit union with financial or 
operational problems must be carefully considered.
    In most cases, field of membership amendments will only be approved 
for credit unions that are operating satisfactorily. Generally, if a 
federal credit union is having difficulty providing service to its 
current membership, or is experiencing financial or other operational 
problems, it may have more difficulty serving an expanded field of 
membership.
    Occasionally, however, an expanded field of membership may provide 
the basis for reversing current financial problems. In such cases, an 
amendment to expand the field of membership may be granted 
notwithstanding the credit union's financial or operational problems. 
The applicant credit union must clearly establish that the expanded 
field of membership is in the best interest of the members and will not 
increase the risk to the NCUSIF.

                   III.C.3--Regional Director Approval

    If the regional director approves the requested amendment, the 
credit union will be issued an amendment to Section 5 of its charter.

                 III.C.4--Regional Director Disapproval

    When a regional director disapproves any application, in whole or in 
part, to amend the field of membership under this chapter,

[[Page 512]]

the applicant will be informed in writing of the:
      Specific reasons for the action;
      Options to consider, if appropriate, for gaining approval; 
and
      Appeal procedures.

              III.C.5--Appeal of Regional Director Decision

    If a field of membership expansion request, merger, or spin-off is 
denied by the regional director, the federal credit union may appeal the 
decision to the NCUA Board. An appeal must be sent to the appropriate 
regional office within 60 days of the date of denial and must address 
the specific reason(s) for the denial. The regional director will then 
forward the appeal to the NCUA Board. NCUA central office staff will 
make an independent review of the facts and present the appeal to the 
NCUA Board with a recommendation.
    Before appealing, the credit union may, within 30 days of the 
denial, provide supplemental information to the regional director for 
reconsideration. A reconsideration will contain new and material 
evidence addressing the reasons for the initial denial. The regional 
director will have 30 days from the date of the receipt of the request 
for reconsideration to make a final decision. If the request is again 
denied, the applicant may proceed with the appeal process within 60 days 
of the date of the last denial. A second request for reconsideration 
will be treated as an appeal to the NCUA Board.

         III.D--Mergers, Purchase and Assumptions, and Spin-Offs

    In general, other than the addition of common bond groups, there are 
three additional ways a federal credit union with a single associational 
common bond can expand its field of membership:
      By taking in the field of membership of another credit 
union through a common bond or emergency merger;
      By taking in the field of membership of another credit 
union through a common bond or emergency purchase and assumption (P&A); 
or
      By taking a portion of another credit union's field of 
membership through a common bond spin-off.

                            III.D.1--Mergers

    Generally, the requirements applicable to field of membership 
expansions found in this section apply to mergers where the continuing 
credit union is a federal charter. That is, the two credit unions must 
share a common bond.
    Where the merging credit union is state-chartered, the common bond 
rules applicable to a federal credit union apply.
    Mergers must be approved by the NCUA regional director where the 
continuing credit union is headquartered, with the concurrence of the 
regional director of the merging credit union, and, as applicable, the 
state regulators.
    If a single associational credit union wants to merge into a 
multiple common bond or community credit union, Section IV.D or Section 
V.D of this Chapter, respectively, should be reviewed.

                       III.D.2--Emergency Mergers

    An emergency merger may be approved by NCUA without regard to common 
bond or other legal constraints. An emergency merger involves NCUA's 
direct intervention and approval. The credit union to be merged must 
either be insolvent or in danger of insolvency, as defined in the 
Glossary, and NCUA must determine that:
      An emergency requiring expeditious action exists;
      Other alternatives are not reasonably available; and
      The public interest would best be served by approving the 
merger.
    If not corrected, conditions that could lead to insolvency include, 
but are not limited to:
      Abandonment by management;
      Loss of sponsor;
      Serious and persistent record keeping problems; or
      Serious and persistent operational concerns.
    In an emergency merger situation, NCUA will take an active role in 
finding a suitable merger partner (continuing credit union). NCUA is 
primarily concerned that the continuing credit union has the financial 
strength and management expertise to absorb the troubled credit union 
without adversely affecting its own financial condition and stability.
    As a stipulated condition to an emergency merger, the field of 
membership of the merging credit union may be transferred intact to the 
continuing federal credit union without regard to any common bond 
restrictions. Under this authority, therefore, a single associational 
common bond federal credit union may take into its field of membership 
any dissimilar charter type.
    The common bond characteristic of the continuing credit union in an 
emergency merger does not change. That is, even though the merging 
credit union is a multiple common bond or community, the continuing 
credit union will remain a single common bond credit union. Similarly, 
if the merging credit union is an unlike single common bond, the 
continuing credit union will remain a single common bond credit union. 
Future common bond expansions will be based on the continuing credit 
union's single common bond.
    Emergency mergers involving federally insured credit unions in 
different NCUA regions must be approved by the regional director where 
the continuing credit union is

[[Page 513]]

headquartered, with the concurrence of the regional director of the 
merging credit union and, as applicable, the state regulators.

                 III.D.3--Purchase and Assumption (P&A)

    Another alternative for acquiring the field of membership of a 
failing credit union is through a consolidation known as a P&A. A P&A 
has limited application because, in most cases, the failing credit union 
must be placed into involuntary liquidation. In the few instances where 
a P&A may be appropriate, the assuming federal credit union, as with 
emergency mergers, may acquire the entire field of membership if the 
emergency merger criteria are satisfied. However, if the P&A does not 
meet the emergency merger criteria, it must be processed under the 
common bond requirements.
    In a P&A processed under the emergency criteria, specified loans, 
shares, and certain other designated assets and liabilities, without 
regard to common bond restrictions, may also be acquired without 
changing the character of the continuing federal credit union for 
purposes of future field of membership amendments.
    If the purchased and/or assumed credit union's field of membership 
does not share a common bond with the purchasing and/or assuming credit 
union, then the continuing credit union's original common bond will be 
controlling for future common bond expansions.
    P&As involving federally insured credit unions in different NCUA 
regions must be approved by the regional director where the continuing 
credit union is headquartered, with the concurrence of the regional 
director of the purchased and/or assumed credit union and, as 
applicable, the state regulators.

                           III.D.4--Spin-Offs

    A spin-off occurs when, by agreement of the parties, a portion of 
the field of membership, assets, liabilities, shares, and capital of a 
credit union are transferred to a new or existing credit union. A spin-
off is unique in that usually one credit union has a field of membership 
expansion and the other loses a portion of its field of membership.
    All common bond requirements apply regardless of whether the spun-
off group becomes a new credit union or goes to an existing federal 
charter.
    The request for approval of a spin-off must be supported with a plan 
that addresses, at a minimum:
      Why the spin-off is being requested;
      What part of the field of membership is to be spun off;
      Whether the affected credit unions have the same common 
bond (applies only to single associational credit unions);
      Which assets, liabilities, shares, and capital are to be 
transferred;
      The financial impact the spin-off will have on the 
affected credit unions;
      The ability of the acquiring credit union to effectively 
serve the new members;
      The proposed spin-off date; and
      Disclosure to the members of the requirements set forth 
above.
    The spin-off request must also include current financial statements 
from the affected credit unions and the proposed voting ballot.
    For federal credit unions spinning off a group, membership notice 
and voting requirements and procedures are the same as for mergers (see 
part 708 of the NCUA Rules and Regulations), except that only the 
members directly affected by the spin-off--those whose shares are to be 
transferred--are permitted to vote. Members whose shares are not being 
transferred will not be afforded the opportunity to vote. All members of 
the group to be spun off (whether they voted in favor, against, or not 
at all) will be transferred if the spin-off is approved by the voting 
membership. Voting requirements for federally insured state credit 
unions are governed by state law.
    Spin-offs involving federally insured credit unions in different 
NCUA regions must be approved by all regional directors where the credit 
unions are headquartered and the state regulators, as applicable. Spin-
offs in the same region also require approval by the state regulator, as 
applicable.

                             III.E--Overlaps

                            III.E.1--General

    An overlap exists when a group of persons is eligible for membership 
in two or more credit unions. NCUA will permit single associational 
federal credit unions to overlap any other charters without performing 
an overlap analysis.

                  III.E.2--Organizational Restructuring

    A federal credit union's field of membership will always be governed 
by the common bond descriptions contained in Section 5 of its charter. 
Where a sponsor organization expands its operations internally, by 
acquisition or otherwise, the credit union may serve these new entrants 
to its field of membership if they are part of the common bond described 
in Section 5. NCUA will permit a complete overlap of the credit unions' 
fields of membership. If a sponsor organization sells off a group, new 
members can no longer be served unless they otherwise qualify for 
membership in the credit union or it converts to a multiple common bond.
    Credit unions must submit documentation explaining the restructuring 
and providing information regarding the new organizational structure.

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                      III.E.3--Exclusionary Clauses

    An exclusionary clause is a limitation precluding the credit union 
from serving the primary members of a portion of a group otherwise 
included in its field of membership. NCUA no longer grants exclusionary 
clauses. Those granted prior to the adoption of this new chartering 
manual will remain in effect unless the credit unions agree to remove 
them or one of the affected credit unions submits a housekeeping 
amendment to have it removed.

                       III.F--Charter Conversions

    A single associational common bond federal credit union may apply to 
convert to a community charter provided the field of membership 
requirements of the community charter are met. Groups within the 
existing charter which cannot qualify in the new charter cannot be 
served except for members of record, or groups or communities obtained 
in an emergency merger or P&A. A credit union must notify all groups 
that will be removed from the field of membership as a result of 
conversion. Members of record can continue to be served. Also, in order 
to support a case for a conversion, the applicant federal credit union 
may be required to develop a detailed business plan as specified in 
Chapter 2, Section V.A.3.
    A single associational common bond federal credit union may apply to 
convert to a multiple common bond charter by adding a non-common bond 
group that is within a reasonable proximity of a service facility. 
Groups within the existing charter may be retained and continue to be 
served. However, future amendments, including any expansions of the 
original single common bond group, must be done in accordance with 
multiple common bond policy.

          III.G--Removal of Groups From the Field of Membership

    A credit union may request removal of a portion of the common bond 
group from its field of membership for various reasons. The most common 
reasons for this type of amendment are:
      The group is within the field of membership of two credit 
unions and one wishes to discontinue service;
      The federal credit union cannot continue to provide 
adequate service to the group;
      The group has ceased to exist;
      The group does not respond to repeated requests to contact 
the credit union or refuses to provide needed support; or
      The group initiates action to be removed from the field of 
membership.
    When a federal credit union requests an amendment to remove a group 
from its field of membership, the regional director will determine why 
the credit union desires to remove the group. If the regional director 
concurs with the request, membership will continue for those who are 
already members under the ``once a member, always a member'' provision 
of the Federal Credit Union Act.

        III.H--Other Persons Eligible for Credit Union Membership

    A number of persons by virtue of their close relationship to a 
common bond group may be included, at the charter applicant's option, in 
the field of membership. These include the following:
      Spouses of persons who died while within the field of 
membership of this credit union;
      Employees of this credit union;
      Volunteers;
      Members of the immediate family or household;
      Organizations of such persons; and
      Corporate or other legal entities in this charter.
    Immediate family is defined as spouse, child, sibling, parent, 
grandparent, or grandchild. This includes stepparents, stepchildren, 
stepsiblings, and adoptive relationships.
    Household is defined as persons living in the same residence 
maintaining a single economic unit.
    Membership eligibility is extended only to individuals who are 
members of an ``immediate family or household'' of a credit union 
member. It is not necessary for the primary member to join the credit 
union in order for the immediate family or household member of the 
primary member to join, provided the immediate family or household 
clause is included in the field of membership. However, it is necessary 
for the immediate family member or household member to first join in 
order for that person's immediate family member or household member to 
join the credit union. A credit union can adopt a more restrictive 
definition of immediate family or household.
    Volunteers, by virtue of their close relationship with a sponsor 
group, may be included. One example is volunteers working at a church.
    Under the Federal Credit Union Act, once a person becomes a member 
of the credit union, such person may remain a member of the credit union 
until the person chooses to withdraw or is expelled from the membership 
of the credit union. This is commonly referred to as ``once a member, 
always a member.'' The ``once a member, always a member'' provision does 
not prevent a credit union from restricting services to members who are 
no longer within the field of membership.

[[Page 515]]

          IV--Multiple Occupational/ Associational Common Bonds

                             IV.A.1--General

    A federal credit union may be chartered to serve a combination of 
distinct, definable single occupational and/or associational common 
bonds. This type of credit union is called a multiple common bond credit 
union. Each group in the field of membership must have its own 
occupational or associational common bond. For example, a multiple 
common bond credit union may include two unrelated employers, or two 
unrelated associations, or a combination of two or more employers or 
associations. Additionally, these groups must be within reasonable 
geographic proximity of the credit union. That is, the groups must be 
within the service area of one of the credit union's service facilities. 
These groups are referred to as select groups. A multiple common bond 
credit union cannot include a TIP or expand using single common bond 
criteria.
    A federal credit union's service area is the area that can 
reasonably be served by the service facilities accessible to the groups 
within the field of membership. The service area will most often 
coincide with that geographic area primarily served by the service 
facility. Additionally, the groups served by the credit union must have 
access to the service facility. The non-availability of other credit 
union service is a factor to be considered in determining whether the 
group is within reasonable proximity of a credit union wishing to add 
the group to its field of membership.
    A service facility for multiple common bond credit unions is defined 
as a place where shares are accepted for members' accounts, loan 
applications are accepted or loans are disbursed. This definition 
includes a credit union owned branch, a mobile branch, an office 
operated on a regularly scheduled weekly basis, a credit union owned 
ATM, or a credit union owned electronic facility that meets, at a 
minimum, these requirements. A service facility also includes a shared 
branch or a shared branch network if either: (1) the credit union has an 
ownership interest in the service facility either directly or through a 
CUSO or similar organization; or (2) the service facility is local to 
the credit union and the credit union is an authorized participant in 
the service center. This definition does not include the credit union's 
Internet Web site.
    The select group as a whole will be considered to be within a credit 
union's service area when:
      A majority of the persons in a select group live, work, or 
gather regularly within the service area;
      The group's headquarters is located within the service 
area; or
      The group's ``paid from'' or ``supervised from'' location 
is within the service area.

         IV.A.2--Sample Multiple Common Bond Field of Membership

    An example of a multiple common bond field of membership is:
    ``The field of membership of this federal credit union shall be 
limited to the following:
    1. Employees of Teltex Corporation who work in Wilmington, Delaware;
    2. Partners and employees of Smith & Jones, Attorneys at Law, who 
work in Wilmington, Delaware;
    3. Members of the M&L Association in Wilmington, Delaware, who 
qualify for membership in accordance with its charter and bylaws in 
effect on December 31, 1997.''

                  IV.B--Multiple Common Bond Amendments

                             IV.B.1--General

    Section 5 of every multiple common bond federal credit union's 
charter defines the field of membership and select groups the credit 
union can legally serve. Only those persons or legal entities specified 
in the field of membership can be served. There are a number of 
instances in which Section 5 must be amended by NCUA.
    First, a new select group is added to the field of membership. This 
may occur through agreement between the group and the credit union 
directly, or through a merger, corporate acquisition, purchase and 
assumption (P&A), or spin-off.
    Second, a federal credit union qualifies to change its charter from:
      A single occupational or associational charter to a 
multiple common bond charter;
      A multiple common bond to a single occupational or 
associational charter;
      A multiple common bond to a community charter; or
      A community to a multiple common bond charter.
    Third, a federal credit union removes a group from its field of 
membership through agreement with the group, a spin-off, or because the 
group no longer exists.

              IV.B.2--Numerical Limitation of Select Groups

    An existing multiple common bond federal credit union that submits a 
request to amend its charter must provide documentation to establish 
that the multiple common bond requirements have been met. The regional 
director must approve all amendments to a multiple common bond credit 
union's field of membership.
    NCUA will approve groups to a credit union's field of membership if 
the agency determines in writing that the following criteria are met:

[[Page 516]]

      The credit union has not engaged in any unsafe or unsound 
practice, as determined by the regional director, which is material 
during the one year period preceding the filing to add the group;
      The credit union is ``adequately capitalized.'' NCUA 
defines adequately capitalized to mean the credit union has a net worth 
ratio of not less than 6 percent. For low-income credit unions or credit 
unions chartered less than ten years, the regional director may 
determine that a net worth ratio of less than 6 percent is adequate if 
the credit union is making reasonable progress toward meeting the 6 
percent net worth requirement. For any other credit union, the regional 
director may determine that a net worth ratio of less than 6 percent is 
adequate if the credit union is making reasonable progress toward 
meeting the 6 percent net worth requirement, and the addition of the 
group would not adversely affect the credit union's capitalization 
level;
      The credit union has the administrative capability to 
serve the proposed group and the financial resources to meet the need 
for additional staff and assets to serve the new group;
      Any potential harm the expansion may have on any other 
credit union and its members is clearly outweighed by the probable 
beneficial effect of the expansion. With respect to a proposed 
expansion's effect on other credit unions, the requirements on 
overlapping fields of membership set forth in Section IV.E of this 
Chapter are also applicable; and
      If the formation of a separate credit union by such group 
is not practical and consistent with reasonable standards for the safe 
and sound operation of a credit union.
    A detailed analysis is required for groups of 3,000 or more primary 
potential members requesting to be added to a multiple common bond 
credit union. It is incumbent upon the credit union to demonstrate that 
the formation of a separate credit union by such a group is not 
practical. The group must provide evidence that it lacks sufficient 
volunteer and other resources to support the efficient and effective 
operations of a credit union or does not meet the economic advisability 
criteria outlined in Chapter 1. If this can be demonstrated, the group 
may be added to a multiple common bond credit union's field of 
membership.

                   IV.B.3--Documentation Requirements

    A multiple common bond credit union requesting a select group 
expansion must submit a formal written request, using the Application 
for Field of Membership Amendment (NCUA 4015 or NCUA 4015-EZ) to the 
appropriate NCUA regional director. An authorized credit union 
representative must sign the request.
    The NCUA 4015-EZ (for groups less than 3,000 potential members) must 
be accompanied by the following:
      A letter, or equivalent documentation, from the group 
requesting credit union service. This letter must indicate:
    [cir] That the group wants to be added to the applicant federal 
credit union's field of membership;
    [cir] The number of persons currently included within the group to 
be added and their locations; and
    [cir] The group's proximity to credit union's nearest service 
facility.
      The most recent copy of the group's charter and bylaws or 
equivalent documentation (for associational groups).
    The NCUA 4015 (for groups of 3,000 or more primary potential 
members) must be accompanied by the following:
      A letter, or equivalent documentation, from the group 
requesting credit union service. This letter must indicate:
    [cir] That the group wants to be added to the federal credit union's 
field of membership;
    [cir] Whether the group presently has other credit union service 
available;
    [cir] The number of persons currently included within the group to 
be added and their locations;
    [cir] The group's proximity to credit union's nearest service 
facility, and
    [cir] Why the formation of a separate credit union for the group is 
not practical or consistent with safety and soundness standards. A 
credit union need not address every item on the list, simply those 
issues that are relevant to its particular request:
    Member location--whether the membership is widely dispersed or 
concentrated in a central location.
    Demographics--the employee turnover rate, economic status of the 
group's members, and whether the group is more apt to consist of savers 
and/or borrowers.
    Market competition--the availability of other financial services.
    Desired services and products--the type of services the group 
desires in comparison to the type of services a new credit union could 
offer.
    Sponsor subsidies--the availability of operating subsidies.
    The desire of the sponsor--the extent of the sponsor's interest in 
supporting a credit union charter.
    Employee interest--the extent of the employees' interest in 
obtaining a credit union charter.
    Evidence of past failure--whether the group previously had its own 
credit union or previously filed for a credit union charter.
    Administrative capacity to provide services--will the group have the 
management expertise to provide the services requested.
      If the group is eligible for membership in any other 
credit union, documentation must

[[Page 517]]

be provided to support inclusion of the group under the overlap 
standards set forth in Section IV.E of this Chapter; and
      The most recent copy of the group's charter and bylaws or 
equivalent documentation (for associational groups).

                     IV.B.4--Corporate Restructuring

    If a select group within a federal credit union's field of 
membership undergoes a substantial restructuring, a change to the credit 
union's field of membership may be required if the credit union is to 
continue to provide service to the select group. NCUA permits a multiple 
common bond credit union to maintain in its field of membership a sold, 
spun-off, or merged select group to which it has been providing service. 
This type of amendment to the credit union's charter is not considered 
an expansion; therefore, the criteria relating to adding new groups are 
not applicable.
    When two groups merge and each is in the field of membership of a 
credit union, then both (or all affected) credit unions can serve the 
resulting merged group, subject to any existing geographic limitation 
and without regard to any overlap provisions. However, the credit unions 
cannot serve the other multiple groups that may be in the field of 
membership of the other credit union.

      IV.C--NCUA's Procedures for Amending the Field of Membership

                             IV.C.1--General

    All requests for approval to amend a federal credit union's charter 
must be submitted to the appropriate regional director.

                  IV.C.2--Regional Director's Decision

    NCUA staff will review all amendment requests in order to ensure 
conformance to NCUA policy.
    Before acting on a proposed amendment, the regional director may 
require an on-site review. In addition, the regional director may, after 
taking into account the significance of the proposed field of membership 
amendment, require the applicant to submit a business plan addressing 
specific issues.
    The financial and operational condition of the requesting credit 
union will be considered in every instance. An expanded field of 
membership may provide the basis for reversing adverse trends. In such 
cases, an amendment to expand the field of membership may be granted 
notwithstanding the credit union's adverse trends. The applicant credit 
union must clearly establish that the approval of the expanded field of 
membership meets the requirements of Section IV.B.2 of this Chapter and 
will not increase the risk to the NCUSIF.

                   IV.C.3--Regional Director Approval

    If the regional director approves the requested amendment, the 
credit union will be issued an amendment to Section 5 of its charter.

                  IV.C.4--Regional Director Disapproval

    When a regional director disapproves any application, in whole or in 
part, to amend the field of membership under this chapter, the applicant 
will be informed in writing of the:
      Specific reasons for the action;
      Options to consider, if appropriate, for gaining approval; 
and
      Appeal procedure.

              IV.C.5--Appeal of Regional Director Decision

    If a field of membership expansion request, merger, or spin-off is 
denied by the regional director, the federal credit union may appeal the 
decision to the NCUA Board. An appeal must be sent to the appropriate 
regional office within 60 days of the date of denial, and must address 
the specific reason(s) for the denial. The regional director will then 
forward the appeal to the NCUA Board. NCUA central office staff will 
make an independent review of the facts and present the appeal to the 
Board with a recommendation.
    Before appealing, the credit union may, within 30 days of the 
denial, provide supplemental information to the regional director for 
reconsideration. A reconsideration will contain new and material 
evidence addressing the reasons for the initial denial. The regional 
director will have 30 days from the date of the receipt of the request 
for reconsideration to make a final decision. If the request is again 
denied, the applicant may proceed with the appeal process within 60 days 
of the date of the last denial. A second request for reconsideration 
will be treated as an appeal to the NCUA Board.

         IV.D--Mergers, Purchase and Assumptions, and Spin-Offs

    In general, other than the addition of select groups, there are 
three additional ways a multiple common bond federal credit union can 
expand its field of membership:
      By taking in the field of membership of another credit 
union through a merger;
      By taking in the field of membership of another credit 
union through a purchase and assumption (P&A); or
      By taking a portion of another credit union's field of 
membership through a spin-off.

[[Page 518]]

                        IV.D.1--Voluntary Mergers

 a. All Select Groups in the Merging Credit Union's Field of Membership 
             Have Less Than 3,000 Primary Potential Members

    A voluntary merger of two or more federal credit unions is 
permissible as long as each select group in the merging credit union's 
field of membership has less than 3,000 primary potential members. While 
the merger requirements outlined in Section 205 of the Federal Credit 
Union Act must still be met, the requirements of Chapter 2, Section 
IV.B.2 of this manual are not applicable.

  b. One or More Select Groups in the Merging Credit Union's Field of 
         Membership Has 3,000 or More Primary Potential Members

    If the merging credit unions serve the same group, and the group 
consists of 3,000 or more primary potential members, then the ability to 
form a separate credit union analysis is not required for that group. If 
the merging credit union has any other groups consisting of 3,000 or 
more primary potential members, special requirements apply. NCUA will 
analyze each group of 3,000 or more primary potential members, except as 
noted above, to determine whether the formation of a separate credit 
union by such a group is practical. If the formation of a separate 
credit union by such a group is not practical because the group lacks 
sufficient volunteer and other resources to support the efficient and 
effective operations of a credit union or does not meet the economic 
advisable criteria outlined in Chapter 1, the group may be merged into a 
multiple common bond credit union. If the formation of a separate credit 
union is practical, the group must be spun-off before the merger can be 
approved.

 c. Merger of a Single Common Bond Credit Union Into a Multiple Common 
                            Bond Credit Union

    A financially healthy single common bond credit union with a primary 
potential membership of 3,000 or more cannot merge into a multiple 
common bond credit union, absent supervisory reasons, unless the 
continuing credit union already serves the same group.

                           d. Merger Approval

    If the merger is approved, the qualifying groups within the merging 
credit union's field of membership will be transferred intact to the 
continuing credit union and can continue to be served.
    Where the merging credit union is state-chartered, the field of 
membership rules applicable to a federal credit union apply.
    Mergers must be approved by the NCUA regional director where the 
continuing credit union is headquartered, with the concurrence of the 
regional director of the merging credit union, and, as applicable, the 
state regulators.

                       IV.D.2--Supervisory Mergers

    The NCUA may approve the merger of any federally insured credit 
union when safety and soundness concerns are present without regard to 
the 3,000 numerical limitation. The credit union need not be insolvent 
or in danger of insolvency for NCUA to use this statutory authority. 
Examples constituting appropriate reasons for using this authority are: 
abandonment of the management and/or officials and an inability to find 
replacements, loss of sponsor support, serious and persistent record 
keeping problems, sustained material decline in financial condition, or 
other serious or persistent circumstances.

                        IV.D.3--Emergency Mergers

    An emergency merger may be approved by NCUA without regard to common 
bond or other legal constraints. An emergency merger involves NCUA's 
direct intervention and approval. The credit union to be merged must 
either be insolvent or in danger of insolvency, as defined in the 
Glossary, and NCUA must determine that:
      An emergency requiring expeditious action exists;
      Other alternatives are not reasonably available; and
      The public interest would best be served by approving the 
merger.
    If not corrected, conditions that could lead to insolvency include, 
but are not limited to:
      Abandonment by management;
      Loss of sponsor;
      Serious and persistent record keeping problems; or
      Serious and persistent operational concerns.
    In an emergency merger situation, NCUA will take an active role in 
finding a suitable merger partner (continuing credit union). NCUA is 
primarily concerned that the continuing credit union has the financial 
strength and management expertise to absorb the troubled credit union 
without adversely affecting its own financial condition and stability.
    As a stipulated condition to an emergency merger, the field of 
membership of the merging credit union may be transferred intact to the 
continuing federal credit union without regard to any field of 
membership restrictions including numerical limitation requirements. 
Under this authority, any single occupational or associational common 
bond, multiple common bond, or community charter may merger into a 
multiple common bond credit union and that credit union can continue to 
serve the merging credit union's field of membership. Subsequent field 
of membership expansions of the continuing

[[Page 519]]

multiple common bond credit union must be consistent with multiple 
common bond policies.
    Emergency mergers involving federally insured credit unions in 
different NCUA regions must be approved by the regional director where 
the continuing credit union is headquartered, with the concurrence of 
the regional director of the merging credit union and, as applicable, 
the state regulators.

                  IV.D.4--Purchase and Assumption (P&A)

    Another alternative for acquiring the field of membership of a 
failing credit union is through a consolidation known as a P&A. 
Generally, the requirements applicable to field of membership expansions 
found in this chapter apply to purchase and assumptions where the 
purchasing credit union is a federal charter.
    A P&A has limited application because, in most cases, the failing 
credit union must be placed into involuntary liquidation. However, in 
the few instances where a P&A may occur, the assuming federal credit 
union, as with emergency mergers, may acquire the entire field of 
membership if the emergency criteria are satisfied. Specified loans, 
shares, and certain other designated assets and liabilities, without 
regard to field of membership restrictions, may also be acquired without 
changing the character of the continuing federal credit union for 
purposes of future field of membership amendments. Subsequent field of 
membership expansions must be consistent with multiple common bond 
policies.
    P&As involving federally insured credit unions in different NCUA 
regions must be approved by the regional director where the continuing 
credit union is headquartered, with the concurrence of the regional 
director of the purchased and/or assumed credit union and, as 
applicable, the state regulators.

                            IV.D.5--Spin-Offs

    A spin-off occurs when, by agreement of the parties, a portion of 
the field of membership, assets, liabilities, shares, and capital of a 
credit union are transferred to a new or existing credit union. A spin-
off is unique in that usually one credit union has a field of membership 
expansion and the other loses a portion of its field of membership.
    All common bond requirements apply regardless of whether the spun-
off group becomes a new charter or goes to an existing federal charter.
    The request for approval of a spun-off group must be supported with 
a plan that addresses, at a minimum:
      Why the spin-off is being requested;
      What part of the field of membership is to be spun off;
      Which assets, liabilities, shares, and capital are to be 
transferred;
      The financial impact the spin-off will have on the 
affected credit unions;
      The ability of the acquiring credit union to effectively 
serve the new members;
      The proposed spin-off date; and
      Disclosure to the members of the requirements set forth 
above.
    The spin-off request must also include current financial statements 
from the affected credit unions and the proposed voting ballot.
    For federal credit unions spinning off a group, membership notice 
and voting requirements and procedures are the same as for mergers (see 
part 708 of the NCUA Rules and Regulations), except that only the 
members directly affected by the spin-off--those whose shares are to be 
transferred--are permitted to vote. Members whose shares are not being 
transferred will not be afforded the opportunity to vote. All members of 
the group to be spun off (whether they voted in favor, against, or not 
at all) will be transferred if the spin-off is approved by the voting 
membership. Voting requirements for federally insured state credit 
unions are governed by state law.
    Spin-offs involving federally insured credit unions in different 
NCUA regions must be approved by all regional directors where the credit 
unions are headquartered and the state regulators, as applicable. Spin-
offs in the same region also require approval by the state regulator, as 
applicable.

                             IV.E--Overlaps

                             IV.E.1--General

    An overlap exists when a group of persons is eligible for membership 
in two or more credit unions, including state charters. An overlap is 
permitted when the expansion's beneficial effect in meeting the 
convenience and needs of the members of the group proposed to be 
included in the field of membership clearly outweighs any adverse effect 
on the overlapped credit union.
    Credit unions must investigate the possibility of an overlap with 
federally insured credit unions prior to submitting an expansion request 
if the group has 3,000 or more primary potential members. If cases arise 
where the assurance given to a regional director concerning the 
unavailability of credit union service is inaccurate, the misinformation 
may be grounds for removal of the group from the federal credit union's 
charter.
    When an overlap situation requiring analysis does arise, officials 
of the expanding credit union must ascertain the views of the overlapped 
credit union. If the overlapped credit union does not object, the 
applicant must submit a letter or other documentation to that effect. If 
the overlapped credit union does not respond, the expanding credit union 
must notify NCUA in writing of its attempt

[[Page 520]]

to obtain the overlapped credit union's comments.
    NCUA will approve an overlap if the expansion's beneficial effect in 
meeting the convenience and needs of the members of the group clearly 
outweighs any adverse effect on the overlapped credit union.
    In reviewing the overlap, the regional director will consider:
      The view of the overlapped credit union(s);
      Whether the overlap is incidental in nature--the group of 
persons in question is so small as to have no material effect on the 
original credit union;
      Whether there is limited participation by members or 
employees of the group in the original credit union after the expiration 
of a reasonable period of time;
      Whether the original credit union fails to provide 
requested service;
      Financial effect on the overlapped credit union;
      The desires of the group(s);
      The desire of the sponsor organization; and
      The best interests of the affected group and the credit 
union members involved.
    Generally, if the overlapped credit union does not object, and NCUA 
determines that there is no safety and soundness problem, the overlap 
will be permitted.
    Potential overlaps of a federally insured state credit union's field 
of membership by a federal credit union will generally be analyzed in 
the same way as if two federal credit unions were involved. Where a 
federally insured state credit union's field of membership is broadly 
stated, NCUA will exclude its field of membership from any overlap 
protection.
    NCUA will permit multiple common bond federal credit unions to 
overlap community charters without performing an overlap analysis.

   IV.E.2--Overlap Issues as a Result of Organizational Restructuring

    A federal credit union's field of membership will always be governed 
by the field of membership descriptions contained in Section 5 of its 
charter. Where a sponsor organization expands its operations internally, 
by acquisition or otherwise, the credit union may serve these new 
entrants to its field of membership if they are part of any select group 
listed in Section 5. Where acquisitions are made which add a new 
subsidiary, the group cannot be served until the subsidiary is included 
in the field of membership through a housekeeping amendment.
    Overlaps may occur as a result of restructuring or merger of the 
parent organization. When such overlaps occur, each credit union must 
request a field of membership amendment to reflect the new groups each 
wishes to serve. The credit union can continue to serve any current 
group in its field of membership that is acquiring a new group or has 
been acquired by a new group. The new group cannot be served by the 
credit union until the field of membership amendment is approved by 
NCUA.
    Credit unions affected by organizational restructuring or merger 
should attempt to resolve overlap issues among themselves. Unless an 
agreement is reached limiting the overlap resulting from the corporate 
restructuring, NCUA will permit a complete overlap of the credit unions' 
fields of membership. When two groups merge, or one group is acquired by 
the other, and each is in the field of membership of a credit union, 
both (or all affected) credit unions can serve the resulting merged or 
acquired group, subject to any existing geographic limitation and 
without regard to any overlap provisions. This is accomplished through a 
housekeeping amendment.
    Credit unions must submit to NCUA documentation explaining the 
restructuring and provide information regarding the new organizational 
structure.

                      IV.E.3--Exclusionary Clauses

    An exclusionary clause is a limitation precluding the credit union 
from serving the primary members of a portion of a group otherwise 
included in its field of membership. NCUA no longer grants exclusionary 
clauses. Those granted prior to the adoption of this new chartering 
manual will remain in effect unless the credit unions agree to remove 
them or one of the affected credit unions submits a housekeeping 
amendment to have it removed.

                        IV.F--Charter Conversion

    A multiple common bond federal credit union may apply to convert to 
a community charter provided the field of membership requirements of the 
community charter are met. Groups within the existing charter which 
cannot qualify in the new charter cannot be served except for members of 
record, or groups or communities obtained in an emergency merger or P&A. 
A credit union must notify all groups that will be removed from the 
field of membership as a result of conversion. Members of record can 
continue to be served. Also, in order to support a case for a 
conversion, the applicant federal credit union may be required to 
develop a detailed business plan as specified in Chapter 2, Section 
V.A.3.
    A multiple common bond federal credit union may apply to convert to 
a single occupational or associational common bond charter provided the 
field of membership requirements of the new charter are met. Groups 
within the existing charter, which do not qualify in the new charter, 
cannot be served except for members of record, or groups or

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communities obtained in an emergency merger or P&A. A credit union must 
notify all groups that will be removed from the field of membership as a 
result of conversion.

          IV.G--Removal of Groups From the Field of Membership

    A credit union may request removal of a group from its field of 
membership for various reasons. The most common reasons for this type of 
amendment are:
      The group is within the field of membership of two credit 
unions and one wishes to discontinue service;
      The federal credit union cannot continue to provide 
adequate service to the group;
      The group has ceased to exist;
      The group does not respond to repeated requests to contact 
the credit union or refuses to provide needed support;
      The group initiates action to be removed from the field of 
membership; or
      The federal credit union wishes to convert to a single 
common bond.
    When a federal credit union requests an amendment to remove a group 
from its field of membership, the regional director will determine why 
the credit union desires to remove the group. If the regional director 
concurs with the request, membership will continue for those who are 
already members under the ``once a member, always a member'' provision 
of the Federal Credit Union Act.

        IV.H--Other Persons Eligible for Credit Union Membership

    A number of persons, by virtue of their close relationship to a 
common bond group, may be included, at the charter applicant's option, 
in the field of membership. These include the following:
      Spouses of persons who died while within the field of 
membership of this credit union;
      Employees of this credit union;
      Persons retired as pensioners or annuitants from the above 
employment;
      Volunteers;
      Members of the immediate family or household;
      Organizations of such persons; and
      Corporate or other legal entities in this charter.
    Immediate family is defined as spouse, child, sibling, parent, 
grandparent, or grandchild. This includes stepparents, stepchildren, 
stepsiblings, and adoptive relationships.
    Household is defined as persons living in the same residence 
maintaining a single economic unit.
    Membership eligibility is extended only to individuals who are 
members of an ``immediate family or household'' of a credit union 
member. It is not necessary for the primary member to join the credit 
union in order for the immediate family or household member of the 
primary member to join, provided the immediate family or household 
clause is included in the field of membership. However, it is necessary 
for the immediate family member or household member to first join in 
order for that person's immediate family member or household member to 
join the credit union. A credit union can adopt a more restrictive 
definition of immediate family or household.
    Volunteers, by virtue of their close relationship with a sponsor 
group, may be included. Examples include volunteers working at a 
hospital or church.
    Under the Federal Credit Union Act, once a person becomes a member 
of the credit union, such person may remain a member of the credit union 
until the person chooses to withdraw or is expelled from the membership 
of the credit union. This is commonly referred to as ``once a member, 
always a member.'' The ``once a member, always a member'' provision does 
not prevent a credit union from restricting services to members who are 
no longer within the field of membership.

                    V--Community Charter Requirements

                             V.A.1--General

    There are two types of community charters. One is based on a single, 
geographically well-defined local community or neighborhood; the other 
is a rural district. More than one credit union may serve the same 
community.
    NCUA recognizes four types of affinity on which both a community 
charter and a rural district can be based--persons who live in, worship 
in, attend school in, or work in the community or rural district. 
Businesses and other legal entities within the community boundaries or 
rural district may also qualify for membership.
    NCUA has established the following requirements for community 
charters:
      The geographic area's boundaries must be clearly defined; 
and
      The area is a well-defined local community or a rural 
district.

  V.A.2--Definition of Well-Defined Local Community and Rural District

    In addition to the documentation requirements in Chapter 1 to 
charter a credit union, a community credit union applicant must provide 
additional documentation addressing the proposed area to be served and 
community service policies.
    An applicant has the burden of demonstrating to NCUA that the 
proposed community area meets the statutory requirements of being: (1) 
well-defined, and (2) a local community or rural district.

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    ``Well-defined'' means the proposed area has specific geographic 
boundaries. Geographic boundaries may include a city, township, county 
(single, multiple, or portions of a county) or their political 
equivalent, school districts, or a clearly identifiable neighborhood. 
Although congressional districts and state boundaries are well-defined 
areas, they do not meet the requirement that the proposed area be a 
local community or rural district.
    The well-defined local community requirement is met if:
      Single Political Jurisdiction--The area to be served is in 
a recognized single political jurisdiction, i.e., a city, county, or 
their political equivalent, or any contiguous portion thereof.
      Statistical Area--
      The area is a designated Core Based Statistical Area 
(CBSA) or allowing part thereof, or in the case of a CBSA with 
Metropolitan Divisions, the area is a Metropolitan Division or part 
thereof; and
      The CBSA or Metropolitan Division must have a population 
of 2.5 million or less people.
    The rural district requirement is met if:
      Rural District--
      The district has well-defined, contiguous geographic 
boundaries;
      More than 50% of the district's population resides in 
census blocks or other geographic areas that are designated as rural by 
the United State Census Bureau; and
      The total population of the district does not exceed the 
greater of 250,000 people or three percent of the population of the 
state in which the majority of the district is located; or
      The district has well-defined, contiguous geographic 
boundaries;
      The district does not have a population density in excess 
of 100 people per square mile; and
      The total population of the district does not exceed the 
greater of 250,000 people or three percent of the population of the 
state in which the majority of the district is located.
    The affinities that apply to rural districts are the same as those 
that apply to well defined local communities. The OMB definitions of 
CBSA and Metropolitan Division may be found at 65 FR82238 (Dec. 27, 
2000). They are incorporated herein by reference. Access to these 
definitions is available through the main page of the Federal Register 
Web site at http://www.gpoaccess.gov/fr/index.html and on NCUA's Web 
site at http://www.ncua.gov.
    The requirements in Chapter 2, Sections V.A.4 through V.G. also 
apply to a credit union that serves a rural district.

                 V.A.3--Previously Approved Communities

    If prior to July 26, 2010 NCUA has determined that a specific 
geographic area is a well defined local community, then a new applicant 
need not reestablish that fact as part of its application to serve the 
exact area. The new applicant must, however, note NCUA's previous 
determination as part of its overall application. An applicant applying 
for an area after that date that is not exactly the same as the 
previously approved well defined local community must comply with the 
current criteria in place for determining a well defined local 
community.

     V.A.4--Business Plan Requirements for a Community Credit Union

    A community credit union is frequently more susceptible to 
competition from other local financial institutions and generally does 
not have substantial support from any single sponsoring company or 
association. As a result, a community credit union will often encounter 
financial and operational factors that differ from an occupational or 
associational charter. Its diverse membership may require special 
marketing programs targeted to different segments of the community. For 
example, the lack of payroll deduction creates special challenges in the 
development and promotion of savings programs and in the collection of 
loans. Accordingly, to support an application for a community charter, 
an applicant Federal credit union must develop a business plan 
incorporating the following data:
      Pro forma financial statements for a minimum of 24 months 
after the proposed conversion, including the underlying assumptions and 
rationale for projected member, share, loan, and asset growth;
      Anticipated financial impact on the credit union, 
including the need for additional employees and fixed assets, and the 
associated costs;
      A description of the current and proposed office/branch 
structure, including a general description of the location(s); parking 
availability, public transportation availability, drive-through service, 
lobby capacity, or any other service feature illustrating community 
access;
      A marketing plan addressing how the community will be 
served for the 24-month period after the proposed conversion to a 
community charter, including detailing: how the credit union will 
implement its business plan; the unique needs of the various demographic 
groups in the proposed community; how the credit union will market to 
each group, particularly underserved groups; which community-based 
organizations the credit union will target in its outreach efforts; the 
credit union's marketing budget projections dedicating greater resources 
to reaching new members; and the credit

[[Page 523]]

union's timetable for implementation, not just a calendar of events;
      Details, terms and conditions of the credit union's 
financial products, programs, and services to be provided to the entire 
community; and
      Maps showing the current and proposed service facilities, 
ATMs, political boundaries, major roads, and other pertinent 
information.
    An existing Federal credit union may apply to convert to a community 
charter. Groups currently in the credit union's field of membership, but 
outside the new community credit union's boundaries, may not be included 
in the new community charter. Therefore, the credit union must notify 
groups that will be removed from the field of membership as a result of 
the conversion. Members of record can continue to be served.
    Before approval of an application to convert to a community credit 
union, NCUA must be satisfied that the credit union will be viable and 
capable of providing services to its members.
    Community credit unions will be expected to regularly review and to 
follow, to the fullest extent economically possible, the marketing and 
business plans submitted with their applications. Additionally, NCUA 
will follow-up with an FCU every year for three years after the FCU has 
been granted a new or expanded community charter, and at any other 
intervals NCUA believes appropriate, to determine if the FCU is 
satisfying the terms of its marketing and business plans. An FCU failing 
to satisfy those terms will be subject to supervisory action. As part of 
this review process, the regional office will report to the NCUA Board 
instances where an FCU is failing to satisfy the terms of its marketing 
and business plan and indicate what supervisory actions the region 
intends to take.

                       V.A.5--Community Boundaries

    The geographic boundaries of a community Federal credit union are 
the areas defined in its charter. The boundaries can usually be defined 
using political borders, streets, rivers, railroad tracks, or other 
static geographical feature.
    A community that is a recognized legal entity may be stated in the 
field of membership--for example, ``Gus Township, Texas,'' ``Isabella 
City, Georgia,'' or ``Fairfax County, Virginia.''
    A community that is a recognized CBSA must state in the field of 
membership the political jurisdiction(s) that comprise the CBSA.

                    V.A.6--Special Community Charters

    A community field of membership may include persons who work or 
attend school in a particular industrial park, shopping mall, office 
complex, or similar development. The proposed field of membership must 
have clearly defined geographic boundaries.

              V.A.7--Sample Community Fields of Membership

    A community charter does not have to include all four affinities 
(i.e., live, work, worship, or attend school in a community). Some 
examples of community fields of membership are:
      Persons who live, work, worship, or attend school in, and 
businesses located in the area of Johnson City, Tennessee, bounded by 
Fern Street on the north, Long Street on the east, Fourth Street on the 
south, and Elm Avenue on the west;
      Persons who live or work in Green County, Maine;
      Persons who live, worship, work (or regularly conduct 
business in), or attend school on the University of Dayton campus, in 
Dayton, Ohio;
      Persons who work for businesses located in Clifton Country 
Mall, in Clifton Park, New York;
      Persons who live, work, or worship in the Binghamton, New 
York, CBSA, consisting of Broome and Tioga Counties, New York (a 
qualifying CBSA in its entirety);
      Persons who live, work, worship, or attend school in the 
portion of the Oklahoma City, OK MSA that includes Canadian and Oklahoma 
counties, Oklahoma (two contiguous counties in a portion of a qualifying 
CBSA that has seven counties in total); or
      Persons who live, work, worship, or attend school in Uinta 
County or Lincoln County, Wyoming, a rural district.
    Some examples of insufficiently defined local communities, 
neighborhoods, or rural districts are:
      Persons who live or work within and businesses located 
within a ten-mile radius of Washington, DC (using a radius does not 
establish a well-defined area);
      Persons who live or work in the industrial section of New 
York, New York. (not a well-defined neighborhood, community, or rural 
district); or
      Persons who live or work in the greater Boston area. (not 
a well-defined neighborhood, community, or rural district).
    Some examples of unacceptable local communities, neighborhoods, or 
rural districts are:
      Persons who live or work in the State of California. (does 
not meet the definition of local community, neighborhood, or rural 
district).
      Persons who live in the first congressional district of 
Florida. (does not meet the definition of local community, neighborhood, 
or rural district).

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                   V.B--Field of Membership Amendments

    A community credit union may amend its field of membership by adding 
additional affinities or removing exclusionary clauses. This can be 
accomplished with a housekeeping amendment.
    A community credit union also may expand its geographic boundaries. 
Persons who live, work, worship, or attend school within the proposed 
well-defined local community, neighborhood or rural district must have 
common interests and/or interact. The credit union must follow the 
requirements of Section V.A.3 of this chapter.

        V.C--NCUA Procedures for Amending the Field of Membership

                             V.C.1--General

    All requests for approval to amend a community credit union's 
charter must be submitted to the appropriate regional director. If a 
decision cannot be made within a reasonable period of time, the regional 
director will notify the credit union.

                         V.C.2--NCUA's Decision

    The financial and operational condition of the requesting credit 
union will be considered in every instance. The economic advisability of 
expanding the field of membership of a credit union with financial or 
operational problems must be carefully considered.
    In most cases, field of membership amendments will only be approved 
for credit unions that are operating satisfactorily. Generally, if a 
federal credit union is having difficulty providing service to its 
current membership, or is experiencing financial or other operational 
problems, it may have more difficulty serving an expanded field of 
membership.
    Occasionally, however, an expanded field of membership may provide 
the basis for reversing current financial problems. In such cases, an 
amendment to expand the field of membership may be granted 
notwithstanding the credit union's financial or operational problems. 
The applicant credit union must clearly establish that the expanded 
field of membership is in the best interest of the members and will not 
increase the risk to the NCUSIF.

                          V.C.3--NCUA Approval

    If the requested amendment is approved by NCUA, the credit union 
will be issued an amendment to Section 5 of its charter.

                         V.C.4--NCUA Disapproval

    When NCUA disapproves any application to amend the field of 
membership, in whole or in part, under this chapter, the applicant will 
be informed in writing of the:
      Specific reasons for the action;
      If appropriate, options or suggestions that could be 
considered for gaining approval; and
      Appeal procedures.

               V.C.5--Appeal of Regional Director Decision

    If a field of membership expansion request, merger, or spin-off is 
denied by the regional director, the federal credit union may appeal the 
decision to the NCUA Board. An appeal must be sent to the appropriate 
regional office within 60 days of the date of denial and must address 
the specific reason(s) for the denial. The regional director will then 
forward the appeal to the NCUA Board. NCUA central office staff will 
make an independent review of the facts and present the appeal to the 
NCUA Board with a recommendation.
    Before appealing, the credit union may, within 30 days of the 
denial, provide supplemental information to the regional director for 
reconsideration. A reconsideration will contain new and material 
evidence addressing the reasons for the initial denial. The regional 
director will have 30 days from the date of the receipt of the request 
for reconsideration to make a final decision. If the request is again 
denied, the applicant may proceed with the appeal process within 60 days 
of the date of the last denial. A second request for reconsideration 
will be treated as an appeal to the NCUA Board.

          V.D--Mergers, Purchase and Assumptions, and Spin-offs

    There are three additional ways a community federal credit union can 
expand its field of membership:
      By taking in the field of membership of another credit 
union through a merger;
      By taking in the field of membership through a purchase 
and assumption (P&A); or
      By taking a portion of another credit union's field of 
membership through a spin-off.

                         V.D.1--Standard Mergers

    Generally, the requirements applicable to field of membership 
expansions apply to mergers where the continuing credit union is a 
community federal charter.
    Where both credit unions are community charters, the continuing 
credit union must meet the criteria for expanding the community 
boundaries. A community credit union cannot merge into a single 
occupational/associational, or multiple common bond credit union, except 
in an emergency merger. However, a single occupational or associational, 
or multiple common bond credit union can merge into a community charter 
as long as the merging credit union has a service facility within the 
community boundaries or a majority of the merging credit union's field 
of membership would

[[Page 525]]

qualify for membership in the community charter. While a community 
charter may take in an occupational, associational, or multiple common 
bond credit union in a merger, it will remain a community charter.
    Groups within the merging credit union's field of membership located 
outside of the community boundaries may not continue to be served. The 
merging credit union must notify groups that will be removed from the 
field of membership as a result of the merger. However, the credit union 
may continue to serve members of record.
    Where a state-chartered credit union is merging into a community 
federal credit union, the continuing federal credit union's field of 
membership will be worded in accordance with NCUA policy. Any subsequent 
field of membership expansions must comply with applicable amendment 
procedures.
    Mergers must be approved by the NCUA regional director where the 
continuing credit union is headquartered, with the concurrence of the 
regional director of the merging credit union, and, as applicable, the 
state regulators.

                        V.D.2--Emergency Mergers

    An emergency merger may be approved by NCUA without regard to common 
bond or other legal constraints. An emergency merger involves NCUA's 
direct intervention and approval. The credit union to be merged must 
either be insolvent or in danger of insolvency, as defined in the 
Glossary, and NCUA must determine that:
      An emergency requiring expeditious action exists;
      Other alternatives are not reasonably available; and
      The public interest would best be served by approving the 
merger.
    If not corrected, conditions that could lead to insolvency include, 
but are not limited to:
      Abandonment by management;
      Loss of sponsor;
      Serious and persistent record keeping; or
      Serious and persistent operational concerns.
    In an emergency merger situation, NCUA will take an active role in 
finding a suitable merger partner (continuing credit union). NCUA is 
primarily concerned that the continuing credit union has the financial 
strength and management expertise to absorb the troubled credit union 
without adversely affecting its own financial condition and stability.
    As a stipulated condition to an emergency merger, the field of 
membership of the merging credit union may be transferred intact to the 
continuing federal credit union without regard to any field of 
membership restrictions, including the service facility requirement. 
Under this authority, a federal credit union may take in any dissimilar 
field of membership.
    Even though the merging credit union is a single common bond credit 
union or multiple common bond credit union or community credit union, 
the continuing credit union will remain a community charter. Future 
community expansions will be based on the continuing credit union's 
original community area.
    Emergency mergers involving federally insured credit unions in 
different NCUA regions must be approved by the regional director where 
the continuing credit union is headquartered, with the concurrence of 
the regional director of the merging credit union and, as applicable, 
the state regulators.

                  V.D.3--Purchase and Assumption (P&A)

    Another alternative for acquiring the field of membership of a 
failing credit union is through a consolidation known as a P&A. 
Generally, the requirements applicable to community expansions found in 
this chapter apply to purchase and assumptions where the purchasing 
credit union is a federal charter.
    A P&A has limited application because, in most instances, the 
failing credit union must be placed into involuntary liquidation. 
However, in the few instances where a P&A may occur, the assuming 
federal credit union, as with emergency mergers, may acquire the entire 
field of membership if the emergency criteria are satisfied.
    In a P&A processed under the emergency criteria, specified loans, 
shares, and certain other designated assets and liabilities may also be 
acquired without regard to field of membership restrictions and without 
changing the character of the continuing federal credit union for 
purposes of future field of membership amendments.
    If the P&A does not meet the emergency criteria, then only members 
of record can be obtained unless they otherwise qualify for membership 
in the community charter.
    P&As involving federally insured credit unions in different NCUA 
regions must be approved by the regional director where the continuing 
credit union is headquartered, with the concurrence of the regional 
director of the purchased and/or assumed credit union and, as 
applicable, the state regulators.

                            V.D.4--Spin-Offs

    A spin-off occurs when, by agreement of the parties, a portion of 
the field of membership, assets, liabilities, shares, and capital of a 
credit union are transferred to a new or existing credit union. A spin-
off is unique in that usually one credit union has a field of membership 
expansion and the other loses a portion of its field of membership.
    All field of membership requirements apply regardless of whether the 
spun-off group goes to a new or existing federal charter.

[[Page 526]]

    The request for approval of a spin-off must be supported with a plan 
that addresses, at a minimum:
      Why the spin-off is being requested;
      What part of the field of membership is to be spun off;
      Whether the field of membership requirements are met;
      Which assets, liabilities, shares, and capital are to be 
transferred;
      The financial impact the spin-off will have on the 
affected credit unions;
      The ability of the acquiring credit union to effectively 
serve the new members;
      The proposed spin-off date; and
      Disclosure to the members of the requirements set forth 
above.
    The spin-off request must also include current financial statements 
from the affected credit unions and the proposed voting ballot.
    For federal credit unions spinning off a portion of the community, 
membership notice and voting requirements and procedures are the same as 
for mergers (see part 708 of the NCUA Rules and Regulations), except 
that only the members directly affected by the spin-off--those whose 
shares are to be transferred--are permitted to vote. Members whose 
shares are not being transferred will not be afforded the opportunity to 
vote. All members of the group to be spun off (whether they voted in 
favor, against, or not at all) will be transferred if the spin-off is 
approved by the voting membership. Voting requirements for federally 
insured state credit unions are governed by state law.

                              V.E--Overlaps

                             V.E.1--General

    Generally, an overlap exists when a group of persons is eligible for 
membership in two or more credit unions. NCUA will permit community 
credit unions to overlap any other charters without performing an 
overlap analysis.

                       V.E.2--Exclusionary Clauses

    An exclusionary clause is a limitation precluding the credit union 
from serving the primary members of a portion of a group or community 
otherwise included in its field of membership. NCUA no longer grants 
exclusionary clauses. Those granted prior to the adoption of this new 
chartering manual will remain in effect unless the credit unions agree 
to remove them or one of the affected credit unions submits a 
housekeeping amendment to have it removed.

                        V.F--Charter Conversions

    A community federal credit union may convert to a single 
occupational or associational, or multiple common bond credit union. The 
converting credit union must meet all occupational, associational, and 
multiple common bond requirements, as applicable. The converting credit 
union may continue to serve members of record of the prior field of 
membership as of the date of the conversion, and any groups or 
communities obtained in an emergency merger or P&A. A change to the 
credit union's field of membership and designated common bond will be 
necessary.
    A community credit union may convert to serve a new geographical 
area provided the field of membership requirements of V.A.3 of this 
chapter are met. Members of record of the original community can 
continue to be served.

         V.G--Other Persons With a Relationship to the Community

    A number of persons who have a close relationship to the community 
may be included, at the charter applicant's option, in the field of 
membership. These include the following:
      Spouses of persons who died while within the field of 
membership of this credit union;
      Employees of this credit union;
      Volunteers in the community;
      Members of the immediate family or household; and
      Organizations of such persons
    Immediate family is defined as spouse, child, sibling, parent, 
grandparent, or grandchild. This includes stepparents, stepchildren, 
stepsiblings, and adoptive relationships.
    Household is defined as persons living in the same residence 
maintaining a single economic unit.
    Membership eligibility is extended only to individuals who are 
members of an ``immediate family or household'' of a credit union 
member. It is not necessary for the primary member to join the credit 
union in order for the immediate family or household member of the 
primary member to join, provided the immediate family or household 
clause is included in the field of membership. However, it is necessary 
for the immediate family member or household member to first join in 
order for that person's immediate family member or household member to 
join the credit union. A credit union can adopt a more restrictive 
definition of immediate family or household.
    Under the Federal Credit Union Act, once a person becomes a member 
of the credit union, such person may remain a member of the credit union 
until the person chooses to withdraw or is expelled from the membership 
of the credit union. This is commonly referred to as ``once a member, 
always a member.'' The ``once a member, always a member'' provision does 
not prevent a credit union from restricting services to members who are 
no longer within the field of membership.

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                                Chapter 3

  Low-Income Credit Unions and Credit Unions Serving Underserved Areas

                             I--Introduction

    One of the primary reasons for the creation of federal credit unions 
is to make credit available to people of modest means for provident and 
productive purposes. To help NCUA fulfill this mission, the agency has 
established special operational policies for federal credit unions that 
serve low-income groups and underserved areas. The policies provide a 
greater degree of flexibility that will enhance and invigorate capital 
infusion into low-income groups, low-income communities, and underserved 
areas. These unique policies are necessary to provide credit unions 
serving low-income groups with financial stability and potential for 
controlled growth and to encourage the formation of new charters as well 
as the delivery of credit union services in low-income communities.

                       II--Low-Income Credit Union

                              II.A--Defined

    A credit union serving predominantly low-income members may be 
designated as a low-income credit union. Section 701.34 of NCUA's Rules 
and Regulations defines the term ``low-income members'' as those 
members:
      Who make less than 80 percent of the average for all wage 
earners as established by the Bureau of Labor Statistics; or
      Whose annual household income falls at or below 80 percent 
of the median household income for the nation as established by the 
Census Bureau.
    The term ``low-income members'' also includes members who are full-
time or part-time students in a college, university, high school, or 
vocational school.
    To obtain a low-income designation from NCUA, an existing credit 
union must establish that a majority of its members meet the low-income 
definition. An existing community credit union that serves a geographic 
area where a majority of residents meet the annual income standard is 
presumed to be serving predominantly low-income members. A low-income 
designation for a new credit union charter may be based on a majority of 
the potential membership.

                         II.B--Special Programs

    A credit union with a low-income designation has greater flexibility 
in accepting nonmember deposits insured by the NCUSIF, are exempt from 
the aggregate loan limit on business loans, and may offer secondary 
capital accounts to strengthen its capital base. It also may participate 
in special funding programs such as the Community Development Revolving 
Loan Program for Credit Unions (CDRLP) if it is involved in the 
stimulation of economic development and community revitalization 
efforts.
    The CDRLP provides both loans and grants for technical assistance to 
low-income credit unions. The requirements for participation in the 
revolving loan program are in part 705 of the NCUA Rules and 
Regulations. Only operating credit unions are eligible for participation 
in this program.

                     II.C--Low-Income Documentation

    A federal credit union charter applicant or existing credit union 
wishing to receive a low-income designation should forward a separate 
request for the designation to the regional director, along with 
appropriate documentation supporting the request.
    For community charter applicants, the supporting material should 
include the median household income or annual wage figures for the 
community to be served. If this information is unavailable, the 
applicant should identify the individual zip codes or census tracts that 
comprise the community and NCUA will assist in obtaining the necessary 
demographic data.
    Similarly, if single occupational or associational or multiple 
common bond charter applicants cannot supply income data on its 
potential members, they should provide the regional director with a list 
which includes the number of potential members, sorted by their 
residential zip codes, and NCUA will assist in obtaining the necessary 
demographic data.
    An existing credit union can perform a loan or membership survey to 
determine if the credit union is primarily serving low-income members.

                      II.D--Third Party Assistance

    A low-income federal credit union charter applicant may contract 
with a third party to assist in the chartering and low-income 
designation process. If the charter is granted, a low-income credit 
union may contract with a third party to provide necessary management 
services. Such contracts should not exceed the duration of one year 
subject to renewal.

        II.E--Special Rules for Low-Income Federal Credit Unions

    In recognition of the unique efforts needed to help make credit 
union service available to low-income groups, NCUA has adopted special 
rules that pertain to low-income credit union charters, as well as field 
of membership additions for low-income credit unions. These special 
rules provide additional latitude to enable underserved, low-income 
individuals to gain access to credit union service.
    NCUA permits credit union chartering and field of membership 
amendments based on

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associational groups formed for the sole purpose of making credit union 
service available to low-income persons. The association must be defined 
so that all of its members will meet the low-income definition of 
Section 701.34 of the NCUA Rules and Regulations. Any multiple common 
bond credit union can add low-income associations to their fields of 
membership.
    A low-income designated community federal credit union has 
additional latitude in serving persons who are affiliated with the 
community. In addition to serving members who live, work, worship, or 
attend school in the community, a low-income community federal credit 
union may also serve persons who participate in programs to alleviate 
poverty or distress, or who participate in associations headquartered in 
the community.
    Examples of a low-income designated community and an associational-
based low-income federal credit union are as follows:
      Persons who live in [the target area]; persons who work, 
worship, attend school, or participate in associations headquartered in 
[the target area]; persons participating in programs to alleviate 
poverty or distress which are located in [the target area]; incorporated 
and unincorporated organizations located in [the target area] or 
maintaining a facility in [the target area]; and organizations of such 
persons.
      Members of the Canarsie Economic Assistance League, in 
Brooklyn, NY, an association whose members all meet the low-income 
definition of Section 701.34 of the NCUA Rules and Regulations.

                 III--Service to Underserved Communities

                             III.A--General

    A multiple common bond federal credit union may include in its field 
of membership, without regard to location, an ``underserved area'' as 
defined by the Federal Credit Union Act. 12 U.S.C. 1759(c)(2). The 
addition of an ``underserved area'' will not change the charter type of 
the multiple common bond federal credit union. More than one multiple 
common-bond federal credit union can serve the same ``underserved 
area,'' provided each credit union is approved as provided below.
    By adding an ``underserved area,'' a multiple common bond federal 
credit union does not become eligible to receive the benefits afforded 
to low-income designated credit unions, such as expanded use of 
nonmember deposits and access to the Community Development Revolving 
Loan Program for Credit Unions.

                   III.B--``Underserved Area'' Defined

    The Federal Credit Union Act defines an ``underserved area'' as (1) 
a ``local community, neighborhood, or rural district'' that (2) meets 
the definition of an ``investment area'' under section 103(16) of the 
Community Development Banking and Financial Institutions Act of 1994 
(``CDFI''), 12 U.S.C. 4702(16), and (3) is ``underserved by other 
depository institutions'' based on data of the NCUA Board and the 
federal banking agencies.

                        III.B.1--Local Community

    To be eligible for approval as ``underserved,'' a proposed area must 
be a well-defined local community, neighborhood, or rural district as 
defined in Chapter 2, sections V.A.1. and V.A.2. of this Manual.

                        III.B.2--Investment Area

    To be approved as an ``underserved area,'' the proposed area must 
meet the CDFI definition of an ``investment area.'' Id. Sec. 4702(16). A 
proposed area that, at the time the credit union applies, is designated 
in its entirety as an Empowerment Zone or Enterprise Community (id. 
Sec. 1391) automatically qualifies as an ``investment area''; no further 
criteria of an ``investment area'' must be met. Id. Sec. 4702(16)(B). A 
proposed area that is not designated as such must qualify as an 
``investment area'' under ``the objective criteria of economic 
distress'' developed by the CDFI Fund (``distress criteria'') based on 
current decennial U.S. Census data, and also must have ``significant 
unmet needs'' for loans and financial services that credit unions are 
authorized to offer to their members. Id. Sec. 4702(16)(A).

                  III.B.2.a--Economic Distress Criteria

    Geographic Unit(s) By Proposed Area's Location. The location of a 
proposed ``underserved area'' either within or outside of an MSA 
corresponding to the most recent completed decennial census published by 
the U.S. Bureau of the Census (``decennial Census'') determines the 
geographic unit(s) that apply to determine whether the area meets the 
distress criteria.
    Within MSA. For a proposed area located, in whole or in part, within 
an MSA, the permissible geographic units (``Metro units'') for 
implementing the economic distress criteria are: (i) a census tract; 
(ii) a block group; and (iii) an American Indian or Alaskan Native area. 
12 CFR 1805.201(b)(3)(ii)(B) (2008). For ease of implementation, it is 
advisable to use a census tract as the proposed area's Metro unit.
    Outside MSA. For a proposed area that is located entirely outside an 
MSA, the permissible units (``Non-Metro units'') for implementing the 
economic distress criteria are: (i) a county or equivalent area; (ii) a 
minor civil division that is a unit of local government; (iii) an 
incorporated place; (iv) a census tract; (v) a block numbering area; 
(vi) a block group; and (vii) an American Indian or Alaskan Native area. 
Id. For ease of implementation, it is advisable to use either a

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census tract or county, as the case may be, as the proposed area's Non-
Metro unit.
    Proposed Area Consisting of a Single Metro Unit. A proposed area 
consisting of a single whole Metro unit (e.g., a single census tract 
located within an MSA) must meet one of the following distress criteria, 
as reported by the most recent decennial Census:
      Unemployment. The proposed area's unemployment rate is at 
least 1.5 times the national average; or
      Poverty. At least 20 percent (20%) of the proposed area's 
population lives in poverty; or
      Median Family Income. The proposed area's Median Family 
Income (``MFI'') is at or below 80 percent (80%) of either the MFI of 
the corresponding MSA, or of the national MFI for Metro Areas, whichever 
is greater; or
      Other Criterion. Any other economic distress criterion the 
CDFI Fund may adopt in the future.
    Id. Sec. 1805.201(b)(3)(ii)(D)(1), (2)(i) and (3) (2008).
    Proposed Area Consisting of a Single Non-Metro Unit. A proposed area 
consisting of a single whole Non-Metro unit (e.g., a single county 
located outside an MSA) must meet one of the following distress 
criteria, as reported by the most recent decennial Census:
      Unemployment. The proposed area's unemployment rate is at 
least 1.5 times the national average; or
      Poverty. At least 20 percent (20%) of the proposed area's 
population lives in poverty; or
      Median Family Income. The proposed area's MFI is at or 
below 80 percent (80%) of either the corresponding state's Non-Metro MFI 
or the national MFI for Non-Metro Areas, whichever is greater; or
      Other Criterion. Any other economic distress criterion the 
CDFI Fund may adopt in the future.
    Id. Sec. 1805.201(b)(3)(ii)(D)(1), (2)(ii) and (3) (2008). 
Alternatively, a proposed area consisting of a single Non-Metro county 
(located outside an MSA) may instead meet either of the following two 
criteria, as reported by the decennial Census:
      County Population Loss. County's population loss of at 
least 10 percent (10%) between the most recent and the preceding 
decennial Census; or
      County Migration Loss. County's net migration loss of at 
least 5 percent (5%) in the 5-year period preceding the most recent 
decennial Census.
    Id. Sec. 1805.201(b)(3)(ii)(D)(4)-(5) (2008).
    Proposed Area Consisting of Multiple Contiguous Units. When a 
proposed area consists of either multiple contiguous Metro units (e.g., 
a group of adjoining census tracts) or multiple contiguous Non-Metro 
units (e.g., a group of adjoining counties), a population threshold 
applies when implementing the economic distress criteria. At least 85 
percent (85%) of the area's total population must reside within the 
units that are ``distressed,'' i.e, that meet one of the applicable 
economic distress criteria above, as reported by the decennial Census 
(Unemployment, Poverty and MFI for census tracts plus, for counties 
only, Population Loss and Migration Loss); the balance of the area's 
population may reside in the non-``distressed'' tract(s). The population 
threshold is met, and the whole proposed area qualifies as 
``distressed,'' when the ``distressed'' units represent at least 85 
percent of the area's total population.

         III.B.2.b--Proposed Area's ``Significant Unmet Needs''

    A proposed area that is ``distressed'' also must display 
``significant unmet needs'' for loans or for one or more of the 
financial services credit unions are authorized to offer. To meet this 
criterion, the credit union must include within its Business Plan a 
section, one page in length, entitled ``Significant Unmet Needs for 
Credit Union Services'' (``SUN section'') that establishes the existence 
of such unmet needs by identifying the credit and depository needs of 
the community and detailing how the credit union plans to serve those 
needs. The credit union may choose which among the following ``credit 
and depository needs'' to address in the SUN section: loans, share draft 
accounts, savings accounts, check cashing, money orders, certified 
checks, automated teller machines, deposit taking, safe deposit box 
services, and similar services. The existence of each ``credit and 
depository need'' the credit union identifies and plans to serve must be 
supported by objective reasons and/or accompanying documentation derived 
from an identified, authoritative source of the credit union's choice. 
Third party documentation generally is the most compelling.

          III.B.3--Underserved by Other Depository Institutions

    A proposed area that meets the CDFI definition of an ``investment 
area'' (i.e, is ``distressed'' and has ``significant unmet needs'') must 
also be underserved by other insured depository institutions, including 
credit unions. 12 U.S.C. 1759(c)(2)(A)(ii). This statutory criterion is 
met when the concentration of depository institution facilities among 
the population of the proposed area's non-``distressed'' tracts--which 
sets a benchmark level of adequate service--is greater than the 
concentration of facilities among the population of all of the proposed 
area's census tracts combined. If there are no non-``distressed'' tracts 
within a proposed area, a non-``distressed'' census tract or larger 
geographic unit (e.g., city or county) of the credit union's choice that 
adjoins the proposed

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area may be used to set the benchmark concentration ratio.
    Without regard to a proposed area's location within or outside an 
MSA, this criterion compares two ratios: the ratio of facilities to the 
population of the non-``distressed'' tracts (the benchmark) versus the 
same facilities-to-population ratio among all the tracts of the proposed 
area as a whole. If the benchmark ratio is greater than the ratio for 
the whole area, then the area is ``underserved by other depository 
institutions,'' and vice versa.

                          III.C--NCUA Approval

    If NCUA approves the request to add an ``underserved area,'' the 
credit union will be issued an amendment to Section 5 of its charter.

    III.D--Approval to Serve an Already Approved ``Underserved Area''

    Once a credit union is initially approved to serve an ``underserved 
area,'' other credit unions that subsequently apply may be approved to 
serve the same area. To be approved, the area must qualify as 
``underserved'' at the time the new applicant applies. An applicant must 
demonstrate the area continues to be ``distressed'', as provided above, 
only if a new decennial Census has been published since the date the 
area was last approved. In any case, the applicant must demonstrate that 
the area still has ``significant unmet needs'' for loans or credit union 
services (to qualify as an ``investment area''), and remains 
``underserved by other depository institutions'' (to qualify as 
``underserved'').

                          III.E--Business Plan

    A federal credit union that desires to include an underserved 
community in its field of membership must first develop, and submit for 
approval, a business plan specifying how it will serve the community. In 
addition, the business plan must include a SUN section as provided in 
section III.B.2.b. above. The credit union will be expected to regularly 
review the business plan to determine if the community is being 
adequately served. The regional director may require periodic service 
status reports from a credit union about the ``underserved area'' to 
ensure that the needs of the community are being met, and must require 
such reports before NCUA allows a multiple common bond federal credit 
union to add an additional ``underserved area.''

                         III.F--Service Facility

    Once an ``underserved area'' has been added to a federal credit 
union's field of membership, the credit union must establish within two 
years, and maintain, an office or service facility in the community. A 
service facility is defined as a place where shares are accepted for 
members' accounts, loan applications are accepted and loans are 
disbursed. By definition, a service facility includes a credit union-
owned branch, a shared branch, a mobile branch, or an office operated on 
a regularly scheduled weekly basis or a credit union owned electronic 
facility that meets, at a minimum, the above requirements. This 
definition does not include an ATM or the credit union's Internet Web 
site.

          IV--Appeal Procedures for Denial of Underserved Area

                         IV.A--NCUA Disapproval

    When NCUA disapproves any application to add an ``underserved area'' 
in whole or in part, under this chapter, the applicant will be informed 
in writing of the:
      Specific reasons for the action;
      Options to consider, if appropriate, for gaining approval; 
and
      Appeal procedures.

               IV.B--Appeal of Regional Director Decision

    If the regional director denies an ``underserved area'' request, the 
federal credit union may appeal the decision to the NCUA Board. An 
appeal must be sent to the appropriate regional office within 60 days of 
the date of denial and must address the specific reason(s) for the 
denial. The regional director will then forward the appeal to the NCUA 
Board. NCUA central office staff will make an independent review of the 
facts and present the appeal to the NCUA Board with a recommendation.
    Before appealing, the credit union may, within 30 days of the 
denial, provide supplemental information to the regional director for 
reconsideration. A reconsideration will contain new and material 
evidence addressing the reasons for the initial denial. The regional 
director will have 30 days from the date of the receipt of the request 
for reconsideration to make a final decision. If the request is again 
denied, the applicant may proceed with the appeal process within 60 days 
of the date of the last denial. A second request for reconsideration 
will be treated as an appeal to the NCUA Board.

                                Chapter 4

                           Charter Conversions

                             I--Introduction

    A charter conversion is a change in the jurisdictional authority 
under which a credit union operates.
    Federal credit unions receive their charters from NCUA and are 
subject to its supervision, examination, and regulation.
    State-chartered credit unions are incorporated in a particular 
state, receiving their charter from the state agency responsible for

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credit unions and subject to the state's regulator. If the state-
chartered credit union's deposits are federally insured, it will also 
fall under NCUA's jurisdiction.
    A federal credit union's power and authority are derived from the 
Federal Credit Union Act and NCUA Rules and Regulations. State-chartered 
credit unions are governed by state law and regulation. Certain federal 
laws and regulations also apply to federally insured state chartered 
credit unions.
    There are two types of charter conversions: federal charter to state 
charter and state charter to federal charter. Common bond and community 
requirements are not an issue from NCUA's standpoint in the case of a 
federal to state charter conversion. The procedures and forms relevant 
to both types of charter conversion are included in appendix 4.

    II--Conversion of a State Credit Union to a Federal Credit Union

                       II.A--General Requirements

    Any state-chartered credit union may apply to convert to a federal 
credit union. In order to do so it must:
      Comply with state law regarding conversion and file proof 
of compliance with NCUA;
      File the required conversion application, proposed federal 
credit union organization certificate, and other documents with NCUA;
      Comply with the requirements of the Federal Credit Union 
Act, e.g., chartering and reserve requirements; and
      Be granted federal share insurance by NCUA.
    Conversions are treated the same as any initial application for a 
federal charter, including an on-site examination by NCUA where 
appropriate. NCUA will also consult with the appropriate state authority 
regarding the credit union's current financial condition, management 
expertise, and past performance. Since the applicant in a conversion is 
an ongoing credit union, the economic advisability of granting a charter 
is more readily determinable than in the case of an initial charter 
applicant.
    A converting state credit union's field of membership must conform 
to NCUA's chartering policy. The field of membership will be phrased in 
accordance with NCUA chartering policy. However, if the converting 
credit union is a multiple group charter and the new federal charter is 
a multiple group, then the new federal charter may retain in its field 
of membership any group that the state credit union was serving at the 
time of conversion. Subsequent changes must conform to NCUA chartering 
policy in effect at that time.
    If the converting credit union is a community charter and the new 
federal charter is community-based, it must meet the community field of 
membership requirements set forth in Chapter 2, Section V of this 
manual. If the state-chartered credit union's community boundary is more 
expansive than the approved federal boundary, only members of record 
outside of the new community boundary may continue to be served.
    The converting credit union, regardless of charter type, may 
continue to serve members of record. The converting credit union may 
retain in its field of membership any group or community added pursuant 
to state emergency provisions.

             II.B--Submission of Conversion Proposal to NCUA

    The following documents must be submitted with the conversion 
proposal:
      Conversion of State Charter to Federal Charter (NCUA 
4000);
      Organization Certificate (NCUA 4008). Only Part (3) and 
the signature/notary section should be completed and, where applicable, 
signed by the credit union officials.
      Report of Officials and Agreement to Serve (NCUA 4012);
      The Application to Convert From State Credit Union to 
Federal Credit Union (NCUA 4401);
      The Application and Agreements for Insurance of Accounts 
(NCUA 9500);
      Certification of Resolution (NCUA 9501);
      Written evidence regarding whether the state regulator is 
in agreement with the conversion proposal; and
      Business plan, as appropriate, including the most current 
financial report and delinquent loan schedule.
    If the state charter is applying to become a federal community 
charter, it must also comply with the documentation requirements 
included in Chapter 2, Section V.A.2 of this manual.

           II.C--NCUA Consideration of Application To Convert

                 II.C.1--Review by the Regional Director

    The application will be reviewed to determine that it is complete 
and that the proposal is in compliance with Section 125 of the Federal 
Credit Union Act. This review will include a determination that the 
state credit union's field of membership is in compliance with NCUA's 
chartering policies. The regional director may make further 
investigation into the proposal and may require the submission of 
additional information to support the request to convert.

                         II.C.2--On-Site Review

    NCUA may conduct an on-site examination of the books and records of 
the credit union. Non-federally insured credit unions will be assessed 
an insurance application fee.

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II.C.3--Approval by the Regional Director and Conditions to the Approval

    The conversion will be approved by the regional director if it is in 
compliance with Section 125 of the Federal Credit Union Act and meets 
the criteria for federal insurance. Where applicable, the regional 
director will specify any special conditions that the credit union must 
meet in order to convert to a federal charter, including changes to the 
credit union's field of membership in order to conform to NCUA's 
chartering policies. Some of these conditions may be set forth in a 
Letter of Understanding and Agreement (LUA), which requires the 
signature of the officials and the regional director.

                          II.C.4--Notification

    The regional director will notify both the credit union and the 
state regulator of the decision on the conversion.

                        II.C.5--NCUA Disapproval

    When NCUA disapproves any application to convert to a federal 
charter, the applicant will be informed in writing of the:
      Specific reasons for the action;
      Options to consider, if appropriate, for gaining approval; 
and
      Appeal procedures.

              II.C.6--Appeal of Regional Director Decision

    If a conversion to a federal charter is denied by the regional 
director, the applicant credit union may appeal the decision to the NCUA 
Board. An appeal must be sent to the appropriate regional office within 
60 days of the date of denial and must address the specific reason(s) 
for the denial. The regional director will then forward the appeal to 
the NCUA Board. NCUA central office staff will make an independent 
review of the facts and present the appeal to the NCUA Board with a 
recommendation.
    Before appealing, the credit union may, within 30 days of the 
denial, provide supplemental information to the regional director for 
reconsideration. The request will not be considered as an appeal, but a 
request for reconsideration by the regional director. The regional 
director will have 30 business days from the date of the receipt of the 
request for reconsideration to make a final decision. If the application 
is again denied, the credit union may proceed with the appeal process to 
the NCUA Board within 60 days of the date of the last denial by the 
regional director.

                   II.D--Action by Board of Directors

                             II.D.1--General

    Upon being informed of the regional director's preliminary approval, 
the board must:
      Comply with all requirements of the state regulator that 
will enable the credit union to convert to a federal charter and cease 
being a state credit union;
      Obtain a letter or official statement from the state 
regulator certifying that the credit union has met all of the state 
requirements and will cease to be a state credit union upon its 
receiving a federal charter. A copy of this document must be submitted 
to the regional director;
      Obtain a letter from the private share insurer (includes 
excess share insurers), if applicable, certifying that the credit union 
has met all withdrawal requirements. A copy of this document must be 
submitted to the regional director; and
      Submit a statement of the action taken to comply with any 
conditions imposed by the regional director in the preliminary approval 
of the conversion proposal and, if applicable, submit the signed LUA.

                II.D.2--Application for a Federal Charter

    When the regional director has received evidence that the board of 
directors has satisfactorily completed the actions described above, the 
federal charter and new Certificate of Insurance will be issued.
    The credit union may then complete the conversion as discussed in 
the following section. A denial of a conversion application can be 
appealed. Refer to Section II.C.6 of this chapter.

                   II.E--Completion of the Conversion

                  II.E.1--Effective Date of Conversion

    The date on which the regional director approves the Organization 
Certificate and the Application and Agreements for Insurance of Accounts 
is the date on which the credit union becomes a federal credit union. 
The regional director will notify the credit union and the state 
regulator of the date of the conversion.

              II.E.2--Assumption of Assets and Liabilities

    As of the effective date of the conversion, the federal credit union 
will be the owner of all of the assets and will be responsible for all 
of the liabilities and share accounts of the state credit union.

                   II.E.3--Board of Directors' Meeting

    Upon receipt of its federal charter, the board will hold its first 
meeting as a federal credit union. At this meeting, the board will 
transact such business as is necessary to complete the conversion as 
approved and to operate the credit union in accordance with the 
requirements of the Federal Credit Union Act and NCUA Rules and 
Regulations.
    As of the commencement of operations, the accounting system, 
records, and forms must conform to the standards established by NCUA.

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                       II.E.4--Credit Union's Name

    Changing of the credit union's name on all signage, records, 
accounts, investments, and other documents should be accomplished as 
soon as possible after conversion. The credit union has 180 days from 
the effective date of the conversion to change its signage and 
promotional material. This requires the credit union to discontinue 
using any remaining stock of ``state credit union'' stationery 
immediately, and discontinue using credit cards, ATM cards, etc., within 
180 days after the effective date of the conversion, or the reissue 
date,whichever is later. The regional director has the discretion to 
extend the timeframe for an additional 180 days. Member share drafts 
with the state-chartered name can be used by the members until depleted.

                         II.E.5--Reports to NCUA

    Within 10 business days after commencement of operations, the 
recently converted federal credit union must submit to the regional 
director the following:
      Report of Officials (NCUA 4501); and
      Financial and Statistical Reports, as of the commencement 
of business of the federal credit union.

    III--Conversion of a Federal Credit Union to a State Credit Union

                       III.A--General Requirements

    Any federal credit union may apply to convert to a state credit 
union. In order to do so, it must:
      Notify NCUA prior to commencing the process to convert to 
a state charter and state the reason(s) for the conversion;
      Comply with the requirements of Section 125 of the Federal 
Credit Union Act that enable it to convert to a state credit union and 
to cease being a federal credit union; and
      Comply with applicable state law and the requirements of 
the state regulator.
    It is important that the credit union provide an accurate disclosure 
of the reasons for the conversion. These reasons should be stated in 
specific terms, not as generalities. The federal credit union converting 
to a state charter remains responsible for the entire operating fee for 
the year in which it converts.

       III.B--Special Provisions Regarding Federal Share Insurance

    If the federal credit union intends to continue federal share 
insurance after the conversion to a state credit union, it must submit 
an Application for Insurance of Accounts (NCUA 9600) to the regional 
director at the time it requests approval of the conversion proposal. 
The regional director has the authority to approve or disapprove the 
application.
    If the converting federal credit union does not intend to continue 
federal share insurance or if its application for continued insurance is 
denied, insurance will cease in accordance with the provisions of 
Section 206 of the Federal Credit Union Act.
    If, upon its conversion to a state credit union, the federal credit 
union will be terminating its federal share insurance or converting from 
federal to non-federal share insurance, it must comply with the 
membership notice and voting procedures set forth in Section 206 of the 
Federal Credit Union Act and part 708 of NCUA's Rules and Regulations, 
and address the criteria set forth in Section 205(c) of the Federal 
Credit Union Act.
    Where the state credit union will be non-federally insured, federal 
insurance ceases on the effective date of the charter conversion. If it 
will be otherwise uninsured, then federal insurance will cease one year 
after the date of conversion subject to the restrictions in Section 
206(d)(1) of the Federal Credit Union Act. In either case, the state 
credit union will be entitled to a refund of the federal credit union's 
NCUSIF capitalization deposit after the final date on which any of its 
shares are federally insured.
    The NCUA Board reserves the right to delay the refund of the 
capitalization deposit for up to one year if it determines that payment 
would jeopardize the NCUSIF.

            III.C--Submission of Conversion Proposal to NCUA

    Upon approval of a proposition for conversion by a majority vote of 
the board of directors at a meeting held in accordance with the federal 
credit union's bylaws, the conversion proposal will be submitted to the 
regional director and will include:
      A current financial report;
      A current delinquent loan schedule;
      An explanation and appropriate documents relative to any 
changes in insurance of member accounts;
      A resolution of the board of directors;
      A proposed Notice of Special Meeting of the Members (NCUA 
4221);
      A copy of the ballot to be sent to all members (NCUA 
4506);
      If the credit union intends to continue with federal share 
insurance, an application for insurance of accounts (NCUA 9600);
      Evidence that the state regulator is in agreement with the 
conversion proposal; and
      A statement of reasons supporting the request to convert.

                 III.D--Approval of Proposal to Convert

                III.D.1--Review by the Regional Director

    The proposal will be reviewed to determine that it is complete and 
is in compliance with Section 125 of the Federal Credit Union Act.

[[Page 534]]

The regional director may make further investigation into the proposal 
and require the submission of additional information to support the 
request.

                   III.D.2--Conditions to the Approval

    The regional director will specify any special conditions that the 
credit union must meet in order to proceed with the conversion.

               III.D.3--Approval by the Regional Director

    The proposal will be approved by the regional director if it is in 
compliance with Section 125 and, in the case where the state credit 
union will no longer be federally insured, the notice and voting 
requirements of Section 206 of the Federal Credit Union Act.

                          III.D.4--Notification

    The regional director will notify both the credit union and the 
state regulator of the decision on the proposal.

                        III.D.5--NCUA Disapproval

    When NCUA disapproves any application to convert to a state charter, 
the applicant will be informed in writing of the:
      Specific reasons for the action;
      If appropriate, options or suggestions that could be 
considered for gaining approval; and
      Appeal procedures.

              III.D.6--Appeal of Regional Director Decision

    If the regional director denies a conversion to a state charter, the 
applicant credit union may appeal the decision to the NCUA Board. An 
appeal must be sent to the appropriate regional office within 60 days of 
the date of denial and must address the specific reason(s) for the 
denial. The regional director will then forward the appeal to the NCUA 
Board. NCUA central office staff will make an independent review of the 
facts and present the appeal to the NCUA Board with a recommendation.
    Before appealing, the credit union may, within 30 days of the 
denial, provide supplemental information to the regional director for 
reconsideration. The request will not be considered as an appeal, but a 
request for reconsideration by the regional director. The regional 
director will have 30 business days from the date of the receipt of the 
request for reconsideration to make a final decision. If the application 
is again denied, the credit union may proceed with the appeal process to 
the NCUA Board within 60 days of the date of the last denial by the 
regional director.

                 III.E--Approval of Proposal by Members

    The members may not vote on the proposal until it is approved by the 
regional director. Once approval of the proposal is received, the 
following actions will be taken by the board of directors:
      The proposal must be submitted to the members for approval 
and a date set for a meeting to vote on the proposal. The proposal may 
be acted on at the annual meeting or at a special meeting for that 
purpose. The members must also be given the opportunity to vote by 
written ballot to be filed by the date set for the meeting.
      Members must be given advance notice (NCUA 4221) of the 
meeting at which the proposal is to be submitted. The notice must:
    [cir] Specify the purpose, time and place of the meeting;
    [cir] Include a brief, complete, and accurate statement of the 
reasons for and against the proposed conversion, including any effects 
it could have upon share holdings, insurance of member accounts, and the 
policies and practices of the credit union;
    [cir] Specify the costs of the conversion, i.e., changing the credit 
union's name, examination and operating fees, attorney and consulting 
fees, tax liability, etc.;
    [cir] Inform the members that they have the right to vote on the 
proposal at the meeting, or by written ballot to be filed not later than 
the date and time announced for the annual meeting, or at the special 
meeting called for that purpose;
    [cir] Be accompanied by a Federal to State Conversion--Ballot for 
Conversion Proposal (NCUA 4506); and
    [cir] State in bold face type that the issue will be decided by a 
majority of members who vote.
      The proposed conversion must be approved by a majority of 
all of the members who vote on the proposal, a quorum being present, in 
order for the credit union to proceed further with the proposition, 
provided federal insurance is maintained. If the proposed state-
chartered credit union will not be federally insured, 20 percent of the 
total membership must participate in the voting, and of those, a 
majority must vote in favor of the proposal. Ballots cast by members who 
did not attend the meeting but who submitted their ballots in accordance 
with instructions above will be counted with votes cast at the meeting. 
In order to have a suitable record of the vote, the voting at the 
meeting should be by written ballot as well.
      The board of directors shall, within 10 days, certify the 
results of the membership vote to the regional director. The statement 
shall be verified by affidavits of the Chief Executive Officer and the 
Recording Officer on NCUA 4505.

                    III.F--Compliance With State Laws

    If the proposal for conversion is approved by a majority of all 
members who voted, the board of directors will:

[[Page 535]]

      Ensure that all requirements of state law and the state 
regulator have been accommodated;
      Ensure that the state charter or the license has been 
received within 90 days from the date the members approved the proposal 
to convert; and
      Ensure that the regional director is kept informed as to 
progress toward conversion and of any material delay or of substantial 
difficulties which may be encountered.
    If the conversion cannot be completed within the 90-day period, the 
regional director should be informed of the reasons for the delay. The 
regional director may set a new date for the conversion to be completed.

                     III.G--Completion of Conversion

    In order for the conversion to be completed, the following steps are 
necessary:
      The board of directors will submit a copy of the state 
charter to the regional director within 10 days of its receipt. This 
will be accompanied by the federal charter and the federal insurance 
certificate. A copy of the financial reports as of the preceding month-
end should be submitted at this time.
      The regional director will notify the credit union and the 
state regulator in writing of the receipt of evidence that the credit 
union has been authorized to operate as a state credit union.
      The credit union shall cease to be a federal credit union 
as of the effective date of the state charter.
      If the regional director finds a material deviation from 
the provisions that would invalidate any steps taken in the conversion, 
the credit union and the state regulator shall be promptly notified in 
writing. This notice may be either before or after the copy of the state 
charter is filed with the regional director. The notice will inform the 
credit union as to the nature of the adverse findings. The conversion 
will not be effective and completed until the improper actions and steps 
have been corrected.
      Upon ceasing to be a federal credit union, the credit 
union shall no longer be subject to any of the provisions of the Federal 
Credit Union Act, except as may apply if federal share insurance 
coverage is continued. The successor state credit union shall be 
immediately vested with all of the assets and shall continue to be 
responsible for all of the obligations of the federal credit union to 
the same extent as though the conversion had not taken place. Operation 
of the credit union from this point will be in accordance with the 
requirements of state law and the state regulator.
      If the regional director is satisfied that the conversion 
has been accomplished in accordance with the approved proposal, the 
federal charter will be canceled.
      There is no federal requirement for closing the records of 
the federal credit union at the time of conversion or for the manner in 
which the records shall be maintained thereafter. The converting credit 
union is advised to contact the state regulator for applicable state 
requirements.
      The credit union shall neither use the words ``Federal 
Credit Union'' in its name nor represent itself in any manner as being a 
federal credit union.
      Changing of the credit union's name on all signage, 
records, accounts, investments, and other documents should be 
accomplished as soon as possible after conversion. Unless it violates 
state law, the credit union has 180 days from the effective date of the 
conversion to change its signage and promotional material. This requires 
the credit union to discontinue using any remaining stock of ``federal 
credit union'' stationery immediately, and discontinue using credit 
cards, ATM cards, etc., within 180 days after the effective date of the 
conversion, or the reissue date, whichever is later. The regional 
director has the discretion to extend the timeframe for an additional 
180 days. Member share drafts with the federal chartered name can be 
used by the members until depleted. If the state credit union is not 
federally insured, it must change its name and must immediately cease 
using any credit union documents referencing federal insurance.
      If the state credit union is to be federally insured, the 
regional director will issue a new insurance certificate.

(Approved by the Office of Management and Budget under control numbers 
3133-0015 and 3133-0116)
      
      

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[73 FR 73398, Dec. 2, 2008, as amended at 75 FR 36263, 36263, June 25, 
2010; 78 FR 13463, Feb. 28, 2013; 78 FR 32544, May 31, 2013; 80 FR 
25931, May 6, 2015]

    Effective Date Note: At 81 FR 88424, Dec. 7, 2016, appendix B to 
part 701 was revised, effective Feb. 6, 2017. For the convenience of the 
user, the revised text is set forth as follows:



 Sec. Appendix B to Part 701--Chartering and Field of Membership Manual

              Chapter 1 -- Federal Credit Union Chartering

                   I--Goals of NCUA Chartering Policy

    The National Credit Union Administration's (NCUA) chartering and 
field of membership policies are directed toward achieving the following 
goals:
      To encourage the formation of credit unions;
      To uphold the provisions of the Federal Credit Union Act; 
\92\
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    \92\ 12 U.S.C. 1751 et seq.
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      To promote thrift and credit extension;
      To promote credit union safety and soundness; and
      To make quality credit union service available to all 
eligible persons.
    NCUA may grant a charter to single occupational/associational 
groups, multiple groups, or communities if:
      The occupational, associational, or multiple groups 
possess an appropriate common bond or the community represents a well-
defined local community, neighborhood, or rural district;
      The subscribers are of good character and are fit to 
represent the proposed credit union; and
      The establishment of the credit union is economically 
advisable.
    Generally, these are the primary criteria that NCUA will consider. 
In unusual circumstances, however, NCUA may examine other factors, such 
as other federal law or public policy, in deciding if a charter should 
be approved.
    Unless otherwise noted, the policies outlined in this manual apply 
only to federal credit unions.

                          II--Types of Charters

    The Federal Credit Union Act recognizes three types of federal 
credit union charters-- single common bond (occupational and 
associational), multiple common bond (more than one group each having a 
common bond of occupation or association), and community.
    The requirements that must be met to charter a federal credit union 
are described in Chapter 2. Special rules for credit unions serving low-
income groups are described in Chapter 3.
    If a federal credit union charter is granted, Section 5 of the 
charter will describe the credit union's field of membership, which 
defines those persons and entities eligible for membership. Generally, 
federal credit unions are only able to grant loans and provide services 
to persons within the field of membership who have become members of the 
credit union.

                            III--Subscribers

    Federal credit unions are generally organized by persons who 
volunteer their time and resources and are responsible for determining 
the interest, commitment, and economic advisability of forming a federal 
credit union. The organization of a successful federal credit union 
takes considerable planning and dedication.
    Persons interested in organizing a federal credit union should 
contact one of the credit union trade associations or the NCUA regional 
office serving the state in which the credit union will be organized. 
Lists of NCUA offices and credit union trade associations are shown in 
the appendices. NCUA will provide information to groups interested in 
pursuing a federal charter and will assist them in contacting an 
organizer.
    While anyone may organize a credit union, a person with training and 
experience in chartering new federal credit unions is generally the most 
effective organizer. However, extensive involvement by the group 
desiring credit union service is essential.
    The functions of the organizer are to provide direction, guidance, 
and advice on the chartering process. The organizer also provides the 
group with information about a credit union's functions and purpose as 
well as technical assistance in preparing and submitting the charter 
application. Close communication and cooperation between the organizer 
and the proposed members are critical to the chartering process.
    The Federal Credit Union Act requires that seven or more natural 
persons--the ``subscribers''--present to NCUA for approval a sworn 
organization certificate stating at a minimum:
      The name of the proposed federal credit union;
      The location of the proposed federal credit union and the 
territory in which it will operate;
      The names and addresses of the subscribers to the 
certificate and the number of shares subscribed by each;
      The initial par value of the shares;
      The detailed proposed field of membership; and
      
      The fact that the certificate is made to enable such 
persons to avail themselves of

[[Page 610]]

the advantages of the Federal Credit Union Act.
    Willfully and knowingly making false statements on any of the 
required documentation filed in obtaining a federal credit union charter 
may be grounds for federal criminal prosecution under 18 U.S.C. 1001.

                        IV--Economic Advisability

                              IV.A--General

    Before chartering a federal credit union, NCUA must be satisfied 
that the institution will be viable and that it will provide needed 
services to its members. Economic advisability, which is a key factor in 
determining whether a potential charter will have a reasonable 
opportunity to succeed, is essential in order to qualify for a credit 
union charter.
    NCUA will conduct an independent on-site investigation of each 
charter application to ensure that the proposed credit union can be 
successful. In general, the success of any credit union depends on: (a) 
The character and fitness of management; (b) the depth of the members' 
support; and (c) present and projected market conditions.

            IV.B--Proposed Management's Character and Fitness

    The Federal Credit Union Act requires NCUA to ensure that the 
subscribers are of good ``general character and fitness.'' Prospective 
officials and employees will be the subject of credit and background 
investigations. The investigation report must demonstrate each 
applicant's ability to effectively handle financial matters. Employees 
and officials should also be competent, experienced, honest and of good 
character. Factors that may lead to disapproval of a prospective 
official or employee include criminal convictions, indictments, and acts 
of fraud and dishonesty. Further, factors such as serious or unresolved 
past due credit obligations and bankruptcies disclosed during credit 
checks may disqualify an individual.
    NCUA also needs reasonable assurance that the management team will 
have the requisite skills--particularly in leadership and accounting--
and the commitment to dedicate the time and effort needed to make the 
proposed federal credit union a success.
    Section 701.14 of NCUA's Rules and Regulations sets forth the 
procedures for NCUA approval of officials of newly chartered credit 
unions. If the application of a prospective official or employee to 
serve is not acceptable to the Office of Consumer Financial Protection 
and Access Director, the group can propose an alternate to act in that 
individual's place. If the charter applicant feels it is essential that 
the disqualified individual be retained, the individual may appeal the 
Office of Consumer Financial Protection and Access Director's decision 
to the NCUA Board. If an appeal is pursued, action on the application 
may be delayed. If the appeal is denied by the NCUA Board, an acceptable 
new applicant must be provided before the charter can be approved.

                          IV.C--Member Support

    Economic advisability is a major factor in determining whether the 
credit union will be chartered. An important consideration is the degree 
of support from the field of membership. The charter applicant must be 
able to demonstrate that membership support is sufficient to ensure 
viability.
    NCUA has not set a minimum field of membership size for chartering a 
federal credit union. Consequently, groups of any size may apply for a 
credit union charter and be approved if they demonstrate economic 
advisability. However, it is important to note that often the size of 
the group is indicative of the potential for success. For that reason, a 
charter application with fewer than 3,000 primary potential members 
(e.g., employees of a corporation or members of an association) may not 
be economically advisable. Therefore, a charter applicant with a 
proposed field of membership of fewer than 3,000 primary potential 
members may have to provide more support than an applicant with a larger 
field of membership. For example, a small occupational or associational 
group may be required to demonstrate a commitment for long-term support 
from the sponsor.

        IV.D--Present and Future Market Conditions--Business Plan

    The ability to provide effective service to members, to compete in 
the marketplace, and to adapt to changing market conditions are key to 
the survival of any enterprise. Before NCUA will charter a credit union, 
a business plan based on realistic and supportable projections and 
assumptions must be submitted.
    The business plan should contain, at a minimum, the following 
elements:
      Mission statement;
      Analysis of market conditions, including if applicable, 
geographic, demographic, employment, income, housing, and other economic 
data;
      Evidence of member support;
      Goals for shares, loans, and for number of members;
      Financial services needed/desired;
      Financial services to be provided to members of all 
segments within the field of membership;
      How/when services are to be implemented;
      Organizational/management plan addressing qualification 
and planned training of officials/employees;
      Continuity plan for directors, committee members and 
management staff;

[[Page 611]]

      
      Operating facilities, to include office space/equipment 
and supplies, safeguarding of assets, insurance coverage, etc.;
      Type of record-keeping and data processing system;
      Detailed semiannual pro forma financial statements 
(balance sheet, income and expense projections) for 1st and 2nd year, 
including assumptions--e.g., loan and dividend rates;
      Plans for operating independently;
      Written policies (shares, lending, investments, funds 
management, capital accumulation, dividends, collections, etc.);
      Source of funds to pay expenses during initial months of 
operation, including any subsidies, assistance, etc., and terms or 
conditions of such resources; and
      Evidence of sponsor commitment (or other source of 
support) if subsidies are critical to success of the federal credit 
union. Evidence may be in the form of letters, contracts, financial 
statements from the sponsor, and any other such document on which the 
proposed federal credit union can substantiate its projections.
    While the business plan may be prepared with outside assistance, the 
subscribers and proposed officials must understand and support the 
submitted business plan.

              V--Steps in Organizing a Federal Credit Union

                          V.A--Getting Started

    Following the guidance contained throughout this policy, the 
organizers should submit wording for the proposed field of membership 
(the persons, organizations and other legal entities the credit union 
will serve) to NCUA early in the application process for written 
preliminary approval. The proposed field of membership must meet all 
common bond or community requirements.
    Once the field of membership has been given preliminary approval, 
the organizer should conduct an organizational meeting to elect seven to 
ten persons to serve as subscribers. The subscribers should locate 
willing individuals capable of serving on the board of directors, credit 
committee, supervisory committee, and as chief operating officer/manager 
of the proposed credit union.
    Subsequent organizational meetings may be held to discuss the 
progress of the charter investigation, to announce the proposed slate of 
officials, and to respond to any questions posed at these meetings.
    If NCUA approves the charter application, the subscribers, as their 
final duty, will elect the board of directors of the proposed federal 
credit union. The new board of directors will then appoint the 
supervisory committee.

                 V. B--Charter Application Documentation

                             V.B.1--General

    As discussed previously in this Chapter, the organizer of a federal 
credit union charter must, at a minimum, provide evidence that:
      The group(s) possess an appropriate common bond or the 
geographical area to be served is a well-defined local community, 
neighborhood, or rural district;
      The subscribers, prospective officials, and employees are 
of good character and fitness; and
      The establishment of the credit union is economically 
advisable.
    As part of the application process, the organizer must submit the 
following forms, which are available in appendix 4 of this Manual:
      Federal Credit Union Investigation Report, NCUA 4001;
      Organization Certificate, NCUA 4008;
      
      Report of Official and Agreement To Serve, NCUA 4012;
      Application and Agreements for Insurance of Accounts, NCUA 
9500; and
      Certification of Resolutions, NCUA 9501.
    Each of these forms is described in more detail in the following 
sections.

       V.B.2--Federal Credit Union Investigation Report, NCUA 4001

    The application for a new federal credit union will be submitted on 
NCUA 4001. State-chartered credit unions applying for conversion to a 
federal charter will use NCUA 4000. (See Chapter 4 for a full 
discussion.) The organizer is required to certify the information and 
recommend approval or disapproval, based on the investigation of the 
request.

               V.B.3--Organization Certificate, NCUA 4008

    This document, which must be completed by the subscribers, includes 
the seven criteria established by the Federal Credit Union Act. NCUA 
staff assigned to the case will assist in the proper completion of this 
document.

       V.B.4--Report of Official and Agreement To Serve, NCUA 4012

    This form documents general background information of each official 
and employee of the proposed federal credit union. Each official and 
employee must complete and sign this form. The organizer must review 
each of the NCUA 4012s for elements that would prevent the prospective 
official or employee from serving. Further, such factors as serious, 
unresolved past due credit obligations and bankruptcies disclosed during 
credit checks may disqualify an individual.

[[Page 612]]

 V.B.5--Application and Agreements for Insurance of Accounts, NCUA 9500

    This document contains the agreements with which federal credit 
unions must comply in order to obtain National Credit Union Share 
Insurance Fund (NCUSIF) coverage of member accounts. The document must 
be completed and signed by both the chief executive officer and chief 
financial officer. A federal credit union must qualify for federal share 
insurance.

             V.B. 5--Certification of Resolutions, NCUA 9501

    This document certifies that the board of directors of the proposed 
federal credit union has resolved to apply for NCUSIF insurance of 
member accounts and has authorized the chief executive officer and 
recording officer to execute the Application and Agreements for 
Insurance of Accounts. Both the chief executive officer and recording 
officer of the proposed federal credit union must sign this form.

                           VI--Name Selection

    It is the responsibility of the federal credit union organizers or 
officials of an existing credit union to ensure that the proposed 
federal credit union name or federal credit union name change does not 
constitute an infringement on the name of any corporation in its trade 
area. This responsibility also includes researching any service marks or 
trademarks used by any other corporation (including credit unions) in 
its trade area. NCUA will ensure, to the extent possible, that the 
credit union's name:
      Is not already being officially used by another federal 
credit union;
      Will not be confused with NCUA or another federal or state 
agency, or with another credit union; and
      Does not include misleading or inappropriate language.
    The last three words in the name of every credit union chartered by 
NCUA must be ``Federal Credit Union.''
    The word ``community,'' while not required, can only be included in 
the name of federal credit unions that have been granted a community 
charter.



                                 Sec. 

                            VII--NCUA Review

                             VII.A--General

    Once NCUA receives a complete charter application package, an 
acknowledgment of receipt will be sent to the organizer. During the 
review process, a staff member will be assigned to perform an on-site 
contact with the proposed officials and others having an interest in the 
proposed federal credit union.
    NCUA staff will review the application package and verify its 
accuracy and reasonableness. A staff member will inquire into the 
financial management experience and the suitability and commitment of 
the proposed officials and employees, and will make an assessment of 
economic advisability. The staff member will also provide guidance to 
the subscribers in the proper completion of the Organization 
Certificate, NCUA 4008.
    Credit and background investigations may be conducted concurrently 
by NCUA with other work being performed by the organizer and subscribers 
to reduce the likelihood of delays in the chartering process.
    The staff member will analyze the prospective credit union's 
business plan for realistic projections, attainable goals, adequate 
service to all segments of the field of membership, sufficient start-up 
capital, and time commitment by the proposed officials and employees. 
Any concerns will be reviewed with the organizer and discussed with the 
prospective credit union's officials. Additional on-site contacts by 
NCUA staff may be necessary. The organizer and subscribers will be 
expected to take the steps necessary to resolve any issues or concerns. 
Such resolution efforts may delay processing the application.
    NCUA staff will then make a recommendation to the Office of Consumer 
Financial Protection and Access Director regarding the charter 
application. The recommendation may include specific provisions to be 
included in a Letter of Understanding and Agreement. In most cases, NCUA 
will require the prospective officials to adhere to certain operational 
guidelines. Generally, the agreement is for a limited term of two to 
four years. A sample Letter of Understanding and Agreement is found in 
appendix 2.

   VII.B--Office of Consumer Financial Protection and Access Director 
                                Approval

    Once approved, the board of directors of the newly formed federal 
credit union will receive a signed charter and standard bylaws from the 
Office of Consumer Financial Protection and Access Director. 
Additionally, the officials will be advised of the name of the examiner 
assigned responsibility for supervising and examining the credit union.

   VII.C--Office of Consumer Financial Protection and Access Director 
                               Disapproval

    When the Office of Consumer Financial Protection and Access Director 
disapproves any charter application, in whole or in part, the organizer 
will be informed in writing of the specific reasons for the disapproval. 
Where applicable, the Office of Consumer Financial Protection and Access 
Director will provide information concerning options or

[[Page 613]]

suggestions that the applicant could consider for gaining approval or 
otherwise acquiring credit union service. The letter of denial will 
include the procedures for appealing the decision.

  VII.D--Appeal of Office of Consumer Financial Protection and Access 
                            Director Decision

    If the Office of Consumer Financial Protection and Access Director 
denies a charter application, in whole or in part, that decision may be 
appealed to the NCUA Board. An appeal must be sent to the NCUA Board 
Secretary within 60 days of the date of denial and must address the 
specific reasons for denial. The appeal must be clearly identified as 
such and address the specific reason(s) the prospective group disagrees 
with the denial. A copy of the appeal must be sent to the Office of 
Consumer Financial Protection and Access Director. NCUA central office 
staff will make an independent review of the facts and present the 
appeal with a recommendation to the NCUA Board.
    Before appealing, the prospective group may, within 30 days of the 
denial, provide supplemental information to the Office of Consumer 
Financial Protection and Access Director for reconsideration. A 
reconsideration will contain new and material evidence addressing the 
reasons for the initial denial. The Office of Consumer Financial 
Protection and Access Director will have 30 days from the date of the 
receipt of the request for reconsideration to make a final decision. If 
the request is again denied, the applicant may proceed with the appeal 
process within 60 days of the date of the last denial. A second request 
for reconsideration will be treated as an appeal to the NCUA Board.

                    VII.E--Commencement of Operations

    Assistance in commencing operations is generally available through 
the various credit union trade organizations listed in appendix 5.
    All new federal credit unions are also encouraged to establish a 
mentor relationship with a knowledgeable, experienced credit union 
individual or an existing, well-operated credit union. The mentor should 
provide guidance and assistance to the new credit union through 
attendance at meetings and general oversight. Upon request, NCUA will 
provide assistance in finding a qualified mentor.

                        VIII--Future Supervision

    Each federal credit union will be examined regularly by NCUA to 
determine that it remains in compliance with applicable laws and 
regulations and to determine that it does not pose undue risk to the 
NCUSIF. The examiner will contact the credit union officials shortly 
after approval of the charter in order to arrange for the initial 
examination (usually within the first six months of operation).
    The examiner will be responsible for monitoring the progress of the 
credit union and providing the necessary advice and guidance to ensure 
it is in compliance with applicable laws and regulations. The examiner 
will also monitor compliance with the terms of any required Letter of 
Understanding and Agreement. Typically, the examiner will require the 
credit union to submit copies of monthly board minutes and financial 
statements.
    The Federal Credit Union Act requires all newly chartered credit 
unions, up to two years after the charter anniversary date, to obtain 
NCUA approval prior to appointment of any new board member, credit or 
supervisory committee member, or senior executive officer. Section 
701.14 of the NCUA Rules and Regulations sets forth the notice and 
application requirements. If NCUA issues a Notice of Disapproval, the 
newly chartered credit union is prohibited from making the change.
    NCUA may disapprove an individual serving as a director, committee 
member or senior executive officer if it finds that the competence, 
experience, character, or integrity of the individual indicates it would 
not be in the best interests of the members of the credit union or of 
the public to permit the individual to be employed by or associated with 
the credit union. If a Notice of Disapproval is issued, the credit union 
may appeal the decision to the NCUA Board.

                   IX--Corporate Federal Credit Unions

    A corporate federal credit union is one that is operated primarily 
for the purpose of serving other credit unions. Corporate federal credit 
unions are not governed by this manual, but instead operate under and 
are administered by the NCUA Office of National Examinations and 
Supervision.

                 X--Groups Seeking Credit Union Service

    NCUA will attempt to assist any group in chartering a credit union 
or joining an existing credit union. If the group is not eligible for 
federal credit union service, NCUA will refer the group to the 
appropriate state supervisory authority where different requirements may 
apply.

                  XI--Field of Membership Designations

    NCUA will designate a credit union based on the following criteria:
    Single Occupational: If a credit union serves a single occupational 
sponsor, such as ABC Corporation, it will be designated as an 
occupational credit union. A single occupational common bond credit 
union may also serve a trade, industry, or profession (TIP), such as all 
teachers.
    Single Associational: If a credit union serves a single 
associational sponsor, such as

[[Page 614]]

the Knights of Columbus, it will be designated as an associational 
credit union.
    Multiple Common Bond: If a credit union serves more than one group, 
each of which has a common bond of occupation and/or association, it 
will be designated as a multiple common bond credit union.
    Community: All community credit unions will be designated as such, 
followed by a description of their geographic boundaries, including but 
not limited to city or county boundaries, roadways, rivers, 
transportation lines.
    Credit unions desiring to confirm or submit an application to change 
their designations should contact the Office of Consumer Financial 
Protection and Access.

                         XII--Foreign Branching

    A federal credit union is permitted to serve foreign nationals 
within its field of membership wherever such individuals reside if 
management has the ability and resources to serve them. Before a credit 
union opens a branch outside the United States, it must submit an 
application to do so and have prior written approval of the regional 
director or Office of National Examinations and Supervision Director. A 
federal credit union may establish a service facility on a United States 
military installation or United States embassy without prior NCUA 
approval.



                                 Sec. 

 Chapter 2 -- Field of Membership Requirements for Federal Credit Unions

                             I--Introduction

                             I.A.1--General

    As set forth in Chapter 1, the Federal Credit Union Act provides for 
three types of federal credit union charters--single common bond 
(occupational or associational), multiple common bond (multiple groups), 
and community. Section 109 (12 U.S.C. 1759) of the Federal Credit Union 
Act addresses the membership requirements for each type of charter.
    The field of membership, which is specified in Section 5 of the 
charter, defines those persons and entities eligible for membership. A 
single common bond federal credit union consists of one group having a 
common bond of occupation or association. A multiple common bond federal 
credit union consists of more than one group, each of which has a common 
bond of occupation or association. A community federal credit union 
consists of persons or organizations within a well-defined local 
community, neighborhood, or rural district.
    Once chartered, a federal credit union can amend its field of 
membership; however, the same common bond or community requirements for 
chartering the credit union must be satisfied. Since there are 
differences in the three types of charters, special rules apply to each, 
which are fully discussed in the following sections of this Chapter.

                    I.A. 2--Special Low-Income Rules

    Generally, federal credit unions can only grant loans and provide 
services to persons who have joined the credit union. The Federal Credit 
Union Act states that one of the purposes of federal credit unions is 
``to serve the productive and provident credit needs of individuals of 
modest means.'' Although field of membership requirements are 
applicable, special rules set forth in Chapter 3 may apply to low-income 
designated credit unions and those credit unions assisting low-income 
groups or to a federal credit union that adds an underserved community 
to its field of membership.

                      II--Occupational Common Bond

                             II.A.1--General

    A single occupational common bond federal credit union may include 
in its field of membership all persons and entities who share that 
common bond. NCUA permits a person's membership eligibility in a single 
occupational common bond group to be established in five ways:
      Employment (or a contractual relationship equivalent to 
employment) in a single corporation or other legal entity makes that 
person part of a single occupational common bond;
      Employment in a corporation or other legal entity with a 
controlling ownership interest (which shall not be less than 10 percent) 
in or by another legal entity makes that person part of a single 
occupational common bond;
      Employment in a corporation or other legal entity which is 
related to another legal entity (such as a company under contract and 
possessing a strong dependency relationship with another company) makes 
that person part of a single occupational common bond;
      Employment or attendance at a school makes that person 
part of a single occupational common bond (see Chapter 2, Section 
III.A.1); or
      Employment in the same Trade, Industry, or Profession 
(TIP) (see Chapter 2, Section II.A.2).
    A geographic limitation is not a requirement for a single 
occupational common bond. However, for purposes of describing the field 
of membership, the geographic areas being served may be included in the 
charter. For example:
      Employees, officials, and persons who work regularly under 
contract in Miami, Florida for ABC Corporation and subsidiaries;

[[Page 615]]

      Employees of ABC Corporation who are paid from * * *;
      Employees of ABC Corporation who are supervised from * * 
*;
      Employees of ABC Corporation who are headquartered in * * 
*; and/or
      Employees of ABC Corporation who work in the United 
States.
    The corporation or other legal entity (i.e., the employer) may also 
be included in the common bond--e.g., ``ABC Corporation.'' The 
corporation or legal entity will be defined in the last clause in 
Section 5 of the credit union's charter.
    A charter applicant must provide documentation to establish that the 
single occupational common bond requirement has been met.
    Some examples of valid single occupational common bonds are:
      Employees of the Hunt Manufacturing Company who work in 
West Chester, Pennsylvania. (common bond--same employer with geographic 
definition);
      Employees of the Buffalo Manufacturing Company who work in 
the United States. (common bond--same employer with geographic 
definition);
      Employees, elected and appointed officials of municipal 
government in Parma, Ohio. (common bond--same employer with geographic 
definition);
      Employees of Johnson Soap Company and its majority owned 
subsidiary, Johnson Toothpaste Company, who work in, are paid from, are 
supervised from, or are headquartered in Augusta and Portland, Maine. 
(common bond--parent and subsidiary company with geographic definition);
     
      Employees of MMLLJS contractor who work regularly at the 
U.S. Naval Shipyard in Bremerton, Washington. (common bond--employees of 
contractors with geographic definition);
      Employees, doctors, medical staff, technicians, medical 
and nursing students who work in or are paid from the Newport Beach 
Medical Center, Newport Beach, California. (single corporation with 
geographic definition);
      Employees of JLS, Incorporated and MJM, Incorporated 
working for the LKM Joint Venture Company in Catalina Island, 
California. (common bond--same employer--ongoing dependent 
relationship);
      Employees of and students attending Georgetown University. 
(common bond--same occupation);
      Employees of all the schools supervised by the Timbrook 
Board of Education in Timbrook, Georgia. (common bond--same employer); 
or
      All licensed nurses in Fairfax County, Virginia. 
(occupational common bond TIP).
    In contrast, some examples of insufficiently defined single 
occupational common bonds are:
      Employees of manufacturing firms in Seattle, Washington. 
(no defined occupational sponsor; overly broad TIP);
      Persons employed or working in Chicago, Illinois. (no 
occupational common bond).

                 II.A. 2--Trade, Industry, or Profession

    A common bond based on employment in a trade, industry, or 
profession can include employment at any number of corporations or other 
legal entities that--while not under common ownership--have a common 
bond by virtue of producing similar products, providing similar 
services, or participating in the same type of business.
    While proposed or existing single common bond credit unions have 
some latitude in defining a trade, industry, or profession occupational 
common bond, it cannot be defined so broadly as to include groups in 
fields which are not closely related. For example, the manufacturing 
industry, energy industry, communications industry, retail industry, or 
entertainment industry would not qualify as a TIP because each industry 
lacks the necessary commonality. However, textile workers, realtors, 
nurses, teachers, police officers, or U.S. military personnel are 
closely related and each would qualify as a TIP.
    The common bond relationship must be one that demonstrates a narrow 
commonality of interests within a specific trade, industry, or 
profession. If a credit union wants to serve a physician TIP, it can 
serve all physicians, but that does not mean it can also serve all 
clerical staff in the physicians' offices. However, if the TIP is based 
on the health care industry, then clerical staff would be able to be 
served by the credit union because they work in the same industry and 
have the same commonality of interests.
    If a credit union wants to include the airline services industry, it 
can serve airline and airport personnel but not passengers. Clients or 
customers of the TIP are not eligible for credit union membership (e.g., 
patients in hospitals). Any company that is involved in more than one 
industry cannot be included in an industry TIP (e.g., a company that 
makes tobacco products, food products, and electronics). However, 
employees of these companies may be eligible for membership in a variety 
of trade/profession occupational common bond TIPs.
    Although a TIP should be narrowly defined, and ordinarily would not 
include third-party vendors and other suppliers, it may include, on a 
case by case basis, employees of types of entities that have a ``strong 
dependency relationship'' and work directly with other types of entities 
within the industry. In this context, a ``strong dependency 
relationship'' between a TIP entity and its

[[Page 616]]

supplier/vendor must be demonstrated by their reliance on each other as 
measured by the presence of indicators of a likelihood that the absence 
of one would cause the other to suffer a material decline in either 
revenue, functionality or productivity.
    Under this definition, a firm whose employees are specially trained 
to protect nuclear facilities, and whose employees work primarily at 
such facilities, could be a part of a TIP based on the firm's 
participation in the nuclear energy industry.
    Other ``strong relationship'' indicators NCUA would consider include 
the regularity or frequency of work that employees of the entity perform 
at facilities directly related to the industry, or the degree to which 
employees must adjust their work practices to adapt to the needs of the 
industry. For example, a company's focus on producing specialized 
confectionary products for a hotel chain could add that company to a 
hospitality industry TIP. A credit union seeking to include a clause of 
this type in its TIP charter must provide a brief narrative identifying 
indicators that support the existence of a strong dependency 
relationship between the TIP entity and its individual supplier/vendors.
    Likewise, an FCU may serve employees of companies within the 
commercial airline industry that have a strong dependency relationship 
with airlines or airports, without the limitation that these employees 
work at an airport. However, these employees must work directly with the 
following: Air transportation of freight, air courier services; air 
passenger services; airport baggage handling; airport security; 
commercial airport janitorial services; maintenance, servicing, and 
repair services; and on board airline food services. The employees of 
those entities have a narrow commonality of interests, share the single 
occupational common bond, and can be included within the Air 
Transportation Industry field of membership.
    In general, except for credit unions serving a national field of 
membership or operating in multiple states, a geographic limitation is 
required for a TIP credit union. The geographic limitation will be part 
of the credit union's charter and generally correspond to its current or 
planned operational area. More than one federal credit union may serve 
the same trade, industry, or profession, even if both credit unions are 
in the same geographic location.
    This type of occupational common bond is only available to single 
common bond credit unions. A TIP cannot be added to a multiple common 
bond or community field of membership.
    To obtain a TIP designation, the proposed or existing credit union 
must submit a request to the Office of Consumer Financial Protection and 
Access Director. New charter applicants must follow the documentation 
requirements in Chapter 1. New charter applicants and existing credit 
unions must submit a business plan on how the credit union will serve 
the group with the request to serve the TIP. The business plan also must 
address how the credit union will verify the TIP. Examples of such 
verification include state licenses, professional licenses, 
organizational memberships, pay statements, union membership, or 
employer certification. The Office of Consumer Financial Protection and 
Access Director must approve this type of field of membership before a 
credit union can serve a TIP. Credit unions converting to a TIP can 
retain members of record but cannot add new members from its previous 
group or groups, unless the group or groups are part of the TIP.
    Section II.B on Occupational Common Bond Amendments does not apply 
to a TIP common bond. Removing or changing a geographical limitation 
will be processed as a housekeeping amendment. If safety and soundness 
concerns are present, the Office of Consumer Financial Protection and 
Access Director may require additional information before the request 
can be processed.
    Section II.H, on Other Persons Eligible for Credit Union Membership, 
applies to TIP based credit unions except for the corporate account 
provision which only applies to industry based TIPs. Credit unions with 
industry based TIPs may include corporations as members because they 
have the same commonality of interests as all employees in the industry. 
For example, an airline service TIP (industry) can serve an airline 
carrier (corporate account); however, a nurses TIP (profession) could 
not serve a hospital (corporate account) because not everyone working in 
the hospital shares the same profession.
    If a TIP designated credit union wishes to convert to a different 
TIP or employer-based occupational common bond, or different charter 
type, it only retains members of record after the conversion. The Office 
of Consumer Financial Protection and Access Director, for safety and 
soundness reasons, may approve a TIP designated credit union to convert 
to its original field of membership.

                II.B--Occupational Common Bond Amendments

                             II.B.1--General

    Section 5 of every single occupational federal credit union's 
charter defines the field of membership the credit union can legally 
serve. Only those persons or legal entities specified in the field of 
membership can be served. There are a number of instances in which 
Section 5 must be amended by NCUA.
    First, a group sharing the credit union's common bond is added to 
the field of membership. This may occur through various ways including 
agreement between the group

[[Page 617]]

and the credit union directly, or through a merger, corporate 
acquisition, purchase and assumption (P&A), or spin-off.
    Second, if the entire field of membership is acquired by another 
corporation, the credit union can serve the employees of the new 
corporation and any subsidiaries after receiving NCUA approval.
    Third, a federal credit union qualifies to change its common bond 
from:
      A single occupational common bond to a single 
associational common bond;
      
      A single occupational common bond to a community charter; 
or
      A single occupational common bond to a multiple common 
bond.
    Fourth, a federal credit union removes a portion of the group from 
its field of membership through agreement with the group, a spin-off, or 
because a portion of the group is no longer in existence.
    An existing single occupational common bond federal credit union 
that submits a request to amend its charter must provide documentation 
to establish that the occupational common bond requirement has been met. 
The Office of Consumer Financial Protection and Access Director must 
approve all amendments to an occupational common bond credit union's 
field of membership.

                           II.B.Restructuring

    If the single common bond group that comprises a federal credit 
union's field of membership undergoes a substantial restructuring, the 
result is often that portions of the group are sold or spun off. This 
requires a change to the credit union's field of membership. NCUA will 
not permit a single common bond credit union to maintain in its field of 
membership a sold or spun-off group to which it has been providing 
service unless the group otherwise qualifies for membership in the 
credit union or the credit union converts to a multiple common bond 
credit union.
    If the group comprising the single common bond of the credit union 
merges with, or is acquired by, another group, the credit union can 
serve the new group resulting from the merger or acquisition after 
receiving a housekeeping amendment.

                      II.B.3--Economic Advisability

    Prior to granting a common bond expansion, NCUA will examine the 
amendment's likely effect on the credit union's operations and financial 
condition. In most cases, the information needed for analyzing the 
effect of adding a particular group will be available to NCUA through 
the examination and financial and statistical reports; however, in 
particular cases, the Office of Consumer Financial Protection and Access 
Director may require additional information prior to making a decision.

                     II.B.Documentation Requirements

    A federal credit union requesting a common bond expansion must 
submit an Application for Field of Membership Amendment (NCUA 4015-EZ) 
to the Office of Consumer Financial Protection and Access Director. An 
authorized credit union representative must sign the request.

      II.C--NCUA's Procedures for Amending the Field of Membership

                             II.C.1--General

    All requests for approval to amend a federal credit union's charter 
must be submitted to the Office of Consumer Financial Protection and 
Access Director.

  II.C.2--Office of Consumer Financial Protection and Access Director 
                                Decision

    NCUA staff will review all amendment requests in order to ensure 
compliance with NCUA policy.
    Before acting on a proposed amendment, the Office of Consumer 
Financial Protection and Access Director may require an on-site review. 
In addition, the Office of Consumer Financial Protection and Access 
Director may, after taking into account the significance of the proposed 
field of membership amendment, require the applicant to submit a 
business plan addressing specific issues.
    The financial and operational condition of the requesting credit 
union will be considered in every instance. NCUA will carefully consider 
the economic advisability of expanding the field of membership of a 
credit union with financial or operational problems.
    In most cases, field of membership amendments will only be approved 
for credit unions that are operating satisfactorily. Generally, if a 
federal credit union is having difficulty providing service to its 
current membership, or is experiencing financial or other operational 
problems, it may have more difficulty serving an expanded field of 
membership.
    Occasionally, however, an expanded field of membership may provide 
the basis for reversing current financial problems. In such cases, an 
amendment to expand the field of membership may be granted 
notwithstanding the credit union's financial or operational problems. 
The applicant credit union must clearly establish that the expanded 
field of membership is in the best interest of the members and will not 
increase the risk to the NCUSIF.

[[Page 618]]

  II.C.3--Office of Consumer Financial Protection and Access Director 
                                Approval

    If the Office of Consumer Financial Protection and Access Director 
approves the requested amendment, the credit union will be issued an 
amendment to Section 5 of its charter.

  II.C.4--Office of Consumer Financial Protection and Access Director 
                               Disapproval

    When the Office of Consumer Financial Protection and Access Director 
disapproves any application, in whole or in part, to amend the field of 
membership under this chapter, the applicant will be informed in writing 
of the:
      Specific reasons for the action;
      Options to consider, if appropriate, for gaining approval; 
and
      Appeal procedure.

  II.C.5--Appeal of Office of Consumer Financial Protection and Access 
                            Director Decision

    If a field of membership expansion request, merger, or spin-off is 
denied by staff, the federal credit union may appeal the decision to the 
NCUA Board. An appeal must be sent to the NCUA Board Secretary within 60 
days of the date of denial. The appeal must be clearly identified as 
such and must address the specific reason(s) the federal credit union 
disagrees with the denial. A copy of the appeal must be sent to the 
Office of Consumer Financial Protection and Access, or as applicable, 
the appropriate regional office or Office of National Examinations and 
Supervision Director. NCUA central office staff will make an independent 
review of the facts and present the appeal to the Board with a 
recommendation.
    Before appealing, the credit union may, within 30 days of the 
denial, provide supplemental information to the office rendering the 
initial decision for reconsideration. A reconsideration will contain new 
and material evidence addressing the reasons for the initial denial. The 
office rendering the initial decision will have 30 days from the date of 
the receipt of the request for reconsideration to make a final decision. 
If the request is again denied, the applicant may proceed with the 
appeal process within 60 days of the date of the last denial. A second 
request for reconsideration will be treated as an appeal to the NCUA 
Board.

         II.D--Mergers, Purchase and Assumptions, and Spin-Offs

    In general, other than the addition of common bond groups, there are 
three additional ways a federal credit union with a single occupational 
common bond can expand its field of membership:
      By taking in the field of membership of another credit 
union through a common bond or emergency merger;
      By taking in the field of membership of another credit 
union through a common bond or emergency purchase and assumption (P&A); 
or
      By taking a portion of another credit union's field of 
membership through a common bond spin-off.

                             II.D.1--Mergers

    Generally, the requirements applicable to field of membership 
expansions found in this chapter apply to mergers where the continuing 
credit union has a federal charter. That is, the two credit unions must 
share a common bond.
    Where the merging credit union is state-chartered, the common bond 
rules applicable to a federal credit union apply.
    Mergers must be approved by the NCUA regional director or Office of 
National Examinations and Supervision Director where the continuing 
credit union is headquartered, with the concurrence of the regional 
director or Office of National Examinations and Supervision Director of 
the merging credit union, and, as applicable, the state regulators.
    If a single occupational credit union wants to merge into a multiple 
common bond or community credit union, Section IV.D or Section V.D of 
this Chapter, respectively, should be reviewed.

                         II.D.Emergency Mergers

    An emergency merger may be approved by NCUA without regard to common 
bond or other legal constraints. An emergency merger involves NCUA's 
direct intervention and approval. The credit union to be merged must 
either be insolvent or in danger of insolvency, as defined in the 
Glossary, and NCUA must determine that:
      An emergency requiring expeditious action exists;
      Other alternatives are not reasonably available; and
      The public interest would best be served by approving the 
merger.
    If not corrected, conditions that could lead to insolvency include, 
but are not limited to:
      Abandonment by management;
      Loss of sponsor;
      Serious and persistent recordkeeping problems; or
      
      Serious and persistent operational concerns.
    In an emergency merger situation, NCUA will take an active role in 
finding a suitable merger partner (continuing credit union). NCUA is 
primarily concerned that the continuing credit union has the financial 
strength and management expertise to absorb the troubled credit union 
without adversely affecting its own financial condition and stability.

[[Page 619]]

    As a stipulated condition to an emergency merger, the field of 
membership of the merging credit union may be transferred intact to the 
continuing federal credit union without regard to any common bond 
restrictions. Under this authority, therefore, a single occupational 
common bond federal credit union may take into its field of membership 
any dissimilar charter type.
    The common bond characteristic of the continuing credit union in an 
emergency merger does not change. That is, even though the merging 
credit union is a multiple common bond or community, the continuing 
credit union will remain a single common bond credit union. Similarly, 
if the merging credit union is also an unlike single common bond, the 
continuing credit union will remain a single common bond credit union. 
Future common bond expansions will be based on the continuing credit 
union's original single common bond.
    Emergency mergers involving federally insured credit unions in 
different NCUA field regions must be approved by the regional director 
or Office of National Examinations and Supervision Director where the 
continuing credit union is headquartered, with the concurrence of the 
regional director or Office of National Examinations and Supervision 
Director of the merging credit union and, as applicable, the state 
regulators.

                   II.D.Purchase and Assumption (P&A)

    Another alternative for acquiring the field of membership of a 
failing credit union is through a consolidation known as a P&A. A P&A 
has limited application because, in most cases, the failing credit union 
must be placed into involuntary liquidation. In the few instances where 
a P&A may be appropriate, the assuming federal credit union, as with 
emergency mergers, may acquire the entire field of membership if the 
emergency merger criteria are satisfied. However, if the P&A does not 
meet the emergency merger criteria, it must be processed under the 
common bond requirements.
    In a P&A processed under the emergency criteria, specified loans, 
shares, and certain other designated assets and liabilities, without 
regard to common bond restrictions, may also be acquired without 
changing the character of the continuing federal credit union for 
purposes of future field of membership amendments.
    If the purchased and/or assumed credit union's field of membership 
does not share a common bond with the purchasing and/or assuming credit 
union, then the continuing credit union's original common bond will be 
controlling for future common bond expansions.
    P&As involving federally insured credit unions in different NCUA 
regions must be approved by the regional director or Office of National 
Examinations and Supervision Director where the continuing credit union 
is headquartered, with the concurrence of the regional director or 
Office of National Examinations and Supervision Director of the 
purchased and/or assumed credit union and, as applicable, the state 
regulators.

                            II.D.4--Spin-Offs

    A spin-off occurs when, by agreement of the parties, a portion of 
the field of membership, assets, liabilities, shares, and capital of a 
credit union are transferred to a new or existing credit union. A spin-
off is unique in that usually one credit union has a field of membership 
expansion and the other loses a portion of its field of membership.
    All common bond requirements apply regardless of whether the spun-
off group becomes a new credit union or goes to an existing federal 
charter.
    The request for approval of a spin-off must be supported with a plan 
that addresses, at a minimum:
      Why the spin-off is being requested;
      What part of the field of membership is to be spun off;
      Whether the affected credit unions have a common bond 
(applies only to single occupational credit unions);
      Which assets, liabilities, shares, and capital are to be 
transferred;
      The financial impact the spin-off will have on the 
affected credit unions;
      The ability of the acquiring credit union to effectively 
serve the new members;
      The proposed spin-off date; and
      Disclosure to the members of the requirements set forth 
above.
    The spin-off request must also include current financial statements 
from the affected credit unions and the proposed voting ballot.
    For federal credit unions spinning off a group, membership notice 
and voting requirements and procedures are the same as for mergers (see 
part 708 of the NCUA Rules and Regulations), except that only the 
members directly affected by the spin-off--those whose shares are to be 
transferred--are permitted to vote. Members whose shares are not being 
transferred will not be afforded the opportunity to vote. All members of 
the group to be spun off (whether they voted in favor, against, or not 
at all) will be transferred if the spin-off is approved by the voting 
membership. Voting requirements for federally insured state credit 
unions are governed by state law.
    Spin-offs involving federally insured credit unions in different 
NCUA regions must be approved by all regional directors and, if 
applicable, Office of National Examinations and Supervision Director 
where the credit unions are headquartered and the state regulators, as 
applicable. Spin-offs in the same region also require approval by the 
state regulator, as applicable. Spin-offs involving the creation of a 
new federally insured credit

[[Page 620]]

union require the approval of the Office of Consumer Financial 
Protection and Access Director. The Office of Consumer Financial 
Protection and Access also provides advice regarding field of membership 
compatibility when appropriate.



                                 Sec. 

                             II.E--Overlaps

                             II.E.1--General

    An overlap exists when a group of persons is eligible for membership 
in two or more credit unions. NCUA will permit single occupational 
federal credit unions to overlap any other charter without performing an 
overlap analysis.

                    II.E.Organizational Restructuring

    A federal credit union's field of membership will always be governed 
by the common bond descriptions contained in Section 5 of its charter. 
Where a sponsor organization expands its operations internally, by 
acquisition or otherwise, the credit union may serve these new entrants 
to its field of membership if they are part of the common bond described 
in Section 5. NCUA will permit a complete overlap of the credit unions' 
fields of membership.
    If a sponsor organization sells off a group, new members can no 
longer be served unless they otherwise qualify for membership in the 
credit union or it converts to a multiple common bond charter.
    Credit unions must submit documentation explaining the restructuring 
and providing information regarding the new organizational structure.

                      II.E.3--Exclusionary Clauses

    An exclusionary clause is a limitation precluding the credit union 
from serving the primary members of a portion of a group otherwise 
included in its field of membership. NCUA no longer grants exclusionary 
clauses. Those granted prior to the adoption of this new Chartering and 
Field of Membership Manual will remain in effect unless the credit 
unions agree to remove them or one of the affected credit unions submits 
a housekeeping amendment to have it removed.

                        II.F--Charter Conversion

    A single occupational common bond federal credit union may apply to 
convert to a community charter provided the field of membership 
requirements of the community charter are met. Groups within the 
existing charter which cannot qualify in the new charter cannot be 
served except for members of record, or groups or communities obtained 
in an emergency merger or P&A. A credit union must notify all groups 
that will be removed from the field of membership as a result of 
conversion. Members of record can continue to be served. Also, in order 
to support a case for a conversion, the applicant federal credit union 
may be required to develop a detailed business plan as specified in 
Chapter 2, Section V.A.3.
    A single occupational common bond federal credit union may apply to 
convert to a multiple common bond charter by adding a non-common bond 
group that is within a reasonable proximity of a service facility. 
Groups within the existing charter may be retained and continue to be 
served. However, future amendments, including any expansions of the 
original single common bond group, must be done in accordance with 
multiple common bond policy.

          II.G--Removal of Groups From the Field of Membership

    A credit union may request removal of a portion of the common bond 
group from its field of membership for various reasons. The most common 
reasons for this type of amendment are:
      The group is within the field of membership of two credit 
unions and one wishes to discontinue service;
      The federal credit union cannot continue to provide 
adequate service to the group;
      The group has ceased to exist;
      The group does not respond to repeated requests to contact 
the credit union or refuses to provide needed support; or
      The group initiates action to be removed from the field of 
membership.
    When a federal credit union requests an amendment to remove a group 
from its field of membership, the Office of Consumer Financial 
Protection and Access Director will determine why the credit union 
desires to remove the group. If the Office of Consumer Financial 
Protection and Access Director concurs with the request, membership will 
continue for those who are already members under the ``once a member, 
always a member'' provision of the Federal Credit Union Act.

        II.H--Other Persons Eligible for Credit Union Membership

    A number of persons, by virtue of their close relationship to a 
common bond group, may be included, at the charter applicant's option, 
in the field of membership. These include the following:
      Spouses of persons who died while within the field of 
membership of this credit union;
      Employees of this credit union;
      Persons retired as pensioners or annuitants from the above 
employment;
      Volunteers;
      Members of the immediate family or household;
      

[[Page 621]]

      Honorably discharged veterans who served in any of the 
Armed Services of the United States listed in this charter;
    Organizations of such persons; and
      Corporate or other legal entities in this charter.
    Immediate family is defined as spouse, child, sibling, parent, 
grandparent, or grandchild. This includes stepparents, stepchildren, 
stepsiblings, and adoptive relationships.
    Household is defined as persons living in the same residence 
maintaining a single economic unit.
    Membership eligibility is extended only to individuals who are 
members of an ``immediate family or household'' of a credit union 
member. It is not necessary for the primary member to join the credit 
union in order for the immediate family or household member of the 
primary member to join, provided the immediate family or household 
clause is included in the field of membership. However, it is necessary 
for the immediate family member or household member to first join in 
order for that person's immediate family member or household member to 
join the credit union. A credit union can adopt a more restrictive 
definition of immediate family or household.
    Volunteers, by virtue of their close relationship with a sponsor 
group, may be included. Examples include volunteers working at a 
hospital or school.
    Under the Federal Credit Union Act, once a person becomes a member 
of the credit union, such person may remain a member of the credit union 
until the person chooses to withdraw or is expelled from the membership 
of the credit union. This is commonly referred to as ``once a member, 
always a member.'' The ``once a member, always a member'' provision does 
not prevent a credit union from restricting services to members who are 
no longer within the field of membership.



                                 Sec. 

                     III--Associational Common Bond

                            III.A.1--General

    A single associational federal credit union may include in its field 
of membership, regardless of location, all members and employees of a 
recognized association. A single associational common bond consists of 
individuals (natural persons) and/or groups (non-natural persons) whose 
members participate in activities developing common loyalties, mutual 
benefits, and mutual interests. Separately chartered associational 
groups can establish a single common bond relationship if they are 
integrally related and share common goals and purposes. For example, two 
or more churches of the same denomination, Knights of Columbus Councils, 
or locals of the same union can qualify as a single associational common 
bond. Individuals and groups eligible for membership in a single 
associational credit union can include the following:
      Natural person members of the association (for example, 
members of a union or church members);
      Non-natural person members of the association;
      Employees of the association (for example, employees of 
the labor union or employees of the church); and
      The association.
    Generally, a single associational common bond does not include a 
geographic definition and can operate nationally. However, a proposed or 
existing federal credit union may limit its field of membership to a 
single association or geographic area. NCUA may impose a geographic 
limitation if it is determined that the applicant credit union does not 
have the ability to serve a larger group or there are other operational 
concerns. All single associational common bonds should include a 
definition of the group that may be served based on the association's 
charter, bylaws, and any other equivalent documentation.
    Applicants for a single associational common bond federal credit 
union charter or a field of membership amendment to include an 
association must provide, at the request of NCUA, a copy of the 
association's charter, bylaws, or other equivalent documentation, 
including any legal documents required by the state or other governing 
authority. The associational sponsor itself may also be included in the 
field of membership--e.g., ``Sprocket Association''--and will be shown 
in the last clause of the field of membership.

  III.A.1.a--Threshold Requirement Regarding the Purpose for Which an 
  Associational Group Is Formed and the Totality of the Circumstances 
                                Criteria

    As a threshold matter, when reviewing an application to include an 
association in a federal credit union's field of membership, NCUA will 
determine if the association has been formed primarily for the purpose 
of expanding credit union membership. If NCUA makes such a 
determination, then the analysis ends and the association is denied 
inclusion in the federal credit union's field of membership. If NCUA 
determines that the association was formed to serve some other separate 
function as an organization, then NCUA will apply the following totality 
of the circumstances test to determine if the association satisfies the 
associational common bond requirements. The totality of the 
circumstances test consists of the following factors:
    1. Whether the association provides opportunities for members to 
participate in the furtherance of the goals of the association;

[[Page 622]]

    2. Whether the association maintains a membership list;
    1.
    3. Whether the association sponsors other activities;
    4. Whether the association's membership eligibility requirements are 
authoritative;
    5. Whether members pay dues;
    6. Whether the members have voting rights; to meet this requirement, 
members need not vote directly for an officer, but may vote for a 
delegate who in turn represents the members' interests;
    7. The frequency of meetings; and
    8. Separateness--NCUA reviews if there is corporate separateness 
between the group and the federal credit union. The group and the 
federal credit union must operate in a way that demonstrates the 
separate corporate existence of each entity. Specifically, this means 
the federal credit union's and the group's respective business 
transactions, accounts, and corporate records are not intermingled.
    No one factor alone is determinative of membership eligibility as an 
association. The totality of the circumstances controls over any 
individual factor in the test. However, NCUA's primary focus will be on 
factors 1-4.

                       III.A.1.Pre-Approved Groups

    NCUA automatically approves the below groups as satisfying the 
associational common bond provisions. NCUA only approves regular members 
of an approved group. Honorary, affiliate, or non-regular members do not 
qualify.
    These groups are:
    (1) Alumni associations;
    (2) Religious organizations, including churches or groups of related 
churches;
    (3) Electric cooperatives;
    (4) Homeowner associations;
    (1)
    (5) Labor unions;
    (6) Scouting groups;
    (7) Parent teacher associations (PTAs) organized at the local level 
to serve a single school district;
    (8) Chamber of commerce groups (members only and not employees of 
members);
    (9) Athletic booster clubs whose members have voting rights;
    (10) Fraternal organizations or civic groups with a mission of 
community service whose members have voting rights;
    (11) Organizations having a mission based on preserving or 
furthering the culture of a particular national or ethnic origin; and
    (12) Organizations promoting social interaction or educational 
initiatives among persons sharing a common occupational profession.

                    III.A.1.c--Additional Information

    A support group whose members are continually changing or whose 
duration is temporary may not meet the single associational common bond 
criteria. Each class of member will be evaluated based on the totality 
of the circumstances. Individuals or honorary members who only make 
donations to the association are not eligible to join the credit union.
    Student groups (e.g., students enrolled at a public, private, or 
parochial school) may constitute either an associational or occupational 
common bond. For example, students enrolled at a church sponsored school 
could share a single associational common bond with the members of that 
church and may qualify for a federal credit union charter. Similarly, 
students enrolled at a university, as a group by itself, or in 
conjunction with the faculty and employees of the school, could share a 
single occupational common bond and may qualify for a federal credit 
union charter.
    Tenant groups, consumer groups, and other groups of persons having 
an ``interest in'' a particular cause and certain consumer cooperatives 
may also qualify as an association.
    Associations based primarily on a client-customer relationship do 
not meet associational common bond requirements. Health clubs are an 
example of a group not meeting associational common bond requirements, 
including YMCAs. However, having an incidental client-customer 
relationship does not preclude an associational charter as long as the 
associational common bond requirements are met. For example, a fraternal 
association that offers insurance, which is not a condition of 
membership, may qualify as a valid associational common bond.

           III.A.2--Subsequent Changes to Association's Bylaws

    If the association's membership or geographical definitions in its 
charter and bylaws are changed subsequent to the effective date stated 
in the field of membership, the credit union must submit the revised 
charter or bylaws for NCUA's consideration and approval prior to serving 
members of the association added as a result of the change.

            III.A.3--Sample Single Associational Common Bonds

    Some examples of associational common bonds are:
      Regular members of Locals 10 and 13, IBEW, in Florida, who 
qualify for membership in accordance with their charter and bylaws in 
effect on May 20, 2001;
      Members of the Hoosier Farm Bureau in Grant, Logan, or Lee 
Counties of Indiana, who qualify for membership in accordance

[[Page 623]]

with its charter and bylaws in effect on March 7, 1997;
      Members of the Shalom Congregation in Chevy Chase, 
Maryland;
      
      Regular members of the Corporate Executives Association, 
located in Westchester, New York, who qualify for membership in 
accordance with its charter and bylaws in effect on December 1, 1997;
      Members of the University of Wisconsin Alumni Association, 
located in Green Bay, Wisconsin;
      Members of the Marine Corps Reserve Officers Association; 
or
      Members of St. John's Methodist Church and St. Luke's 
Methodist Church, located in Toledo, Ohio.
    Some examples of insufficiently defined single associational common 
bonds are:
      All Lutherans in the United States (too broadly defined); 
or
      Veterans of U.S. military service (group is too broadly 
defined; no formal association of all members of the group).
    Some examples of unacceptable single associational common bonds are:
      Alumni of Amos University (no formal association);
      Customers of Fleetwood Insurance Company (policyholders or 
primarily customer/client relationships do not meet associational 
standards);
      Employees of members of the Reston, Virginia, Chamber of 
Commerce (not a sufficiently close tie to the associational common 
bond); or
      Members of St. John's Lutheran Church and St. Mary's 
Catholic Church located in Anniston, Alabama (churches are not of the 
same denomination).

               III.B--Associational Common Bond Amendments

                            III.B.1--General

    Section 5 of every associational federal credit union's charter 
defines the field of membership the credit union can legally serve. Only 
those persons who, or legal entities that, join the credit union and are 
specified in the field of membership can be served. There are three 
instances in which Section 5 must be amended by NCUA.
    First, a group that shares the credit union's common bond is added 
to the field of membership. This may occur through various ways 
including agreement between the group and the credit union directly, or 
through a merger, purchase and assumption (P&A), or spin-off.
    Second, a federal credit union qualifies to change its common bond 
from:
      A single associational common bond to a single 
occupational common bond;
      A single associational common bond to a community charter; 
or
      A single associational common bond to a multiple common 
bond.
    Third, a federal credit union removes a portion of the group from 
its field of membership through agreement with the group, a spin-off, or 
a portion of the group that is no longer in existence.
    An existing single associational federal credit union that submits a 
request to amend its charter must provide documentation to establish 
that the associational common bond requirement has been met. The Office 
of Consumer Financial Protection and Access Director must approve all 
amendments to an associational common bond credit union's field of 
membership.

                   III.B.Organizational Restructuring

    If the single common bond group that comprises a federal credit 
union's field of membership undergoes a substantial restructuring, the 
result is often that portions of the group are sold or spun off. This is 
an event requiring a change to the credit union's field of membership. 
NCUA may not permit a single associational credit union to maintain in 
its field of membership a sold or spun-off group to which it has been 
providing service unless the group otherwise qualifies for membership in 
the credit union or the credit union converts to a multiple common bond 
credit union.
    If the group comprising the single common bond of the credit union 
merges with, or is acquired by, another group, the credit union can 
serve the new group resulting from the merger or acquisition after 
receiving a housekeeping amendment.

                     III.B.3--Economic Advisability

    Prior to granting a common bond expansion, NCUA will examine the 
amendment's likely impact on the credit union's operations and financial 
condition. In most cases, the information needed for analyzing the 
effect of adding a particular group will be available to NCUA through 
the examination and financial and statistical reports; however, in 
particular cases, the Office of Consumer Financial Protection and Access 
Director may require additional information prior to making a decision.

                    III.B.Documentation Requirements

    A federal credit union requesting a common bond expansion must 
submit an Application for Field of Membership Amendment (NCUA 4015-EZ) 
to the Office of Consumer Financial Protection and Access Director. An 
authorized credit union representative must sign the request.

[[Page 624]]

       III.C--NCUA Procedures for Amending the Field of Membership

                            III.C.1--General

    All requests for approval to amend a federal credit union's charter 
must be submitted to the Office of Consumer Financial Protection and 
Access Director.

 III.C.C.2--Office of Consumer Financial Protection and Access Director 
                                Decision

    NCUA staff will review all amendment requests in order to ensure 
conformance to NCUA policy.
    Before acting on a proposed amendment, the Office of Consumer 
Financial Protection and Access Director may require an on-site review. 
In addition, the Office of Consumer Financial Protection and Access 
Director may, after taking into account the significance of the proposed 
field of membership amendment, require the applicant to submit a 
business plan addressing specific issues.
    The financial and operational condition of the requesting credit 
union will be considered in every instance. The economic advisability of 
expanding the field of membership of a credit union with financial or 
operational problems must be carefully considered.
    In most cases, field of membership amendments will only be approved 
for credit unions that are operating satisfactorily. Generally, if a 
federal credit union is having difficulty providing service to its 
current membership, or is experiencing financial or other operational 
problems, it may have more difficulty serving an expanded field of 
membership.
    Occasionally, however, an expanded field of membership may provide 
the basis for reversing current financial problems. In such cases, an 
amendment to expand the field of membership may be granted 
notwithstanding the credit union's financial or operational problems. 
The applicant credit union must clearly establish that the expanded 
field of membership is in the best interest of the members and will not 
increase the risk to the NCUSIF.

  III.C.3--Office of Consumer Financial Protection and Access Director 
                                Approval

    If the Office of Consumer Financial Protection and Access Director 
approves the requested amendment, the credit union will be issued an 
amendment to Section 5 of its charter.

  III.C.4--Office of Consumer Financial Protection and Access Director 
                               Disapproval

    When the Office of Consumer Financial Protection and Access Director 
disapproves any application, in whole or in part, to amend the field of 
membership under this chapter, the applicant will be informed in writing 
of the:
      Specific reasons for the action;
      Options to consider, if appropriate, for gaining approval; 
and
      Appeal procedures.

 III.C.5--Appeal of Office of Consumer Financial Protection and Access 
                            Director Decision

    If a field of membership expansion request, merger, or spin-off is 
denied by staff, the federal credit union may appeal the decision to the 
NCUA Board. An appeal must be sent to the NCUA Board Secretary within 60 
days of the date of denial and must be clearly identified as such and 
address the reason(s) the federal credit union disagrees with the 
denial. A copy of the appeal must be sent to the Office of Consumer 
Financial Protection and Access, or as applicable, the appropriate 
regional office or Office of National Examinations and Supervision 
Director. NCUA central office staff will make an independent review of 
the facts and present the appeal to the NCUA Board with a 
recommendation.
    Before appealing, the credit union may, within 30 days of the 
denial, provide supplemental information to the office rendering the 
initial decision for reconsideration. A reconsideration will contain new 
and material evidence addressing the reasons for the initial denial. The 
office rendering the initial decision will have 30 days from the date of 
the receipt of the request for reconsideration to make a final decision. 
If the request is again denied, the applicant may proceed with the 
appeal process within 60 days of the date of the last denial. A second 
request for reconsideration will be treated as an appeal to the NCUA 
Board.



                                 Sec. 

         III.D--Mergers, Purchase and Assumptions, and Spin-Offs

    In general, other than the addition of common bond groups, there are 
three additional ways a federal credit union with a single associational 
common bond can expand its field of membership:
      By taking in the field of membership of another credit 
union through a common bond or emergency merger;
      By taking in the field of membership of another credit 
union through a common bond or emergency purchase and assumption (P&A); 
or
      By taking a portion of another credit union's field of 
membership through a common bond spin-off.

                            III.D.1--Mergers

    Generally, the requirements applicable to field of membership 
expansions found in this section apply to mergers where the continuing 
credit union is a federal charter.

[[Page 625]]

That is, the two credit unions must share a common bond.
    Where the merging credit union is state-chartered, the common bond 
rules applicable to a federal credit union apply.
    Mergers must be approved by the NCUA regional director or Office of 
National Examinations and Supervision Director where the continuing 
credit union is headquartered, with the concurrence of the regional 
director or Office of National Examinations and Supervision Director of 
the merging credit union, and, as applicable, the state regulators.
    If a single associational credit union wants to merge into a 
multiple common bond or community credit union, Section IV.D or Section 
V.D of this Chapter, respectively, should be reviewed.

                         III.D.Emergency Mergers

    An emergency merger may be approved by NCUA without regard to common 
bond or other legal constraints. An emergency merger involves NCUA's 
direct intervention and approval. The credit union to be merged must 
either be insolvent or in danger of insolvency, as defined in the 
Glossary, and NCUA must determine that:
      An emergency requiring expeditious action exists;
      Other alternatives are not reasonably available; and
      The public interest would best be served by approving the 
merger.
    If not corrected, conditions that could lead to insolvency include, 
but are not limited to:
      Abandonment by management;
      Loss of sponsor;
      Serious and persistent record-keeping problems; or
      Serious and persistent operational concerns.
    In an emergency merger situation, NCUA will take an active role in 
finding a suitable merger partner (continuing credit union). NCUA is 
primarily concerned that the continuing credit union has the financial 
strength and management expertise to absorb the troubled credit union 
without adversely affecting its own financial condition and stability.
    As a stipulated condition to an emergency merger, the field of 
membership of the merging credit union may be transferred intact to the 
continuing federal credit union without regard to any common bond 
restrictions. Under this authority, therefore, a single associational 
common bond federal credit union may take into its field of membership 
any dissimilar charter type.
    The common bond characteristic of the continuing credit union in an 
emergency merger does not change. That is, even though the merging 
credit union is a multiple common bond or community, the continuing 
credit union will remain a single common bond credit union. Similarly, 
if the merging credit union is an unlike single common bond, the 
continuing credit union will remain a single common bond credit union. 
Future common bond expansions will be based on the continuing credit 
union's single common bond.
    Emergency mergers involving federally insured credit unions in 
different NCUA regions must be approved by the regional director or 
Office of National Examinations and Supervision Director where the 
continuing credit union is headquartered, with the concurrence of the 
regional director or Office of National Examinations and Supervision 
Director of the merging credit union and, as applicable, the state 
regulators.

                   III.D.Purchase and Assumption (P&A)

    Another alternative for acquiring the field of membership of a 
failing credit union is through a consolidation known as a P&A. A P&A 
has limited application because, in most cases, the failing credit union 
must be placed into involuntary liquidation. In the few instances where 
a P&A may be appropriate, the assuming federal credit union, as with 
emergency mergers, may acquire the entire field of membership if the 
emergency merger criteria are satisfied. However, if the P&A does not 
meet the emergency merger criteria, it must be processed under the 
common bond requirements.
    In a P&A processed under the emergency criteria, specified loans, 
shares, and certain other designated assets and liabilities, without 
regard to common bond restrictions, may also be acquired without 
changing the character of the continuing federal credit union for 
purposes of future field of membership amendments.
    If the purchased and/or assumed credit union's field of membership 
does not share a common bond with the purchasing and/or assuming credit 
union, then the continuing credit union's original common bond will be 
controlling for future common bond expansions.
    P&As involving federally insured credit unions in different NCUA 
regions must be approved by the regional director or Office of National 
Examinations and Supervision Director where the continuing credit union 
is headquartered, with the concurrence of the regional director or 
Office of National Examinations and Supervision Director of the 
purchased and/or assumed credit union and, as applicable, the state 
regulators.

                           III.D.4--Spin-Offs

    A spin-off occurs when, by agreement of the parties, a portion of 
the field of membership, assets, liabilities, shares, and capital of a 
credit union are transferred to a new or existing credit union. A spin-
off is unique in that usually one credit union has a field of

[[Page 626]]

membership expansion and the other loses a portion of its field of 
membership.
    All common bond requirements apply regardless of whether the spun-
off group becomes a new credit union or goes to an existing federal 
charter.
    The request for approval of a spin-off must be supported with a plan 
that addresses, at a minimum:
      Why the spin-off is being requested;
      What part of the field of membership is to be spun off;
      Whether the affected credit unions have the same common 
bond (applies only to single associational credit unions);
      Which assets, liabilities, shares, and capital are to be 
transferred;
      The financial impact the spin-off will have on the 
affected credit unions;
      The ability of the acquiring credit union to effectively 
serve the new members;
      The proposed spin-off date; and
      Disclosure to the members of the requirements set forth 
above.
    The spin-off request must also include current financial statements 
from the affected credit unions and the proposed voting ballot.
    For federal credit unions spinning off a group, membership notice 
and voting requirements and procedures are the same as for mergers (see 
part 708 of the NCUA Rules and Regulations), except that only the 
members directly affected by the spin-off--those whose shares are to be 
transferred--are permitted to vote. Members whose shares are not being 
transferred will not be afforded the opportunity to vote. All members of 
the group to be spun off (whether they voted in favor, against, or not 
at all) will be transferred if the spin-off is approved by the voting 
membership. Voting requirements for federally insured state credit 
unions are governed by state law.
    Spin-offs involving federally insured credit unions in different 
NCUA regions must be approved by all regional directors and, if 
applicable, Office of National Examinations and Supervision Director 
where the credit unions are headquartered and the state regulators, as 
applicable. Spin-offs in the same region also require approval by the 
state regulator, as applicable. Spin-offs involving the creation of a 
new federally insured credit union require the approval of the Office of 
Consumer Financial Protection and Access Director. The Office of 
Consumer Financial Protection and Access also provides advice regarding 
field of membership compatibility when appropriate.

                             III.E--Overlaps

                            III.E.1--General

    An overlap exists when a group of persons is eligible for membership 
in two or more credit unions. NCUA will permit single associational 
federal credit unions to overlap any other charters without performing 
an overlap analysis.

                   III.E.Organizational Restructuring

    A federal credit union's field of membership will always be governed 
by the common bond descriptions contained in Section 5 of its charter. 
Where a sponsor organization expands its operations internally, by 
acquisition or otherwise, the credit union may serve these new entrants 
to its field of membership if they are part of the common bond described 
in Section 5. NCUA will permit a complete overlap of the credit unions' 
fields of membership. If a sponsor organization sells off a group, new 
members can no longer be served unless they otherwise qualify for 
membership in the credit union or it converts to a multiple common bond.
    Credit unions must submit documentation explaining the restructuring 
and providing information regarding the new organizational structure.

                      III.E.3--Exclusionary Clauses

    An exclusionary clause is a limitation precluding the credit union 
from serving the primary members of a portion of a group otherwise 
included in its field of membership. NCUA no longer grants exclusionary 
clauses. Those granted prior to the adoption of this new Chartering and 
Field of Membership Manual will remain in effect unless the credit 
unions agree to remove them or one of the affected credit unions submits 
a housekeeping amendment to have it removed.

                       III.F--Charter Conversions

    A single associational common bond federal credit union may apply to 
convert to a community charter provided the field of membership 
requirements of the community charter are met. Groups within the 
existing charter which cannot qualify in the new charter cannot be 
served except for members of record, or groups or communities obtained 
in an emergency merger or P&A. A credit union must notify all groups 
that will be removed from the field of membership as a result of 
conversion. Members of record can continue to be served. Also, in order 
to support a case for a conversion, the applicant federal credit union 
may be required to develop a detailed business plan as specified in 
Chapter 2, Section V.A.3.
    A single associational common bond federal credit union may apply to 
convert to a multiple common bond charter by adding a non-common bond 
group that is within a reasonable proximity of a service facility. 
Groups within the existing charter may be retained and continue to be 
served. However, future amendments, including any expansions of the 
original single common bond group, must be done in accordance with 
multiple common bond policy.

[[Page 627]]

          III.G--Removal of Groups From the Field of Membership

    A credit union may request removal of a portion of the common bond 
group from its field of membership for various reasons. The most common 
reasons for this type of amendment are:
      The group is within the field of membership of two credit 
unions and one wishes to discontinue service;
      The federal credit union cannot continue to provide 
adequate service to the group;
      The group has ceased to exist;
      The group does not respond to repeated requests to contact 
the credit union or refuses to provide needed support; or
      The group initiates action to be removed from the field of 
membership.
    When a federal credit union requests an amendment to remove a group 
from its field of membership, the Office of Consumer Financial 
Protection and Access Director will determine why the credit union 
desires to remove the group. If the Office of Consumer Financial 
Protection and Access Director concurs with the request, membership will 
continue for those who are already members under the ``once a member, 
always a member'' provision of the Federal Credit Union Act.

        III.H--Other Persons Eligible for Credit Union Membership

    A number of persons by virtue of their close relationship to a 
common bond group may be included, at the charter applicant's option, in 
the field of membership. These include the following:
      Spouses of persons who died while within the field of 
membership of this credit union;
      Employees of this credit union;
      Volunteers;
      Members of the immediate family or household;
      
      Honorably discharged veterans who served in any of the 
Armed Services of the United States in this charter;
    Organizations of such persons; and
      Corporate or other legal entities in this charter.
    Immediate family is defined as spouse, child, sibling, parent, 
grandparent, or grandchild. This includes stepparents, stepchildren, 
stepsiblings, and adoptive relationships.
    Household is defined as persons living in the same residence 
maintaining a single economic unit.
    Membership eligibility is extended only to individuals who are 
members of an ``immediate family or household'' of a credit union 
member. It is not necessary for the primary member to join the credit 
union in order for the immediate family or household member of the 
primary member to join, provided the immediate family or household 
clause is included in the field of membership. However, it is necessary 
for the immediate family member or household member to first join in 
order for that person's immediate family member or household member to 
join the credit union. A credit union can adopt a more restrictive 
definition of immediate family or household.
    Volunteers, by virtue of their close relationship with a sponsor 
group, may be included. One example is volunteers working at a church.
    Under the Federal Credit Union Act, once a person becomes a member 
of the credit union, such person may remain a member of the credit union 
until the person chooses to withdraw or is expelled from the membership 
of the credit union. This is commonly referred to as ``once a member, 
always a member.'' The ``once a member, always a member'' provision does 
not prevent a credit union from restricting services to members who are 
no longer within the field of membership.



                                 Sec. 

          IV--Multiple Occupational/Associational Common Bonds

                             IV.A.1--General

    A federal credit union may be chartered to serve a combination of 
distinct, definable single occupational and/or associational common 
bonds. This type of credit union is called a multiple common bond credit 
union. Each group in the field of membership must have its own 
occupational or associational common bond. For example, a multiple 
common bond credit union may include two unrelated employers, or two 
unrelated associations, or a combination of two or more employers or 
associations. Additionally, these groups must be within reasonable 
geographic proximity of the credit union. That is, the groups must be 
within the service area of one of the credit union's service facilities. 
These groups are referred to as select groups. A multiple common bond 
credit union cannot include a TIP or expand using single common bond 
criteria.
    Employment in a corporation or other legal entity which is related 
to another legal entity (such as a company under contract to, and 
possessing a strong dependency relationship with, the other company) 
makes that person part of the occupational common bond of a select 
employee group within a multiple common bond. In this context, a 
``strong dependency relationship'' is a relationship in which the 
entities rely on each other as measured by a pattern of regularly doing 
business with each other, for example, as documented by the number, the 
term length, and the dollar volume of prior and pending contracts 
between them.

[[Page 628]]

    A multiple common bond credit union's charter may also combine 
individual occupational groups that each consist of employees of a 
retailer or other business tenant of an industrial park, a shopping 
mall, office park or office building (each ``a park''). To be able to 
have this type of clause in its charter, the multiple common bond credit 
union first must receive a request from an authorized representative of 
the group or the park to establish credit union service. The park must 
be within the multiple common bond credit union's service area, and each 
occupational group must have fewer than 3,000 employees, who are 
eligible for membership only for so long as each is employed by a park 
tenant. Under this clause, a multiple common bond credit union can 
enroll group employees only while the group's retail or business 
employer is a park tenant, but such credit unions are free to serve 
employees of new groups under the above conditions as each respective 
employer becomes a park tenant.
    A federal credit union's service area is the area that can 
reasonably be served by the service facilities accessible to the groups 
within the field of membership. The service area will most often 
coincide with that geographic area primarily served by the service 
facility. Additionally, the groups served by the credit union must have 
access to the service facility. The non-availability of other credit 
union service is a factor to be considered in determining whether the 
group is within reasonable proximity of a credit union wishing to add 
the group to its field of membership.
    A service facility for multiple common bond credit unions is defined 
as a place where shares are accepted for members' accounts, loan 
applications are accepted or loans are disbursed. This definition 
includes a credit union owned branch, a mobile branch, an office 
operated on a regularly scheduled weekly basis, a credit union owned 
ATM, or a credit union owned electronic facility that meets, at a 
minimum, these requirements. A service facility also includes a shared 
branch or a shared branch network if either: (1) The credit union has an 
ownership interest in the service facility either directly or through a 
CUSO or similar organization; or (2) the service facility is local to 
the credit union and the credit union is an authorized participant in 
the service center. This definition does not include the credit union's 
Internet Web site.
    The select group as a whole will be considered to be within a credit 
union's service area when:
      A majority of the persons in a select group live, work, or 
gather regularly within the service area;
      The group's headquarters is located within the service 
area; or
      The group's ``paid from'' or ``supervised from'' location 
is within the service area.

         IV.A.2--Sample Multiple Common Bond Field of Membership

    An example of a multiple common bond field of membership is:
    ``The field of membership of this federal credit union shall be 
limited to the following:
    1. Employees of Teltex Corporation who work in Wilmington, Delaware;
    2. Partners and employees of Smith & Jones, Attorneys at Law, who 
work in Wilmington, Delaware;
    3. Members of the M&L Association in Wilmington, Delaware, who 
qualify for membership in accordance with its charter and bylaws in 
effect on December 31, 1997;
    4. Employees of tenants of MJB Office Park under the following 
conditions:

--Each tenant's employees form an individual occupational group;
--the tenant has fewer than 3,000 employees working at MJB Office Park; 
and
--those employees work in MJB Office Park's Wilmington, Delaware 
location,''



                                 Sec. 

                  IV.B--Multiple Common Bond Amendments

                             IV.B.1--General

    Section 5 of every multiple common bond federal credit union's 
charter defines the field of membership and select groups the credit 
union can legally serve. Only those persons or legal entities specified 
in the field of membership can be served. There are a number of 
instances in which Section 5 must be amended by NCUA.
    First, a new select group is added to the field of membership. This 
may occur through agreement between the group and the credit union 
directly, or through a merger, corporate acquisition, purchase and 
assumption (P&A), or spin-off.
    Second, a federal credit union qualifies to change its charter from:
      A single occupational or associational charter to a 
multiple common bond charter;
      A multiple common bond to a single occupational or 
associational charter;
      A multiple common bond to a community charter; or
      A community to a multiple common bond charter.
    Third, a federal credit union removes a group from its field of 
membership through agreement with the group, a spin-off, or because the 
group no longer exists.

              IV.B.2--Numerical Limitation of Select Groups

    An existing multiple common bond federal credit union that submits a 
request to amend its charter must provide documentation to establish 
that the multiple common bond requirements have been met. The Office

[[Page 629]]

of Consumer Financial Protection and Access Director must approve all 
amendments to a multiple common bond credit union's field of membership.
    NCUA will approve groups to a credit union's field of membership if 
the agency determines in writing that the following criteria are met:
      The credit union has not engaged in any unsafe or unsound 
practice, as determined by the Office of Consumer Financial Protection 
and Access Director, with input from the appropriate regional director 
or Office of National Examinations and Supervision Director, which is 
material during the one year period preceding the filing to add the 
group;
      The credit union is ``adequately capitalized'' pursuant to 
Part 702 of NCUA's Rules and Regulations. For low-income credit unions 
or credit unions chartered less than ten years, the Office of Consumer 
Financial Protection and Access Director, with input from the 
appropriate regional director or Office of National Examinations and 
Supervision Director, may determine that a less than ``adequately 
capitalized'' credit union can qualify for an expansion if it is making 
reasonable progress toward becoming ``adequately capitalized.'' For any 
other credit union, the Office of Consumer Financial Protection and 
Access Director, with input from the appropriate regional director or 
Office of National Examinations and Supervision Director, may determine 
that a less than ``adequately capitalized'' credit union can qualify for 
an expansion if it is making reasonable progress toward becoming 
``adequately capitalized,'' and the addition of the group would not 
adversely affect the credit union's capitalization level;
      The credit union has the administrative capability to 
serve the proposed group and the financial resources to meet the need 
for additional staff and assets to serve the new group;
      Any potential harm the expansion may have on any other 
credit union and its members is clearly outweighed by the probable 
beneficial effect of the expansion. With respect to a proposed 
expansion's effect on other credit unions, the requirements on 
overlapping fields of membership set forth in Section IV.E of this 
Chapter are also applicable; and
      If the formation of a separate credit union by such group 
is not practical and consistent with reasonable standards for the safe 
and sound operation of a credit union.
    The Federal Credit Union Act presumes that a group of 3,000 or more 
primary potential members is able to form its own stand-alone credit 
union unless NCUA determines that it is infeasible to do so for reasons 
such as:
    (i) The group lacks sufficient volunteer and other resources to 
support the efficient and effective operation of its own credit union;
    (ii) the group does not meet criteria that the Board has determined 
to be an important indicator of success in establishing and managing a 
new credit union, including demographic characteristics such as the 
geographic location of members, the diversity of ages and income levels 
among members, and other factors that may affect such a credit union's 
financial viability and stability; or
    (iii) the group would be unlikely to operate a safe and sound credit 
union.
    As such, NCUA requires additional information when a multiple common 
bond credit union applies to add a group of 3,000 or more primary 
potential members. For groups between 3,000 and 4,999 potential members, 
NCUA requires documentation indicating the group has a lack of available 
subsidies, interest among the group's members, and sufficient resources. 
For such cases NCUA, in its discretion, will accept a written statement 
indicating these conditions exist as sufficient documentation the group 
cannot form its own credit union. Groups with 5,000 or more members will 
be subject to the standard document requirements as discussed later in 
this chapter, requiring a group to fully describe its inability to 
establish a new single common bond credit union.

                     IV.B.Documentation Requirements

    A multiple common bond credit union requesting a select group 
expansion must submit a formal written request, using the Application 
for Field of Membership Amendment (NCUA 4015-EZ, NCUA 4015-A or NCUA 
4015) to the Office of Consumer Financial Protection and Access 
Director. An authorized credit union representative must sign the 
request.
    The NCUA 4015-EZ (for groups less than 3,000 potential members) must 
be accompanied by the following:
      A letter, or equivalent documentation, from the group 
requesting credit union service. This letter must indicate:
      That the group wants to be added to the applicant federal 
credit union's field of membership;
      The number of persons currently included within the group 
to be added and their locations; and
      The group's proximity to the credit union's nearest 
service facility.
      The most recent copy of the group's charter and bylaws or 
equivalent documentation (for associational groups).
    The NCUA 4015-A (for groups between 3,000 and 4,999 primary 
potential members) must be accompanied by the following:
      A letter, or equivalent documentation, from the group 
requesting credit union service. This letter must indicate:
      That the group wants to be added to the federal credit 
union's field of membership;

[[Page 630]]

      The number of persons currently included within the group 
to be added and their locations;
      The group's proximity to credit union's nearest service 
facility, and
      Why the formation of a separate credit union for the group 
is not practical or consistent with safety and soundness standards 
because of a lack of available subsidies, interest among the group's 
members, and sufficient resources.
    The NCUA 4015 (for groups of 5,000 or more primary potential 
members) must be accompanied by the following:
      A letter, or equivalent documentation, from the group 
requesting credit union service. This letter must indicate:
      That the group wants to be added to the federal credit 
union's field of membership;
      Whether the group presently has other credit union service 
available;
      The number of persons currently included within the group 
to be added and their locations;
      The group's proximity to credit union's nearest service 
facility, and
      Why the formation of a separate credit union for the group 
is not practical or consistent with safety and soundness standards. A 
credit union need not address every item on the list, simply those 
issues that are relevant to its particular request:
    Member location--whether the membership is widely dispersed or 
concentrated in a central location.
    Demographics--the employee turnover rate, economic status of the 
group's members, and whether the group is more apt to consist of savers 
and/or borrowers.
    Market competition--the availability of other financial services.
    Desired services and products--the type of services the group 
desires in comparison to the type of services a new credit union could 
offer.
    Sponsor subsidies--the availability of operating subsidies.
    The desire of the sponsor--the extent of the sponsor's interest in 
supporting a credit union charter.
    Employee interest--the extent of the employees' interest in 
obtaining a credit union charter.
    Evidence of past failure--whether the group previously had its own 
credit union or previously filed for a credit union charter.
    Administrative capacity to provide services--will the group have the 
management expertise to provide the services requested.
      If the group is eligible for membership in any other 
credit union, documentation must be provided to support inclusion of the 
group under the overlap standards set forth in Section IV.E of this 
Chapter; and
      The most recent copy of the group's charter and bylaws or 
equivalent documentation (for associational groups).

                           IV.B.Restructuring

    If a select group within a federal credit union's field of 
membership undergoes a substantial restructuring, a change to the credit 
union's field of membership may be required if the credit union is to 
continue to provide service to the select group. NCUA permits a multiple 
common bond credit union to maintain in its field of membership a sold, 
spun-off, or merged select group to which it has been providing service. 
This type of amendment to the credit union's charter is not considered 
an expansion; therefore, the criteria relating to adding new groups are 
not applicable.
    When two groups merge and each is in the field of membership of a 
credit union, then both (or all affected) credit unions can serve the 
resulting merged group, subject to any existing geographic limitation 
and without regard to any overlap provisions. However, the credit unions 
cannot serve the other multiple groups that may be in the field of 
membership of the other credit union.

      IV.C--NCUA's Procedures for Amending the Field of Membership

                             IV.C.1--General

    All requests for approval to amend a federal credit union's charter 
must be submitted to the Office of Consumer Financial Protection and 
Access Director.

  IV.C.2--Office of Consumer Financial Protection and Access Director 
                                Decision

    NCUA staff will review all amendment requests in order to ensure 
conformance to NCUA policy.
    Before acting on a proposed amendment, the Office of Consumer 
Financial Protection and Access Director may require an on-site review. 
In addition, the Office of Consumer Financial Protection and Access 
Director may, after taking into account the significance of the proposed 
field of membership amendment, require the applicant to submit a 
business plan addressing specific issues.
    The financial and operational condition of the requesting credit 
union will be considered in every instance. An expanded field of 
membership may provide the basis for reversing adverse trends. In such 
cases, an amendment to expand the field of membership may be granted 
notwithstanding the credit union's adverse trends. The applicant credit 
union must clearly establish that the approval of the expanded field of 
membership meets the requirements of Section IV.B.2 of this Chapter and 
will not increase the risk to the NCUSIF.

[[Page 631]]

  IV.C.3--Office of Consumer Financial Protection and Access Director 
                                Approval

    If the Office of Consumer Financial Protection and Access Director 
approves the requested amendment, the credit union will be issued an 
amendment to Section 5 of its charter.

  IV.C.4--Office of Consumer Financial Protection and Access Director 
                               Disapproval

    When the Office of Consumer Financial Protection and Access Director 
disapproves any application, in whole or in part, to amend the field of 
membership under this chapter, the applicant will be informed in writing 
of the:
      Specific reasons for the action;
      
      Options to consider, if appropriate, for gaining approval; 
and
      Appeal procedure.

  IV.C.5--Appeal of Office of Consumer Financial Protection and Access 
                            Director Decision

    If a field of membership expansion request, merger, or spin-off is 
denied by staff, the federal credit union may appeal the decision to the 
NCUA Board. An appeal must be sent to the NCUA Board Secretary within 60 
days of the date of denial and must be clearly identified as such and 
address the reason(s) the federal credit union disagrees with the 
denial. A copy of the appeal must be sent to the Office of Consumer 
Financial Protection and Access or, as applicable, the appropriate 
regional office or Office of National Examinations and Supervision 
Director. NCUA central office staff will make an independent review of 
the facts and present the appeal to the NCUA Board with a 
recommendation.
    Before appealing, the credit union may, within 30 days of the 
denial, provide supplemental information to the office rendering the 
initial decision for reconsideration. A reconsideration will contain new 
and material evidence addressing the reasons for the initial denial. The 
office rendering the initial decision will have 30 days from the date of 
the receipt of the request for reconsideration to make a final decision. 
If the request is again denied, the applicant may proceed with the 
appeal process within 60 days of the date of the last denial. A second 
request for reconsideration will be treated as an appeal to the NCUA 
Board.

         IV.D--Mergers, Purchase and Assumptions, and Spin-Offs

    In general, other than the addition of select groups, there are 
three additional ways a multiple common bond federal credit union can 
expand its field of membership:
      By taking in the field of membership of another credit 
union through a merger;
      By taking in the field of membership of another credit 
union through a purchase and assumption (P&A); or
      By taking a portion of another credit union's field of 
membership through a spin-off.

                         IV.D. Voluntary Mergers

 a. All Select Groups in the Merging Credit Union's Field of Membership 
             Have Less Than 3,000 Primary Potential Members

    A voluntary merger of two or more federal credit unions is 
permissible as long as each select group in the merging credit union's 
field of membership has less than 3,000 primary potential members. While 
the merger requirements outlined in Section 205 of the Federal Credit 
Union Act must still be met, the requirements of Chapter 2, Section 
IV.B.2 of this manual are not applicable.

  b. One or More Select Groups in the Merging Credit Union's Field of 
         Membership Has 3,000 or More Primary Potential Members

    If the merging credit unions serve the same group, and the group 
consists of 3,000 or more primary potential members, then the ability to 
form a separate credit union analysis is not required for that group. If 
the merging credit union has any other groups consisting of 3,000 or 
more primary potential members, special requirements apply. NCUA will 
analyze each group of 3,000 or more primary potential members, except as 
noted above, to determine whether the formation of a separate credit 
union by such a group is practical. If the formation of a separate 
credit union by such a group is not practical because the group lacks 
sufficient volunteer and other resources to support the efficient and 
effective operations of a credit union or does not meet the economic 
advisable criteria outlined in Chapter 1, the group may be merged into a 
multiple common bond credit union. If the formation of a separate credit 
union is practical, the group must be spun-off before the merger can be 
approved.

 c. Merger of a Single Common Bond Credit Union Into a Multiple Common 
                            Bond Credit Union

    A financially healthy single common bond credit union with a primary 
potential membership of 3,000 or more cannot merge into a multiple 
common bond credit union, absent supervisory reasons, unless the 
continuing credit union already serves the same group.

                           d. Merger Approval

    If the merger is approved, the qualifying groups within the merging 
credit union's field of membership will be transferred intact to the 
continuing credit union and can continue to be served.

[[Page 632]]

    Where the merging credit union is state-chartered, the field of 
membership rules applicable to a federal credit union apply.
    Mergers must be approved by the applicable NCUA regional or Office 
of National Examinations and Supervision Director where the continuing 
credit union is headquartered, with the concurrence of the regional 
director or Office of National Examinations and Supervision Director of 
the merging credit union, and, as applicable, the state regulators.

                       IV.D.2--Supervisory Mergers

    The NCUA may approve the merger of any federally insured credit 
union when safety and soundness concerns are present without regard to 
the 3,000 numerical limitation. The credit union need not be insolvent 
or in danger of insolvency for NCUA to use this statutory authority. 
Examples constituting appropriate reasons for using this authority are: 
abandonment of the management and/or officials and an inability to find 
replacements, loss of sponsor support, serious and persistent record-
keeping problems, sustained material decline in financial condition, or 
other serious or persistent circumstances.

                         IV.D. Emergency Mergers

    An emergency merger may be approved by NCUA without regard to common 
bond or other legal constraints. An emergency merger involves NCUA's 
direct intervention and approval. The credit union to be merged must 
either be insolvent or in danger of insolvency, as defined in the 
Glossary, and NCUA must determine that:
      An emergency requiring expeditious action exists;
      Other alternatives are not reasonably available; and
      The public interest would best be served by approving the 
merger.
    If not corrected, conditions that could lead to insolvency include, 
but are not limited to:
      Abandonment by management;
      Loss of sponsor;
      Serious and persistent record-keeping problems; or
      Serious and persistent operational concerns.
    In an emergency merger situation, NCUA will take an active role in 
finding a suitable merger partner (continuing credit union). NCUA is 
primarily concerned that the continuing credit union has the financial 
strength and management expertise to absorb the troubled credit union 
without adversely affecting its own financial condition and stability.
    As a stipulated condition to an emergency merger, the field of 
membership of the merging credit union may be transferred intact to the 
continuing federal credit union without regard to any field of 
membership restrictions including numerical limitation requirements. 
Under this authority, any single occupational or associational common 
bond, multiple common bond, or community charter may merger into a 
multiple common bond credit union and that credit union can continue to 
serve the merging credit union's field of membership. Subsequent field 
of membership expansions of the continuing multiple common bond credit 
union must be consistent with multiple common bond policies.
    Emergency mergers involving federally insured credit unions in 
different NCUA regions must be approved by the regional director or 
Office of National Examinations and Supervision Director where the 
continuing credit union is headquartered, with the concurrence of the 
regional director or Office of National Examinations and Supervision 
Director of the merging credit union and, as applicable, the state 
regulators.

                   IV.D. Purchase and Assumption (P&A)

    Another alternative for acquiring the field of membership of a 
failing credit union is through a consolidation known as a P&A. 
Generally, the requirements applicable to field of membership expansions 
found in this chapter apply to purchase and assumptions where the 
purchasing credit union is a federal charter.
    A P&A has limited application because, in most cases, the failing 
credit union must be placed into involuntary liquidation. However, in 
the few instances where a P&A may occur, the assuming federal credit 
union, as with emergency mergers, may acquire the entire field of 
membership if the emergency criteria are satisfied. Specified loans, 
shares, and certain other designated assets and liabilities, without 
regard to field of membership restrictions, may also be acquired without 
changing the character of the continuing federal credit union for 
purposes of future field of membership amendments. Subsequent field of 
membership expansions must be consistent with multiple common bond 
policies.
    P&As involving federally insured credit unions in different NCUA 
regions must be approved by the regional director or Office of National 
Examinations and Supervision Director where the continuing credit union 
is headquartered, with the concurrence of the regional director or 
Office of National Examinations and Supervision Director of the 
purchased and/or assumed credit union and, as applicable, the state 
regulators.

                            IV.D.5--Spin-Offs

    A spin-off occurs when, by agreement of the parties, a portion of 
the field of membership, assets, liabilities, shares, and capital of

[[Page 633]]

a credit union are transferred to a new or existing credit union. A 
spin-off is unique in that usually one credit union has a field of 
membership expansion and the other loses a portion of its field of 
membership.
    All common bond requirements apply regardless of whether the spun-
off group becomes a new charter or goes to an existing federal charter.
    The request for approval of a spun-off group must be supported with 
a plan that addresses, at a minimum:
      Why the spin-off is being requested;
      What part of the field of membership is to be spun off;
      Which assets, liabilities, shares, and capital are to be 
transferred;
      The financial impact the spin-off will have on the 
affected credit unions;
      The ability of the acquiring credit union to effectively 
serve the new members;
      The proposed spin-off date; and
      Disclosure to the members of the requirements set forth 
above.
    The spin-off request must also include current financial statements 
from the affected credit unions and the proposed voting ballot.
    For federal credit unions spinning off a group, membership notice 
and voting requirements and procedures are the same as for mergers (see 
part 708 of the NCUA Rules and Regulations), except that only the 
members directly affected by the spin-off--those whose shares are to be 
transferred--are permitted to vote. Members whose shares are not being 
transferred will not be afforded the opportunity to vote. All members of 
the group to be spun off (whether they voted in favor, against, or not 
at all) will be transferred if the spin-off is approved by the voting 
membership. Voting requirements for federally insured state credit 
unions are governed by state law.
    Spin-offs involving federally insured credit unions in different 
NCUA regions must be approved by all regional directors and, if 
applicable, the Office of National Examinations and Supervision Director 
where the credit unions are headquartered and the state regulators, as 
applicable. Spin-offs in the same region also require approval by the 
state regulator, as applicable.



                                 Sec. 

                             IV.E--Overlaps

                             IV.E.1--General

    An overlap exists when a group of persons is eligible for membership 
in two or more credit unions, including state charters. An overlap is 
permitted when the expansion's beneficial effect in meeting the 
convenience and needs of the members of the group proposed to be 
included in the field of membership outweighs any adverse effect on the 
overlapped credit union.
    Credit unions must investigate the possibility of an overlap with 
federally insured credit unions prior to submitting an expansion request 
if the group has 5,000 or more primary potential members. If cases arise 
where the assurance given to the Office of Consumer Financial Protection 
and Access Director concerning the unavailability of credit union 
service is inaccurate, the misinformation may be grounds for removal of 
the group from the federal credit union's charter.
    When an overlap situation requiring analysis does arise, officials 
of the expanding credit union must ascertain the views of the overlapped 
credit union. If the overlapped credit union does not object, the 
applicant must submit a letter or other documentation to that effect. If 
the overlapped credit union does not respond, the expanding credit union 
must notify NCUA in writing of its attempt to obtain the overlapped 
credit union's comments.
    NCUA will approve an overlap if the expansion's beneficial effect in 
meeting the convenience and needs of the members of the group outweighs 
any adverse effect on the overlapped credit union.
    In reviewing the overlap, the Office of Consumer Financial 
Protection and Access Director will consider:
      The view of the overlapped credit union(s);
      Whether the overlap is incidental in nature--the group of 
persons in question is so small as to have no material effect on the 
original credit union;
      Whether there is limited participation by members or 
employees of the group in the original credit union after the expiration 
of a reasonable period of time;
      Whether the original credit union fails to provide 
requested service;
      Financial effect on the overlapped credit union;
      The desires of the group(s);
      The desire of the sponsor organization; and
      The best interests of the affected group and the credit 
union members involved.
    Generally, if the overlapped credit union does not object, and NCUA 
determines that there is no safety and soundness problem, the overlap 
will be permitted.
    Potential overlaps of a federally insured state credit union's field 
of membership by a federal credit union will generally be analyzed in 
the same way as if two federal credit unions were involved. Where a 
federally insured state credit union's field of membership is broadly 
stated, NCUA will exclude its field of membership from any overlap 
protection.
    NCUA will permit multiple common bond federal credit unions to 
overlap community charters without performing an overlap analysis.

[[Page 634]]

    IV.E. Overlap Issues as a Result of Organizational Restructuring

    A federal credit union's field of membership will always be governed 
by the field of membership descriptions contained in Section 5 of its 
charter. Where a sponsor organization expands its operations internally, 
by acquisition or otherwise, the credit union may serve these new 
entrants to its field of membership if they are part of any select group 
listed in Section 5. Where acquisitions are made which add a new 
subsidiary, the group cannot be served until the subsidiary is included 
in the field of membership through a housekeeping amendment.
    A federal credit union's field of membership will always be governed 
by the field of membership descriptions contained in Section 5 of its 
charter. Where a sponsor organization expands its operations internally, 
by acquisition or otherwise, the credit union may serve these new 
entrants to its field of membership if they are part of any select group 
listed in Section 5. Where acquisitions are made which add a new 
subsidiary, the group cannot be served until the subsidiary is included 
in the field of membership through a housekeeping amendment.
    Overlaps may occur as a result of restructuring or merger of the 
parent organization. When such overlaps occur, each credit union must 
request a field of membership amendment to reflect the new groups each 
wishes to serve. The credit union can continue to serve any current 
group in its field of membership that is acquiring a new group or has 
been acquired by a new group.
    The new group cannot be served by the credit union until the field 
of membership amendment is approved by NCUA.
    Credit unions affected by organizational restructuring or merger 
should attempt to resolve overlap issues among themselves. Unless an 
agreement is reached limiting the overlap resulting from the corporate 
restructuring, NCUA will permit a complete overlap of the credit unions' 
fields of membership. When two groups merge, or one group is acquired by 
the other, and each is in the field of membership of a credit union, 
both (or all affected) credit unions can serve the resulting merged or 
acquired group, subject to any existing geographic limitation and 
without regard to any overlap provisions. This is accomplished through a 
housekeeping amendment.
    Credit unions must submit to NCUA documentation explaining the 
restructuring and provide information regarding the new organizational 
structure.

                      IV.E.3--Exclusionary Clauses

    An exclusionary clause is a limitation precluding the credit union 
from serving the primary members of a portion of a group otherwise 
included in its field of membership. NCUA no longer grants exclusionary 
clauses. Those granted prior to the adoption of this new Chartering and 
Field of Membership Manual will remain in effect unless the credit 
unions agree to remove them or one of the affected credit unions submits 
a housekeeping amendment to have it removed.

                        IV.F--Charter Conversion

    A multiple common bond federal credit union may apply to convert to 
a community charter provided the field of membership requirements of the 
community charter are met. Groups within the existing charter which 
cannot qualify in the new charter cannot be served except for members of 
record, or groups or communities obtained in an emergency merger or P&A. 
A credit union must notify all groups that will be removed from the 
field of membership as a result of conversion. Members of record can 
continue to be served. Also, in order to support a case for a 
conversion, the applicant federal credit union may be required to 
develop a detailed business plan as specified in Chapter 2, Section 
V.A.3.
    A multiple common bond federal credit union may apply to convert to 
a single occupational or associational common bond charter provided the 
field of membership requirements of the new charter are met. Groups 
within the existing charter, which do not qualify in the new charter, 
cannot be served except for members of record, or groups or communities 
obtained in an emergency merger or P&A. A credit union must notify all 
groups that will be removed from the field of membership as a result of 
conversion.

    IV.G--Credit Union Requested Removal of Groups From the Field of 
                               Membership

    A credit union may request removal of a group from its field of 
membership for various reasons. The most common reasons for this type of 
amendment are:
      The group is within the field of membership of two credit 
unions and one wishes to discontinue service;
      The federal credit union cannot continue to provide 
adequate service to the group;
      The group has ceased to exist;
      The group does not respond to repeated requests to contact 
the credit union or refuses to provide needed support;
      The group initiates action to be removed from the field of 
membership; or
      The federal credit union wishes to convert to a single 
common bond.
    When a federal credit union requests an amendment to remove a group 
from its field of membership, the Office of Consumer Financial 
Protection and Access Director will

[[Page 635]]

determine why the credit union desires to remove the group. If the 
Office of Consumer Financial Protection and Access Director concurs with 
the request, membership will continue for those who are already members 
under the ``once a member, always a member'' provision of the Federal 
Credit Union Act.

    IV.H--NCUA Supervisory Action To Remove Groups From the Field of 
                               Membership

    NCUA has in place quality control processes that protect the 
integrity of its field of membership requirements. As part of this 
obligation, NCUA's Office of Consumer Financial Protection and Access 
will randomly select groups added through NCUA's Field of Membership 
Internet Application (FOMIA) system for quality assurance reviews even 
if the expansion application meets all the conditions for approval. Each 
FCU is responsible for obtaining certain documentation when seeking to 
add groups to its field of membership through FOMIA. In addition, as 
indicated in the FOMIA User Instruction Guide, available on NCUA's Web 
site, an FCU must permanently retain the documentation from the select 
group requesting service and the Confirmation Certificate generated at 
the time the FOMIA request is submitted to NCUA.
    As part of the quality assurance process, the Office of Consumer 
Financial Protection and Access reserves the right to request this 
documentation at any time. If the FCU fails to provide this 
documentation when the Office of Consumer Financial Protection and 
Access requests it, the director of the Office of Consumer Financial 
Protection and Access may consider removing the group from the FCU's 
field of membership and restricting the FCU from using the FOMIA system 
for future requests. Specifically, as part of the FOMIA quality 
assurance process, the Office of Consumer Financial Protection and 
Access staff will do the following:
    1. Within 10 days of receiving an application selected for a quality 
assurance review, notify the FCU of the documentation the Office of 
Consumer Financial Protection and Access requires. The FCU will have 15 
days to provide the necessary documentation. the Office of Consumer 
Financial Protection and Access will respond to the FCU with a 
determination on the quality assurance review of the association within 
15 days of receiving the requested information;
    2. After receiving the additional documentation, if any concerns 
remain outstanding, the Office of Consumer Financial Protection and 
Access will again correspond with the FCU and provide a 15-day time 
frame for correcting the concern. the Office of Consumer Financial 
Protection and Access will respond to the FCU with a determination on 
the quality assurance review of the association within 15 days of 
receiving the requested information; and
    3. If the FCU does not provide the requested documentation, or 
cannot correct the concern, the Office of Consumer Financial Protection 
and Access Director will deny the application and notify the credit 
union of its appeal rights.

  IV.I--NCUA Investigation of Potential Field of Membership Violations

    NCUA's Office of Consumer Financial Protection and Access is 
responsible for investigating field of membership complaints from the 
public, and matters referred to it from the field. It also pursues 
corrective action as needed for FCUs with confirmed field of membership 
violations. Although circumstances can vary with each case, the Office 
of Consumer Financial Protection and Access will generally adhere to the 
following process for investigating and addressing potential field of 
membership violations:
    1. Initially correspond with management to outline concerns and 
request clarifying information within 60 days. the Office of Consumer 
Financial Protection and Access will also provide context as to the 
source of NCUA's concerns, such as the discovery of new information 
about a particular group or an examination finding brought to the 
attention of the Office of Consumer Financial Protection and Access;
    2. If the Office of Consumer Financial Protection and Access does 
not receive the requested information within 60 days, it will notify the 
FCU and again request the required information be provided within 30 
days;
    3. After receiving the additional documentation, if any concerns 
remain outstanding, the Office of Consumer Financial Protection and 
Access will again correspond with the FCU to provide a 60-day time frame 
for addressing the concern; and
    4. If the FCU is unable to correct the concern, and after 
consultation with the Office of General Counsel and the appropriate 
Regional Office or Office of National Examinations and Supervision 
Director, and in accordance with agency guidelines for administrative 
actions, the Director of the Office of Consumer Financial Protection and 
Access will remove the group from the FCU's field of membership pursuant 
to authority delegated by the NCUA Board. Removal of a group is treated 
the same as an initial denial under the Chartering Manual. In any 
adverse final determination on removal under the above delegations, the 
Office of Consumer Financial Protection and Access will notify the FCU 
of its appeal rights.
    NCUA considers the removal of an association from an FCU's field of 
membership as an action of last resort. If a group is removed, the FCU 
can no longer add new members from the group, but can continue serving

[[Page 636]]

those who are already members of the FCU under the ``once a member, 
always a member'' provision of the Federal Credit Union Act. Also, if 
the group subsequently qualifies due to changes to the group itself, 
management can submit a new application at that time.

        IV.J--Other Persons Eligible for Credit Union Membership

    A number of persons, by virtue of their close relationship to a 
common bond group, may be included, at the charter applicant's option, 
in the field of membership. These include the following:
      Spouses of persons who died while within the field of 
membership of this credit union;
      Employees of this credit union;
      Persons retired as pensioners or annuitants from the above 
employment;
      Volunteers;
      Members of the immediate family or household;
      Honorably discharged veterans who served in any of the 
Armed Services of the United States in this charter;
      Organizations of such persons; and
      Corporate or other legal entities in this charter.
    Immediate family is defined as spouse, child, sibling, parent, 
grandparent, or grandchild. This includes stepparents, stepchildren, 
stepsiblings, and adoptive relationships.
    Household is defined as persons living in the same residence 
maintaining a single economic unit.
    Membership eligibility is extended only to individuals who are 
members of an ``immediate family or household'' of a credit union 
member. It is not necessary for the primary member to join the credit 
union in order for the immediate family or household member of the 
primary member to join, provided the immediate family or household 
clause is included in the field of membership. However, it is necessary 
for the immediate family member or household member to first join in 
order for that person's immediate family member or household member to 
join the credit union. A credit union can adopt a more restrictive 
definition of immediate family or household.
    Volunteers, by virtue of their close relationship with a sponsor 
group, may be included. Examples include volunteers working at a 
hospital or church.
    Under the Federal Credit Union Act, once a person becomes a member 
of the credit union, such person may remain a member of the credit union 
until the person chooses to withdraw or is expelled from the membership 
of the credit union. This is commonly referred to as ``once a member, 
always a member.'' The ``once a member, always a member'' provision does 
not prevent a credit union from restricting services to members who are 
no longer within the field of membership

                    V--Community Charter Requirements

                             V.A.1--General

    There are two types of community charters. One is based on a single, 
geographically well- defined local community or neighborhood; the other 
is a rural district. More than one credit union may serve the same 
community.
    NCUA recognizes four types of affinity on which both a community 
charter and a rural district can be based--persons who live in, worship 
in, attend school in, or work in the community or rural district. 
Businesses and other legal entities within the community boundaries or 
rural district may also qualify for membership.
    NCUA has established the following requirements for community 
charters:
      The geographic area's boundaries must be clearly defined; 
and
      The area is a well-defined local community or a rural 
district.

  V.A.2--Definition of Well-Defined Local Community and Rural District

    In addition to the documentation requirements in Chapter 1 to 
charter a credit union, a community credit union applicant must provide 
additional documentation addressing the proposed area to be served and 
community service policies.
    An applicant has the burden of demonstrating to NCUA that the 
proposed community area meets the statutory requirements of being: (1) 
Well-defined, and (2) a local community or rural district.
    ``Well-defined'' means the proposed area has specific geographic 
boundaries. Geographic boundaries may include a city, township, county 
(single, multiple, or portions of a county) or a political equivalent, 
school district, or a clearly identifiable neighborhood. Although state 
boundaries are well-defined areas, states themselves do not meet the 
requirement that the proposed area be a local community.
    The well-defined local community requirement is met if:
      Single Political Jurisdiction--The area to be served is in 
a recognized Single Political Jurisdiction, i.e., a city, county, or 
their political equivalent, or any individual portion thereof.
      Statistical Area--The area is a designated Core Based 
Statistical Area or allowing a portion thereof, or in the case of a Core 
Based Statistical Area with Metropolitan Divisions, the area is a 
Metropolitan Division or is a portion thereof; or
      The area is a designated a Combined Statistical Area or a 
portion thereof; AND
      The Core Based Statistical Area, Metropolitan Division or 
Combined Statistical

[[Page 637]]

Area, or the portion thereof, must have a population of 2.5 million or 
less people.
      Compelling Evidence of Interaction or Common Interests--In 
lieu of a statistical area as defined above, this option applies only to 
the addition of an immediately adjacent area falling outside a Single 
Political Jurisdiction, Core Based Statistical Area or Combined 
Statistical Area, and thus may demonstrate a sufficient level of 
interaction to qualify as a local community. For these situations, 
applicants have the option of submitting a narrative to NCUA to address 
how the residents meet the requirements for being a local community. The 
Office of Consumer Financial Protection and Access will issue additional 
guidance to help a credit union develop its written narrative. NCUA will 
base its decision on a consideration of the following factors with 
respect to the proposed service area in its entirety:
    Economic Hub: Evidence indicates residents commonly travel to a 
geographically compact locale within the area for work and major 
commerce needs. Traffic flows, the presence of common or related 
industries, or unified economic planning demonstrate how the locales 
have economic interdependence.
    Population Center: Area has a dominant county or municipality with a 
significant portion of the area's population and evidence exists to 
support the relevance of the population center to all residents within 
the area.
    Isolated Areas: Areas geographically isolated, such as by mountains, 
bodies of water, or other prominent features.
    Quasi-Governmental Agencies: A quasi-governmental agency, such as a 
regional planning commission, predominantly covers the proposed service 
area and derives its leadership from the area to advance meaningful 
objectives advancing the residents' common interests in economic 
development and/or improving quality of life. Success of agency in 
meeting its mission depends upon collaboration from throughout the area.
    Government Designations: A division of a federal or state agency 
specifically designates the proposed service area as its area of 
coverage or as a target area for specific programs.
    Shared Public Services/Facilities: Formal agreements exist that 
provide for a common need shared by all of the residents, such as common 
police or fire protection, or public utilities.
    Colleges and Universities: Evidence exists to demonstrate the common 
relevance of an institution or institutions to the entire area, such as 
unique educational initiatives to support economic objectives benefiting 
all residents and/or partnerships with local businesses or high schools.
    An area of any geographic size qualifies as a Rural District if:
      The proposed district has well-defined, contiguous 
geographic boundaries;
      The total population of the proposed district does not 
exceed 1,000,000.
      Either more than 50% of the proposed district's population 
resides in census blocks or other geographic units that are designated 
as rural by either the Consumer Financial Protection Bureau or the 
United States Census Bureau, OR the district has a population density of 
100 persons or fewer per square mile; and
      The boundaries of the well-defined rural district do not 
exceed the outer boundaries of the states that are immediately 
contiguous to the state in which the credit union maintains its 
headquarters (i.e., not to exceed the outer perimeter of the layer of 
states immediately surrounding the headquarters state).
    The affinity groups that apply to well-defined local communities, 
found in Chapter 2, Section V.G., also apply to Rural Districts.
    The OMB definitions of Core Based Statistical Area and Metropolitan 
Division, as well as that of Combined Statistical Area (found at https:/
/www.whitehouse.gov/omb/bulletins_default) are incorporated herein by 
reference. Access to these definitions is also available through NCUA's 
Web site at http://www.ncua.gov.
    The requirements in Chapter 2, Sections V.A.4 through V.G. also 
apply to a credit union that serves a rural district.

                 V.A.3--Previously Approved Communities

    If NCUA has determined that a specific geographic area is a well-
defined local community, then a new applicant need not reestablish that 
fact as part of its application to serve the exact area. The new 
applicant must, however, note NCUA's previous determination as part of 
its overall application. An applicant applying for an area that is not 
exactly the same as a previously approved well defined local community 
must comply with the current criteria in place for determining a well-
defined local community.

      V.A. Business Plan Requirements for a Community Credit Union

    A community credit union is frequently more susceptible to 
competition from other local financial institutions and generally does 
not have substantial support from any single sponsoring company or 
association. As a result, a community credit union will often encounter 
financial and operational factors that differ from an occupational or 
associational charter. Its diverse membership may require special 
marketing programs targeted to different segments of the community. For 
example, the lack of payroll deduction creates special challenges in the 
development and promotion of savings programs and in the collection of 
loans. Accordingly, to support an application for a community charter, 
an applicant Federal credit

[[Page 638]]

union must develop a business plan incorporating the following data:
      Pro forma financial statements for a minimum of 24 months 
after the proposed conversion, including the underlying assumptions and 
rationale for projected member, share, loan, and asset growth;
      Anticipated financial impact on the credit union, 
including the need for additional employees and fixed assets, and the 
associated costs;
      A description of the current and proposed office/branch 
structure, including a general description of the location(s); parking 
availability, public transportation availability, drive-through service, 
lobby capacity, or any other service feature illustrating community 
access;
      A marketing plan addressing how the community will be 
served for the 24-month period after the proposed conversion to a 
community charter, including detailing: How the credit union will 
implement its business plan; the unique needs of the various demographic 
groups in the proposed community; how the credit union will market to 
each group, particularly underserved groups; which community-based 
organizations the credit union will target in its outreach efforts; the 
credit union's marketing budget projections dedicating greater resources 
to reaching new members; and the credit union's timetable for 
implementation, not just a calendar of events;
      Details, terms and conditions of the credit union's 
financial products, programs, and services to be provided to the entire 
community; and
      Maps showing the current and proposed service facilities, 
ATMs, political boundaries, major roads, and other pertinent 
information.
    An existing Federal credit union may apply to convert to a community 
charter. Groups currently in the credit union's field of membership, but 
outside the new community credit union's boundaries, may not be included 
in the new community charter. Therefore, the credit union must notify 
groups that will be removed from the field of membership as a result of 
the conversion. Members of record can continue to be served.
    Before approval of an application to convert to a community credit 
union, NCUA must be satisfied that the credit union will be viable and 
capable of providing services to its members.
    Community credit unions will be expected to regularly review and to 
follow, to the fullest extent economically possible, the marketing and 
business plans submitted with their applications. Additionally, NCUA 
will follow-up with an FCU every year for three years after the FCU has 
been granted a new or expanded community charter, and at any other 
intervals NCUA believes appropriate, to determine if the FCU is 
satisfying the terms of its marketing and business plans.
    An FCU failing to satisfy those terms will be subject to supervisory 
action. As part of this review process, the regional office or Office of 
National Examinations and Supervision Director will report to the NCUA 
Board instances where an FCU is failing to satisfy the terms of its 
marketing and business plan and indicate what supervisory actions the 
region or ONES intends to take.

                       V.A.5--Community Boundaries

    The geographic boundaries of a community Federal credit union are 
the areas defined in its charter. The boundaries can usually be defined 
using political borders, streets, rivers, railroad tracks, or other 
static geographical feature.
    A community that is a recognized legal entity may be stated in the 
field of membership-- for example, ``Gus Township, Texas,'' ``Isabella 
City, Georgia,'' or ``Fairfax County, Virginia.''
    A community that is an entire United States Census Bureau designated 
Core Based Statistical Area or Combined Statistical Area may be stated 
in the field of membership--for example, ``Fort Wayne, IN Metropolitan 
Statistical Area,'' ``Albany, GA Metropolitan Statistical Area,'' or 
``Syracuse-Auburn, NY Combined Statistical Area.''



                                 Sec. 

                    V.A.6--Special Community Charters

    A community field of membership may include persons who work or 
attend school in a particular industrial park, shopping mall, office 
building or complex, or similar development. The proposed field of 
membership must have clearly defined geographic boundaries.

                V.A. Ample Community Fields of Membership

    A community charter does not have to include all four affinities 
(i.e., live, work, worship, or attend school in a community). Some 
examples of community fields of membership are:
      Persons who live, work, worship, or attend school in, and 
businesses located in the area of Johnson City, Tennessee, bounded by 
Fern Street on the north, Long Street on the east, Fourth Street on the 
south, and Elm Avenue on the west;
      Persons who live or work in Green County, Maine;
      Persons who live, worship, work (or regularly conduct 
business in), or attend school on the University of Dayton campus, in 
Dayton, Ohio;
      Persons who work for businesses located in Clifton Country 
Mall, in Clifton Park, New York;

[[Page 639]]

      Persons who live, work, or worship in the Binghamton, New 
York, Core Based Statistical Area, consisting of Broome and Tioga 
Counties, New York (a qualifying Core Based Statistical Area in its 
entirety);
      Persons who live, work, worship, or attend school in the 
portion of the Oklahoma City, OK Metropolitan Statistical Area that 
includes Canadian and Oklahoma counties, Oklahoma (two contiguous 
counties in a portion of a qualifying Core Based Statistical Area that 
has seven counties in total); or
      Persons who live, work, worship, or attend school in Uinta 
County or Lincoln County, Wyoming, a rural district.
    Some examples of insufficiently defined local communities, 
neighborhoods, or rural districts are:
      Persons who live or work within and businesses located 
within a ten-mile radius of Washington, DC (not a permitted community);
      Persons who live or work in the industrial section of New 
York, New York. (not well- defined nor a permitted community); or
      Persons who live or work in the greater Boston area. (not 
well-defined).
    Some examples of unacceptable local communities, neighborhoods, or 
rural districts are:
      Persons who live or work in the State of California. (not 
a permitted community). Persons who live in the first congressional 
district of Florida. (not a permitted community).

                   V.B--Field of Membership Amendments

    A community credit union may amend its field of membership by adding 
additional affinities or removing exclusionary clauses. This can be 
accomplished with a housekeeping amendment.
    A community credit union also may expand its geographic boundaries. 
Persons who live, work, worship, or attend school within the proposed 
well-defined local community, neighborhood or rural district must have 
common interests and/or interact. The credit union must follow the 
requirements of Section V.A.4 of this chapter.
    A community credit union that is based on a Single Political 
Jurisdiction, a Statistical Area (e.g., Core Based Statistical Area or 
Combined Statistical Area) or a rural district may expand its geographic 
boundaries to add a bordering area, provided the area is well defined 
and the credit union demonstrates that persons who live, work, worship, 
or attend school within the proposed expanded community (i.e., on both 
sides of the boundary separating the existing community and the 
bordering area) have common interests and/or interact. Such a credit 
union applying to expand its geographic boundaries to add a bordering 
area must follow a streamlined version of the business plan requirements 
of Section V.A.4 of this chapter and the expanded community would be 
subject to the corresponding population limit--2.5 million in the case 
of a Single Political Jurisdiction, or a Statistical Area and 1 million 
in the case of a rural district. The streamlined business plan 
requirements for adding a bordering area are:
      Anticipated marginal financial impact on the credit union 
of adding the proposed bordering area, including the need for additional 
employees and fixed assets, and the associated costs;
      A description of the current and, if applicable, proposed 
office/branch structure specific to serving the proposed bordering area;
      A marketing plan addressing how the new community will be 
served for the 24-month period after the proposed expansion of a 
community charter, including detailing how the credit union will address 
the unique needs of any demographic groups in the proposed bordering 
community not presently served by the credit union and how the credit 
union will market to any new groups; and
      Details, terms and conditions of any new financial 
products, programs, and services to be introduced as part of this 
expansion.

        V.C--NCUA Procedures for Amending the Field of Membership

                             V.C.1--General

    All requests for approval to amend a community credit union's 
charter must be submitted to the Office of Consumer Financial Protection 
and Access Director. If a decision cannot be made within a reasonable 
period of time, the Office of Consumer Financial Protection and Access 
Director will notify the credit union.

                         V.C.2--NCUA's Decision

    The financial and operational condition of the requesting credit 
union will be considered in every instance. The economic advisability of 
expanding the field of membership of a credit union with financial or 
operational problems must be carefully considered.
    In most cases, field of membership amendments will only be approved 
for credit unions that are operating satisfactorily. Generally, if a 
federal credit union is having difficulty providing service to its 
current membership, or is experiencing financial or other operational 
problems, it may have more difficulty serving an expanded field of 
membership.
    Occasionally, however, an expanded field of membership may provide 
the basis for reversing current financial problems. In such cases, an 
amendment to expand the field of membership may be granted 
notwithstanding the credit union's financial or operational problems. 
The applicant credit union must clearly establish that the expanded 
field of membership is in the best interest of

[[Page 640]]

the members and will not increase the risk to the NCUSIF.

                          V.C.3--NCUA Approval

    If the requested amendment is approved by NCUA, the credit union 
will be issued an amendment to Section 5 of its charter.

                         V.C.4--NCUA Disapproval

    When NCUA disapproves any application to amend the field of 
membership, in whole or in part, under this chapter, the applicant will 
be informed in writing of the:
      Specific reasons for the action;
      If appropriate, options or suggestions that could be 
considered for gaining approval; and
      Appeal procedures.

  V.C.5--Appeal of Office of Consumer Financial Protection and Access 
                            Director Decision

    If a field of membership expansion request, merger, or spin-off is 
denied by staff, the federal credit union may appeal the decision to the 
NCUA Board. An appeal must be sent to the NCUA Board Secretary within 60 
days of the date of denial and must be clearly identified as such and 
address the specific reason(s) the federal credit union disagrees with 
the denial. A copy of the appeal must be sent to the Office of Consumer 
Financial Protection and Access or, as applicable, the appropriate 
regional office or Office of National Examinations and Supervision 
Director. NCUA central office staff will make an independent review of 
the facts and present the appeal to the NCUA Board with a 
recommendation.
    Before appealing, the credit union may, within 30 days of the 
denial, provide supplemental information to the office rendering the 
initial decision for reconsideration. A reconsideration will contain new 
and material evidence addressing the reasons for the initial denial. The 
office rendering the initial decision will have 30 days from the date of 
the receipt of the request for reconsideration to make a final decision. 
If the request is again denied, the applicant may proceed with the 
appeal process within 60 days of the date of the last denial. A second 
request for reconsideration will be treated as an appeal to the NCUA 
Board.

         V. D--Mergers, Purchase and Assumptions, and Spin-Offs

    There are three additional ways a community federal credit union can 
expand its field of membership:
      By taking in the field of membership of another credit 
union through a merger;
      By taking in the field of membership through a purchase 
and assumption (P&A); or
      By taking a portion of another credit union's field of 
membership through a spin-off.

                              V.D. Mergers

    Generally, the requirements applicable to field of membership 
expansions apply to mergers where the continuing credit union is a 
community federal charter.
    Where both credit unions are community charters, the continuing 
credit union must meet the criteria for expanding the community 
boundaries. A community credit union cannot merge into a single 
occupational/associational, or multiple common bond credit union, except 
in an emergency merger. However, a single occupational or associational, 
or multiple common bond credit union can merge into a community charter 
as long as the merging credit union has a service facility within the 
community boundaries or a majority of the merging credit union's field 
of membership would qualify for membership in the community charter. 
While a community charter may take in an occupational, associational, or 
multiple common bond credit union in a merger, it will remain a 
community charter.
    Groups within the merging credit union's field of membership located 
outside of the community boundaries may not continue to be served. The 
merging credit union must notify groups that will be removed from the 
field of membership as a result of the merger. However, the credit union 
may continue to serve members of record.
    Where a state-chartered credit union is merging into a community 
federal credit union, the continuing federal credit union's field of 
membership will be worded in accordance with NCUA policy. Any subsequent 
field of membership expansions must comply with applicable amendment 
procedures.
    Mergers must be approved by the NCUA regional director or Office of 
National Examinations and Supervision Director where the continuing 
credit union is headquartered, with the concurrence of the regional 
director or Office of National Examinations and Supervision Director of 
the merging credit union, and, as applicable, the state regulators.

                         V.D. Emergency Mergers

    An emergency merger may be approved by NCUA without regard to common 
bond or other legal constraints. An emergency merger involves NCUA's 
direct intervention and approval. The credit union to be merged must 
either be insolvent or in danger of insolvency, as defined in the 
Glossary, and NCUA must determine that:
      An emergency requiring expeditious action exists;
      Other alternatives are not reasonably available; and

[[Page 641]]

      The public interest would best be served by approving the 
merger.
    If not corrected, conditions that could lead to insolvency include, 
but are not limited to:
      Abandonment by management;
      Loss of sponsor;
      Serious and persistent record-keeping problems; or
      Serious and persistent operational concerns.
    In an emergency merger situation, NCUA will take an active role in 
finding a suitable merger partner (continuing credit union). NCUA is 
primarily concerned that the continuing credit union has the financial 
strength and management expertise to absorb the troubled credit union 
without adversely affecting its own financial condition and stability.
    As a stipulated condition to an emergency merger, the field of 
membership of the merging credit union may be transferred intact to the 
continuing federal credit union without regard to any field of 
membership restrictions, including the service facility requirement. 
Under this authority, a federal credit union may take in any dissimilar 
field of membership.
    Even though the merging credit union is a single common bond credit 
union or multiple common bond credit union or community credit union, 
the continuing credit union will remain a community charter. Future 
community expansions will be based on the continuing credit union's 
original community area.
    Emergency mergers involving federally insured credit unions in 
different NCUA regions must be approved by the regional director or 
Office of National Examinations and Supervision Director where the 
continuing credit union is headquartered, with the concurrence of the 
regional director or Office of National Examinations and Supervision 
Director of the merging credit union and, as applicable, the state 
regulators.

                   V.D. Purchase and Assumption (P&A)

    Another alternative for acquiring the field of membership of a 
failing credit union is through a consolidation known as a P&A. 
Generally, the requirements applicable to community expansions found in 
this chapter apply to purchase and assumptions where the purchasing 
credit union is a federal charter.
    A P&A has limited application because, in most instances, the 
failing credit union must be placed into involuntary liquidation. 
However, in the few instances where a P&A may occur, the assuming 
federal credit union, as with emergency mergers, may acquire the entire 
field of membership if the emergency criteria are satisfied.
    In a P&A processed under the emergency criteria, specified loans, 
shares, and certain other designated assets and liabilities may also be 
acquired without regard to field of membership restrictions and without 
changing the character of the continuing federal credit union for 
purposes of future field of membership amendments.
    If the P&A does not meet the emergency criteria, then only members 
of record can be obtained unless they otherwise qualify for membership 
in the community charter.
    P&As involving federally insured credit unions in different NCUA 
regions must be approved by the regional director or Office of National 
Examinations and Supervision Director where the continuing credit union 
is headquartered, with the concurrence of the regional director or 
Office of National Examinations and Supervision Director of the 
purchased and/or assumed credit union and, as applicable, the state 
regulators.

                            V.D.4--Spin-Offs

    A spin-off occurs when, by agreement of the parties, a portion of 
the field of membership, assets, liabilities, shares, and capital of a 
credit union are transferred to a new or existing credit union. A spin-
off is unique in that usually one credit union has a field of membership 
expansion and the other loses a portion of its field of membership.
    All field of membership requirements apply regardless of whether the 
spun-off group goes to a new or existing federal charter.
    The request for approval of a spin-off must be supported with a plan 
that addresses, at a minimum:
      Why the spin-off is being requested;
      What part of the field of membership is to be spun off;
      Whether the field of membership requirements are met;
      Which assets, liabilities, shares, and capital are to be 
transferred;
      The financial impact the spin-off will have on the 
affected credit unions;
      The ability of the acquiring credit union to effectively 
serve the new members;
      The proposed spin-off date; and
      Disclosure to the members of the requirements set forth 
above.
    The spin-off request must also include current financial statements 
from the affected credit unions and the proposed voting ballot.
    For federal credit unions spinning off a portion of the community, 
membership notice and voting requirements and procedures are the same as 
for mergers (see part 708 of the NCUA Rules and Regulations), except 
that only the members directly affected by the spin-off--those whose 
shares are to be transferred--are permitted to vote. Members whose 
shares are not being transferred will not be afforded the opportunity to 
vote. All members of the group to be spun off (whether they voted in 
favor, against, or not at all) will be transferred if the spin-off is 
approved

[[Page 642]]

by the voting membership. Voting requirements for federally insured 
state credit unions are governed by state law.

                              V.E--Overlaps

                             V.E.1--General

    Generally, an overlap exists when a group of persons is eligible for 
membership in two or more credit unions. NCUA will permit community 
credit unions to overlap any other charters without performing an 
overlap analysis.

                        V.E. Exclusionary Clauses

    An exclusionary clause is a limitation precluding the credit union 
from serving the primary members of a portion of a group or community 
otherwise included in its field of membership.
    NCUA no longer grants exclusionary clauses. Those granted prior to 
the adoption of this new Chartering and Field of Membership Manual will 
remain in effect unless the credit unions agree to remove them or one of 
the affected credit unions submits a housekeeping amendment to have it 
removed.

                        V.F--Charter Conversions

    A community federal credit union may convert to a single 
occupational or associational, or multiple common bond credit union. The 
converting credit union must meet all occupational, associational, and 
multiple common bond requirements, as applicable. The converting credit 
union may continue to serve members of record of the prior field of 
membership as of the date of the conversion, and any groups or 
communities obtained in an emergency merger or P&A. A change to the 
credit union's field of membership and designated common bond will be 
necessary.
    A community credit union may convert to serve a new geographical 
area provided the field of membership requirements of V.A.3 of this 
chapter are met. Members of record of the original community can 
continue to be served.

         V.G--Other Persons With a Relationship to the Community

    A number of persons who have a close relationship to the community 
may be included, at the charter applicant's option, in the field of 
membership. These include the following:
      Spouses of persons who died while within the field of 
membership of this credit union;
      Employees of this credit union;
      Volunteers in the community;
      Members of the immediate family or household; and
      Organizations of such persons
    Immediate family is defined as spouse, child, sibling, parent, 
grandparent, or grandchild. This includes stepparents, stepchildren, 
stepsiblings, and adoptive relationships.
    Household is defined as persons living in the same residence 
maintaining a single economic unit.
    Membership eligibility is extended only to individuals who are 
members of an ``immediate family or household'' of a credit union 
member. It is not necessary for the primary member to join the credit 
union in order for the immediate family or household member of the 
primary member to join, provided the immediate family or household 
clause is included in the field of membership. However, it is necessary 
for the immediate family member or household member to first join in 
order for that person's immediate family member or household member to 
join the credit union. A credit union can adopt a more restrictive 
definition of immediate family or household.
    Under the Federal Credit Union Act, once a person becomes a member 
of the credit union, such person may remain a member of the credit union 
until the person chooses to withdraw or is expelled from the membership 
of the credit union. This is commonly referred to as ``once a member, 
always a member.'' The ``once a member, always a member'' provision does 
not prevent a credit union from restricting services to members who are 
no longer within the field of membership.

     Chapter 3--Low-Income Credit Unions and Credit Unions Serving 
                            Underserved Areas

                             I--Introduction

    One of the primary reasons for the creation of federal credit unions 
is to make credit available to people of modest means for provident and 
productive purposes. To help NCUA fulfill this mission, the agency has 
established special operational policies for federal credit unions that 
serve low-income groups and underserved areas. The policies provide a 
greater degree of flexibility that will enhance and invigorate capital 
infusion into low-income groups, low-income communities, and underserved 
areas. These unique policies are necessary to provide credit unions 
serving low-income groups with financial stability and potential for 
controlled growth and to encourage the formation of new charters as well 
as the delivery of credit union services in low-income communities.

                       II--Low-Income Credit Union

                              II.A--Defined

    A credit union serving predominantly low-income members may be 
designated as a low- income credit union. Section 701.34 of NCUA's Rules 
and Regulations defines the term ``low- income members'' as those 
members:

[[Page 643]]

      Who make less than 80 percent of the average for all wage 
earners as established by the Bureau of Labor Statistics; or
      Whose median family income falls at or below 80 percent of 
the median family income for the nation as established by the Census 
Bureau.
    The term ``low-income members'' also includes members who are full-
time or part-time students in a college, university, high school, or 
vocational school.
    To obtain a low-income designation from NCUA, an existing credit 
union must establish that a majority of its members meet the low-income 
definition. An existing community credit union that serves a geographic 
area where a majority of residents meet the annual income standard is 
presumed to be serving predominantly low-income members. A low-income 
designation for a new credit union charter may be based on a majority of 
the potential membership.

                         II.B--Special Programs

    A credit union with a low-income designation has greater flexibility 
in accepting nonmember deposits insured by the NCUSIF, are exempt from 
the aggregate loan limit on business loans, and may offer secondary 
capital accounts to strengthen its capital base. It also may participate 
in special funding programs such as the Community Development Revolving 
Loan Program for Credit Unions (CDRLP) if it is involved in the 
stimulation of economic development and community revitalization 
efforts.
    The CDRLP provides both loans and grants for technical assistance to 
low-income credit unions. The requirements for participation in the 
revolving loan program are in part 705 of the NCUA Rules and 
Regulations. Only operating credit unions are eligible for participation 
in this program.

                     II.C--Low-Income Documentation

    A federal credit union charter applicant or existing credit union 
wishing to receive a low- income designation should forward a separate 
request for the designation to the Office of Consumer Financial 
Protection and Access Director, along with appropriate documentation 
supporting the request.
    For community charter applicants, the supporting material should 
include the median family income or annual wage figures for the 
community to be served. If this information is unavailable, the 
applicant should identify the individual zip codes or census tracts that 
comprise the community and NCUA will assist in obtaining the necessary 
demographic data.
    Similarly, if single occupational or associational or multiple 
common bond charter applicants cannot supply income data on its 
potential members, they should provide the Office of Consumer Financial 
Protection and Access Director with a list which includes the number of 
potential members, sorted by their residential zip codes, and NCUA will 
assist in obtaining the necessary demographic data.
    An existing credit union can perform a loan or membership survey to 
determine if the credit union is primarily serving low-income members.

                      II.D--Third-Party Assistance

    A low-income federal credit union charter applicant may contract 
with a third party to assist in the chartering and low-income 
designation process. If the charter is granted, a low-income credit 
union may contract with a third party to provide necessary management 
services. Such contracts should not exceed the duration of one year 
subject to renewal.

        II.E--Special Rules for Low-Income Federal Credit Unions

    In recognition of the unique efforts needed to help make credit 
union service available to low-income groups, NCUA has adopted special 
rules that pertain to low-income credit union charters, as well as field 
of membership additions for low-income credit unions. These special 
rules provide additional latitude to enable underserved, low-income 
individuals to gain access to credit union service.
    NCUA permits credit union chartering and field of membership 
amendments based on associational groups formed for the sole purpose of 
making credit union service available to low- income persons. The 
association must be defined so that all of its members will meet the 
low- income definition of Section 701.34 of the NCUA Rules and 
Regulations. Any multiple common bond credit union can add low-income 
associations to their fields of membership.
    A low-income designated community federal credit union has 
additional latitude in serving persons who are affiliated with the 
community. In addition to serving members who live, work, worship, or 
attend school in the community, a low-income community federal credit 
union may also serve persons who participate in programs to alleviate 
poverty or distress, or who participate in associations headquartered in 
the community.
    Examples of a low-income designated community and an associational-
based low-income federal credit union are as follows:
      Persons who live in [the target area]; persons who work, 
worship, attend school, or participate in associations headquartered in 
[the target area]; persons participating in programs to alleviate 
poverty or distress which are located in [the target area]; incorporated 
and unincorporated organizations located in [the target area] or 
maintaining a

[[Page 644]]

facility in [the target area]; and organizations of such persons.
      Members of the Canarsie Economic Assistance League, in 
Brooklyn, NY, an association whose members all meet the low-income 
definition of Section 701.34 of the NCUA Rules and Regulations.

                 III--Service to Underserved Communities

                             III.A--General

    A multiple common bond federal credit union may include in its field 
of membership, without regard to location, an ``underserved area'' as 
defined by the Federal Credit Union Act. 12
    U.S.C. 1759(c)(2). The addition of an ``underserved area'' will not 
change the charter type of the multiple common bond federal credit 
union. More than one multiple common-bond federal credit union can serve 
the same ``underserved area,'' provided each credit union is approved as 
provided below.
    By adding an ``underserved area,'' a multiple common bond federal 
credit union does not become eligible to receive the benefits afforded 
to low-income designated credit unions, such as expanded use of 
nonmember deposits and access to the Community Development Revolving 
Loan Program for Credit Unions.

                   III.B--``Underserved Area'' Defined

    The Federal Credit Union Act defines an ``underserved area'' as (1) 
a ``local community, neighborhood, or rural district'' that (2) meets 
the definition of an ``investment area'' under section 103(16) of the 
Community Development Banking and Financial Institutions Act of 1994 
(``CDFI''), 12 U.S.C. 4702(16), and (3) is ``underserved by other 
depository institutions'' based on data of the NCUA Board and the 
federal banking agencies.

                        III.B.1--Local Community

    To be eligible for approval as ``underserved,'' a proposed area must 
be a well-defined local community, neighborhood, or rural district as 
defined in Chapter 2, sections V.A.1. and V.A.2. of this Manual.

                        III.B.2--Investment Area

    To be approved as an ``underserved area,'' the proposed area must 
meet the CDFI definition of an ``investment area.'' Id. Sec. 4702(16). A 
proposed area that, at the time the credit union applies, is designated 
in its entirety as an Empowerment Zone or Enterprise Community (id. 
Sec. 1391) automatically qualifies as an ``investment area''; no further 
criteria of an ``investment area'' must be met. Id. Sec. 4702(16)(B). A 
proposed area that is not designated as such must qualify as an 
``investment area'' under ``the objective criteria of economic 
distress'' developed by the CDFI Fund (``distress criteria'') based on 
current decennial U.S. Census data, and also must have ``significant 
unmet needs'' for loans and financial services that credit unions are 
authorized to offer to their members. Id. Sec. 4702(16)(A).

                   III.B.2. Economic Distress Criteria

    Geographic Unit(s) By Proposed Area's Location. The location of a 
proposed ``underserved area'' either within or outside of a Metropolitan 
Statistical Area corresponding to the most recent completed decennial 
census published by the U.S. Bureau of the Census (``decennial Census'') 
determines the geographic unit(s) that apply to determine whether the 
area meets the distress criteria.
    Within a Metropolitan Statistical Area. For a proposed area located, 
in whole or in part, within a Metropolitan Statistical Area, the 
permissible geographic units (``Metro units'') for implementing the 
economic distress criteria are: (i) A census tract; (ii) a block group; 
and (iii) an American Indian or Alaskan Native area. 12 CFR 
1805.201(b)(3)(ii)(B) (2008). For ease of implementation, it is 
advisable to use a census tract as the proposed area's Metro unit.
    Outside a Metropolitan Statistical Area. For a proposed area that is 
located entirely outside a Metropolitan Statistical Area, the 
permissible units (``Non-Metro units'') for implementing the economic 
distress criteria are: (i) A county or equivalent area; (ii) a minor 
civil division that is a unit of local government; (iii) an incorporated 
place; (iv) a census tract; (v) a block numbering area; (vi) a block 
group; and (vii) an American Indian or Alaskan Native area. Id. For ease 
of implementation, it is advisable to use either a census tract or 
county, as the case may be, as the proposed area's Non-Metro unit.
    Proposed Area Consisting of a Single Metro Unit. A proposed area 
consisting of a single whole Metro unit (e.g., a single census tract 
located within a Metropolitan Statistical Area) must meet one of the 
following distress criteria, as reported by the most recent decennial 
Census:
      Unemployment. The proposed area's unemployment rate is at 
least 1.5 times the national average; or
      Poverty. At least 20 percent (20%) of the proposed area's 
population lives in poverty; or
      Median Family Income. The proposed area's Median Family 
Income (``MFI'') is at or below 80 percent (80%) of either the MFI of 
the corresponding Metropolitan Statistical Area, or of the national MFI 
for Metro Areas, whichever is greater; or
      Other Criterion. Any other economic distress criterion the 
CDFI Fund may adopt in the future.
    Id. Sec. 1805.201(b)(3)(ii)(D)(1), (2)(i) and (3) (2008).

[[Page 645]]

    Proposed Area Consisting of a Single Non-Metro Unit. A proposed area 
consisting of a single whole Non-Metro unit (e.g., a single county 
located outside a Metropolitan Statistical Area) must meet one of the 
following distress criteria, as reported by the most recent decennial 
Census:
      Unemployment. The proposed area's unemployment rate is at 
least 1.5 times the national average; or
      Poverty. At least 20 percent (20%) of the proposed area's 
population lives in poverty; or
      Median Family Income. The proposed area's MFI is at or 
below 80 percent (80%) of either the corresponding state's Non-Metro MFI 
or the national MFI for Non-Metro Areas, whichever is greater; or
      Other Criterion. Any other economic distress criterion the 
CDFI Fund may adopt in the future.
     
    Id. Sec. 1805.201(b)(3)(ii)(D)(1), (2)(ii) and (3) (2008). 
Alternatively, a proposed area consisting of a single Non-Metro county 
(located outside a Metropolitan Statistical Area) may instead meet 
either of the following two criteria, as reported by the decennial 
Census:
      County Population Loss. County's population loss of at 
least 10 percent (10%) between the most recent and the preceding 
decennial Census; or
      County Migration Loss. County's net migration loss of at 
least 5 percent (5%) in the 5- year period preceding the most recent 
decennial Census.
    Id. Sec. 1805.201(b)(3)(ii)(D)(4)-(5) (2008).
    Proposed Area Consisting of Multiple Contiguous Units. When a 
proposed area consists of either multiple contiguous Metro units (e.g., 
a group of adjoining census tracts) or multiple contiguous Non-Metro 
units (e.g., a group of adjoining counties), a population threshold 
applies when implementing the economic distress criteria. At least 85 
percent (85%) of the area's total population must reside within the 
units that are ``distressed,'' i.e., that meet one of the applicable 
economic distress criteria above, as reported by the decennial Census 
(Unemployment, Poverty and MFI for census tracts plus, for counties 
only, Population Loss and Migration Loss); the balance of the area's 
population may reside in the non-``distressed'' tract(s). The population 
threshold is met, and the whole proposed area qualifies as 
``distressed,'' when the ``distressed'' units represent at least 85 
percent of the area's total population.

         III.B.2.b--Proposed Area's ``Significant Unmet Needs''

    A proposed area that is ``distressed'' also must display 
``significant unmet needs'' for loans or for one or more of the 
financial services credit unions are authorized to offer. To meet this 
criterion, the credit union must include within its Business Plan a 
section, one page in length, entitled ``Significant Unmet Needs for 
Credit Union Services'' (``SUN section'') that establishes the existence 
of such unmet needs by identifying the credit and depository needs of 
the community and detailing how the credit union plans to serve those 
needs. The credit union may choose which among the following ``credit 
and depository needs'' to address in the SUN section: loans, share draft 
accounts, savings accounts, check cashing, money orders, certified 
checks, automated teller machines, deposit taking, safe deposit box 
services, and similar services. The existence of each ``credit and 
depository need'' the credit union identifies and plans to serve must be 
supported by objective reasons and/or accompanying documentation derived 
from an identified, authoritative source of the credit union's choice. 
Third-party documentation generally is the most compelling.

          III.B.3--Underserved by Other Depository Institutions

    A proposed area that meets the CDFI definition of an ``investment 
area'' (i.e., is ``distressed'' and has ``significant unmet needs'') 
must also be underserved by other insured depository institutions, 
including credit unions. 12 U.S.C. 1759(c)(2)(A)(ii). This statutory 
criterion is met when the concentration of depository institution 
facilities among the population of the proposed area's non-
``distressed'' tracts--which sets a benchmark level of adequate 
service--is greater than the concentration of facilities among the 
population of all of the proposed area's census tracts combined. This 
establishes the area's concentration of facilities ratio. If there are 
no non- ``distressed'' tracts within a proposed area, a non-
``distressed'' census tract or larger geographic unit (e.g., city or 
county) of the credit union's choice that adjoins the proposed area may 
be used to set the benchmark concentration ratio.
    Without regard to a proposed area's location within or outside a 
Metropolitan Statistical Area, this criterion compares two ratios: the 
ratio of facilities to the population of the non- ``distressed'' tracts 
(the benchmark) versus the same facilities-to-population ratio among all 
the tracts of the proposed area as a whole. If the benchmark ratio is 
greater than the ratio for the whole area, then the area is 
``underserved by other depository institutions,'' and vice versa.
    When, as the result of an initial Concentration of Facilities ratio 
calculation, a proposed area does not qualify as ``underserved by other 
depository institutions,'' NCUA will exclude non- depository banks 
(e.g., trust companies) and non-community credit unions (i.e., those 
institutions unable to serve the general public) from the computation. 
For the purposes of this analysis, a

[[Page 646]]

multiple common bond credit union already serving the area as an 
underserved area is considered able to serve the general public and thus 
would not be excluded. With both of these exclusions, NCUA will 
recalculate the concentration of facilities ratio to determine whether, 
as a result, the proposed area qualifies as ``underserved by other 
depository institutions.''
    As one alternative to the concentration of facilities ratio, a 
proposed area will qualify as ``underserved by other depository 
institutions'' if it is designated an ``underserved county'' by NCUA 
based on data produced by the Consumer Financial Protection Bureau 
(available at: http://www.consumerfinance.gov/guidance/
ruralunderserved). NCUA will make its list of ``underserved counties'' 
available on its Web site.
    As another alternative to the concentration of facilities ratio, a 
proposed area will qualify as ``underserved by other depository 
institutions'' if the credit seeking to serve it, using a metric of its 
own choosing, provided that it is based on NCUA or other Federal banking 
agency data, that establishes to NCUA that the proposed area is 
``underserved by other depository institutions.''



                                 Sec. 

                          III.C--NCUA Approval

    If NCUA approves the request to add an ``underserved area,'' the 
credit union will be issued an amendment to Section 5 of its charter.

    III.D--Approval to Serve an Already Approved ``Underserved Area''

    Once a credit union is initially approved to serve an ``underserved 
area,'' other credit unions that subsequently apply may be approved to 
serve the same area. To be approved, the area must qualify as 
``underserved'' at the time the new applicant applies. An applicant must 
demonstrate that the area continues to be ``distressed'', as provided 
above, only if a new decennial Census has been published since the date 
the area was last approved. In any case, the applicant must demonstrate 
that the area still has ``significant unmet needs'' for loans or credit 
union services (to qualify as an ``investment area''), and remains 
``underserved by other depository institutions'' (to qualify as 
``underserved'').

                          III.E--Business Plan

    A federal credit union that desires to include an underserved 
community in its field of membership must first develop, and submit for 
approval, a business plan specifying how it will serve the community. In 
addition, the business plan must include a SUN section as provided in 
section III.B.2.b. above. The credit union will be expected to regularly 
review the business plan to determine if the community is being 
adequately served. The Office of Consumer Financial Protection and 
Access Director may require periodic service status reports from a 
credit union about the ``underserved area'' to ensure that the needs of 
the community are being met, and must require such reports before NCUA 
allows a multiple common bond federal credit union to add an additional 
``underserved area.''

                         III.F--Service Facility

    Once an ``underserved area'' has been added to a federal credit 
union's field of membership, the credit union must establish within two 
years, and maintain, an office or service facility in the community. A 
service facility is defined as a place where shares are accepted for 
members' accounts, loan applications are accepted and loans are 
disbursed. By definition, a service facility includes a credit union-
owned branch, a shared branch, a mobile branch, or an office operated on 
a regularly scheduled weekly basis or a credit union owned electronic 
facility that meets, at a minimum, the above requirements. This 
definition does not include an ATM or the credit union's Internet Web 
site.

          IV--Appeal Procedures for Denial of Underserved Area

                         IV.A--NCUA Disapproval

    When NCUA disapproves any application to add an ``underserved area'' 
in whole or in part, under this chapter, the applicant will be informed 
in writing of the:
      Specific reasons for the action;
      Options to consider, if appropriate, for gaining approval; 
and
      Appeal procedures.

   IV.B--Appeal of Office of Consumer Financial Protection and Access 
                            Director Decision

    If the Office of Consumer Financial Protection and Access Director 
denies an ``underserved area'' request, the federal credit union may 
appeal the decision to the NCUA Board. An appeal must be sent to the 
NCUA Board Secretary within 60 days of the date of denial. The appeal 
must be clearly identified as such and address the specific reason(s) 
the federal credit union disagrees with the denial. A copy of the appeal 
must be sent to the Office of Consumer Financial Protection and Access. 
NCUA central office staff will make an independent review of the facts 
and present the appeal to the NCUA Board with a recommendation.
    Before appealing, the credit union may, within 30 days of the 
denial, provide supplemental information to the Office of Consumer 
Financial Protection and Access Director for reconsideration. A 
reconsideration

[[Page 647]]

will contain new and material evidence addressing the reasons for the 
initial denial. The Office of Consumer Financial Protection and Access 
Director will have 30 days from the date of the receipt of the request 
for reconsideration to make a final decision. If the request is again 
denied, the applicant may proceed with the appeal process within 60 days 
of the date of the last denial. A second request for reconsideration 
will be treated as an appeal to the NCUA Board.

                     Chapter 4--Charter Conversions

                             I--Introduction

    A charter conversion is a change in the jurisdictional authority 
under which a credit union operates.
    Federal credit unions receive their charters from NCUA and are 
subject to its supervision, examination, and regulation.
    State-chartered credit unions are incorporated in a particular 
state, receiving their charter from the state agency responsible for 
credit unions and subject to the state's regulator. If the state-
chartered credit union's deposits are federally insured, it will also 
fall under NCUA's jurisdiction.
    A federal credit union's power and authority are derived from the 
Federal Credit Union Act and NCUA Rules and Regulations. State-chartered 
credit unions are governed by state law and regulation. Certain federal 
laws and regulations also apply to federally insured state chartered 
credit unions.
    There are two types of charter conversions: federal charter to state 
charter and state charter to federal charter. Common bond and community 
requirements are not an issue from NCUA's standpoint in the case of a 
federal to state charter conversion. The procedures and forms relevant 
to both types of charter conversion are included in appendix 4.

    II--Conversion of a State Credit Union to a Federal Credit Union

                       II.A--General Requirements

    Any state-chartered credit union may apply to convert to a federal 
credit union. In order to do so it must:
      Comply with state law regarding conversion and file proof 
of compliance with NCUA;
      File the required conversion application, proposed federal 
credit union organization certificate, and other documents with NCUA;
      Comply with the requirements of the Federal Credit Union 
Act, e.g., chartering and reserve requirements; and
      Be granted federal share insurance by NCUA.
    Conversions are treated the same as any initial application for a 
federal charter, including an on-site examination by NCUA where 
appropriate. NCUA will also consult with the appropriate state authority 
regarding the credit union's current financial condition, management 
expertise, and past performance. Since the applicant in a conversion is 
an ongoing credit union, the economic advisability of granting a charter 
is more readily determinable than in the case of an initial charter 
applicant.
    A converting state credit union's field of membership must conform 
to NCUA's chartering policy. The field of membership will be phrased in 
accordance with NCUA chartering policy. However, if the converting 
credit union is a multiple group charter and the new federal charter is 
a multiple group, then the new federal charter may retain in its field 
of membership any group that the state credit union was serving at the 
time of conversion. Subsequent changes must conform to NCUA chartering 
policy in effect at that time.
    If the converting credit union is a community charter and the new 
federal charter is community-based, it must meet the community field of 
membership requirements set forth in Chapter 2, Section V of this 
manual. If the state-chartered credit union's community boundary is more 
expansive than the approved federal boundary, only members of record 
outside of the new community boundary may continue to be served.
    The converting credit union, regardless of charter type, may 
continue to serve members of record. The converting credit union may 
retain in its field of membership any group or community added pursuant 
to state emergency provisions.

             II.B--Submission of Conversion Proposal to NCUA

    The following documents must be submitted with the conversion 
proposal:
      Conversion of State Charter to Federal Charter (NCUA 
4000);
      Organization Certificate (NCUA 4008). Only Part (3) and 
the signature/notary section should be completed and, where applicable, 
signed by the credit union officials.
      Report of Officials and Agreement to Serve (NCUA 4012);
      The Application to Convert From State Credit Union to 
Federal Credit Union (NCUA 4401);
      The Application and Agreements for Insurance of Accounts 
(NCUA 9500);
      Certification of Resolution (NCUA 9501);
      Written evidence regarding whether the state regulator is 
in agreement with the conversion proposal; and
      Business plan, as appropriate, including the most current 
financial report and delinquent loan schedule.
    If the state charter is applying to become a federal community 
charter, it must also comply with the documentation requirements 
included in Chapter 2, Section V.A.2 of this manual.

[[Page 648]]

           II.C--NCUA Consideration of Application To Convert

II.C.1--Review by the Office of Consumer Financial Protection and Access 
                                Director

    The application will be reviewed to determine that it is complete 
and that the proposal is in compliance with Section 125 of the Federal 
Credit Union Act. This review will include a determination that the 
state credit union's field of membership is in compliance with NCUA's 
chartering policies. The Office of Consumer Financial Protection and 
Access Director may make further investigation into the proposal and may 
require the submission of additional information to support the request 
to convert.

                         II.C.2--On-Site Review

    NCUA may conduct an on-site examination of the books and records of 
the credit union. Non-federally insured credit unions will be assessed 
an insurance application fee.

  II.C.3--Approval by the Office of Consumer Financial Protection and 
             Access Director and Conditions to the Approval

    The conversion will be approved by the Office of Consumer Financial 
Protection and Access Director if it is in compliance with Section 125 
of the Federal Credit Union Act and meets the criteria for federal 
insurance. Where applicable, the Office of Consumer Financial Protection 
and Access Director will specify any special conditions that the credit 
union must meet in order to convert to a federal charter, including 
changes to the credit union's field of membership in order to conform to 
NCUA's chartering policies. Some of these conditions may be set forth in 
a Letter of Understanding and Agreement (LUA), which requires the 
signature of the officials and the appropriate NCUA regional director or 
Office of National Examinations and Supervision Director.

                          II.C.4--Notification

    The Office of Consumer Financial Protection and Access Director will 
notify both the credit union and the state regulator of the decision on 
the conversion.

                        II.C.5--NCUA Disapproval

    When NCUA disapproves any application to convert to a federal 
charter, the applicant will be informed in writing of the:
      Specific reasons for the action;
      Options to consider, if appropriate, for gaining approval; 
and
      Appeal procedures.

  II.C.6--Appeal of Office of Consumer Financial Protection and Access 
                            Director Decision

    If a conversion to a federal charter is denied by the Office of 
Consumer Financial Protection and Access Director, the applicant credit 
union may appeal the decision to the NCUA Board. An appeal must be sent 
to the NCUA Board Secretary within 60 days of the date of denial. The 
appeal must be clearly identified as such and address the specific 
reason(s) the credit union disagrees with the denial. A copy of the 
appeal must be sent to the Office of Consumer Financial Protection and 
Access. NCUA central office staff will make an independent review of the 
facts and present the appeal to the NCUA Board with a recommendation.
    Before appealing, the credit union may, within 30 days of the 
denial, provide supplemental information to the Office of Consumer 
Financial Protection and Access Director for reconsideration. The 
request will not be considered as an appeal, but a request for 
reconsideration by the Office of Consumer Financial Protection and 
Access Director. The Office of Consumer Financial Protection and Access 
Director will have 30 business days from the date of the receipt of the 
request for reconsideration to make a final decision. If the application 
is again denied, the credit union may proceed with the appeal process to 
the NCUA Board within 60 days of the date of the last denial by the 
Office of Consumer Financial Protection and Access Director.

                   II.D--Action by Board of Directors

                             II.D.1--General

    Upon being informed of the Office of Consumer Financial Protection 
and Access Director's preliminary approval, the board must:
      Comply with all requirements of the state regulator that 
will enable the credit union to convert to a federal charter and cease 
being a state credit union;
      Obtain a letter or official statement from the state 
regulator certifying that the credit union has met all of the state 
requirements and will cease to be a state credit union upon its 
receiving a federal charter. A copy of this document must be submitted 
to the Office of Consumer Financial Protection and Access Director;
      Obtain a letter from the private share insurer (includes 
excess share insurers), if applicable, certifying that the credit union 
has met all withdrawal requirements. A copy of this document must be 
submitted to the Office of Consumer Financial Protection and Access 
Director; and
      Submit a statement of the action taken to comply with any 
conditions imposed by the Office of Consumer Financial Protection

[[Page 649]]

and Access Director in the preliminary approval of the conversion 
proposal and, if applicable, submit the signed LUA.

                 II.D.Application for a Federal Charter

    When the Office of Consumer Financial Protection and Access Director 
has received evidence that the board of directors has satisfactorily 
completed the actions described above, the federal charter and new 
Certificate of Insurance will be issued.
    The credit union may then complete the conversion as discussed in 
the following section. A denial of a conversion application can be 
appealed. Refer to Section II.C.6 of this chapter.

                   II.E--Completion of the Conversion

                   II.E.--Effective Date of Conversion

    The date on which the Office of Consumer Financial Protection and 
Access Director approves the Organization Certificate and the 
Application and Agreements for Insurance of Accounts is the date on 
which the credit union becomes a federal credit union. The Office of 
Consumer Financial Protection and Access Director will notify the credit 
union and the state regulator of the date of the conversion.

              II.E.2--Assumption of Assets and Liabilities

    As of the effective date of the conversion, the federal credit union 
will be the owner of all of the assets and will be responsible for all 
of the liabilities and share accounts of the state credit union.

                   II.E.3--Board of Directors' Meeting

    Upon receipt of its federal charter, the board will hold its first 
meeting as a federal credit union. At this meeting, the board will 
transact such business as is necessary to complete the conversion as 
approved and to operate the credit union in accordance with the 
requirements of the Federal Credit Union Act and NCUA Rules and 
Regulations.
    As of the commencement of operations, the accounting system, 
records, and forms must conform to the standards established by NCUA.

                       II.E.4--Credit Union's Name

    Changing of the credit union's name on all signage, records, 
accounts, investments, and other documents should be accomplished as 
soon as possible after conversion. The credit union has 180 days from 
the effective date of the conversion to change its signage and 
promotional material. This requires the credit union to discontinue 
using any remaining stock of ``state credit union'' stationery 
immediately, and discontinue using credit cards, ATM cards, etc., within 
180 days after the effective date of the conversion, or the reissue date 
whichever is later. The Office of Consumer Financial Protection and 
Access Director has the discretion to extend the timeframe for an 
additional 180 days. Member share drafts with the state-chartered name 
can be used by the members until depleted.

                          II.E.Reports to NCUA

    Within 10 business days after commencement of operations, the 
recently converted federal credit union must submit to the Office of 
Consumer Financial Protection and Access Director the following:
      Report of Officials (NCUA 4501); and
      Financial and Statistical Reports, as of the commencement 
of business of the federal credit union.

    III--Conversion of a Federal Credit Union to a State Credit Union

                       III.A--General Requirements

    Any federal credit union may apply to convert to a state credit 
union. In order to do so, it must:
      Notify NCUA prior to commencing the process to convert to 
a state charter and state the reason(s) for the conversion;
      Comply with the requirements of Section 125 of the Federal 
Credit Union Act that enable it to convert to a state credit union and 
to cease being a federal credit union; and
      Comply with applicable state law and the requirements of 
the state regulator.
    It is important that the credit union provide an accurate disclosure 
of the reasons for the conversion. These reasons should be stated in 
specific terms, not as generalities. The federal credit union converting 
to a state charter remains responsible for the entire operating fee for 
the year in which it converts.

       III.B--Special Provisions Regarding Federal Share Insurance

    If the federal credit union intends to continue federal share 
insurance after the conversion to a state credit union, it must submit 
an Application for Insurance of Accounts (NCUA 9600) to the Office of 
Consumer Financial Protection and Access Director at the time it 
requests approval of the conversion proposal. The Office of Consumer 
Financial Protection and Access Director has the authority to approve or 
disapprove the application.
    If the converting federal credit union does not intend to continue 
federal share insurance or if its application for continued insurance is 
denied, insurance will cease in accordance with the provisions of 
Section 206 of the Federal Credit Union Act.

[[Page 650]]

    If, upon its conversion to a state credit union, the federal credit 
union will be terminating its federal share insurance or converting from 
federal to non-federal share insurance, it must comply with the 
membership notice and voting procedures set forth in Section 206 of the 
Federal Credit Union Act and part 708 of NCUA's Rules and Regulations, 
and address the criteria set forth in Section 205(c) of the Federal 
Credit Union Act.
    Where the state credit union will be non-federally insured, federal 
insurance ceases on the effective date of the charter conversion. If it 
will be otherwise uninsured, then federal insurance will cease one year 
after the date of conversion subject to the restrictions in Section 
206(d)(1) of the Federal Credit Union Act. In either case, the state 
credit union will be entitled to a refund of the federal credit union's 
NCUSIF capitalization deposit after the final date on which any of its 
shares are federally insured.
    The NCUA Board reserves the right to delay the refund of the 
capitalization deposit for up to one year if it determines that payment 
would jeopardize the NCUSIF.

            III.C--Submission of Conversion Proposal to NCUA

    Upon approval of a proposition for conversion by a majority vote of 
the board of directors at a meeting held in accordance with the federal 
credit union's bylaws, the conversion proposal will be submitted to the 
Office of Consumer Financial Protection and Access Director and will 
include:
      A current financial report;
      A current delinquent loan schedule;
      An explanation and appropriate documents relative to any 
changes in insurance of member accounts;
      A resolution of the board of directors;
      A proposed Notice of Special Meeting of the Members (NCUA 
4221);
      A copy of the ballot to be sent to all members (NCUA 
4506);
      If the credit union intends to continue with federal share 
insurance, an application for insurance of accounts (NCUA 9600);
      Evidence that the state regulator is in agreement with the 
conversion proposal; and
      A statement of reasons supporting the request to convert.

                 III.D--Approval of Proposal to Convert

   III.D.1--Review by the Office of Consumer Financial Protection and 
                             Access Director

    The proposal will be reviewed to determine that it is complete and 
is in compliance with Section 125 of the Federal Credit Union Act. The 
Office of Consumer Financial Protection and Access Director may make 
further investigation into the proposal and require the submission of 
additional information to support the request.

                   III.D.2--Conditions to the Approval

    The Office of Consumer Financial Protection and Access Director will 
specify any special conditions that the credit union must meet in order 
to proceed with the conversion.

  III.D.3--Approval by the Office of Consumer Financial Protection and 
                             Access Director

    The proposal will be approved by the Office of Consumer Financial 
Protection and Access Director if it is in compliance with Section 125 
and, in the case where the state credit union will no longer be 
federally insured, the notice and voting requirements of Section 206 of 
the Federal Credit Union Act.

                          III.D.4--Notification

    The Office of Consumer Financial Protection and Access Director will 
notify both the credit union and the state regulator of the decision on 
the proposal.

                          III.D.UA Disapproval

    When NCUA disapproves any application to convert to a state charter, 
the applicant will be informed in writing of the:
      Specific reasons for the action;
      If appropriate, options or suggestions that could be 
considered for gaining approval; and
      Appeal procedures.

 III.D.6--Appeal of Office of Consumer Financial Protection and Access 
                            Director Decision

    If the Office of Consumer Financial Protection and Access Director 
denies a conversion to a state charter, the federal credit union may 
appeal the decision to the NCUA Board. An appeal must be sent to the 
NCUA Board Secretary within 60 days of the date of denial. The appeal 
must be clearly identified as such and address the specific reason(s) 
the federal credit union disagrees with the denial. A copy of the appeal 
must be sent to the Office of Consumer Financial Protection and Access. 
NCUA central office staff will make an independent review of the facts 
and present the appeal to the NCUA Board with a recommendation.
    Before appealing, the credit union may, within 30 days of the 
denial, provide supplemental information to the Office of Consumer 
Financial Protection and Access Director for reconsideration. The 
request will not be considered as an appeal, but a request for 
reconsideration by the Office of Consumer Financial Protection and 
Access Director. The Office of Consumer Financial Protection and Access 
Director will have 30 business days from the date of the receipt of the 
request for reconsideration to make a final decision. If the application 
is again denied, the credit union may proceed with the

[[Page 651]]

appeal process to the NCUA Board within 60 days of the date of the last 
denial by the Office of Consumer Financial Protection and Access 
Director.

                 III.E--Approval of Proposal by Members

    The members may not vote on the proposal until it is approved by the 
Office of Consumer Financial Protection and Access Director. Once 
approval of the proposal is received, the following actions will be 
taken by the board of directors:
      The proposal must be submitted to the members for approval 
and a date set for a meeting to vote on the proposal. The proposal may 
be acted on at the annual meeting or at a special meeting for that 
purpose. The members must also be given the opportunity to vote by 
written ballot to be filed by the date set for the meeting.
      Members must be given advance notice (NCUA 4221) of the 
meeting at which the proposal is to be submitted. The notice must:
      Specify the purpose, time and place of the meeting;
      Include a brief, complete, and accurate statement of the 
reasons for and against the proposed conversion, including any effects 
it could have upon share holdings, insurance of member accounts, and the 
policies and practices of the credit union;
      Specify the costs of the conversion, i.e., changing the 
credit union's name, examination and operating fees, attorney and 
consulting fees, tax liability, etc.;
      Inform the members that they have the right to vote on the 
proposal at the meeting, or by written ballot to be filed not later than 
the date and time announced for the annual meeting, or at the special 
meeting called for that purpose;
      Be accompanied by a Federal to State Conversion--Ballot 
for Conversion Proposal (NCUA 4506); and
      State in bold face type that the issue will be decided by 
a majority of members who vote.
      The proposed conversion must be approved by a majority of 
all of the members who vote on the proposal, a quorum being present, in 
order for the credit union to proceed further with the proposition, 
provided federal insurance is maintained. If the proposed state-
chartered credit union will not be federally insured, 20 percent of the 
total membership must participate in the voting, and of those, a 
majority must vote in favor of the proposal. Ballots cast by members who 
did not attend the meeting but who submitted their ballots in accordance 
with instructions above will be counted with votes cast at the meeting. 
In order to have a suitable record of the vote, the voting at the 
meeting should be by written ballot as well.
      The board of directors shall, within 10 days, certify the 
results of the membership vote to the Office of Consumer Financial 
Protection and Access Director. The statement shall be verified by 
affidavits of the Chief Executive Officer and the Recording Officer on 
NCUA 4505.

                    III.F--Compliance With State Laws

    If the proposal for conversion is approved by a majority of all 
members who voted, the board of directors will:
      Ensure that all requirements of state law and the state 
regulator have been accommodated;
      Ensure that the state charter or the license has been 
received within 90 days from the date the members approved the proposal 
to convert; and
      Ensure that the Office of Consumer Financial Protection 
and Access Director is kept informed as to progress toward conversion 
and of any material delay or of substantial difficulties which may be 
encountered.
    If the conversion cannot be completed within the 90-day period, the 
Office of Consumer Financial Protection and Access Director should be 
informed of the reasons for the delay. The Office of Consumer Financial 
Protection and Access Director may set a new date for the conversion to 
be completed.

                     III.G--Completion of Conversion

    In order for the conversion to be completed, the following steps are 
necessary:
      The board of directors will submit a copy of the state 
charter to the Office of Consumer Financial Protection and Access 
Director within 10 days of its receipt. This will be accompanied by the 
federal charter and the federal insurance certificate. A copy of the 
financial reports as of the preceding month-end should be submitted at 
this time.
      The Office of Consumer Financial Protection and Access 
Director will notify the credit union and the state regulator in writing 
of the receipt of evidence that the credit union has been authorized to 
operate as a state credit union.
      The credit union shall cease to be a federal credit union 
as of the effective date of the state charter.
      If the Office of Consumer Financial Protection and Access 
Director finds a material deviation from the provisions that would 
invalidate any steps taken in the conversion, the credit union and the 
state regulator shall be promptly notified in writing. This notice may 
be either before or after the copy of the state charter is filed with 
the Office of Consumer Financial Protection and Access Director. The 
notice will inform the credit union as to the nature of the adverse 
findings. The conversion will not be effective and completed until the 
improper actions and steps have been corrected.
      Upon ceasing to be a federal credit union, the credit 
union shall no longer be subject to any of the provisions of the Federal 
Credit

[[Page 652]]

Union Act, except as may apply if federal share insurance coverage is 
continued. The successor state credit union shall be immediately vested 
with all of the assets and shall continue to be responsible for all of 
the obligations of the federal credit union to the same extent as though 
the conversion had not taken place. Operation of the credit union from 
this point will be in accordance with the requirements of state law and 
the state regulator.
      If the Office of Consumer Financial Protection and Access 
Director is satisfied that the conversion has been accomplished in 
accordance with the approved proposal, the federal charter will be 
canceled.
      There is no federal requirement for closing the records of 
the federal credit union at the time of conversion or for the manner in 
which the records shall be maintained thereafter. The converting credit 
union is advised to contact the state regulator for applicable state 
requirements.
      The credit union shall neither use the words ``Federal 
Credit Union'' in its name nor represent itself in any manner as being a 
federal credit union.
      Changing of the credit union's name on all signage, 
records, accounts, investments, and other documents should be 
accomplished as soon as possible after conversion. Unless it violates 
state law, the credit union has 180 days from the effective date of the 
conversion to change its signage and promotional material. This requires 
the credit union to discontinue using any remaining stock of ``federal 
credit union'' stationery immediately, and discontinue using credit 
cards, ATM cards, etc., within 180 days after the effective date of the 
conversion, or the reissue date, whichever is later. The Office of 
Consumer Financial Protection and Access Director has the discretion to 
extend the timeframe for an additional 180 days. Member share drafts 
with the federal chartered name can be used by the members until 
depleted. If the state credit union is not federally insured, it must 
change its name and must immediately cease using any credit union 
documents referencing federal insurance.
      If the state credit union is to be federally insured, the 
Office of Consumer Financial Protection and Access Director will issue a 
new insurance certificate.



                                 Sec. 

                           APPENDIX 1 GLOSSARY

    These definitions apply only for use with this Manual. Definitions 
are not intended to be all inclusive or comprehensive. This Manual, the 
Federal Credit Union Act, and NCUA Rules and Regulations, as well as 
state laws, may be used for further reference.
    Adequately capitalized--A credit union is considered ``adequately 
capitalized'' when it meets the ``adequately capitalized'' definition in 
Part 702 of NCUA's Rules and Regulations. A multiple common bond credit 
union must be ``adequately capitalized'' in order to add new groups to 
its charter. The Office of Consumer Financial Protection and Access 
director, with input from the appropriate regional director or Office of 
National Examinations and Supervision Director, may determine that a 
less than ``adequately capitalized'' credit union can qualify for an 
expansion if it is making reasonable progress toward becoming 
``adequately capitalized,'' and the addition of the group would not 
adversely affect the credit union's capitalization level.
    Affinity--A relationship upon which a community charter is based. 
Acceptable affinities include living, working, worshiping, or attending 
school in a community.
    Appeal--The right of a credit union or charter applicant to request 
a formal review of the Office of Consumer Financial Protection and 
Access, regional director's or Office of National Examinations and 
Supervision Director's adverse decision by the National Credit Union 
Administration Board.
    Associational common bond--A common bond comprised of members and 
employees of a recognized association. It includes individuals (natural 
persons) and/or groups (non-natural persons) whose members participate 
in activities developing common loyalties, mutual benefits, and mutual 
interests.
    Business plan--Plan submitted by a charter applicant or existing 
federal credit union addressing the economic advisability of a proposed 
charter or field of membership addition.
    Charter--The document which authorizes a group to operate as a 
credit union and defines the fundamental limits of its operating 
authority, generally including the persons the credit union is permitted 
to accept for membership. Charters are issued by the National Credit 
Union Administration for federal credit unions and by the designated 
state chartering authority for credit unions organized under the laws of 
that state.
    Common bond--The characteristic or combination of characteristics 
which distinguishes a particular group of persons from the general 
public. There are two common bonds which can serve as a basis for a 
group forming a federal credit union or being included in an existing 
federal credit union's field of membership: Occupational--employment by 
the same company, related companies or in a trade, industry, or 
profession (TIP); and associational--membership in the same association.
    Community credit union--A credit union whose field of membership 
consists of persons who live, work, worship, or attend school in the 
same well-defined local community, neighborhood, or rural district.
    Credit union--A member-owned, not-for-profit cooperative financial 
institution

[[Page 653]]

formed to permit those in the field of membership specified in the 
charter to save, borrow, and obtain related financial services.
    Economic advisability--An overall evaluation of the credit union's 
or charter applicant's ability to operate successfully.
    Emergency merger--Pursuant to Section 205(h) of the Federal Credit 
Union Act, authority of NCUA to merge two credit unions without regard 
to common bond policy.
    Exclusionary clause--A limitation, written in a credit union's 
charter, which precludes the credit union from serving a portion of a 
group which otherwise could be included in its field of membership.
    Federal share insurance--Insurance coverage provided by the National 
Credit Union Share Insurance Fund and administered by the National 
Credit Union Administration. Coverage is provided for qualified accounts 
in all federal credit unions and participating state credit unions.
    Field of membership--The persons (including organizations and other 
legal entities) a credit union is permitted to accept for membership.
    Household--Persons living in the same residence maintaining a single 
economic unit.
    Housekeeping Amendment--A field of membership amendment to delete 
groups, change group names, change group locations, remove exclusionary 
clauses, and to add other persons eligible for credit union membership 
by virtue of their close relationship to a common bond group or the 
community for community charters.
    Immediate family member--A spouse, child, sibling, parent, 
grandparent, or grandchild. This includes stepparents, stepchildren, 
stepsiblings, and adoptive relationships.
    In danger of insolvency--In making the determination that a 
particular credit union is in danger of insolvency, NCUA will establish 
that the credit union falls into one or more of the following 
categories:
    1. The credit union's net worth is declining at a rate that will 
render it insolvent within 24 months. In projecting future net worth, 
NCUA may rely on data in addition to Call Report data. The trend must be 
supported by at least 12 months of historic data.
    2. The credit union's net worth is declining at a rate that will 
take it under two percent (2%) net worth within 12 months. In projecting 
future net worth, NCUA may rely on data in addition to Call Report data. 
The trend must be supported by at least 12 months of historic data.
    3. The credit union's net worth, as self-reported on its Call 
Report, is significantly undercapitalized, and NCUA determines that 
there is no reasonable prospect of the credit union becoming adequately 
capitalized in the succeeding 36 months. In making its determination on 
the prospect of achieving adequate capitalization, NCUA will assume 
that, if adverse economic conditions are affecting the value of the 
credit union's assets and liabilities, including property values and 
loan delinquencies related to unemployment, these adverse conditions 
will not further deteriorate.
    Letter of Understanding and Agreement--Agreement between NCUA and 
federal credit union officials not to engage in certain activities and/
or to establish reasonable operational goals. These are normally entered 
into with new charter applicants for a limited time.
    Mentor--An individual who provides guidance and assistance to newly 
chartered, small, or low-income credit unions. All new federal credit 
unions are encouraged to establish a mentor relationship with a trained, 
experienced credit union individual or an existing credit union.
    Metropolitan Statistical Area--The Office of Management and Budget 
defines a metropolitan statistical area as an urbanized area that has at 
least one urbanized area in excess of 50,000 and ``comprises the central 
county or counties containing the core, plus adjacent outlying counties 
having a high degree of social and economic integration with the central 
county as measured through commuting.''
    Merger--Absorption by one credit union of all of the assets, 
liabilities and equity of another credit union. Mergers must be approved 
by the National Credit Union Administration and by the appropriate state 
regulator whenever a state credit union is involved.
    Multiple common bond credit union--A credit union whose field of 
membership consists of more than one group, each of which has a common 
bond of occupation or association.
    Occupational common bond--Employment by the same entity or related 
entities or a Trade, Industry, or Profession.
    Once a member, always a member--A provision of the Federal Credit 
Union Act which permits an individual to remain a member of the credit 
union until he or she chooses to withdraw or is expelled from the 
membership of the credit union. Under this provision, leaving a group 
that is named in the credit union's charter does not terminate an 
individual's membership in the credit union.
    Organizations of such persons--An organization or organizations 
composed exclusively of persons who are within the field of membership 
of the credit union.
    Overlap--The situation which results when a group is eligible for 
membership in more than one credit union.
    Primary potential members--Members or employees who belong to an 
associational or occupational group.
    Purchase and assumption--Purchase of all or part of the assets of 
and assumption of all or part of the liabilities of one credit union by 
another credit union. The purchased and

[[Page 654]]

assumed credit union must first be placed into involuntary liquidation.
    Service area--The area that can reasonably be served by the service 
facilities accessible to the groups within the field of membership.
    Service facility--A place where shares are accepted for members' 
accounts, loan applications are accepted or loans are disbursed. This 
definition includes a credit union owned branch, a mobile branch, an 
office operated on a regularly scheduled weekly basis, a credit union 
owned ATM, a video teller machine or a credit union owned electronic 
facility that meets, at a minimum, these requirements. A service 
facility also includes a shared branch or a shared branch network if 
either: (1) the credit union has an ownership interest in the service 
facility either directly or through a CUSO or similar organization; or 
(2) the service facility is local to the credit union and the credit 
union is an authorized participant in the service center. This 
definition does not include the credit union's Internet Web site. A 
service facility does not include an ATM or interest in a shared branch 
network for purposes of serving an underserved area.
    Single associational common bond credit union--A credit union whose 
field of membership includes members and employees of a recognized 
association.
    Single common bond credit union--A credit union whose field of 
membership consists of one group which has a common bond of occupation 
or association.
    Single occupational common bond credit union--A credit union whose 
field of membership consists of employees of the same entity or related 
entities or part of a Trade, Industry, or Profession (TIP).
    Spin-off--The transfer of a portion of the field of membership, 
assets, liabilities, shares, and capital of one credit union to a new or 
existing credit union.
    Subscribers--For a federal credit union, at least seven individuals 
who sign the charter application and pledge at least one share.
    Trade, Industry, or Profession (TIP)--A single occupational common 
bond credit union based on employment in a trade, industry, or 
profession including employment at any number of corporations or other 
legal entities that while not under common ownership--have a common bond 
by virtue of producing similar products, providing similar services, or 
participating in the same type of business.
    Underserved community--A local community, neighborhood, or rural 
district that is an ``investment area'' as defined in Section 103(16) of 
the Community Development Banking and Financial Institutions Act of 
1994. The area must also be underserved based on other NCUA and federal 
banking agency data.
    Unsafe or unsound practice--Any action, or lack of action, which 
would result in an abnormal risk or loss to the credit union, its 
members, or the National Credit Union Share Insurance Fund.



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PART 702_CAPITAL ADEQUACY--Table of Contents



Sec.
702.1  Authority, purpose, scope and other supervisory authority.
702.2  Definitions.

                   Subpart A_Net Worth Classification

702.101  Measure and effective date of net worth classification.
702.102  Statutory net worth categories.
702.103  Applicability of risk-based net worth requirement.
702.104  Risk portfolios defined.
702.105  Weighted-average life of investments.
702.106  Standard calculation of risk-based net worth requirement.
702.107  Alternative components for standard calculation.
702.108  Risk mitigation credit.

Appendixes A-H to Subpart A of Part 702

        Subpart B_Mandatory and Discretionary Supervisory Actions

702.201  Prompt corrective action for ``adequately capitalized'' credit 
          unions.
702.202  Prompt corrective action for ``undercapitalized'' credit 
          unions.
702.203  Prompt corrective action for ``significantly undercapitalized'' 
          credit unions.
702.204  Prompt corrective action for ``critically undercapitalized'' 
          credit unions.
702.205  Consultation with State officials on proposed prompt corrective 
          action.
702.206  Net worth restoration plans.

  Subpart C_Alternative Prompt Corrective Action for New Credit Unions

702.301  Scope and definition.
702.302  Net worth categories for new credit unions.
702.303  Prompt corrective action for ``adequately capitalized'' new 
          credit unions.
702.304  Prompt corrective action for ``moderately capitalized,'' 
          ``marginally capitalized'' and ``minimally capitalized'' new 
          credit unions.
702.305  Prompt corrective action for ``uncapitalized'' new credit 
          unions.
702.306  Revised business plans for new credit unions.
702.307  Incentives for new credit unions.

                           Subpart D_Reserves

702.401  Reserves.
702.402  Full and fair disclosure of financial condition.
702.403  Payment of dividends.

              Subpart E_Capital Planning and Stress Testing

702.501  Authority, purpose, and reservation of authority.
702.502  Definitions.
702.503  Capital policy.
702.504  Capital planning.
702.505  NCUA action on capital plans.
702.506  Annual supervisory stress testing.

Appendix A to Part 702--Gross-Up Approach, and Look-Through Approaches

    Authority: 12 U.S.C. 1766(a), 1790d.

    Source: 65 FR 8584, Feb. 18, 2000, unless otherwise noted.



Sec. 702.1  Authority, purpose, scope and other supervisory authority.

    (a) Authority. Subparts A, B and C of this part and subpart L of 
part 747 of this chapter are issued by the National Credit Union 
Administration pursuant to section 216 of the Federal Credit Union Act 
(FCUA), 12 U.S.C. 1790d (section 1790d), as added by section 301 of the 
Credit Union Membership Access Act, Pub. L. No. 105-219, 112 Stat. 913 
(1998). Subpart D of this part is issued pursuant to FCUA section 120, 
12 U.S.C. 1766.
    (b) Purpose. The express purpose of prompt corrective action under 
section 1790d is to resolve the problems of federally-insured credit 
unions at the least possible long-term loss to the National Credit Union 
Share Insurance Fund. This part carries out the purpose of prompt 
corrective action by establishing a framework of mandatory and 
discretionary supervisory actions, applicable according to a credit 
union's net worth ratio, designed primarily to restore and improve the 
net worth of federally-insured credit unions.
    (c) Scope. This part implements the provisions of section 1790d as 
they apply to federally-insured credit unions, whether federally- or 
state-chartered; to such credit unions defined as ``new'' pursuant to 
section 1790d(b)(2); and to such credit unions defined as ``complex'' 
pursuant to section 1790d(d). Certain of these provisions also apply to 
officers and directors of federally-insured credit unions. This part 
does not apply to corporate credit unions. Procedures for issuing, 
reviewing and enforcing orders and directives issued under this part are 
set

[[Page 729]]

forth in subpart L of part 747 of this chapter, 12 CFR 747.2001 et seq.
    (d) Other supervisory authority. Neither Sec. 1790d nor this part in 
any way limits the authority of the NCUA Board or appropriate State 
official under any other provision of law to take additional supervisory 
actions to address unsafe or unsound practices or conditions, or 
violations of applicable law or regulations. Action taken under this 
part may be taken independently of, in conjunction with, or in addition 
to any other enforcement action available to the NCUA Board or 
appropriate State official, including issuance of cease and desist 
orders, orders of prohibition, suspension and removal, or assessment of 
civil money penalties, or any other actions authorized by law.

    Effective Date Note: At 80 FR 66706, Oct. 29, 2015, Sec. 702.1 was 
revised, effective Jan. 1, 2019. For the convenience of the user, the 
revised text is set forth as follows:



Sec. 702.1  Authority, purpose, scope, and other supervisory authority.

    (a) Authority. Subparts A and B of this part and subpart L of part 
747 of this chapter are issued by the National Credit Union 
Administration (NCUA) pursuant to sections 120 and 216 of the Federal 
Credit Union Act (FCUA), 12 U.S.C. 1776 and 1790d (section 1790d), as 
revised by section 301 of the Credit Union Membership Access Act, Public 
Law 105-219, 112 Stat. 913 (1998).
    (b) Purpose. The express purpose of prompt corrective action under 
section 1790d is to resolve the problems of federally insured credit 
unions at the least possible long-term loss to the National Credit Union 
Share Insurance Fund. Subparts A and B of this part carry out the 
purpose of prompt corrective action by establishing a framework of 
minimum capital requirements, and mandatory and discretionary 
supervisory actions applicable according to a credit union's capital 
classification, designed primarily to restore and improve the capital 
adequacy of federally insured credit unions.
    (c) Scope. Subparts A and B of this part implement the provisions of 
section 1790d as they apply to federally insured credit unions, whether 
federally- or state-chartered; to such credit unions defined as ``new'' 
pursuant to section 1790d(b)(2); and to such credit unions defined as 
``complex'' pursuant to section 1790d(d). Certain of these provisions 
also apply to officers and directors of federally insured credit unions. 
Subpart C applies capital planning and stress testing to credit unions 
with $10 billion or more in total assets. This part does not apply to 
corporate credit unions. Unless otherwise provided, procedures for 
issuing, reviewing and enforcing orders and directives issued under this 
part are set forth in subpart L of part 747 of this chapter.
    (d) Other supervisory authority. Neither section 1790d nor this part 
in any way limits the authority of the NCUA Board or appropriate state 
official under any other provision of law to take additional supervisory 
actions to address unsafe or unsound practices or conditions, or 
violations of applicable law or regulations. Action taken under this 
part may be taken independently of, in conjunction with, or in addition 
to any other enforcement action available to the NCUA Board or 
appropriate state official, including issuance of cease and desist 
orders, orders of prohibition, suspension and removal, or assessment of 
civil money penalties, or any other actions authorized by law.



Sec. 702.2  Definitions.

    Except as provided below, the terms used in this part have the same 
meanings as set forth in FCUA sections 101 and 216, 12 U.S.C. 1752, 
1790d.
    (a) Appropriate Regional Director means the director of the NCUA 
Regional Office having jurisdiction over federally insured credit unions 
in the state where the affected credit union is principally located or, 
for credit unions with $10 billion or more in assets, the Director of 
the Office of National Examinations and Supervision.
    (b) Appropriate State official means the commission, board or other 
supervisory authority having jurisdiction over credit unions chartered 
by the State which chartered the affected credit union.
    (c) Credit union means a federally-insured, natural person credit 
union, whether federally- or State-chartered, as defined by 12 U.S.C. 
1752(6).
    (d) CUSO means a credit union service organization as described in 
12 CFR 712 et seq. for federally-chartered credit unions, and as defined 
under State law for State-chartered credit unions.
    (e) NCUSIF means the National Credit Union Share Insurance Fund as 
defined by 12 U.S.C. 1783.
    (f) Net Worth means (1) The retained earnings balance of the credit 
union at quarter-end as determined under generally accepted accounting 
principles, subject to paragraph (f)(3) of this section. Retained 
earnings consists of undivided earnings, regular reserves, and

[[Page 730]]

any other appropriations designated by management or regulatory 
authorities;
    (2) For a low income-designated credit union, net worth also 
includes secondary capital accounts that are uninsured and subordinate 
to all other claims, including claims of creditors, shareholders and the 
NCUSIF; and
    (3) For a credit union that acquires another credit union in a 
mutual combination, net worth includes the retained earnings of the 
acquired credit union, or of an integrated set of activities and assets, 
less any bargain purchase gain recognized in either case to the extent 
the difference between the two is greater than zero. The acquired 
retained earnings must be determined at the point of acquisition under 
generally accepted accounting principles. A mutual combination is a 
transaction in which a credit union acquires another credit union or 
acquires an integrated set of activities and assets that is capable of 
being conducted and managed as a credit union.
    (4) The term ``net worth'' also includes loans to and accounts in an 
insured credit union established pursuant to section 208 of the Act [12 
U.S.C. 1788], provided such loans and accounts:
    (i) Have a remaining maturity of more than 5 years;
    (ii) Are subordinate to all other claims including those of 
shareholders, creditors and the National Credit Union Share Insurance 
Fund;
    (iii) Are not pledged as security on a loan to, or other obligation 
of, any party;
    (iv) Are not insured by the National Credit Union Share Insurance 
Fund;
    (v) Have non-cumulative dividends;
    (vi) Are transferable; and
    (vii) Are available to cover operating losses realized by the 
insured credit union that exceed its available retained earnings.
    (g) Net worth ratio means the ratio of the net worth of the credit 
union (as defined in paragraph (f) of this section) to the total assets 
of the credit union (as defined by a measure chosen under paragraph (j) 
of this section).
    (h) New credit union means a federally-insured credit union which 
both has been in operation for less than ten (10) years and has 
$10,000,000 or less in total assets.
    (i) Senior executive officer means a senior executive officer as 
defined by 12 CFR 701.14(b)(2).
    (j) Shares means deposits, shares, share certificates, share drafts, 
or any other depository account authorized by federal or state law.
    (k) Total assets. (1) Total assets means a credit union's total 
assets as measured by either--
    (i) Average quarterly balance. The average of quarter-end balances 
of the current and three preceding calendar quarters; or
    (ii) Average monthly balance. The average of month-end balances over 
the three calendar months of the calendar quarter; or
    (iii) Average daily balance. The average daily balance over the 
calendar quarter; or
    (iv) Quarter-end balance. The quarter-end balance of the calendar 
quarter as reported on the credit union's Call Report.
    (2) For each quarter, a credit union must elect a measure of total 
assets from paragraph (k)(1) of this section to apply for all purposes 
under this part except Secs. 702.103 through 702.108 [risk-based net 
worth requirement].
    (l) Weighted-average life means the weighted-average time to the 
return of a dollar of principal, calculated by multiplying each portion 
of principal received by the time at which it is expected to be received 
(based on a reasonable and supportable estimate of that time), and then 
summing and dividing by the total amount of principal.

[65 FR 8584, Feb. 18, 2000, as amended at 65 FR 44966, July 20, 2000; 67 
FR 71087, Nov. 29, 2002; 73 FR 72691, Dec. 1, 2008; 75 FR 34620, June 
18, 2010; 76 FR 60367, Sept. 29, 2011; 78 FR 32544, May 31, 2013]

    Effective Date Note: At 80 FR 66706, Oct. 29, 2015, Sec. 702.2 was 
revised, effective Jan. 1, 2019. For the convenience of the user, the 
revised text is set forth as follows:



Sec. 702.2  Definitions.

    Unless otherwise provided in this part, the terms used in this part 
have the same meanings as set forth in FCUA sections 101 and 216, 12 
U.S.C. 1752, 1790d. The following definitions apply to this part:

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    Allowances for loan and lease losses (ALLL) means valuation 
allowances that have been established through a charge against earnings 
to cover estimated credit losses on loans, lease financing receivables 
or other extensions of credit as determined in accordance with GAAP.
    Amortized cost means the purchase price of a security adjusted for 
amortizations of premium or accretion of discount if the security was 
purchased at other than par or face value.
    Appropriate state official means the state commission, board or 
other supervisory authority that chartered the affected credit union.
    Call Report means the Call Report required to be filed by all credit 
unions under Sec. 741.6(a)(2) of this chapter.
    Carrying value means the value of the asset or liability on the 
statement of financial condition of the credit union, determined in 
accordance with GAAP.
    Central counterparty (CCP) means a counterparty (for example, a 
clearing house) that facilitates trades between counterparties in one or 
more financial markets by either guaranteeing trades or novating 
contracts.
    Charitable donation account means an account that satisfies all of 
the conditions in Sec. 721.3(b)(2)(i), (b)(2)(ii), and (b)(2)(v) of this 
chapter.
    Commercial loan means any loan, line of credit, or letter of credit 
(including any unfunded commitments) for commercial, industrial, and 
professional purposes, but not for investment or personal expenditure 
purposes. Commercial loan excludes loans to CUSOs, first- or junior-lien 
residential real estate loans, and consumer loans.
    Commitment means any legally binding arrangement that obligates the 
credit union to extend credit, purchase or sell assets, enter into a 
borrowing agreement, or enter into a financial transaction.
    Consumer loan means a loan for household, family, or other personal 
expenditures, including any loans that, at origination, are wholly or 
substantially secured by vehicles generally manufactured for personal, 
family, or household use regardless of the purpose of the loan. Consumer 
loan excludes commercial loans, loans to CUSOs, first- and junior-lien 
residential real estate loans, and loans for the purchase of one or more 
vehicles to be part of a fleet of vehicles.
    Contractual compensating balance means the funds a commercial loan 
borrower must maintain on deposit at the lender credit union as security 
for the loan in accordance with the loan agreement, subject to a proper 
account hold and on deposit as of the measurement date.
    Credit conversion factor (CCF) means the percentage used to assign a 
credit exposure equivalent amount for selected off-balance sheet 
accounts.
    Credit union means a federally insured, natural person credit union, 
whether federally- or state-chartered.
    Current means, with respect to any loan, that the loan is less than 
90 days past due, not placed on non-accrual status, and not 
restructured.
    CUSO means a credit union service organization as defined in part 
712 and 741 of this chapter.
    Custodian means a financial institution that has legal custody of 
collateral as part of a qualifying master netting agreement, clearing 
agreement, or other financial agreement.
    Depository institution means a financial institution that engages in 
the business of providing financial services; that is recognized as a 
bank or a credit union by the supervisory or monetary authorities of the 
country of its incorporation and the country of its principal banking 
operations; that receives deposits to a substantial extent in the 
regular course of business; and that has the power to accept demand 
deposits. Depository institution includes all federally insured offices 
of commercial banks, mutual and stock savings banks, savings or building 
and loan associations (stock and mutual), cooperative banks, credit 
unions and international banking facilities of domestic depository 
institutions, and all privately insured state chartered credit unions.
    Derivatives Clearing Organization (DCO) means the same as defined by 
the Commodity Futures Trading Commission in 17 CFR 1.3(d).
    Derivative contract means a financial contract whose value is 
derived from the values of one or more underlying assets, reference 
rates, or indices of asset values or reference rates. Derivative 
contracts include interest rate derivative contracts, exchange rate 
derivative contracts, equity derivative contracts, commodity derivative 
contracts, and credit derivative contracts. Derivative contracts also 
include unsettled securities, commodities, and foreign exchange 
transactions with a contractual settlement or delivery lag that is 
longer than the lesser of the market standard for the particular 
instrument or five business days.
    Equity investment means investments in equity securities and any 
other ownership interests, including, for example, investments in 
partnerships and limited liability companies.
    Equity investment in CUSOs means the unimpaired value of the credit 
union's equity investments in a CUSO as recorded on the statement of 
financial condition in accordance with GAAP.
    Exchange means a central financial clearing market where end users 
can enter into derivative transactions.

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    Excluded goodwill means the outstanding balance, maintained in 
accordance with GAAP, of any goodwill originating from a supervisory 
merger or combination that was completed on or before December 28, 2015. 
This term and definition expire on January 1, 2029.
    Excluded other intangible assets means the outstanding balance, 
maintained in accordance with GAAP, of any other intangible assets such 
as core deposit intangible, member relationship intangible, or trade 
name intangible originating from a supervisory merger or combination 
that was completed on or before December 28, 2015. This term and 
definition expire on January 1, 2029.
    Exposure amount means:
    (1) The amortized cost for investments classified as held-to-
maturity and available-for-sale, and the fair value for trading 
securities.
    (2) The outstanding balance for Federal Reserve Bank Stock, Central 
Liquidity Facility Stock, Federal Home Loan Bank Stock, nonperpetual 
capital and perpetual contributed capital at corporate credit unions, 
and equity investments in CUSOs.
    (3) The carrying value for non-CUSO equity investments, and 
investment funds.
    (4) The carrying value for the credit union's holdings of general 
account permanent insurance, and separate account insurance.
    (5) The amount calculated under Sec. 702.105 of this part for 
derivative contracts.
    Fair value has the same meaning as provided in GAAP.
    Financial collateral means collateral approved by both the credit 
union and the counterparty as part of the collateral agreement in 
recognition of credit risk mitigation for derivative contracts.
    First-lien residential real estate loan means a loan or line of 
credit primarily secured by a first-lien on a one-to-four family 
residential property where:
    (1) The credit union made a reasonable and good faith determination 
at or before consummation of the loan that the member will have a 
reasonable ability to repay the loan according to its terms; and
    (2) In transactions where the credit union holds the first-lien and 
junior lien(s), and no other party holds an intervening lien, for 
purposes of this part the combined balance will be treated as a single 
first-lien residential real estate loan.
    GAAP means generally accepted accounting principles in the United 
States as set forth in the Financial Accounting Standards Board's (FASB) 
Accounting Standards Codification (ASC).
    General account permanent insurance means an account into which all 
premiums, except those designated for separate accounts are deposited, 
including premiums for life insurance and fixed annuities and the fixed 
portfolio of variable annuities, whereby the general assets of the 
insurance company support the policy.
    General obligation means a bond or similar obligation that is backed 
by the full faith and credit of a public sector entity.
    Goodwill means an intangible asset, maintained in accordance with 
GAAP, representing the future economic benefits arising from other 
assets acquired in a business combination (e.g., merger) that are not 
individually identified and separately recognized. Goodwill does not 
include excluded goodwill.
    Government guarantee means a guarantee provided by the U.S. 
Government, FDIC, NCUA or other U.S. Government agency, or a public 
sector entity.
    Government-sponsored enterprise (GSE) means an entity established or 
chartered by the U.S. Government to serve public purposes specified by 
the U.S. Congress, but whose debt obligations are not explicitly 
guaranteed by the full faith and credit of the U.S. Government.
    Guarantee means a financial guarantee, letter of credit, insurance, 
or similar financial instrument that allows one party to transfer the 
credit risk of one or more specific exposures to another party.
    Identified losses means those items that have been determined by an 
evaluation made by NCUA, or in the case of a state chartered credit 
union the appropriate state official, as measured on the date of 
examination in accordance with GAAP, to be chargeable against income, 
equity or valuation allowances such as the allowances for loan and lease 
losses. Examples of identified losses would be assets classified as 
losses, off-balance sheet items classified as losses, any provision 
expenses that are necessary to replenish valuation allowances to an 
adequate level, liabilities not shown on the books, estimated losses in 
contingent liabilities, and differences in accounts that represent 
shortages.
    Industrial development bond means a security issued under the 
auspices of a state or other political subdivision for the benefit of a 
private party or enterprise where that party or enterprise, rather than 
the government entity, is obligated to pay the principal and interest on 
the obligation.
    Intangible assets mean assets, maintained in accordance with GAAP, 
other than financial assets, that lack physical substance.
    Investment fund means an investment with a pool of underlying 
investment assets. Investment fund includes an investment company that 
is registered under section 8 of the Investment Company Act of 1940, and 
collective investment funds or common trust investments that are 
unregistered investment products that pool fiduciary client assets to 
invest in a diversified pool of investments.

[[Page 733]]

    Junior-lien residential real estate loan means a loan or line of 
credit secured by a subordinate lien on a one-to-four family residential 
property.
    Loan secured by real estate means a loan that, at origination, is 
secured wholly or substantially by a lien(s) on real property for which 
the lien(s) is central to the extension of the credit. A lien is 
``central'' to the extension of credit if the borrowers would not have 
been extended credit in the same amount or on terms as favorable without 
the liens on real property. For a loan to be ``secured wholly or 
substantially by a lien(s) on real property,'' the estimated value of 
the real estate collateral at origination (after deducting any more 
senior liens held by others) must be greater than 50 percent of the 
principal amount of the loan at origination.
    Loan to a CUSO means the outstanding balance of any loan from a 
credit union to a CUSO as recorded on the statement of financial 
condition in accordance with GAAP.
    Loans transferred with limited recourse means the total principal 
balance outstanding of loans transferred, including participations, for 
which the transfer qualified for true sale accounting treatment under 
GAAP, and for which the transferor credit union retained some limited 
recourse (i.e., insufficient recourse to preclude true sale accounting 
treatment). Loans transferred with limited recourse excludes transfers 
that qualify for true sale accounting treatment but contain only routine 
representation and warranty clauses that are standard for sales on the 
secondary market, provided the credit union is in compliance with all 
other related requirements, such as capital requirements.
    Mortgage-backed security (MBS) means a security backed by first- or 
junior-lien mortgages secured by real estate upon which is located a 
dwelling, mixed residential and commercial structure, residential 
manufactured home, or commercial structure.
    Mortgage partnership finance program means a Federal Home Loan Bank 
program through which loans are originated by a depository institution 
that are purchased or funded by the Federal Home Loan Banks, where the 
depository institution receives fees for managing the credit risk of the 
loans. The credit risk must be shared between the depository institution 
and the Federal Home Loan Banks.
    Mortgage servicing assets mean those assets, maintained in 
accordance with GAAP, resulting from contracts to service loans secured 
by real estate (that have been securitized or owned by others) for which 
the benefits of servicing are expected to more than adequately 
compensate the servicer for performing the servicing.
    NCUSIF means the National Credit Union Share Insurance Fund as 
defined by 12 U.S.C. 1783.
    Net worth means:
    (1) The retained earnings balance of the credit union at quarter-end 
as determined under GAAP, subject to paragraph (3) of this definition.
    (2) For a low income-designated credit union, net worth also 
includes secondary capital accounts that are uninsured and subordinate 
to all other claims, including claims of creditors, shareholders, and 
the NCUSIF.
    (3) For a credit union that acquires another credit union in a 
mutual combination, net worth also includes the retained earnings of the 
acquired credit union, or of an integrated set of activities and assets, 
less any bargain purchase gain recognized in either case to the extent 
the difference between the two is greater than zero. The acquired 
retained earnings must be determined at the point of acquisition under 
GAAP. A mutual combination, including a supervisory combination, is a 
transaction in which a credit union acquires another credit union or 
acquires an integrated set of activities and assets that is capable of 
being conducted and managed as a credit union.
    (4) The term ``net worth'' also includes loans to and accounts in an 
insured credit union, established pursuant to section 208 of the Act [12 
U.S.C. 1788], provided such loans and accounts:
    (i) Have a remaining maturity of more than 5 years;
    (ii) Are subordinate to all other claims including those of 
shareholders, creditors, and the NCUSIF;
    (iii) Are not pledged as security on a loan to, or other obligation 
of, any party;
    (iv) Are not insured by the NCUSIF;
    (v) Have non-cumulative dividends;
    (vi) Are transferable; and
    (vii) Are available to cover operating losses realized by the 
insured credit union that exceed its available retained earnings.
    Net worth ratio means the ratio of the net worth of the credit union 
to the total assets of the credit union rounded to two decimal places.
    New credit union has the same meaning as in Sec. 702.201.
    Nonperpetual capital has the same meaning as in Sec. 704.2 of this 
chapter.
    Off-balance sheet exposure means:
    (1) For loans transferred under the Federal Home Loan Bank mortgage 
partnership finance program, the outstanding loan balance as of the 
reporting date, net of any related valuation allowance.
    (2) For all other loans transferred with limited recourse or other 
seller-provided credit enhancements and that qualify for true sales 
accounting, the maximum contractual amount the credit union is exposed 
to according to the agreement, net of any related valuation allowance.

[[Page 734]]

    (3) For unfunded commitments, the remaining unfunded portion of the 
contractual agreement.
    Off-balance sheet items means items such as commitments, contingent 
items, guarantees, certain repo-style transactions, financial standby 
letters of credit, and forward agreements that are not included on the 
statement of financial condition, but are normally reported in the 
financial statement footnotes.
    On-balance sheet means a credit union's assets, liabilities, and 
equity, as disclosed on the statement of financial condition at a 
specific point in time.
    Other intangible assets means intangible assets, other than 
servicing assets and goodwill, maintained in accordance with GAAP. Other 
intangible assets does not include excluded other intangible assets.
    Over-the-counter (OTC) interest rate derivative contract means a 
derivative contract that is not cleared on an exchange.
    Part 703 compliant investment fund means an investment fund that is 
restricted to holding only investments that are permissible under 
Sec. 703.14(c) of this chapter.
    Perpetual contributed capital has the same meaning as in Sec. 704.2 
of this chapter.
    Public sector entity (PSE) means a state, local authority, or other 
governmental subdivision of the United States below the sovereign level.
    Qualifying master netting agreement means a written, legally 
enforceable agreement, provided that:
    (1) The agreement creates a single legal obligation for all 
individual transactions covered by the agreement upon an event of 
default, including upon an event of conservatorship, receivership, 
insolvency, liquidation, or similar proceeding, of the counterparty;
    (2) The agreement provides the credit union the right to accelerate, 
terminate, and close out on a net basis all transactions under the 
agreement and to liquidate or set off collateral promptly upon an event 
of default, including upon an event of conservatorship, receivership, 
insolvency, liquidation, or similar proceeding, of the counterparty, 
provided that, in any such case, any exercise of rights under the 
agreement will not be stayed or avoided under applicable law in the 
relevant jurisdictions, other than in receivership, conservatorship, 
resolution under the Federal Deposit Insurance Act, Title II of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act, or under any 
similar insolvency law applicable to GSEs;
    (3) The agreement does not contain a walkaway clause (that is, a 
provision that permits a non-defaulting counterparty to make a lower 
payment than it otherwise would make under the agreement, or no payment 
at all, to a defaulter or the estate of a defaulter, even if the 
defaulter or the estate is a net creditor under the agreement); and
    (4) In order to recognize an agreement as a qualifying master 
netting agreement for purposes of this part, a credit union must conduct 
sufficient legal review, at origination and in response to any changes 
in applicable law, to conclude with a well-founded basis (and maintain 
sufficient written documentation of that legal review) that:
    (i) The agreement meets the requirements of paragraph (2) of this 
definition; and
    (ii) In the event of a legal challenge (including one resulting from 
default or from conservatorship, receivership, insolvency, liquidation, 
or similar proceeding), the relevant court and administrative 
authorities would find the agreement to be legal, valid, binding, and 
enforceable under the law of relevant jurisdictions.
    Recourse means a credit union's retention, in form or in substance, 
of any credit risk directly or indirectly associated with an asset it 
has transferred that exceeds a pro rata share of that credit union's 
claim on the asset and disclosed in accordance with GAAP. If a credit 
union has no claim on an asset it has transferred, then the retention of 
any credit risk is recourse. A recourse obligation typically arises when 
a credit union transfers assets in a sale and retains an explicit 
obligation to repurchase assets or to absorb losses due to a default on 
the payment of principal or interest or any other deficiency in the 
performance of the underlying obligor or some other party. Recourse may 
also exist implicitly if the credit union provides credit enhancement 
beyond any contractual obligation to support assets it has transferred.
    Residential mortgage-backed security means a mortgage-backed 
security backed by loans secured by a first-lien on residential 
property.
    Residential property means a house, condominium unit, cooperative 
unit, manufactured home, or the construction thereof, and unimproved 
land zoned for one-to-four family residential use. Residential property 
excludes boats or motor homes, even if used as a primary residence, or 
timeshare property.
    Restructured means, with respect to any loan, a restructuring of the 
loan in which a credit union, for economic or legal reasons related to a 
borrower's financial difficulties, grants a concession to the borrower 
that it would not otherwise consider. Restructured excludes loans 
modified or restructured solely pursuant to the U.S. Treasury's Home 
Affordable Mortgage Program.
    Revenue obligation means a bond or similar obligation that is an 
obligation of a PSE, but which the PSE is committed to repay with 
revenues from the specific project financed rather than general tax 
funds.
    Risk-based capital ratio means the percentage, rounded to two 
decimal places, of the

[[Page 735]]

risk-based capital ratio numerator to risk-weighted assets, as 
calculated in accordance with Sec. 702.104(a).
    Risk-weighted assets means the total risk-weighted assets as 
calculated in accordance with Sec. 702.104(c).
    Secured consumer loan means a consumer loan associated with 
collateral or other item of value to protect against loss where the 
creditor has a perfected security interest in the collateral or other 
item of value.
    Senior executive officer means a senior executive officer as defined 
by Sec. 701.14(b)(2) of this chapter.
    Separate account insurance means an account into which a 
policyholder's cash surrender value is supported by assets segregated 
from the general assets of the carrier.
    Shares means deposits, shares, share certificates, share drafts, or 
any other depository account authorized by federal or state law.
    Share-secured loan means a loan fully secured by shares, and does 
not include the imposition of a statutory lien under Sec. 701.39 of this 
chapter.
    STRIPS means a separately traded registered interest and principal 
security.
    Structured product means an investment that is linked, via return or 
loss allocation, to another investment or reference pool.
    Subordinated means, with respect to an investment, that the 
investment has a junior claim on the underlying collateral or assets to 
other investments in the same issuance. An investment that does not have 
a junior claim to other investments in the same issuance on the 
underlying collateral or assets is non-subordinated. A Security that is 
junior only to money market eligible securities in the same issuance is 
also non-subordinated.
    Supervisory merger or combination means a transaction that involved 
the following:
    (1) An assisted merger or purchase and assumption where funds from 
the NCUSIF were provided to the continuing credit union;
    (2) A merger or purchase and assumption classified by NCUA as an 
``emergency merger'' where the acquired credit union is either insolvent 
or ``in danger of insolvency'' as defined under appendix B to Part 701 
of this chapter; or
    (3) A merger or purchase and assumption that included NCUA's or the 
appropriate state official's identification and selection of the 
continuing credit union.
    Swap dealer has the meaning as defined by the Commodity Futures 
Trading Commission in 17 CFT 1.3(ggg).
    Total assets means a credit union's total assets as measured \1\ by 
either:
---------------------------------------------------------------------------

    \1\ For each quarter, a credit union must elect one of the measures 
of total assets listed in paragraph (2) of this definition to apply for 
all purposes under this part except Secs. 702.103 through 702.106 (risk-
based capital requirement).
---------------------------------------------------------------------------

    (1) Average quarterly balance. The credit union's total assets 
measured by the average of quarter-end balances of the current and three 
preceding calendar quarters;
    (2) Average monthly balance. The credit union's total assets 
measured by the average of month-end balances over the three calendar 
months of the applicable calendar quarter;
    (3) Average daily balance. The credit union's total assets measured 
by the average daily balance over the applicable calendar quarter; or
    (4) Quarter-end balance. The credit union's total assets measured by 
the quarter-end balance of the applicable calendar quarter as reported 
on the credit union's Call Report.
    Tranche means one of a number of related securities offered as part 
of the same transaction. Tranche includes a structured product if it has 
a loss allocation based off of an investment or reference pool.
    Unsecured consumer loan means a consumer loan not secured by 
collateral.
    U.S. Government agency means an instrumentality of the U.S. 
Government whose obligations are fully and explicitly guaranteed as to 
the timely payment of principal and interest by the full faith and 
credit of the U.S. Government. U.S. Government agency includes NCUA.



                   Subpart A_Net Worth Classification

    Effective Date Note: At 80 FR 66706, Oct. 29, 2015, subpart A to 
part 702 was revised, effective Jan. 1, 2019. For the convenience of the 
user, the revised text is set forth at the end of this subpart.



Sec. 702.101  Measures and effective date of net worth classification.

    (a) Net worth measures. For purposes of this part, a credit union 
must determine its net worth category classification at the end of each 
calendar quarter using two measures:
    (1) The net worth ratio as defined in Sec. 702.2(g); and
    (2) If determined to be applicable under Sec. 702.103, a risk-based 
net worth requirement.
    (b) Effective date of net worth classification. For purposes of this 
part, the effective date of a federally-insured

[[Page 736]]

credit union's net worth category classification shall be the most 
recent to occur of:
    (1) Quarter-end effective date. The last day of the calendar month 
following the end of the calendar quarter; or
    (2) Corrected net worth category. The date the credit union received 
subsequent written notice from NCUA or, if State-chartered, from the 
appropriate State official, of a decline in net worth category due to 
correction of an error or misstatement in the credit union's most recent 
Call Report; or
    (3) Reclassification to lower category. The date the credit union 
received written notice from NCUA or, if State-chartered, the 
appropriate State official, of reclassification on safety and soundness 
grounds as provided under Sec. 702.102(b) or Sec. 702.302(d).
    (c) Notice to NCUA by filing Call Report. (1) Other than by filing a 
Call Report, a federally-insured credit union need not notify the NCUA 
Board of a change in its net worth ratio that places the credit union in 
a lower net worth category;
    (2) Failure to timely file a Call Report as required under this 
section in no way alters the effective date of a change in net worth 
classification under this paragraph (b) of this section, or the affected 
credit union's corresponding legal obligations under this part.

[65 FR 8584, Feb. 18, 2000; 65 FR 55439, Sept. 14, 2000, as amended at 
67 FR 12464, Mar. 19, 2002; 67 FR 71087, Nov. 29, 2002]



Sec. 702.102  Statutory net worth categories.

    (a) Net worth categories. Except for credit unions defined as 
``new'' under subpart B of this part, a federally-insured credit union 
shall be classified (Table 1)--
    (1) Well capitalized if it has a net worth ratio of seven percent 
(7%) or greater and also meets any applicable risk-based net worth 
requirement under Secs. 702.103 through 702.108; or
    (2) Adequately capitalized if it has a net worth ratio of six 
percent (6%) or more but less than seven percent (7%), and also meets 
any applicable risk-based net worth requirement under Secs. 702.103 
through 702.108 below; or
    (3) Undercapitalized if it has a net worth ratio of four percent 
(4%) or more but less than six percent (6%), or fails to meet any 
applicable risk-based net worth requirement under Secs. 702.103 through 
702.108; or
    (4) Significantly undercapitalized if it
    (i) Has a net worth ratio of two percent (2%) or more but less than 
four percent (4%); or
    (ii) Has a net worth ratio of four percent (4%) or more but less 
than five percent (5%), and either--
    (A) Fails to submit an acceptable net worth restoration plan within 
the time prescribed in Sec. 702.206; or
    (B) Materially fails to implement a net worth restoration plan 
approved by the NCUA Board; or
    (5) Critically undercapitalized if it has a net worth ratio of less 
than two percent (2%).

[[Page 737]]

[GRAPHIC] [TIFF OMITTED] TR29NO02.065

    (b) Reclassification based on supervisory criteria other than net 
worth. The NCUA Board may reclassify a ``well capitalized'' credit union 
as ``adequately capitalized'' and may require an ``adequately 
capitalized'' or ``undercapitalized'' credit union to comply with 
certain mandatory or discretionary supervisory actions as if it were in 
the next lower net worth category (each of such actions hereinafter 
referred to generally as ``reclassification'') in the following 
circumstances:
    (1) Unsafe or unsound condition. The NCUA Board has determined, 
after notice and opportunity for hearing pursuant to Sec. 747.2003 of 
this chapter, that the credit union is in an unsafe or unsound 
condition; or
    (2) Unsafe or unsound practice. The NCUA Board has determined, after 
notice and opportunity for hearing pursuant to Sec. 747.2003 of this 
chapter, that the credit union has not corrected a material unsafe or 
unsound practice of which it was, or should have been, aware.
    (c) Non-delegation. The NCUA Board may not delegate its authority to 
reclassify a credit union under paragraph (b) of this section.
    (d) Consultation with State officials. The NCUA Board shall consult 
and seek to work cooperatively with the appropriate State official 
before reclassifying a federally-insured State-chartered credit union 
under paragraph (b) of this section, and shall promptly notify the 
appropriate State official of its decision to reclassify.

[65 FR 8584, Feb. 18, 2000, as amended at 65 FR 44966, July 20, 2000; 67 
FR 71087, Nov. 29, 2002]



Sec. 702.103  Applicability of risk-based net worth requirement.

    For purposes of Sec. 702.102, a credit union is defined as 
``complex'' and a risk-based net worth requirement is applicable only if 
the credit union meets both of the following criteria as reflected in 
its most recent Call Report:
    (a) Minimum asset size. Its quarter-end total assets exceed fifty 
million dollars ($50,000,000); and
    (b) Minimum RBNW calculation. Its risk-based net worth requirement 
as calculated under Sec. 702.106 exceeds six percent (6%).

[65 FR 44966, July 20, 2000, as amended at 67 FR 13464, Mar. 19, 2002; 
67 FR 71088, Nov. 29, 2002; 75 FR 34620, June 18, 2010; 78 FR 4037, Jan. 
18, 2013]



Sec. 702.104  Risk portfolios defined.

    A risk portfolio is a portfolio of assets, liabilities, or 
contingent liabilities as specified below, each expressed as a 
percentage of the credit union's quarter-end total assets reflected in 
its most recent Call Report, rounded to two decimal places (Table 2):
    (a) Long-term real estate loans. Total real estate loans and real 
estate lines

[[Page 738]]

of credit outstanding, exclusive of those outstanding that will 
contractually refinance, reprice or mature within the next five (5) 
years, and exclusive of all member business loans (as defined in 12 CFR 
723.1 or as approved under 12 CFR 723.20);
    (b) Member business loans outstanding. All member business loans as 
defined in 12 CFR 723.1 or as approved under 12 CFR 723.20;
    (c) Investments. Investments as defined by 12 CFR 703.2 or 
applicable State law, including investments in CUSOs (as defined by 
Sec. 702.2(d));
    (d) Low-risk assets. Cash on hand (e.g., coin and currency, 
including vault, ATM and teller cash), the NCUSIF deposit, and debt 
instruments unconditionally guaranteed by the National Credit Union 
Administration;
    (e) Average-risk assets. One hundred percent (100%) of total assets 
minus the sum of the risk portfolios in paragraphs (a) through (d) of 
this section;
    (f) Loans sold with recourse. Outstanding balance of loans sold or 
swapped with recourse, excluding loans sold to the secondary mortgage 
market that have representations and warranties consistent with those 
customarily required by the U.S. Government and government sponsored 
enterprises;
    (g) Unused member business loan commitments. Unused commitments for 
member business loans as defined in 12 CFR 723.1 or as approved under 12 
CFR 723.20; and
    (h) Allowance. The Allowance for Loan and Lease Losses not to exceed 
the equivalent of one and one-half percent (1.5%) of total loans 
outstanding.
[GRAPHIC] [TIFF OMITTED] TR06JA03.002


[65 FR 44966, July 20, 2000, as amended at 67 FR 71088, Nov. 29, 2002; 
75 FR 66300, Oct. 28, 2010; 78 FR 32544, May 31, 2013]



Sec. 702.105  Weighted-average life of investments.

    Except as provided below (Table 3), the weighted-average life of an 
investment for purposes of Secs. 702.106(c) and 702.107(c) is defined 
pursuant to Sec. 702.2(m):
    (a) Registered investment companies and collective investment funds. 
(1) For investments in registered investment companies (e.g., mutual 
funds) and collective investment funds, the weighted-average life is 
defined as the maximum weighted-average life disclosed, directly or 
indirectly, in the prospectus or trust instrument;
    (2) For investments in money market funds, as defined in 17 CFR 
270.2a-7, and

[[Page 739]]

collective investment funds operated in accordance with short-term 
investment fund rules set forth in 12 CFR 9.18(b)(4)(ii)(B)(1)-(3), the 
weighted-average life is defined as one (1) year or less; and
    (3) For other investments in registered investment companies or 
collective investment funds, the weighted-average life is defined as 
greater than five (5) years, but less than or equal to seven (7) years;
    (b) Callable fixed-rate debt obligations and deposits. For fixed-
rate debt obligations and deposits that are callable in whole, the 
weighted-average life is defined as the period remaining to the maturity 
date;
    (c) Variable-rate debt obligations and deposits. For variable-rate 
debt obligations and deposits, the weighted-average life is defined as 
the period remaining to the next rate adjustment date;
    (d) Capital in mixed-ownership Government corporations and corporate 
credit unions. For capital stock in mixed-ownership Government 
corporations, as defined in 31 U.S.C. 9101(2), and perpetual and 
nonperpetual capital in corporate credit unions, as defined in 12 CFR 
704.2, the weighted-average life is defined as greater than one (1) 
year, but less than or equal to three years;
    (e) Investments in CUSOs. For investments in CUSOs (as defined in 
Sec. 702.2(d)), the weighted-average life is defined as greater than one 
(1) year, but less than or equal to three (3) years; and
    (f) Other equity securities. For other equity securities, the 
weighted average life is defined as greater than ten (10) years.
[GRAPHIC] [TIFF OMITTED] TR06JA03.003


[65 FR 44966, July 20, 2000, as amended at 67 FR 71088, Nov. 29, 2002; 
75 FR 64826, Oct. 20, 2010]



Sec. 702.106  Standard calculation of risk-based net worth requirement.

    A credit union's risk-based net worth requirement is the aggregate 
of the following standard component amounts, each expressed as a 
percentage of the credit union's quarter-end total assets as reflected 
in its most recent Call Report, rounded to two decimal places (Table 4):
    (a) Long-term real estate loans. The sum of:
    (1) Six percent (6%) of the amount of long-term real estate loans 
less than or equal to twenty-five percent (25%) of total assets; and

[[Page 740]]

    (2) Fourteen percent (14%) of the amount in excess of twenty-five 
percent
    (25%) of total assets;
    (b) Member business loans outstanding. The sum of:
    (1) Six percent (6%) of the amount of member business loans 
outstanding less than or equal to fifteen percent (15%) of total assets;
    (2) Eight percent (8%) of the amount of member business loans 
outstanding greater than fifteen percent (15%), but less than or equal 
to twenty-five percent (25%), of total assets; and
    (3) Fourteen percent (14%) of the amount in excess of twenty-five 
percent (25%) of total assets;
    (c) Investments. The sum of:
    (1) Three percent (3%) of the amount of investments with a weighted-
average life (as specified in Sec. 702.105 above) of one (1) year or 
less;
    (2) Six percent (6%) of the amount of investments with a weighted-
average life greater than one (1) year, but less than or equal to three 
(3) years;
    (3) Twelve percent (12%) of the amount of investments with a 
weighted-average life greater than three (3) years, but less than or 
equal to ten (10) years; and
    (4) Twenty percent (20%) of the amount of investments with a 
weighted-average life greater than ten (10) years;
    (d) Low-risk assets. Zero percent (0%) of the entire portfolio of 
low-risk assets;
    (e) Average-risk assets. Six percent (6%) of the entire portfolio of 
average-risk assets;
    (f) Loans sold with recourse. Six percent (6%) of the entire 
portfolio of loans sold with recourse;
    (g) Unused member business loan commitments. Six percent (6%) of the 
entire portfolio of unused member business loan commitments; and
    (h) Allowance. Negative one hundred percent (-100%) of the balance 
of the Allowance for Loan and Lease Losses account, not to exceed the 
equivalent of one and one-half percent (1.5%) of total loans 
outstanding.

[[Page 741]]

[GRAPHIC] [TIFF OMITTED] TR01OC03.055


[65 FR 44966, July 20, 2000, as amended at 67 FR 71088, Nov. 29, 2002; 
68 FR 56547, Oct. 1, 2003]



Sec. 702.107  Alternative components for standard calculation.

    A credit union may substitute one or more alternative components 
below, in place of the corresponding standard components in Sec. 702.106 
above, when any alternative component amount, expressed as a percentage 
of the credit union's quarter-end total assets as reflected in its most 
recent Call Report, rounded to two decimal places, is smaller (Table 5):
    (a) Long-term real estate loans. The sum of:
    (1) Non-callable. Non-callable long-term real estate loans as 
follows:
    (i) Eight percent (8%) of the amount of such loans with a remaining 
maturity of greater than 5 years, but less than or equal to 12 years;
    (ii) Twelve percent (12%) of the amount of such loans with a 
remaining maturity of greater than 12 years, but less than or equal to 
20 years; and
    (iii) Fourteen percent (14%) of the amount of such loans with a 
remaining maturity greater than 20 years;
    (2) Callable. Long-term real estate loans callable in 5 years or 
less as follows:
    (i) Six percent (6%) of the amount of such loans with a documented 
call provision of 5 years or less and with a remaining maturity of 
greater than 5 years, but less than or equal to 12 years;
    (ii) Ten percent (10%) of the amount of such loans with a documented 
call provision of 5 years or less and with a remaining maturity of 
greater than 12 years, but less than or equal to 20 years; and
    (iii) Twelve percent (12%) of the amount of such loans with a 
documented call provision of 5 years or less and with a remaining 
maturity of greater than 20 years;
    (b) Member business loans outstanding. The sum of:
    (1) Fixed rate. Fixed-rate member business loans outstanding as 
follows:
    (i) Six percent (6%) of the amount of such loans with a remaining 
maturity of 3 or fewer years;

[[Page 742]]

    (ii) Nine percent (9%) of the amount of such loans with a remaining 
maturity greater than 3 years, but less than or equal to 5 years;
    (iii) Twelve percent (12%) of the amount of such loans with a 
remaining maturity greater than 5 years, but less than or equal to 7 
years;
    (iv) Fourteen percent (14%) of the amount of such loans with a 
remaining maturity greater than 7 years, but less than or equal to 12 
years; and
    (v) Sixteen percent (16%) of the amount of such loans with a 
remaining maturity greater than 12 years; and
    (2) Variable-rate. Variable-rate member business loans outstanding 
as follows:
    (i) Six percent (6%) of the amount of such loans with a remaining 
maturity of 3 or fewer years;
    (ii) Eight percent (8%) of the amount of such loans with a remaining 
maturity greater than 3 years, but less than or equal to 5 years;
    (iii) Ten percent (10%) of the amount of such loans with a remaining 
maturity greater than 5 years, but less than or equal to 7 years;
    (iv) Twelve percent (12%) of the amount of such loans with a 
remaining maturity greater than 7 years, but less than or equal to 12 
years; and
    (v) Fourteen percent (14%) of the amount of such loans with a 
remaining maturity greater than 12 years.
    (c) Investments. The sum of:
    (1) Three percent (3%) of the amount of investments with a weighted-
average life (as specified in Sec. 702.105 above) of one (1) year or 
less;
    (2) Six percent (6%) of the amount of investments with a weighted-
average life greater than one (1) year, but less than or equal to three 
(3) years;
    (3) Eight percent (8%) of the amount of investments with a weighted-
average life greater than three (3) years, but less than or equal to 
five (5) years;
    (4) Twelve percent (12%) of the amount of investments with a 
weighted-average life greater than five (5) years, but less than or 
equal to seven (7) years;
    (5) Sixteen percent (16%) of the amount of investments with a 
weighted-average life greater than seven (7) years, but less than or 
equal to ten (10) years; and
    (6) Twenty percent (20%) of the amount of investments with a 
weighted-average life greater than ten (10) years.
    (d) Loans sold with recourse. The alternative component is the sum 
of:
    (1) Six percent (6%) of the amount of loans sold with contractual 
recourse obligations of six percent (6%) or greater; and
    (2) The weighted average recourse percent of the amount of loans 
sold with contractual recourse obligations of less than six percent 
(6%), as computed by the credit union.

[[Page 743]]

  Table 5--Sec. 702.107 Alternative Components for Standard Calculation
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[65 FR 44966, July 20, 2000, as amended at 67 FR 71088, Nov. 29, 2002]



Sec. 702.108  Risk mitigation credit.

    (a) Who may apply. A credit union may apply for a risk mitigation 
credit if on any of the current or three preceding effective dates of 
classification it either failed an applicable RBNW requirement or met it 
by less than 100 basis points.
    (b) Application for credit. Upon application pursuant to guidelines 
duly adopted by the NCUA Board, the NCUA Board may in its discretion 
grant a credit to reduce a risk-based net worth requirement under 
Secs. 702.106 and 702.107 upon proof of mitigation of:
    (1) Credit risk; or
    (2) Interest rate risk as demonstrated by economic value exposure 
measures.
    (c) Application by FISCU. In the case of a FISCU seeking a risk 
mitigation credit--
    (1) Before an application under paragraph (a) above may be submitted 
to the NCUA Board, it must be submitted in duplicate to the appropriate 
State official and the appropriate Regional Director; and
    (2) The NCUA Board, when evaluating the application of a FISCU, 
shall consult and seek to work cooperatively with the appropriate State 
official, and shall provide prompt notice of its decision to the 
appropriate State official.

[65 FR 44971, July 20, 2000, as amended at 67 FR 71089, Nov. 29, 2002]

[[Page 745]]



              Sec. Appendixes A-H to Subpart A of Part 702
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[[Page 747]]


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[[Page 748]]


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[65 FR 44971, July 20, 2000, as amended at 67 FR 71089, 71090, 71091, 
Nov. 29, 2002; 68 FR 56548, 56549, 56550, Oct. 1, 2003]

    Effective Date Note: At 80 FR 66706, Oct. 29, 2015, subpart A to 
part 702 was revised, effective Jan. 1, 2019. For the convenience of the 
user, the revised text is set forth as follows:



                   Subpart A_Prompt Corrective Action



Sec. 702.101  Capital measures, capital adequacy, effective date of 
          classification, and notice to NCUA.

    (a) Capital measures. For purposes of this part, a credit union must 
determine its capital classification at the end of each calendar quarter 
using the following measures:
    (1) The net worth ratio; and
    (2) If determined to be applicable under Sec. 702.103, the risk-
based capital ratio.
    (b) Capital adequacy. (1) Notwithstanding the minimum requirements 
in this part, a credit union defined as complex must maintain capital 
commensurate with the level and nature of all risks to which the 
institution is exposed.
    (2) A credit union defined as complex must have a process for 
assessing its overall capital adequacy in relation to its risk profile 
and a comprehensive written strategy for maintaining an appropriate 
level of capital.
    (c) Effective date of capital classification. For purposes of this 
part, the effective date of a federally insured credit union's capital 
classification shall be the most recent to occur of:
    (1) Quarter-end effective date. The last day of the calendar month 
following the end of the calendar quarter;
    (2) Corrected capital classification. The date the credit union 
received subsequent written notice from NCUA or, if state-chartered, 
from the appropriate state official, of a decline in capital 
classification due to correction of an error or misstatement in the 
credit union's most recent Call Report; or
    (3) Reclassification to lower category. The date the credit union 
received written notice from NCUA or, if state-chartered, the 
appropriate state official, of reclassification on safety and soundness 
grounds as provided under Secs. 702.102(b) or 702. 202(d).
    (d) Notice to NCUA by filing Call Report. (1) Other than by filing a 
Call Report, a federally insured credit union need not notify the NCUA 
Board of a change in its capital measures that places the credit union 
in a lower capital category;
    (2) Failure to timely file a Call Report as required under this 
section in no way alters the effective date of a change in capital 
classification under paragraph (b) of this section, or the affected 
credit union's corresponding legal obligations under this part.



Sec. 702.102  Capital classification.

    (a) Capital categories. Except for credit unions defined as ``new'' 
under subpart B of this part, a credit union shall be deemed to be 
classified (Table 1 of this section)--
    (1) Well capitalized if:

[[Page 749]]

    (i) Net worth ratio. The credit union has a net worth ratio of 7.0 
percent or greater; and
    (ii) Risk-based capital ratio. The credit union, if complex, has a 
risk-based capital ratio of 10 percent or greater.
    (2) Adequately capitalized if:
    (i) Net worth ratio. The credit union has a net worth ratio of 6.0 
percent or greater; and
    (ii) Risk-based capital ratio. The credit union, if complex, has a 
risk-based capital ratio of 8.0 percent or greater; and
    (iii) Does not meet the definition of a well capitalized credit 
union.
    (3) Undercapitalized if:
    (i) Net worth ratio. The credit union has a net worth ratio of 4.0 
percent or more but less than 6.0 percent; or
    (ii) Risk-based capital ratio. The credit union, if complex, has a 
risk-based capital ratio of less than 8.0 percent.
    (4) Significantly undercapitalized if:
    (i) The credit union has a net worth ratio of 2.0 percent or more 
but less than 4.0 percent; or
    (ii) The credit union has a net worth ratio of 4.0 percent or more 
but less than 5.0 percent, and either--
    (A) Fails to submit an acceptable net worth restoration plan within 
the time prescribed in Sec. 702.110;
    (B) Materially fails to implement a net worth restoration plan 
approved by the NCUA Board; or
    (C) Receives notice that a submitted net worth restoration plan has 
not been approved.
    (5) Critically undercapitalized if it has a net worth ratio of less 
than 2.0 percent.

                                  Table 1 to Sec. 702.102--Capital Categories
----------------------------------------------------------------------------------------------------------------
                                                                  Risk-based capital
     A credit union's capital                                         ratio also        And subject to following
     classification is . . .          Net worth ratio                applicable if         condition(s) . . .
                                                                        complex
----------------------------------------------------------------------------------------------------------------
Well Capitalized.................  7% or greater.......    And   10.0% or greater
Adequately Capitalized...........  6% or greater.......    And   8% or greater.......  And does not meet the
                                                                                        criteria to be
                                                                                        classified as well
                                                                                        capitalized.
Undercapitalized.................  4% to 5.99%.........     Or   Less than 8%........
Significantly Undercapitalized...  2% to 3.99%.........  ......  N/A.................  Or if ``undercapitalized
                                                                                        at <5% net worth and (a)
                                                                                        fails to timely submit,
                                                                                        (b) fails to materially
                                                                                        implement, or (c)
                                                                                        receives notice of the
                                                                                        rejection of a net worth
                                                                                        restoration plan.
Critically Undercapitalized......  Less than 2%........  ......  N/A                   .........................
----------------------------------------------------------------------------------------------------------------

    (b) Reclassification based on supervisory criteria other than net 
worth. The NCUA Board may reclassify a well capitalized credit union as 
adequately capitalized and may require an adequately capitalized or 
undercapitalized credit union to comply with certain mandatory or 
discretionary supervisory actions as if it were classified in the next 
lower capital category (each of such actions hereinafter referred to 
generally as ``reclassification'') in the following circumstances:
    (1) Unsafe or unsound condition. The NCUA Board has determined, 
after providing the credit union with notice and opportunity for hearing 
pursuant to Sec. 747.2003 of this chapter, that the credit union is in 
an unsafe or unsound condition; or
    (2) Unsafe or unsound practice. The NCUA Board has determined, after 
providing the credit union with notice and opportunity for hearing 
pursuant to Sec. 747.2003 of this chapter, that the credit union has not 
corrected a material unsafe or unsound practice of which it was, or 
should have been, aware.
    (c) Non-delegation. The NCUA Board may not delegate its authority to 
reclassify a credit union under paragraph (b) of this section.
    (d) Consultation with state officials. The NCUA Board shall consult 
and seek to work cooperatively with the appropriate state official 
before reclassifying a federally insured state-chartered credit union 
under paragraph (b) of this section, and shall promptly notify the 
appropriate state official of its decision to reclassify.



Sec. 702.103  Applicability of the risk-based capital ratio measure.

    For purposes of Sec. 702.102, a credit union is defined as 
``complex'' and the risk-based capital ratio measure is applicable only 
if the credit union's quarter-end total assets exceed one hundred 
million dollars ($100,000,000), as reflected in its most recent Call 
Report.



Sec. 702.104  Risk-based capital ratio.

    A complex credit union must calculate its risk-based capital ratio 
in accordance with this section.
    (a) Calculation of the risk-based capital ratio. To determine its 
risk-based capital ratio, a complex credit union must calculate the 
percentage, rounded to two decimal places, of its risk-based capital 
ratio numerator as described in paragraph (b) of this section, to its

[[Page 750]]

total risk-weighted assets as described in paragraph (c) of this 
section.
    (b) Risk-based capital ratio numerator. The risk-based capital ratio 
numerator is the sum of the specific capital elements in paragraph 
(b)(1) of this section, minus the regulatory adjustments in paragraph 
(b)(2) of this section.
    (1) Capital elements of the risk-based capital ratio numerator. The 
capital elements of the risk-based capital numerator are:
    (i) Undivided earnings;
    (ii) Appropriation for non-conforming investments;
    (iii) Other reserves;
    (iv) Equity acquired in merger;
    (v) Net income
    (vi) ALLL, maintained in accordance with GAAP;
    (vii) Secondary capital accounts included in net worth (as defined 
in Sec. 702.2); and
    (viii) Section 208 assistance included in net worth (as defined in 
Sec. 702.2).
    (2) Risk-based capital ratio numerator deductions. The elements 
deducted from the sum of the capital elements of the risk-based capital 
ratio numerator are:
    (i) NCUSIF Capitalization Deposit;
    (ii) Goodwill;
    (iii) Other intangible assets; and
    (iv) Identified losses not reflected in the risk-based capital ratio 
numerator.
    (c) Risk-weighted assets--(1) General. Risk-weighted assets includes 
risk- weighted on-balance sheet assets as described in paragraphs (c)(2) 
and (3) of this section, plus the risk-weighted off-balance sheet assets 
in paragraph (c)(4) of this section, plus the risk-weighted derivatives 
in paragraph (c)(5) of this section, less the risk-based capital ratio 
numerator deductions in paragraph (b)(2) of this section. If a 
particular asset, derivative contract, or off balance sheet item has 
features or characteristics that suggest it could potentially fit into 
more than one risk weight category, then a credit union shall assign the 
asset, derivative contract, or off balance sheet item to the risk weight 
category that most accurately and appropriately reflects its associated 
credit risk.
    (2) Risk weights for on-balance sheet assets. The risk categories 
and weights for assets of a complex credit union are as follows:
    (i) Category 1--zero percent risk weight. A credit union must assign 
a zero percent risk weight to:
    (A) The balance of:
    (1) Cash, currency and coin, including vault, automatic teller 
machine, and teller cash.
    (2) share-secured loans, where the shares securing the loan are on 
deposit with the credit union.
    (B) The exposure amount of:
    (1) An obligation of the U.S. Government, its central bank, or a 
U.S. Government agency that is directly and unconditionally guaranteed, 
excluding detached security coupons, ex-coupon securities, and interest-
only mortgage-backed-security STRIPS.
    (2) Federal Reserve Bank stock and Central Liquidity Facility stock.
    (C) Insured balances due from FDIC-insured depositories or federally 
insured credit unions.
    (ii) Category 2--20 percent risk weight. A credit union must assign 
a 20 percent risk weight to:
    (A) The uninsured balances due from FDIC-insured depositories, 
federally insured credit unions, and all balances due from privately-
insured credit unions.
    (B) The exposure amount of:
    (1) A non-subordinated obligation of the U.S. Government, its 
central bank, or a U.S. Government agency that is conditionally 
guaranteed, excluding interest-only mortgage-backed-security STRIPS.
    (2) A non-subordinated obligation of a GSE other than an equity 
exposure or preferred stock, excluding interest-only GSE mortgage-
backed-security STRIPS.
    (3) Securities issued by PSEs that represent general obligation 
securities.
    (4) Part 703 compliant investment funds that are restricted to 
holding only investments that qualify for a zero or 20 percent risk-
weight under this section.
    (5) Federal Home Loan Bank stock.
    (C) The balances due from Federal Home Loan Banks.
    (D) The balance of share-secured loans, where the shares securing 
the loan are on deposit with another depository institution.
    (E) The portions of outstanding loans with a government guarantee.
    (F) The portions of commercial loans secured with contractual 
compensating balances.
    (iii) Category 3--50 percent risk weight. A credit union must assign 
a 50 percent risk weight to:
    (A) The outstanding balance (net of government guarantees), 
including loans held for sale, of current first-lien residential real 
estate loans less than or equal to 35 percent of assets.
    (B) The exposure amount of:
    (1) Securities issued by PSEs in the U.S. that represent non-
subordinated revenue obligation securities.
    (2) Other non-subordinated, non-U.S. Government agency or non-GSE 
guaranteed, residential mortgage-backed security, excluding interest-
only mortgage-backed security STRIPS.
    (iv) Category 4--75 percent risk weight. A credit union must assign 
a 75 percent risk weight to the outstanding balance (net of government 
guarantees), including loans held for sale, of:
    (A) Current first-lien residential real estate loans greater than 35 
percent of assets.
    (B) Current secured consumer loans.

[[Page 751]]

    (v) Category 5--100 percent risk weight. A credit union must assign 
a 100 percent risk weight to:
    (A) The outstanding balance (net of government guarantees), 
including loans held for sale, of:
    (1) First-lien residential real estate loans that are not current.
    (2) Current junior-lien residential real estate loans less than or 
equal to 20 percent of assets.
    (3) Current unsecured consumer loans.
    (4) Current commercial loans, less contractual compensating balances 
that comprise less than 50 percent of assets.
    (5) Loans to CUSOs.
    (B) The exposure amount of:
    (1) Industrial development bonds.
    (2) Interest-only mortgage-backed security STRIPS.
    (3) Part 703 compliant investment funds, with the option to use the 
look-through approaches in paragraph (c)(3)(iii)(B) of this section.
    (4) Corporate debentures and commercial paper.
    (5) Nonperpetual capital at corporate credit unions.
    (6) General account permanent insurance.
    (7) GSE equity exposure or preferred stock.
    (8) Non-subordinated tranches of any investment, with the option to 
use the gross-up approach in paragraph (c)(3)(iii)(A) of this section.
    (C) All other assets listed on the statement of financial condition 
not specifically assigned a different risk weight under this subpart.
    (vi) Category 6--150 percent risk weight. A credit union must assign 
a 150 percent risk weight to:
    (A) The outstanding balance, net of government guarantees and 
including loans held for sale, of:
    (1) Current junior-lien residential real estate loans that comprise 
more than 20 percent of assets.
    (2) Junior-lien residential real estate loans that are not current.
    (3) Consumer loans that are not current.
    (4) Current commercial loans (net of contractual compensating 
balances), which comprise more than 50 percent of assets.
    (5) Commercial loans (net of contractual compensating balances), 
which are not current.
    (B) The exposure amount of:
    (1) Perpetual contributed capital at corporate credit unions.
    (2) Equity investments in CUSOs.
    (vii) Category 7--250 percent risk weight. A credit union must 
assign a 250 percent risk weight to the carrying value of mortgage 
servicing assets.
    (viii) Category 8--300 percent risk weight. A credit union must 
assign a 300 percent risk weight to the exposure amount of:
    (A) Publicly traded equity investments, other than a CUSO 
investment.
    (B) Investment funds that do not meet the requirements under 
Sec. 703.14(c) of this chapter, with the option to use the look-through 
approaches in paragraph (c)(3)(iii)(B) of this section.
    (C) Separate account insurance, with the option to use the look-
through approaches in paragraph (c)(3)(iii)(B) of this section.
    (ix) Category 9--400 percent risk weight. A credit union must assign 
a 400 percent risk weight to the exposure amount of non-publicly traded 
equity investments, other than equity investments in CUSOs.
    (x) Category 10--1,250 percent risk weight. A credit union must 
assign a 1,250 percent risk weight to the exposure amount of any 
subordinated tranche of any investment, with the option to use the 
gross-up approach in paragraph (c)(3)(iii)(A) of this section.
    (3) Alternative risk weights for certain on-balance sheet assets--
(i) Non-significant equity exposures.--(A) General. Notwithstanding the 
risk weights assigned in paragraph (c)(2) of this section, a credit 
union must assign a 100 percent risk weight to non-significant equity 
exposures.
    (B) Determination of non-significant equity exposures. A credit 
union has non-significant equity exposures if the aggregate amount of 
its equity exposures does not exceed 10 percent of the sum of the credit 
union's capital elements of the risk-based capital ratio numerator (as 
defined under paragraph (b)(1) of this section).
    (C) Determination of the aggregate amount of equity exposures. When 
determining the aggregate amount of its equity exposures, a credit union 
must include the total amounts (as recorded on the statement of 
financial condition in accordance with GAAP) of the following:
    (1) Equity investments in CUSOs,
    (2) Perpetual contributed capital at corporate credit unions,
    (3) Nonperpetual capital at corporate credit unions, and
    (4) Equity investments subject to a risk weight in excess of 100 
percent.
    (ii) Charitable donation accounts. Notwithstanding the risk weights 
assigned in paragraph (c)(2) of this section, a credit union may assign 
a 100 percent risk weight to a charitable donation account.
    (iii) Alternative approaches. Notwithstanding the risk weights 
assigned in paragraph (c)(2) of this section, a credit union may 
determine the risk weight of investment funds, and non-subordinated or 
subordinated tranches of any investment as follows:
    (A) Gross-up approach. A credit union may use the gross-up approach 
under appendix A of this part to determine the risk weight of the 
carrying value of non-subordinated or subordinated tranches of any 
investment.

[[Page 752]]

    (B) Look-through approaches. A credit union may use one of the look-
through approaches under appendix A of this part to determine the risk 
weight of the exposure amount of any investment funds, the holdings of 
separate account insurance, or both.
    (4) Risk weights for off-balance sheet activities. The risk weighted 
amounts for all off-balance sheet items are determined by multiplying 
the off-balance sheet exposure amount by the appropriate CCF and the 
assigned risk weight as follows:
    (i) For the outstanding balance of loans transferred to a Federal 
Home Loan Bank under the mortgage partnership finance program, a 20 
percent CCF and a 50 percent risk weight.
    (ii) For other loans transferred with limited recourse, a 100 
percent CCF applied to the off-balance sheet exposure and:
    (A) For commercial loans, a 100 percent risk weight.
    (B) For first-lien residential real estate loans, a 50 percent risk 
weight.
    (C) For junior-lien residential real estate loans, a 100 percent 
risk weight.
    (D) For all secured consumer loans, a 75 percent risk weight.
    (E) For all unsecured consumer loans, a 100 percent risk weight.
    (iii) For unfunded commitments:
    (A) For commercial loans, a 50 percent CCF with a 100 percent risk 
weight.
    (B) For first-lien residential real estate loans, a 10 percent CCF 
with a 50 percent risk weight.
    (C) For junior-lien residential real estate loans, a 10 percent CCF 
with a 100 percent risk weight.
    (D) For all secured consumer loans, a 10 percent CCF with a 75 
percent risk weight.
    (E) For all unsecured consumer loans, a 10 percent CCF with a 100 
percent risk weight.
    (5) Derivative contracts. A complex credit union must assign a risk-
weighted amount to any derivative contracts as determined under 
Sec. 702.105.



Sec. 702.105  Derivative contracts.

    (a) OTC interest rate derivative contracts--(1) Exposure amount--(i) 
Single OTC interest rate derivative contract. Except as modified by 
paragraph (a)(2) of this section, the exposure amount for a single OTC 
interest rate derivative contract that is not subject to a qualifying 
master netting agreement is equal to the sum of the credit union's 
current credit exposure and potential future credit exposure (PFE) on 
the OTC interest rate derivative contract.
    (A) Current credit exposure. The current credit exposure for a 
single OTC interest rate derivative contract is the greater of the fair 
value of the OTC interest rate derivative contract or zero.
    (B) PFE. (1) The PFE for a single OTC interest rate derivative 
contract, including an OTC interest rate derivative contract with a 
negative fair value, is calculated by multiplying the notional principal 
amount of the OTC interest rate derivative contract by the appropriate 
conversion factor in Table 1 of this section.
    (2) A credit union must use an OTC interest rate derivative 
contract's effective notional principal amount (that is, the apparent or 
stated notional principal amount multiplied by any multiplier in the OTC 
interest rate derivative contract) rather than the apparent or stated 
notional principal amount in calculating PFE.

  Table 1 to Sec. 702.105--Conversion Factor Matrix for Interest Rate
                        Derivative Contracts \2\
------------------------------------------------------------------------
                                                              Conversion
                     Remaining maturity                         factor
------------------------------------------------------------------------
One year or less...........................................         0.00
Greater than one year and less than or equal to five years.        0.005
Greater than five years....................................        0.015
------------------------------------------------------------------------

    (ii) Multiple OTC interest rate derivative contracts subject to a 
qualifying master netting agreement. Except as modified by paragraph 
(a)(2) of this section, the exposure amount for multiple OTC interest 
rate derivative contracts subject to a qualifying master netting 
agreement is equal to the sum of the net current credit exposure and the 
adjusted sum of the PFE amounts for all OTC interest rate derivative 
contracts subject to the qualifying master netting agreement.
---------------------------------------------------------------------------

    \2\ Non-interest rate derivative contracts are addressed in 
paragraph (d) of this section.
---------------------------------------------------------------------------

    (A) Net current credit exposure. The net current credit exposure is 
the greater of the net sum of all positive and negative fair value of 
the individual OTC interest rate derivative contracts subject to the 
qualifying master netting agreement or zero.
    (B) Adjusted sum of the PFE amounts (Anet). The adjusted sum of the 
PFE amounts is calculated as Anet = (0.4  x  Agross) + (0.6  x  NGR  x  
Agross), where:
    (1) Agross equals the gross PFE (that is, the sum of the PFE amounts 
as determined under paragraph (a)(1)(i)(B) of this section for each 
individual derivative contract subject to the qualifying master netting 
agreement); and
    (2) Net-to-gross Ratio (NGR) equals the ratio of the net current 
credit exposure to the gross current credit exposure. In calculating the 
NGR, the gross current credit exposure equals the sum of the positive 
current credit exposures (as determined under paragraph (a)(1)(i) of 
this section) of all individual derivative contracts subject to the 
qualifying master netting agreement.

[[Page 753]]

    (2) Recognition of credit risk mitigation of collateralized OTC 
derivative contracts. A credit union may recognize credit risk 
mitigation benefits of financial collateral that secures an OTC 
derivative contract or multiple OTC derivative contracts subject to a 
qualifying master netting agreement (netting set) by following the 
requirements of paragraph (c) of this section.
    (b) Cleared transactions for interest rate derivatives--(1) General 
requirements A credit union must use the methodologies described in 
paragraph (b) of this section to calculate risk-weighted assets for a 
cleared transaction.
    (2) Risk-weighted assets for cleared transactions. (i) To determine 
the risk weighted asset amount for a cleared transaction, a credit union 
must multiply the trade exposure amount for the cleared transaction, 
calculated in accordance with paragraph (b)(3) of this section, by the 
risk weight appropriate for the cleared transaction, determined in 
accordance with paragraph (b)(4) of this section.
    (ii) A credit union's total risk-weighted assets for cleared 
transactions is the sum of the risk-weighted asset amounts for all its 
cleared transactions.
    (3) Trade exposure amount. For a cleared transaction the trade 
exposure amount equals:
    (i) The exposure amount for the derivative contract or netting set 
of derivative contracts, calculated using the methodology used to 
calculate exposure amount for OTC interest rate derivative contracts 
under paragraph (a) of this section; plus
    (ii) The fair value of the collateral posted by the credit union and 
held by the, clearing member, or custodian.
    (4) Cleared transaction risk weights. A credit union must apply a 
risk weight of:
    (i) Two percent if the collateral posted by the credit union to the 
DCO or clearing member is subject to an arrangement that prevents any 
losses to the credit union due to the joint default or a concurrent 
insolvency, liquidation, or receivership proceeding of the clearing 
member and any other clearing member clients of the clearing member; and 
the clearing member credit union has conducted sufficient legal review 
to conclude with a well-founded basis (and maintains sufficient written 
documentation of that legal review) that in the event of a legal 
challenge (including one resulting from an event of default or from 
liquidation, insolvency, or receivership proceedings) the relevant court 
and administrative authorities would find the arrangements to be legal, 
valid, binding and enforceable under the law of the relevant 
jurisdictions; or
    (ii) Four percent if the requirements of paragraph (b)(4)(i) are not 
met.
    (5) Recognition of credit risk mitigation of collateralized OTC 
derivative contracts. A credit union may recognize the credit risk 
mitigation benefits of financial collateral that secures a cleared 
derivative contract by following the requirements of paragraph (c) of 
this section.
    (c) Recognition of credit risk mitigation of collateralized interest 
rate derivative contracts. (1) A credit union may recognize the credit 
risk mitigation benefits of financial collateral that secures an OTC 
interest rate derivative contract or multiple interest rate derivative 
contracts subject to a qualifying master netting agreement (netting set) 
or clearing arrangement by using the simple approach in paragraph (c)(3) 
of this section.
    (2) As an alternative to the simple approach, a credit union may 
recognize the credit risk mitigation benefits of financial collateral 
that secures such a contract or netting set if the financial collateral 
is marked-to-fair value on a daily basis and subject to a daily margin 
maintenance requirement by applying a risk weight to the exposure as if 
it were uncollateralized and adjusting the exposure amount calculated 
under paragraph (a) or (b) of this section using the collateral approach 
in paragraph (c)(3) of this section. The credit union must substitute 
the exposure amount calculated under paragraphs (b) or (c) of this 
section in the equation in paragraph (c)(3) of this section.
    (3) Collateralized transactions--(i) General. A credit union may use 
the approach in paragraph (c)(3)(ii) of this section to recognize the 
risk-mitigating effects of financial collateral.
    (ii) Simple collateralized derivatives approach. To qualify for the 
simple approach, the financial collateral must meet the following 
requirements:
    (A) The collateral must be subject to a collateral agreement for at 
least the life of the exposure;
    (B) The collateral must be revalued at least every six months; and
    (C) The collateral and the exposure must be denominated in the same 
currency.
    (iii) Risk weight substitution. (A) A credit union may apply a risk 
weight to the portion of an exposure that is secured by the fair value 
of financial collateral (that meets the requirements for the simple 
collateralized approach of this section) based on the risk weight 
assigned to the collateral as established under Sec. 702.104(c).
    (B) A credit union must apply a risk weight to the unsecured portion 
of the exposure based on the risk weight applicable to the exposure 
under this subpart.
    (iv) Exceptions to the 20 percent risk weight floor and other 
requirements. Notwithstanding the simple collateralized derivatives 
approach in paragraph (c)(3)(ii) of this section:
    (A) A credit union may assign a zero percent risk weight to an 
exposure to a derivatives contract that is marked-to-market on a

[[Page 754]]

daily basis and subject to a daily margin maintenance requirement, to 
the extent the contract is collateralized by cash on deposit.
    (B) A credit union may assign a 10 percent risk weight to an 
exposure to a derivatives contract that is marked-to-market daily and 
subject to a daily margin maintenance requirement, to the extent that 
the contract is collateralized by an exposure that qualifies for a zero 
percent risk weight under Sec. 702.104(c)(2)(i).
    (v) A credit union may assign a zero percent risk weight to the 
collateralized portion of an exposure where:
    (A) The financial collateral is cash on deposit; or
    (B) The financial collateral is an exposure that qualifies for a 
zero percent risk weight under Sec. 702.104(c)(2)(i), and the credit 
union has discounted the fair value of the collateral by 20 percent.
    (4) Collateral haircut approach. (i) A credit union may recognize 
the credit risk mitigation benefits of financial collateral that secures 
a collateralized derivative contract by using the standard supervisory 
haircuts in paragraph (c)(3) of this section.
    (ii) The collateral haircut approach applies to both OTC and cleared 
interest rate derivatives contracts discussed in this section.
    (iii) A credit union must determine the exposure amount for a 
collateralized derivative contracts by setting the exposure amount equal 
to the max 0,[(exposure amount - value of collateral) + (sum of current 
fair value of collateral instruments * market price volatility haircut 
of the collateral instruments)] , where:
    (A) The value of the exposure equals the exposure amount for OTC 
interest rate derivative contracts (or netting set) calculated under 
paragraphs (a)(1)(i) and (ii) of this section.
    (B) The value of the exposure equals the exposure amount for cleared 
interest rate derivative contracts (or netting set) calculated under 
paragraph (b)(3) of this section.
    (C) The value of the collateral is the sum of cash and all 
instruments under the transaction (or netting set).
    (D) The sum of current fair value of collateral instruments as of 
the measurement date.
    (E) A credit union must use the standard supervisory haircuts for 
market price volatility in Table 2 to this section.

 Table 2 to Sec. 702.105--Standard Supervisory Market Price Volatility
                                Haircuts
               [Based on a 10 business-day holding period]
------------------------------------------------------------------------
                                                    Haircut (in percent)
                                                     assigned based on:
                                                   ---------------------
                 Residual maturity                     Collateral risk
                                                     weight (in percent)
                                                   ---------------------
                                                       Zero     20 or 50
------------------------------------------------------------------------
Less than or equal to 1 year......................        0.5        1.0
Greater than 1 year and less than or equal to 5           2.0        3.0
 years............................................
Greater than 5 years..............................        4.0        6.0
                                                   ---------------------
Cash collateral held..............................          Zero
Other exposure types..............................          25.0
------------------------------------------------------------------------

    (d) All other derivative contracts and transactions. Credit unions 
must follow the requirements of the applicable provisions of 12 CFR part 
324, when assigning risk weights to exposure amounts for derivatives 
contracts not addressed in paragraphs (a) or (b) of this section.



Sec. 702.106  Prompt corrective action for adequately capitalized credit 
          unions.

    (a) Earnings retention. Beginning on the effective date of 
classification as adequately capitalized or lower, a federally insured 
credit union must increase the dollar amount of its net worth quarterly 
either in the current quarter, or on average over the current and three 
preceding quarters, by an amount equivalent to at least 1/10th percent 
(0.1%) of its total assets (or more by choice), until it is well 
capitalized.
    (b) Decrease in retention. Upon written application received no 
later than 14 days before the quarter end, the NCUA Board, on a case-by-
case basis, may permit a credit union to increase the dollar amount of 
its net worth by an amount that is less than the amount required under 
paragraph (a) of this section, to the extent the NCUA Board determines 
that such lesser amount:
    (1) Is necessary to avoid a significant redemption of shares; and
    (2) Would further the purpose of this part.
    (c) Decrease by FISCU. The NCUA Board shall consult and seek to work 
cooperatively with the appropriate state official before permitting a 
federally insured state-chartered credit union to decrease its earnings 
retention under paragraph (b) of this section.
    (d) Periodic review. A decision under paragraph (b) of this section 
to permit a credit union to decrease its earnings retention is subject 
to quarterly review and revocation except when the credit union is 
operating under an approved net worth restoration plan that provides for 
decreasing its earnings retention as provided under paragraph (b) of 
this section.

[[Page 755]]



Sec. 702.107  Prompt corrective action for undercapitalized credit 
          unions.

    (a) Mandatory supervisory actions by credit union. A credit union 
which is undercapitalized must--
    (1) Earnings retention. Increase net worth in accordance with 
Sec. 702.106;
    (2) Submit net worth restoration plan. Submit a net worth 
restoration plan pursuant to Sec. 702.111, provided however, that a 
credit union in this category having a net worth ratio of less than five 
percent (5%) which fails to timely submit such a plan, or which 
materially fails to implement an approved plan, is classified 
significantly undercapitalized pursuant to Sec. 702.102(a)(4)(i);
    (3) Restrict increase in assets. Beginning the effective date of 
classification as undercapitalized or lower, not permit the credit 
union's assets to increase beyond its total assets for the preceding 
quarter unless--
    (i) Plan approved. The NCUA Board has approved a net worth 
restoration plan which provides for an increase in total assets and--
    (A) The assets of the credit union are increasing consistent with 
the approved plan; and
    (B) The credit union is implementing steps to increase the net worth 
ratio consistent with the approved plan;
    (ii) Plan not approved. The NCUA Board has not approved a net worth 
restoration plan and total assets of the credit union are increasing 
because of increases since quarter-end in balances of:
    (A) Total accounts receivable and accrued income on loans and 
investments; or
    (B) Total cash and cash equivalents; or
    (C) Total loans outstanding, not to exceed the sum of total assets 
plus the quarter-end balance of unused commitments to lend and unused 
lines of credit provided however that a credit union which increases a 
balance as permitted under paragraphs (a)(3)(ii)(A), (B) or (C) of this 
section cannot offer rates on shares in excess of prevailing rates on 
shares in its relevant market area, and cannot open new branches;
    (4) Restrict member business loans. Beginning the effective date of 
classification as undercapitalized or lower, not increase the total 
dollar amount of member business loans (defined as loans outstanding and 
unused commitments to lend) as of the preceding quarter-end unless it is 
granted an exception under 12 U.S.C. 1757a(b).
    (b) Second tier discretionary supervisory actions by NCUA. Subject 
to the applicable procedures for issuing, reviewing and enforcing 
directives set forth in subpart L of part 747 of this chapter, the NCUA 
Board may, by directive, take one or more of the following actions with 
respect to an undercapitalized credit union having a net worth ratio of 
less than five percent (5%), or a director, officer or employee of such 
a credit union, if it determines that those actions are necessary to 
carry out the purpose of this part:
    (1) Requiring prior approval for acquisitions, branching, new lines 
of business. Prohibit a credit union from, directly or indirectly, 
acquiring any interest in any business entity or financial institution, 
establishing or acquiring any additional branch office, or engaging in 
any new line of business, unless the NCUA Board has approved the credit 
union's net worth restoration plan, the credit union is implementing its 
plan, and the NCUA Board determines that the proposed action is 
consistent with and will further the objectives of that plan;
    (2) Restricting transactions with and ownership of a CUSO. Restrict 
the credit union's transactions with a CUSO, or require the credit union 
to reduce or divest its ownership interest in a CUSO;
    (3) Restricting dividends paid. Restrict the dividend rates the 
credit union pays on shares to the prevailing rates paid on comparable 
accounts and maturities in the relevant market area, as determined by 
the NCUA Board, except that dividend rates already declared on shares 
acquired before imposing a restriction under this paragraph may not be 
retroactively restricted;
    (4) Prohibiting or reducing asset growth. Prohibit any growth in the 
credit union's assets or in a category of assets, or require the credit 
union to reduce its assets or a category of assets;
    (5) Alter, reduce or terminate activity. Require the credit union or 
its CUSO to alter, reduce, or terminate any activity which poses 
excessive risk to the credit union;
    (6) Prohibiting nonmember deposits. Prohibit the credit union from 
accepting all or certain nonmember deposits;
    (7) Dismissing director or senior executive officer. Require the 
credit union to dismiss from office any director or senior executive 
officer, provided however, that a dismissal under this clause shall not 
be construed to be a formal administrative action for removal under 12 
U.S.C. 1786(g);
    (8) Employing qualified senior executive officer. Require the credit 
union to employ qualified senior executive officers (who, if the NCUA 
Board so specifies, shall be subject to its approval); and
    (9) Other action to carry out prompt corrective action. Restrict or 
require such other action by the credit union as the NCUA Board 
determines will carry out the purpose of this part better than any of 
the actions prescribed in paragraphs (b)(1) through (8) of this section.
    (c) First tier application of discretionary supervisory actions. An 
undercapitalized credit union having a net worth ratio of five percent 
(5%) or more, or which is classified undercapitalized by reason of 
failing to maintain a risk-based capital ratio equal to or greater than 
8 percent under Sec. 702.104, is

[[Page 756]]

subject to the discretionary supervisory actions in paragraph (b) of 
this section if it fails to comply with any mandatory supervisory action 
in paragraph (a) of this section or fails to timely implement an 
approved net worth restoration plan under Sec. 702.111, including 
meeting its prescribed steps to increase its net worth ratio.



Sec. 702.108  Prompt corrective action for significantly 
          undercapitalized credit unions.

    (a) Mandatory supervisory actions by credit union. A credit union 
which is significantly undercapitalized must--
    (1) Earnings retention. Increase net worth in accordance with 
Sec. 702.106;
    (2) Submit net worth restoration plan. Submit a net worth 
restoration plan pursuant to Sec. 702.111;
    (3) Restrict increase in assets. Not permit the credit union's total 
assets to increase except as provided in Sec. 702.107(a)(3); and
    (4) Restrict member business loans. Not increase the total dollar 
amount of member business loans (defined as loans outstanding and unused 
commitments to lend) as provided in Sec. 702.107(a)(4).
    (b) Discretionary supervisory actions by NCUA. Subject to the 
applicable procedures for issuing, reviewing and enforcing directives 
set forth in subpart L of part 747 of this chapter, the NCUA Board may, 
by directive, take one or more of the following actions with respect to 
any significantly undercapitalized credit union, or a director, officer 
or employee of such credit union, if it determines that those actions 
are necessary to carry out the purpose of this part:
    (1) Requiring prior approval for acquisitions, branching, new lines 
of business. Prohibit a credit union from, directly or indirectly, 
acquiring any interest in any business entity or financial institution, 
establishing or acquiring any additional branch office, or engaging in 
any new line of business, except as provided in Sec. 702.107(b)(1);
    (2) Restricting transactions with and ownership of CUSO. Restrict 
the credit union's transactions with a CUSO, or require the credit union 
to divest or reduce its ownership interest in a CUSO;
    (3) Restricting dividends paid. Restrict the dividend rates that the 
credit union pays on shares as provided in Sec. 702.107(b)(3);
    (4) Prohibiting or reducing asset growth. Prohibit any growth in the 
credit union's assets or in a category of assets, or require the credit 
union to reduce assets or a category of assets;
    (5) Alter, reduce or terminate activity. Require the credit union or 
its CUSO(s) to alter, reduce, or terminate any activity which poses 
excessive risk to the credit union;
    (6) Prohibiting nonmember deposits. Prohibit the credit union from 
accepting all or certain nonmember deposits;
    (7) New election of directors. Order a new election of the credit 
union's board of directors;
    (8) Dismissing director or senior executive officer. Require the 
credit union to dismiss from office any director or senior executive 
officer, provided however, that a dismissal under this clause shall not 
be construed to be a formal administrative action for removal under 12 
U.S.C. 1786(g);
    (9) Employing qualified senior executive officer. Require the credit 
union to employ qualified senior executive officers (who, if the NCUA 
Board so specifies, shall be subject to its approval);
    (10) Restricting senior executive officers' compensation. Except 
with the prior written approval of the NCUA Board, limit compensation to 
any senior executive officer to that officer's average rate of 
compensation (excluding bonuses and profit sharing) during the four (4) 
calendar quarters preceding the effective date of classification of the 
credit union as significantly undercapitalized, and prohibit payment of 
a bonus or profit share to such officer;
    (11) Other actions to carry out prompt corrective action. Restrict 
or require such other action by the credit union as the NCUA Board 
determines will carry out the purpose of this part better than any of 
the actions prescribed in paragraphs (b)(1) through (10) of this 
section; and
    (12) Requiring merger. Require the credit union to merge with 
another financial institution if one or more grounds exist for placing 
the credit union into conservatorship pursuant to 12 U.S.C. 
1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 
1787(a)(3)(A)(i).
    (c) Discretionary conservatorship or liquidation if no prospect of 
becoming adequately capitalized. Notwithstanding any other actions 
required or permitted to be taken under this section, when a credit 
union becomes significantly undercapitalized (including by 
reclassification under Sec. 702.102(b)), the NCUA Board may place the 
credit union into conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), 
or into liquidation pursuant to 12 U.S.C. 1787(a)(3)(A)(i), provided 
that the credit union has no reasonable prospect of becoming adequately 
capitalized.



Sec. 702.109  Prompt corrective action for critically undercapitalized 
          credit unions.

    (a) Mandatory supervisory actions by credit union. A credit union 
which is critically undercapitalized must--
    (1) Earnings retention. Increase net worth in accordance with 
Sec. 702.106;
    (2) Submit net worth restoration plan. Submit a net worth 
restoration plan pursuant to Sec. 702.111;
    (3) Restrict increase in assets. Not permit the credit union's total 
assets to increase except as provided in Sec. 702.107(a)(3); and

[[Page 757]]

    (4) Restrict member business loans. Not increase the total dollar 
amount of member business loans (defined as loans outstanding and unused 
commitments to lend) as provided in Sec. 702.107(a)(4).
    (b) Discretionary supervisory actions by NCUA. Subject to the 
applicable procedures for issuing, reviewing and enforcing directives 
set forth in subpart L of part 747 of this chapter, the NCUA Board may, 
by directive, take one or more of the following actions with respect to 
any critically undercapitalized credit union, or a director, officer or 
employee of such credit union, if it determines that those actions are 
necessary to carry out the purpose of this part:
    (1) Requiring prior approval for acquisitions, branching, new lines 
of business. Prohibit a credit union from, directly or indirectly, 
acquiring any interest in any business entity or financial institution, 
establishing or acquiring any additional branch office, or engaging in 
any new line of business, except as provided by Sec. 702.107(b)(1);
    (2) Restricting transactions with and ownership of CUSO. Restrict 
the credit union's transactions with a CUSO, or require the credit union 
to divest or reduce its ownership interest in a CUSO;
    (3) Restricting dividends paid. Restrict the dividend rates that the 
credit union pays on shares as provided in Sec. 702.107(b)(3);
    (4) Prohibiting or reducing asset growth. Prohibit any growth in the 
credit union's assets or in a category of assets, or require the credit 
union to reduce assets or a category of assets;
    (5) Alter, reduce or terminate activity. Require the credit union or 
its CUSO(s) to alter, reduce, or terminate any activity which poses 
excessive risk to the credit union;
    (6) Prohibiting nonmember deposits. Prohibit the credit union from 
accepting all or certain nonmember deposits;
    (7) New election of directors. Order a new election of the credit 
union's board of directors;
    (8) Dismissing director or senior executive officer. Require the 
credit union to dismiss from office any director or senior executive 
officer, provided however, that a dismissal under this clause shall not 
be construed to be a formal administrative action for removal under 12 
U.S.C. 1786(g);
    (9) Employing qualified senior executive officer. Require the credit 
union to employ qualified senior executive officers (who, if the NCUA 
Board so specifies, shall be subject to its approval);
    (10) Restricting senior executive officers' compensation. Reduce or, 
with the prior written approval of the NCUA Board, limit compensation to 
any senior executive officer to that officer's average rate of 
compensation (excluding bonuses and profit sharing) during the four (4) 
calendar quarters preceding the effective date of classification of the 
credit union as critically undercapitalized, and prohibit payment of a 
bonus or profit share to such officer;
    (11) Restrictions on payments on uninsured secondary capital. 
Beginning 60 days after the effective date of classification of a credit 
union as critically undercapitalized, prohibit payments of principal, 
dividends or interest on the credit union's uninsured secondary capital 
accounts established after August 7, 2000, except that unpaid dividends 
or interest shall continue to accrue under the terms of the account to 
the extent permitted by law;
    (12) Requiring prior approval. Require a critically undercapitalized 
credit union to obtain the NCUA Board's prior written approval before 
doing any of the following:
    (i) Entering into any material transaction not within the scope of 
an approved net worth restoration plan (or approved revised business 
plan under subpart C of this part);
    (ii) Extending credit for transactions deemed highly leveraged by 
the NCUA Board or, if state-chartered, by the appropriate state 
official;
    (iii) Amending the credit union's charter or bylaws, except to the 
extent necessary to comply with any law, regulation, or order;
    (iv) Making any material change in accounting methods; and
    (v) Paying dividends or interest on new share accounts at a rate 
exceeding the prevailing rates of interest on insured deposits in its 
relevant market area;
    (13) Other action to carry out prompt corrective action. Restrict or 
require such other action by the credit union as the NCUA Board 
determines will carry out the purpose of this part better than any of 
the actions prescribed in paragraphs (b)(1) through (12) of this 
section; and
    (14) Requiring merger. Require the credit union to merge with 
another financial institution if one or more grounds exist for placing 
the credit union into conservatorship pursuant to 12 U.S.C. 
1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 
1787(a)(3)(A)(i).
    (c) Mandatory conservatorship, liquidation or action in lieu 
thereof--(1) Action within 90 days. Notwithstanding any other actions 
required or permitted to be taken under this section (and regardless of 
a credit union's prospect of becoming adequately capitalized), the NCUA 
Board must, within 90 calendar days after the effective date of 
classification of a credit union as critically undercapitalized--
    (i) Conservatorship. Place the credit union into conservatorship 
pursuant to 12 U.S.C. 1786(h)(1)(G); or
    (ii) Liquidation. Liquidate the credit union pursuant to 12 U.S.C. 
1787(a)(3)(A)(ii); or
    (iii) Other corrective action. Take other corrective action, in lieu 
of conservatorship or liquidation, to better achieve the purpose of

[[Page 758]]

this part, provided that the NCUA Board documents why such action in 
lieu of conservatorship or liquidation would do so, provided however, 
that other corrective action may consist, in whole or in part, of 
complying with the quarterly timetable of steps and meeting the 
quarterly net worth targets prescribed in an approved net worth 
restoration plan.
    (2) Renewal of other corrective action. A determination by the NCUA 
Board to take other corrective action in lieu of conservatorship or 
liquidation under paragraph (c)(1)(iii) of this section shall expire 
after an effective period ending no later than 180 calendar days after 
the determination is made, and the credit union shall be immediately 
placed into conservatorship or liquidation under paragraphs (c)(1)(i) 
and (ii) of this section, unless the NCUA Board makes a new 
determination under paragraph (c)(1)(iii) of this section before the end 
of the effective period of the prior determination;
    (3) Mandatory liquidation after 18 months--(i) Generally. 
Notwithstanding paragraphs (c)(1) and (2) of this section, the NCUA 
Board must place a credit union into liquidation if it remains 
critically undercapitalized for a full calendar quarter, on a monthly 
average basis, following a period of 18 months from the effective date 
the credit union was first classified critically undercapitalized.
    (ii) Exception. Notwithstanding paragraph (c)(3)(i) of this section, 
the NCUA Board may continue to take other corrective action in lieu of 
liquidation if it certifies that the credit union--
    (A) Has been in substantial compliance with an approved net worth 
restoration plan requiring consistent improvement in net worth since the 
date the net worth restoration plan was approved;
    (B) Has positive net income or has an upward trend in earnings that 
the NCUA Board projects as sustainable; and
    (C) Is viable and not expected to fail.
    (iii) Review of exception. The NCUA Board shall, at least quarterly, 
review the certification of an exception to liquidation under paragraph 
(c)(3)(ii) of this section and shall either--
    (A) Recertify the credit union if it continues to satisfy the 
criteria of paragraph (c)(3)(ii) of this section; or
    (B) Promptly place the credit union into liquidation, pursuant to 12 
U.S.C. 1787(a)(3)(A)(ii), if it fails to satisfy the criteria of 
paragraph (c)(3)(ii) of this section.
    (4) Nondelegation. The NCUA Board may not delegate its authority 
under paragraph (c) of this section, unless the credit union has less 
than $5,000,000 in total assets. A credit union shall have a right of 
direct appeal to the NCUA Board of any decision made by delegated 
authority under this section within ten (10) calendar days of the date 
of that decision.
    (d) Mandatory liquidation of insolvent federal credit union. In lieu 
of paragraph (c) of this section, a critically undercapitalized federal 
credit union that has a net worth ratio of less than zero percent (0%) 
may be placed into liquidation on grounds of insolvency pursuant to 12 
U.S.C. 1787(a)(1)(A).



Sec. 702.110  Consultation with state officials on proposed prompt 
          corrective action.

    (a) Consultation on proposed conservatorship or liquidation. Before 
placing a federally insured state-chartered credit union into 
conservatorship (pursuant to 12 U.S.C. 1786(h)(1)(F) or (G)) or 
liquidation (pursuant to 12 U.S.C. 1787(a)(3)) as permitted or required 
under subparts A or B of this part to facilitate prompt corrective 
action--
    (1) The NCUA Board shall seek the views of the appropriate state 
official (as defined in Sec. 702.2), and give him or her an opportunity 
to take the proposed action;
    (2) The NCUA Board shall, upon timely request of the appropriate 
state official, promptly provide him or her with a written statement of 
the reasons for the proposed conservatorship or liquidation, and 
reasonable time to respond to that statement; and
    (3) If the appropriate state official makes a timely written 
response that disagrees with the proposed conservatorship or liquidation 
and gives reasons for that disagreement, the NCUA Board shall not place 
the credit union into conservatorship or liquidation unless it first 
considers the views of the appropriate state official and determines 
that--
    (i) The NCUSIF faces a significant risk of loss if the credit union 
is not placed into conservatorship or liquidation; and
    (ii) Conservatorship or liquidation is necessary either to reduce 
the risk of loss, or to reduce the expected loss, to the NCUSIF with 
respect to the credit union.
    (b) Nondelegation. The NCUA Board may not delegate any determination 
under paragraph (a)(3) of this section.
    (c) Consultation on proposed discretionary action. The NCUA Board 
shall consult and seek to work cooperatively with the appropriate state 
official before taking any discretionary supervisory action under 
Secs. 702.107(b), 702.108(b), 702.109(b), 702.204(b) and 702.205(b) with 
respect to a federally insured state-chartered credit union; shall 
provide prompt notice of its decision to the appropriate state official; 
and shall allow the appropriate state official to take the proposed 
action independently or jointly with NCUA.



Sec. 702.111  Net worth restoration plans (NWRP).

    (a) Schedule for filing--(1) Generally. A credit union shall file a 
written net worth restoration plan (NWRP) with the appropriate Regional 
Director and, if state-chartered,

[[Page 759]]

the appropriate state official, within 45 calendar days of the effective 
date of classification as either undercapitalized, significantly 
undercapitalized or critically undercapitalized, unless the NCUA Board 
notifies the credit union in writing that its NWRP is to be filed within 
a different period.
    (2) Exception. An otherwise adequately capitalized credit union that 
is reclassified undercapitalized on safety and soundness grounds under 
Sec. 702.102(b) is not required to submit a NWRP solely due to the 
reclassification, unless the NCUA Board notifies the credit union that 
it must submit an NWRP.
    (3) Filing of additional plan. Notwithstanding paragraph (a)(1) of 
this section, a credit union that has already submitted and is operating 
under a NWRP approved under this section is not required to submit an 
additional NWRP due to a change in net worth category (including by 
reclassification under Sec. 702.102(b)), unless the NCUA Board notifies 
the credit union that it must submit a new NWRP. A credit union that is 
notified to submit a new or revised NWRP shall file the NWRP in writing 
with the appropriate Regional Director within 30 calendar days of 
receiving such notice, unless the NCUA Board notifies the credit union 
in writing that the NWRP is to be filed within a different period.
    (4) Failure to timely file plan. When a credit union fails to timely 
file an NWRP pursuant to this paragraph, the NCUA Board shall promptly 
notify the credit union that it has failed to file an NWRP and that it 
has 15 calendar days from receipt of that notice within which to file an 
NWRP.
    (b) Assistance to small credit unions. Upon timely request by a 
credit union having total assets of less than $10 million (regardless 
how long it has been in operation), the NCUA Board shall provide 
assistance in preparing an NWRP required to be filed under paragraph (a) 
of this section.
    (c) Contents of NWRP. An NWRP must--
    (1) Specify--
    (i) A quarterly timetable of steps the credit union will take to 
increase its net worth ratio, and risk-based capital ratio if 
applicable, so that it becomes adequately capitalized by the end of the 
term of the NWRP, and to remain so for four (4) consecutive calendar 
quarters;
    (ii) The projected amount of net worth increases in each quarter of 
the term of the NWRP as required under Sec. 702.106(a), or as permitted 
under Sec. 702.106(b);
    (iii) How the credit union will comply with the mandatory and any 
discretionary supervisory actions imposed on it by the NCUA Board under 
this subpart;
    (iv) The types and levels of activities in which the credit union 
will engage; and
    (v) If reclassified to a lower category under Sec. 702.102(b), the 
steps the credit union will take to correct the unsafe or unsound 
practice(s) or condition(s);
    (2) Include pro forma financial statements, including any off-
balance sheet items, covering a minimum of the next two years; and
    (3) Contain such other information as the NCUA Board has required.
    (d) Criteria for approval of NWRP. The NCUA Board shall not accept a 
NWRP plan unless it--
    (1) Complies with paragraph (c) of this section;
    (2) Is based on realistic assumptions, and is likely to succeed in 
restoring the credit union's net worth; and
    (3) Would not unreasonably increase the credit union's exposure to 
risk (including credit risk, interest-rate risk, and other types of 
risk).
    (e) Consideration of regulatory capital. To minimize possible long-
term losses to the NCUSIF while the credit union takes steps to become 
adequately capitalized, the NCUA Board shall, in evaluating an NWRP 
under this section, consider the type and amount of any form of 
regulatory capital which may become established by NCUA regulation, or 
authorized by state law and recognized by NCUA, which the credit union 
holds, but which is not included in its net worth.
    (f) Review of NWRP--(1) Notice of decision. Within 45 calendar days 
after receiving an NWRP under this part, the NCUA Board shall notify the 
credit union in writing whether the NWRP has been approved, and shall 
provide reasons for its decision in the event of disapproval.
    (2) Delayed decision. If no decision is made within the time 
prescribed in paragraph (f)(1) of this section, the NWRP is deemed 
approved.
    (3) Consultation with state officials. In the case of an NWRP 
submitted by a federally insured state-chartered credit union (whether 
an original, new, additional, revised or amended NWRP), the NCUA Board 
shall, when evaluating the NWRP, seek and consider the views of the 
appropriate state official, and provide prompt notice of its decision to 
the appropriate state official.
    (g) NWRP not approved--(1) Submission of revised NWRP. If an NWRP is 
rejected by the NCUA Board, the credit union shall submit a revised NWRP 
within 30 calendar days of receiving notice of disapproval, unless it is 
notified in writing by the NCUA Board that the revised NWRP is to be 
filed within a different period.
    (2) Notice of decision on revised NWRP. Within 30 calendar days 
after receiving a revised NWRP under paragraph (g)(1) of this section, 
the NCUA Board shall notify the credit union in writing whether the 
revised NWRP is approved. The Board may extend the time within which 
notice of its decision shall be provided.

[[Page 760]]

    (3) Disapproval of reclassified credit union's NWRP. A credit union 
which has been classified significantly undercapitalized shall remain so 
classified pending NCUA Board approval of a new or revised NWRP.
    (4) Submission of multiple unapproved NWRPs. The submission of more 
than two NWRPs that are not approved is considered an unsafe and unsound 
condition and may subject the credit union to administrative enforcement 
actions under section 206 of the FCUA, 12 U.S.C. 1786 and 1790d.
    (h) Amendment of NWRP. A credit union that is operating under an 
approved NWRP may, after prior written notice to, and approval by the 
NCUA Board, amend its NWRP to reflect a change in circumstance. Pending 
approval of an amended NWRP, the credit union shall implement the NWRP 
as originally approved.
    (i) Publication. An NWRP need not be published to be enforceable 
because publication would be contrary to the public interest.
    (j) Termination of NWRP. For purposes of this part, an NWRP 
terminates once the credit union is classified as adequately capitalized 
and remains so for four consecutive quarters. For example, if a credit 
union with an active NWRP attains the classification as adequately 
classified on December 31, 2015 this would be quarter one and the fourth 
consecutive quarter would end September 30, 2016.



Sec. 702.112  Reserves.

    Each credit union shall establish and maintain such reserves as may 
be required by the FCUA, by state law, by regulation, or in special 
cases by the NCUA Board or appropriate state official.



Sec. 702.113  Full and fair disclosure of financial condition.

    (a) Full and fair disclosure defined. ``Full and fair disclosure'' 
is the level of disclosure which a prudent person would provide to a 
member of a credit union, to NCUA, or, at the discretion of the board of 
directors, to creditors to fairly inform them of the financial condition 
and the results of operations of the credit union.
    (b) Full and fair disclosure implemented. The financial statements 
of a credit union shall provide for full and fair disclosure of all 
assets, liabilities, and members' equity, including such valuation 
(allowance) accounts as may be necessary to present fairly the financial 
condition; and all income and expenses necessary to present fairly the 
statement of income for the reporting period.
    (c) Declaration of officials. The Statement of Financial Condition, 
when presented to members, to creditors or to NCUA, shall contain a dual 
declaration by the treasurer and the chief executive officer, or in the 
latter's absence, by any other officer designated by the board of 
directors of the reporting credit union to make such declaration, that 
the report and related financial statements are true and correct to the 
best of their knowledge and belief and present fairly the financial 
condition and the statement of income for the period covered.
    (d) Charges for loan and lease losses. Full and fair disclosure 
demands that a credit union properly address charges for loan losses as 
follows:
    (1) Charges for loan and lease losses shall be made timely and in 
accordance with GAAP;
    (2) The ALLL must be maintained in accordance with GAAP; and
    (3) At a minimum, adjustments to the ALLL shall be made prior to the 
distribution or posting of any dividend to the accounts of members.



Sec. 702.114  Payment of dividends.

    (a) Restriction on dividends. Dividends shall be available only from 
net worth, net of any special reserves established under Sec. 702.112, 
if any.
    (b) Payment of dividends and interest refunds. The board of 
directors must not pay a dividend or interest refund that will cause the 
credit union's capital classification to fall below adequately 
capitalized under this subpart unless the appropriate Regional Director 
and, if state-chartered, the appropriate state official, have given 
prior written approval (in an NWRP or otherwise). The request for 
written approval must include the plan for eliminating any negative 
retained earnings balance.



        Subpart B_Mandatory and Discretionary Supervisory Actions

    Effective Date Note: At 80 FR 66706, Oct. 29, 2015, subpart B to 
part 702 was revised, effective Jan. 1, 2019. For the convenience of the 
user, the revised text is set forth at the end of this subpart.



Sec. 702.201  Prompt corrective action for ``adequately capitalized''
credit unions.

    (a) Earnings retention. Beginning the effective date of 
classification as ``adequately capitalized'' or lower, a federally-
insured credit union must increase the dollar amount of its net worth 
quarterly either in the current quarter, or on average over the current 
and three preceding quarters, by an amount equivalent to at least 1/10th 
percent (0.1%) of its total assets, and must quarterly transfer that 
amount (or

[[Page 761]]

more by choice) from undivided earnings to its regular reserve account 
until it is ``well capitalized.''
    (b) Decrease in retention. Upon written application received no 
later than 14 days before the quarter end, the NCUA Board, on a case-by-
case basis, may permit a credit union to increase the dollar amount of 
its net worth and quarterly transfer an amount that is less than the 
amount required under paragraph (a) of this section, to the extent the 
NCUA Board determines that such lesser amount--
    (1) Is necessary to avoid a significant redemption of shares; and
    (2) Would further the purpose of this part.
    (c) Decrease by FISCU. The NCUA Board shall consult and seek to work 
cooperatively with the appropriate State official before permitting a 
federally-insured State-chartered credit union to decrease its earnings 
retention under paragraph (b) of this section.
    (d) Periodic review. A decision under paragraph (b) of this section 
to permit a credit union to decrease its earnings retention is subject 
to quarterly review and revocation except when the credit union is 
operating under an approved net worth restoration plan that provides for 
decreasing its earnings retention as provided under paragraph (b).

[67 FR 71091, Nov. 29, 2002]



Sec. 702.202  Prompt corrective action for ``undercapitalized''
credit unions.

    (a) Mandatory supervisory actions by credit union. A federally-
insured credit union which is ``undercapitalized'' must--
    (1) Earnings retention. Increase net worth and transfer earnings to 
its regular reserve account in accordance with Sec. 702.201;
    (2) Submit net worth restoration plan. Submit a net worth 
restoration plan pursuant to Sec. 702.206, provided however, that a 
credit union in this category having a net worth ratio of less than five 
percent (5%) which fails to timely submit such a plan, or which 
materially fails to implement an approved plan, is classified 
``significantly undercapitalized'' pursuant to Sec. 702.102(a)(4)(ii) 
above;
    (3) Restrict increase in assets. Beginning the effective date of 
classification as ``undercapitalized'' or lower, not permit the credit 
union's assets to increase beyond its total assets (per Sec. 702.2(j)) 
for the preceding quarter unless--
    (i) Plan approved. The NCUA Board has approved a net worth 
restoration plan which provides for an increase in total assets and--
    (A) The assets of the credit union are increasing consistent with 
the approved plan; and
    (B) The credit union is implementing steps to increase the net worth 
ratio consistent with the approved plan;
    (ii) Plan not approved. The NCUA Board has not approved a net worth 
restoration plan and total assets of the credit union are increasing 
because of increases since quarter-end in balances of:
    (A) Total accounts receivable and accrued income on loans and 
investments; or
    (B) Total cash and cash equivalents; or
    (C) Total loans outstanding, not to exceed the sum of total assets 
(per Sec. 702.2(j)) plus the quarter-end balance of unused commitments 
to lend and unused lines of credit provided however that a credit union 
which increases a balance as permitted under paragraphs (A), (B) or (C) 
cannot offer rates on shares in excess of prevailing rates on shares in 
its relevant market area, and cannot open new branches;
    (4) Restrict member business loans. Beginning the effective date of 
classification as ``undercapitalized'' or lower, not increase the total 
dollar amount of member business loans (defined as loans outstanding and 
unused commitments to lend) as of the preceding quarter-end unless it is 
granted an exception under 12 U.S.C. 1757a(b).
    (b) ``Second tier'' discretionary supervisory actions by NCUA. 
Subject to the applicable procedures for issuing, reviewing and 
enforcing directives set forth in subpart L of part 747 of this chapter, 
the NCUA Board may, by directive, take one or more of the following 
actions with respect to an ``undercapitalized'' credit union having

[[Page 762]]

a net worth ratio of less than five percent (5%), or a director, officer 
or employee of such a credit union, if it determines that those actions 
are necessary to carry out the purpose of this part:
    (1) Requiring prior approval for acquisitions, branching, new lines 
of business. Prohibit a credit union from, directly or indirectly, 
acquiring any interest in any business entity or financial institution, 
establishing or acquiring any additional branch office, or engaging in 
any new line of business, unless the NCUA Board has approved the credit 
union's net worth restoration plan, the credit union is implementing its 
plan, and the NCUA Board determines that the proposed action is 
consistent with and will further the objectives of that plan;
    (2) Restricting transactions with and ownership of CUSO. Restrict 
the credit union's transactions with a CUSO, or require the credit union 
to reduce or divest its ownership interest in a CUSO;
    (3) Restricting dividends paid. Restrict the dividend rates the 
credit union pays on shares to the prevailing rates paid on comparable 
accounts and maturities in the relevant market area, as determined by 
the NCUA Board, except that dividend rates already declared on shares 
acquired before imposing a restriction under this paragraph may not be 
retroactively restricted;
    (4) Prohibiting or reducing asset growth. Prohibit any growth in the 
credit union's assets or in a category of assets, or require the credit 
union to reduce its assets or a category of assets;
    (5) Alter, reduce or terminate activity. Require the credit union or 
its CUSO to alter, reduce, or terminate any activity which poses 
excessive risk to the credit union;
    (6) Prohibiting nonmember deposits. Prohibit the credit union from 
accepting all or certain nonmember deposits;
    (7) Dismissing director or senior executive officer. Require the 
credit union to dismiss from office any director or senior executive 
officer, provided however, that a dismissal under this clause shall not 
be construed to be a formal administrative action for removal under 12 
U.S.C. 1786(g);
    (8) Employing qualified senior executive officer. Require the credit 
union to employ qualified senior executive officers (who, if the NCUA 
Board so specifies, shall be subject to its approval); and
    (9) Other action to carry out prompt corrective action. Restrict or 
require such other action by the credit union as the NCUA Board 
determines will carry out the purpose of this part better than any of 
the actions prescribed in paragraphs (b)(1) through (8) of this section.
    (c) ``First tier'' application of discretionary supervisory actions. 
An ``undercapitalized'' credit union having a net worth ratio of five 
percent (5%) or more, or which is classified ``undercapitalized'' by 
reason of failing to satisfy a risk-based net worth requirement under 
Sec. 702.105 or Sec. 702.106, is subject to the discretionary 
supervisory actions in paragraph (b) of this section if it fails to 
comply with any mandatory supervisory action in paragraph (a) of this 
section or fails to timely implement an approved net worth restoration 
plan under Sec. 702.206, including meeting its prescribed steps to 
increase its net worth ratio.

[65 FR 8584, Feb. 18, 2000, as amended at 67 FR 71092, Nov. 29, 2002]



Sec. 702.203  Prompt corrective action for ``significantly
undercapitalized'' credit unions.

    (a) Mandatory supervisory actions by credit union. A federally-
insured credit union which is ``significantly undercapitalized'' must--
    (1) Earnings retention. Increase net worth and transfer earnings to 
its regular reserve account in accordance with Sec. 702.201;
    (2) Submit net worth restoration plan. Submit a net worth 
restoration plan pursuant to Sec. 702.206;
    (3) Restrict increase in assets. Not permit the credit union's total 
assets to increase except as provided in Sec. 702.202(a)(3) and
    (4) Restrict member business loans. Not increase the total dollar 
amount of member business loans (defined as loans outstanding and unused 
commitments to lend) as provided in Sec. 702.202(a)(4).

[[Page 763]]

    (b) Discretionary supervisory actions by NCUA. Subject to the 
applicable procedures for issuing, reviewing and enforcing directives 
set forth in subpart L of part 747 of this chapter, the NCUA Board may, 
by directive, take one or more of the following actions with respect to 
any ``significantly undercapitalized'' credit union, or a director, 
officer or employee of such credit union, if it determines that those 
actions are necessary to carry out the purpose of this part:
    (1) Requiring prior approval for acquisitions, branching, new lines 
of business. Prohibit a credit union from, directly or indirectly, 
acquiring any interest in any business entity or financial institution, 
establishing or acquiring any additional branch office, or engaging in 
any new line of business, except as provided in Sec. 702.202(b)(1);
    (2) Restricting transactions with and ownership of CUSO. Restrict 
the credit union's transactions with a CUSO, or require the credit union 
to divest or reduce its ownership interest in a CUSO;
    (3) Restricting dividends paid. Restrict the dividend rates that the 
credit union pays on shares as provided in Sec. 702.202(b)(3);
    (4) Prohibiting or reducing asset growth. Prohibit any growth in the 
credit union's assets or in a category of assets, or require the credit 
union to reduce assets or a category of assets;
    (5) Alter, reduce or terminate activity. Require the credit union or 
its CUSO(s) to alter, reduce, or terminate any activity which poses 
excessive risk to the credit union;
    (6) Prohibiting nonmember deposits. Prohibit the credit union from 
accepting all or certain nonmember deposits;
    (7) New election of directors. Order a new election of the credit 
union's board of directors;
    (8) Dismissing director or senior executive officer. Require the 
credit union to dismiss from office any director or senior executive 
officer, provided however, that a dismissal under this clause shall not 
be construed to be a formal administrative action for removal under 12 
U.S.C. 1786(g);
    (9) Employing qualified senior executive officer. Require the credit 
union to employ qualified senior executive officers (who, if the NCUA 
Board so specifies, shall be subject to its approval);
    (10) Restricting senior executive officers' compensation. Except 
with the prior written approval of the NCUA Board, limit compensation to 
any senior executive officer to that officer's average rate of 
compensation (excluding bonuses and profit sharing) during the four (4) 
calendar quarters preceding the effective date of classification of the 
credit union as ``significantly undercapitalized,'' and prohibit payment 
of a bonus or profit share to such officer;
    (11) Other actions to carry out prompt corrective action. Restrict 
or require such other action by the credit union as the NCUA Board 
determines will carry out the purpose of this part better than any of 
the actions prescribed in paragraphs (b)(1) through (10) of this 
section; and
    (12) Requiring merger. Require the credit union to merge with 
another financial institution if one or more grounds exist for placing 
the credit union into conservatorship pursuant to 12 U.S.C. 
1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 
1787(a)(3)(A)(i).
    (c) Discretionary conservatorship or liquidation if no prospect of 
becoming ``adequately capitalized.'' Notwithstanding any other actions 
required or permitted to be taken under this section, when a credit 
union becomes ``significantly undercapitalized'' (including by 
reclassification under section 702.102(b) above), the NCUA Board may 
place the credit union into conservatorship pursuant to 12 U.S.C. 
1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 
1787(a)(3)(A)(i), provided that the credit union has no reasonable 
prospect of becoming ``adequately capitalized.''

[65 FR 8584, Feb. 18, 2000, as amended at 67 FR 71092, Nov. 29, 2002]



Sec. 702.204  Prompt corrective action for ``critically 
undercapitalized'' credit unions

    (a) Mandatory supervisory actions by credit union. A federally-
insured credit union which is ``critically undercapitalized'' must--
    (1) Earnings retention. Increase net worth and transfer earnings to 
its regular reserve account in accordance with Sec. 702.201;

[[Page 764]]

    (2) Submit net worth restoration plan. Submit a net worth 
restoration plan pursuant to Sec. 702.206;
    (3) Restrict increase in assets. Not permit the credit union's total 
assets to increase except as provided in Sec. 702.202(a)(3); and
    (4) Restrict member business loans. Not increase the total dollar 
amount of member business loans (defined as loans outstanding and unused 
commitments to lend) as provided in Sec. 702.202(a)(4).
    (b) Discretionary supervisory actions by NCUA. Subject to the 
applicable procedures for issuing, reviewing and enforcing directives 
set forth in subpart L of part 747 of this chapter, the NCUA Board may, 
by directive, take one or more of the following actions with respect to 
any ``critically undercapitalized'' credit union, or a director, officer 
or employee of such credit union, if it determines that those actions 
are necessary to carry out the purpose of this part:
    (1) Requiring prior approval for acquisitions, branching, new lines 
of business. Prohibit a credit union from, directly or indirectly, 
acquiring any interest in any business entity or financial institution, 
establishing or acquiring any additional branch office, or engaging in 
any new line of business, except as provided by Sec. 702.202(b)(1);
    (2) Restricting transactions with and ownership of CUSO. Restrict 
the credit union's transactions with a CUSO, or require the credit union 
to divest or reduce its ownership interest in a CUSO;
    (3) Restricting dividends paid. Restrict the dividend rates that the 
credit union pays on shares as provided in Sec. 702.202(b)(3);
    (4) Prohibiting or reducing asset growth. Prohibit any growth in the 
credit union's assets or in a category of assets, or require the credit 
union to reduce assets or a category of assets;
    (5) Alter, reduce or terminate activity. Require the credit union or 
its CUSO(s) to alter, reduce, or terminate any activity which poses 
excessive risk to the credit union;
    (6) Prohibiting nonmember deposits. Prohibit the credit union from 
accepting all or certain nonmember deposits;
    (7) New election of directors. Order a new election of the credit 
union's board of directors;
    (8) Dismissing director or senior executive officer. Require the 
credit union to dismiss from office any director or senior executive 
officer, provided however, that a dismissal under this clause shall not 
be construed to be a formal administrative action for removal under 12 
U.S.C. 1786(g);
    (9) Employing qualified senior executive officer. Require the credit 
union to employ qualified senior executive officers (who, if the NCUA 
Board so specifies, shall be subject to its approval);
    (10) Restricting senior executive officers' compensation. Reduce or, 
with the prior written approval of the NCUA Board, limit compensation to 
any senior executive officer to that officer's average rate of 
compensation (excluding bonuses and profit sharing) during the four (4) 
calendar quarters preceding the effective date of classification of the 
credit union as ``critically undercapitalized,'' and prohibit payment of 
a bonus or profit share to such officer;
    (11) Restrictions on payments on uninsured secondary capital. 
Beginning 60 days after the effective date of classification of a credit 
union as ``critically undercapitalized,'' prohibit payments of 
principal, dividends or interest on the credit union's uninsured 
secondary capital accounts established after August 7, 2000, except that 
unpaid dividends or interest shall continue to accrue under the terms of 
the account to the extent permitted by law;
    (12) Requiring prior approval. Require a ``critically 
undercapitalized'' credit union to obtain the NCUA Board's prior written 
approval before doing any of the following:
    (i) Entering into any material transaction not within the scope of 
an approved net worth restoration plan (or approved revised business 
plan under subpart C of this part);
    (ii) Extending credit for transactions deemed highly leveraged by 
the NCUA Board or, if State-chartered, by the appropriate State 
official;
    (iii) Amending the credit union's charter or bylaws, except to the 
extent necessary to comply with any law, regulation, or order;

[[Page 765]]

    (iv) Making any material change in accounting methods; and
    (v) Paying dividends or interest on new share accounts at a rate 
exceeding the prevailing rates of interest on insured deposits in its 
relevant market area;
    (13) Other action to carry out prompt corrective action. Restrict or 
require such other action by the credit union as the NCUA Board 
determines will carry out the purpose of this part better than any of 
the actions prescribed in paragraphs (b)(1) through (12) of this 
section; and
    (14) Requiring merger. Require the credit union to merge with 
another financial institution if one or more grounds exist for placing 
the credit union into conservatorship pursuant to 12 U.S.C. 
1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 
1787(a)(3)(A)(i).
    (c) Mandatory conservatorship, liquidation or action in lieu 
thereof--(1) Action within 90 days. Notwithstanding any other actions 
required or permitted to be taken under this section (and regardless of 
a credit union's prospect of becoming ``adequately capitalized''), the 
NCUA Board must, within 90 calendar days after the effective date of 
classification of a credit union as ``critically undercapitalized''--
    (i) Conservatorship. Place the credit union into conservatorship 
pursuant to 12 U.S.C. 1786(h)(1)(G); or
    (ii) Liquidation. Liquidate the credit union pursuant to 12 U.S.C. 
1787(a)(3)(A)(ii); or
    (iii) Other corrective action. Take other corrective action, in lieu 
of conservatorship or liquidation, to better achieve the purpose of this 
part, provided that the NCUA Board documents why such action in lieu of 
conservatorship or liquidation would do so, provided however, that other 
corrective action may consist, in whole or in part, of complying with 
the quarterly timetable of steps and meeting the quarterly net worth 
targets prescribed in an approved net worth restoration plan.
    (2) Renewal of other corrective action. A determination by the NCUA 
Board to take other corrective action in lieu of conservatorship or 
liquidation under paragraph (c)(1)(iii) of this section shall expire 
after an effective period ending no later than 180 calendar days after 
the determination is made, and the credit union shall be immediately 
placed into conservatorship or liquidation under paragraphs (c)(1)(i) 
and (ii), unless the NCUA Board makes a new determination under 
paragraph (c)(1)(iii) of this section before the end of the effective 
period of the prior determination;
    (3) Mandatory liquidation after 18 months--(i) Generally. 
Notwithstanding paragraphs (c)(1) and (2) of this section, the NCUA 
Board must place a credit union into liquidation if it remains 
``critically undercapitalized'' for a full calendar quarter, on a 
monthly average basis, following a period of 18 months from the 
effective date the credit union was first classified ``critically 
undercapitalized.''
    (ii) Exception. Notwithstanding paragraph (c)(3)(i) of this section, 
the NCUA Board may continue to take other corrective action in lieu of 
liquidation if it certifies that the credit union--
    (A) Has been in substantial compliance with an approved net worth 
restoration plan requiring consistent improvement in net worth since the 
date the net worth restoration plan was approved;
    (B) Has positive net income or has an upward trend in earnings that 
the NCUA Board projects as sustainable; and
    (C) Is viable and not expected to fail.
    (iii) Review of exception. The NCUA Board shall, at least quarterly, 
review the certification of an exception to liquidation under paragraph 
(c)(3)(ii) of this section and shall either--
    (A) Recertify the credit union if it continues to satisfy the 
criteria of paragraph (c)(3)(ii) of this section; or
    (B) Promptly place the credit union into liquidation, pursuant to 12 
U.S.C. 1787(a)(3)(A)(ii), if it fails to satisfy the criteria of 
paragraph (c)(3)(ii) of this section.
    (4) Nondelegation. The NCUA Board may not delegate its authority 
under paragraph (c) of this section, unless the credit union has less 
than $5,000,000 in total assets. A credit union shall have a right of 
direct appeal to the NCUA Board of any decision made by delegated 
authority under this section

[[Page 766]]

within ten (10) calendar days of the date of that decision.
    (d) Mandatory liquidation of insolvent federal credit union. In lieu 
of paragraph (c) of this section, a ``critically undercapitalized'' 
federal credit union that has a net worth ratio of less than zero 
percent (0%) may be placed into liquidation on grounds of insolvency 
pursuant to 12 U.S.C. 1787(a)(1)(A).

[65 FR 8584, Feb. 18, 2000, as amended at 67 FR 71092, Nov. 29, 2002; 75 
FR 34620, June 18, 2010]



Sec. 702.205  Consultation with State officials on proposed prompt
corrective action.

    (a) Consultation on proposed conservatorship or liquidation. Before 
placing a federally-insured State-chartered credit union into 
conservatorship (pursuant to 12 U.S.C. 1786(h)(1)(F) or (G)) or 
liquidation (pursuant to 12 U.S.C. 1787(a)(3)) as permitted or required 
under subparts B or C of this part to facilitate prompt corrective 
action--
    (1) The NCUA Board shall seek the views of the appropriate State 
official (as defined in Sec. 702.2(b)), and give him or her an 
opportunity to take the proposed action;
    (2) The NCUA Board shall, upon timely request of the appropriate 
State official, promptly provide him or her with a written statement of 
the reasons for the proposed conservatorship or liquidation, and 
reasonable time to respond to that statement; and
    (3) If the appropriate State official makes a timely written 
response that disagrees with the proposed conservatorship or liquidation 
and gives reasons for that disagreement, the NCUA Board shall not place 
the credit union into conservatorship or liquidation unless it first 
considers the views of the appropriate State official and determines 
that--
    (i) The NCUSIF faces a significant risk of loss if the credit union 
is not placed into conservatorship or liquidation; and
    (ii) Conservatorship or liquidation is necessary either to reduce 
the risk of loss, or to reduce the expected loss, to the NCUSIF with 
respect to the credit union.
    (b) Nondelegation. The NCUA Board may not delegate any determination 
under paragraph (a)(3) of this section.
    (c) Consultation on proposed discretionary action. The NCUA Board 
shall consult and seek to work cooperatively with the appropriate State 
official before taking any discretionary supervisory action under 
Secs. 702.202(b), 702.203(b), 702.204(b), 702.304(b) and 702.305(b) with 
respect to a federally-insured State-chartered credit union; shall 
provide prompt notice of its decision to the appropriate State official; 
and shall allow the appropriate State official to take the proposed 
action independently or jointly with NCUA.

[65 FR 8584, Feb. 18, 2000, as amended at 67 FR 71092, Nov. 29, 2002; 75 
FR 34620, June 18, 2010]



Sec. 702.206  Net worth restoration plans.

    (a) Schedule for filing--(1) Generally. A federally-insured credit 
union shall file a written net worth restoration plan (NWRP) with the 
appropriate Regional Director and, if State-chartered, the appropriate 
State official, within 45 calendar days of the effective date of 
classification as either ``undercapitalized,'' ``significantly 
undercapitalized'' or ``critically undercapitalized,'' unless the NCUA 
Board notifies the credit union in writing that its NWRP is to be filed 
within a different period.
    (2) Exception. An otherwise ``adequately capitalized'' credit union 
that is reclassified ``undercapitalized'' on safety and soundness 
grounds under Sec. 702.102(b) is not required to submit a NWRP solely 
due to the reclassification, unless the NCUA Board notifies the credit 
union that it must submit an NWRP.
    (3) Filing of additional plan. Notwithstanding paragraph (a)(1) of 
this section, a credit union that has already submitted and is operating 
under a NWRP approved under this section is not required to submit an 
additional NWRP due to a change in net worth category (including by 
reclassification under Sec. 702.102(b)), unless the NCUA Board notifies 
the credit union that it must submit a new NWRP. A credit union that is 
notified to submit a new or revised NWRP shall file the NWRP in writing 
with the appropriate Regional Director within 30 calendar days

[[Page 767]]

of receiving such notice, unless the NCUA Board notifies the credit 
union in writing that the NWRP is to be filed within a different period.
    (4) Failure to timely file plan. When a credit union fails to timely 
file an NWRP pursuant to this paragraph, the NCUA Board shall promptly 
notify the credit union that it has failed to file an NWRP and that it 
has 15 calendar days from receipt of that notice within which to file an 
NWRP.
    (b) Assistance to small credit unions. Upon timely request by a 
credit union having total assets of less than $10 million (regardless 
how long it has been in operation), the NCUA Board shall provide 
assistance in preparing an NWRP required to be filed under paragraph (a) 
of this section.
    (c) Contents of NWRP. An NWRP must--
    (1) Specify--
    (i) A quarterly timetable of steps the credit union will take to 
increase its net worth ratio so that it becomes ``adequately 
capitalized'' by the end of the term of the NWRP, and to remain so for 
four (4) consecutive calendar quarters. If ``complex,'' the credit union 
is subject to a risk-based net worth requirement that may require a net 
worth ratio higher than six percent (6%) to become ``adequately 
capitalized'';
    (ii) The projected amount of earnings to be transferred to the 
regular reserve account in each quarter of the term of the NWRP as 
required under Sec. 702.201(a), or as permitted under Sec. 702.201(b);
    (iii) How the credit union will comply with the mandatory and any 
discretionary supervisory actions imposed on it by the NCUA Board under 
this subpart;
    (iv) The types and levels of activities in which the credit union 
will engage; and
    (v) If reclassified to a lower category under Sec. 702.102(b), the 
steps the credit union will take to correct the unsafe or unsound 
practice(s) or condition(s);
    (2) Include pro forma financial statements, including any off-
balance sheet items, covering a minimum of the next two years; and
    (3) Contain such other information as the NCUA Board has required.
    (d) Criteria for approval of NWRP. The NCUA Board shall not accept a 
NWRP plan unless it--
    (1) Complies with paragraph (c) of this section;
    (2) Is based on realistic assumptions, and is likely to succeed in 
restoring the credit union's net worth; and (3) Would not unreasonably 
increase the credit union's exposure to risk (including credit risk, 
interest-rate risk, and other types of risk).
    (e) Consideration of regulatory capital. To minimize possible long-
term losses to the NCUSIF while the credit union takes steps to become 
``adequately capitalized,'' the NCUA Board shall, in evaluating an NWRP 
under this section, consider the type and amount of any form of 
regulatory capital which may become established by NCUA regulation, or 
authorized by State law and recognized by NCUA, which the credit union 
holds, but which is not included in its net worth.
    (f) Review of NWRP--(1) Notice of decision. Within 45 calendar days 
after receiving an NWRP under this part, the NCUA Board shall notify the 
credit union in writing whether the NWRP has been approved, and shall 
provide reasons for its decision in the event of disapproval.
    (2) Delayed decision. If no decision is made within the time 
prescribed in paragraph (f)(1) of this section, the NWRP is deemed 
approved.
    (3) Consultation with State officials. In the case of an NWRP 
submitted by a federally-insured State-chartered credit union (whether 
an original, new, additional, revised or amended NWRP), the NCUA Board 
shall, when evaluating the NWRP, seek and consider the views of the 
appropriate State official, and provide prompt notice of its decision to 
the appropriate State official.
    (g) NWRP not approved--(1) Submission of revised NWRP. If an NWRP is 
rejected by the NCUA Board, the credit union shall submit a revised NWRP 
within 30 calendar days of receiving notice of disapproval, unless it is 
notified in writing by the NCUA Board that the revised NWRP is to be 
filed within a different period.
    (2) Notice of decision on revised NWRP. Within 30 calendar days 
after receiving a revised NWRP under paragraph (g)(1)

[[Page 768]]

of this section, the NCUA Board shall notify the credit union in writing 
whether the revised NWRP is approved. The Board may extend the time 
within which notice of its decision shall be provided.
    (3) Disapproval of reclassified credit union's NWRP. A credit union 
which has been classified ``significantly undercapitalized'' under 
Sec. 702.102(a)(4)(ii) shall remain so classified pending NCUA Board 
approval of a new or revised NWRP.
    (h) Amendment of NWRP. A credit union that is operating under an 
approved NWRP may, after prior written notice to, and approval by the 
NCUA Board, amend its NWRP to reflect a change in circumstance. Pending 
approval of an amended NWRP, the credit union shall implement the NWRP 
as originally approved.
    (i) Publication. An NWRP need not be published to be enforceable 
because publication would be contrary to the public interest.

[65 FR 8584, Feb. 18, 2000, as amended at 67 FR 71092, Nov. 29, 2002]

    Effective Date Note: At 80 FR 66706, Oct. 29, 2015, subpart B to 
part 702 was revised, effective Jan. 1, 2019. For the convenience of the 
user, the revised text is set forth as follows:



  Subpart B_Alternative Prompt Corrective Action for New Credit Unions



Sec. 702.201  Scope and definition.

    (a) Scope. This subpart B applies in lieu of subpart A of this part 
exclusively to credit unions defined in paragraph (b) of this section as 
``new'' pursuant to section 216(b)(2) of the FCUA, 12 U.S.C. 
1790d(b)(2).
    (b) New credit union defined. A ``new'' credit union for purposes of 
this subpart is a credit union that both has been in operation for less 
than ten (10) years and has total assets of not more than $10 million. 
Once a credit union reports total assets of more than $10 million on a 
Call Report, the credit union is no longer new, even if its assets 
subsequently decline below $10 million.
    (c) Effect of spin-offs. A credit union formed as the result of a 
``spin-off'' of a group from the field of membership of an existing 
credit union is deemed to be in operation since the effective date of 
the spin-off. A credit union whose total assets decline below $10 
million because a group within its field of membership has been spun-off 
is deemed ``new'' if it has been in operation less than 10 years.
    (d) Actions to evade prompt corrective action. If the NCUA Board 
determines that a credit union was formed, or was reduced in asset size 
as a result of a spin-off, or was merged, primarily to qualify as 
``new'' under this subpart, the credit union shall be deemed subject to 
prompt corrective action under subpart A of this part.



Sec. 702.202  Net worth categories for new credit unions.

    (a) Net worth measures. For purposes of this part, a new credit 
union must determine its capital classification quarterly according to 
its net worth ratio.
    (b) Effective date of net worth classification of new credit union. 
For purposes of subpart B of this part, the effective date of a new 
credit union's classification within a capital category in paragraph (c) 
of this section shall be determined as provided in Sec. 702.101(c); and 
written notice of a decline in net worth classification in paragraph (c) 
of this section shall be given as required by Sec. 702.101(c).
    (c) Net worth categories. A credit union defined as ``new'' under 
this section shall be classified--
    (1) Well capitalized if it has a net worth ratio of seven percent 
(7%) or greater;
    (2) Adequately capitalized if it has a net worth ratio of six 
percent (6%) or more but less than seven percent (7%);
    (3) Moderately capitalized if it has a net worth ratio of three and 
one-half percent (3.5%) or more but less than six percent (6%);
    (4) Marginally capitalized if it has a net worth ratio of two 
percent (2%) or more but less than three and one-half percent (3.5%);
    (5) Minimally capitalized if it has a net worth ratio of zero 
percent (0%) or greater but less than two percent (2%); and
    (6) Uncapitalized if it has a net worth ratio of less than zero 
percent (0%).

   Table 1 to Sec. 702.202--Capital Categories for New Credit Unions
------------------------------------------------------------------------
       A new credit union's capital
             classification is               If it's net worth ratio is
------------------------------------------------------------------------
Well Capitalized..........................  7% or above.
Adequately Capitalized....................  6 to 7%.
Moderately Capitalized....................  3.5% to 5.99%.
Marginally Capitalized....................  2% to 3.49%.
Minimally Capitalized.....................  0% to 1.99%.
Uncapitalized.............................  Less than 0%.
------------------------------------------------------------------------

    (d) Reclassification based on supervisory criteria other than net 
worth. Subject to Sec. 702.102(b), the NCUA Board may reclassify a well 
capitalized, adequately capitalized or moderately capitalized new credit 
union to the next lower capital category (each of such actions is 
hereinafter referred to generally as ``reclassification'') in either of 
the circumstances prescribed in Sec. 702.102(b).
    (e) Consultation with state officials. The NCUA Board shall consult 
and seek to work

[[Page 769]]

cooperatively with the appropriate state official before reclassifying a 
federally insured state-chartered credit union under paragraph (d) of 
this section, and shall promptly notify the appropriate state official 
of its decision to reclassify.



Sec. 702.203  Prompt corrective action for adequately capitalized new 
          credit unions.

    Beginning on the effective date of classification, an adequately 
capitalized new credit union must increase the dollar amount of its net 
worth by the amount reflected in its approved initial or revised 
business plan in accordance with Sec. 702.204(a)(2), or in the absence 
of such a plan, in accordance with Sec. 702.106 until it is well 
capitalized.



Sec. 702.204  Prompt corrective action for moderately capitalized, 
          marginally capitalized, or minimally capitalized new credit 
          unions.

    (a) Mandatory supervisory actions by new credit union. Beginning on 
the date of classification as moderately capitalized, marginally 
capitalized or minimally capitalized (including by reclassification 
under Sec. 702.202(d)), a new credit union must--
    (1) Earnings retention. Increase the dollar amount of its net worth 
by the amount reflected in its approved initial or revised business 
plan;
    (2) Submit revised business plan. Submit a revised business plan 
within the time provided by Sec. 702.206 if the credit union either:
    (i) Has not increased its net worth ratio consistent with its then-
present approved business plan;
    (ii) Has no then-present approved business plan; or
    (iii) Has failed to comply with paragraph (a)(3) of this section; 
and
    (3) Restrict member business loans. Not increase the total dollar 
amount of member business loans (defined as loans outstanding and unused 
commitments to lend) as of the preceding quarter-end unless it is 
granted an exception under 12 U.S.C. 1757a(b).
    (b) Discretionary supervisory actions by NCUA. Subject to the 
applicable procedures set forth in subpart L of part 747 of this chapter 
for issuing, reviewing and enforcing directives, the NCUA Board may, by 
directive, take one or more of the actions prescribed in Sec. 702.109(b) 
if the credit union's net worth ratio has not increased consistent with 
its then-present business plan, or the credit union has failed to 
undertake any mandatory supervisory action prescribed in paragraph (a) 
of this section.
    (c) Discretionary conservatorship or liquidation. Notwithstanding 
any other actions required or permitted to be taken under this section, 
the NCUA Board may place a new credit union which is moderately 
capitalized, marginally capitalized or minimally capitalized (including 
by reclassification under Sec. 702.202(d)) into conservatorship pursuant 
to 12 U.S.C. 1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 
1787(a)(3)(A)(i), provided that the credit union has no reasonable 
prospect of becoming adequately capitalized.



Sec. 702.205  Prompt corrective action for uncapitalized new credit 
          unions.

    (a) Mandatory supervisory actions by new credit union. Beginning on 
the effective date of classification as uncapitalized, a new credit 
union must--
    (1) Earnings retention. Increase the dollar amount of its net worth 
by the amount reflected in the credit union's approved initial or 
revised business plan;
    (2) Submit revised business plan. Submit a revised business plan 
within the time provided by Sec. 702.206, providing for alternative 
means of funding the credit union's earnings deficit, if the credit 
union either:
    (i) Has not increased its net worth ratio consistent with its then-
present approved business plan;
    (ii) Has no then-present approved business plan; or
    (iii) Has failed to comply with paragraph (a)(3) of this section; 
and
    (3) Restrict member business loans. Not increase the total dollar 
amount of member business loans as provided in Sec. 702.204(a)(3).
    (b) Discretionary supervisory actions by NCUA. Subject to the 
procedures set forth in subpart L of part 747 of this chapter for 
issuing, reviewing and enforcing directives, the NCUA Board may, by 
directive, take one or more of the actions prescribed in Sec. 702.109(b) 
if the credit union's net worth ratio has not increased consistent with 
its then-present business plan, or the credit union has failed to 
undertake any mandatory supervisory action prescribed in paragraph (a) 
of this section.
    (c) Mandatory liquidation or conservatorship. Notwithstanding any 
other actions required or permitted to be taken under this section, the 
NCUA Board--
    (1) Plan not submitted. May place into liquidation pursuant to 12 
U.S.C. 1787(a)(3)(A)(ii), or conservatorship pursuant to 12 U.S.C. 
1786(h)(1)(F), an uncapitalized new credit union which fails to submit a 
revised business plan within the time provided under paragraph (a)(2) of 
this section; or
    (2) Plan rejected, approved, implemented. Except as provided in 
paragraph (c)(3) of this section, must place into liquidation pursuant 
to 12 U.S.C. 1787(a)(3)(A)(ii), or conservatorship pursuant to 12 U.S.C. 
1786(h)(1)(F), an uncapitalized new credit union that remains 
uncapitalized one hundred twenty (120) calendar days after the later of:
    (i) The effective date of classification as uncapitalized; or
    (ii) The last day of the calendar month following expiration of the 
time period provided in the credit union's initial business

[[Page 770]]

plan (approved at the time its charter was granted) to remain 
uncapitalized, regardless whether a revised business plan was rejected, 
approved or implemented.
    (3) Exception. The NCUA Board may decline to place a new credit 
union into liquidation or conservatorship as provided in paragraph 
(c)(2) of this section if the credit union documents to the NCUA Board 
why it is viable and has a reasonable prospect of becoming adequately 
capitalized.
    (d) Mandatory liquidation of uncapitalized federal credit union. In 
lieu of paragraph (c) of this section, an uncapitalized federal credit 
union may be placed into liquidation on grounds of insolvency pursuant 
to 12 U.S.C. 1787(a)(1)(A).



Sec. 702.206  Revised business plans (RBP) for new credit unions.

    (a) Schedule for filing--(1) Generally. Except as provided in 
paragraph (a)(2) of this section, a new credit union classified 
moderately capitalized or lower must file a written revised business 
plan (RBP) with the appropriate Regional Director and, if state-
chartered, with the appropriate state official, within 30 calendar days 
of either:
    (i) The last of the calendar month following the end of the calendar 
quarter that the credit union's net worth ratio has not increased 
consistent with the-present approved business plan;
    (ii) The effective date of classification as less than adequately 
capitalized if the credit union has no then-present approved business 
plan; or
    (iii) The effective date of classification as less than adequately 
capitalized if the credit union has increased the total amount of member 
business loans in violation of Sec. 702.204(a)(3).
    (2) Exception. The NCUA Board may notify the credit union in writing 
that its RBP is to be filed within a different period or that it is not 
necessary to file an RBP.
    (3) Failure to timely file plan. When a new credit union fails to 
file an RBP as provided under paragraphs (a)(1) or (a)(2) of this 
section, the NCUA Board shall promptly notify the credit union that it 
has failed to file an RBP and that it has 15 calendar days from receipt 
of that notice within which to do so.
    (b) Contents of revised business plan. A new credit union's RBP 
must, at a minimum--
    (1) Address changes, since the new credit union's current business 
plan was approved, in any of the business plan elements required for 
charter approval under chapter 1, section IV.D. of appendix B to part 
701 of this chapter, or for state-chartered credit unions under 
applicable state law;
    (2) Establish a timetable of quarterly targets for net worth during 
each year in which the RBP is in effect so that the credit union becomes 
adequately capitalized by the time it no longer qualifies as ``new'' per 
Sec. 702.201;
    (3) Specify the projected amount of earnings of net worth increases 
as provided under Sec. 702.204(a)(1) or 702.205(a)(1);
    (4) Explain how the new credit union will comply with the mandatory 
and discretionary supervisory actions imposed on it by the NCUA Board 
under this subpart;
    (5) Specify the types and levels of activities in which the new 
credit union will engage;
    (6) In the case of a new credit union reclassified to a lower 
category under Sec. 702.202(d), specify the steps the credit union will 
take to correct the unsafe or unsound condition or practice; and
    (7) Include such other information as the NCUA Board may require.
    (c) Criteria for approval. The NCUA Board shall not approve a new 
credit union's RBP unless it--
    (1) Addresses the items enumerated in paragraph (b) of this section;
    (2) Is based on realistic assumptions, and is likely to succeed in 
building the credit union's net worth; and
    (3) Would not unreasonably increase the credit union's exposure to 
risk (including credit risk, interest-rate risk, and other types of 
risk).
    (d) Consideration of regulatory capital. To minimize possible long-
term losses to the NCUSIF while the credit union takes steps to become 
adequately capitalized, the NCUA Board shall, in evaluating an RBP under 
this section, consider the type and amount of any form of regulatory 
capital which may become established by NCUA regulation, or authorized 
by state law and recognized by NCUA, which the credit union holds, but 
which is not included in its net worth.
    (e) Review of revised business plan--(1) Notice of decision. Within 
30 calendar days after receiving an RBP under this section, the NCUA 
Board shall notify the credit union in writing whether its RBP is 
approved, and shall provide reasons for its decision in the event of 
disapproval. The NCUA Board may extend the time within which notice of 
its decision shall be provided.
    (2) Delayed decision. If no decision is made within the time 
prescribed in paragraph (e)(1) of this section, the RBP is deemed 
approved.
    (3) Consultation with state officials. When evaluating an RBP 
submitted by a federally insured state-chartered new credit union 
(whether an original, new or additional RBP), the NCUA Board shall seek 
and consider the views of the appropriate state official, and provide 
prompt notice of its decision to the appropriate state official.
    (f) Plan not approved--(1) Submission of new revised plan. If an RBP 
is rejected by the NCUA Board, the new credit union shall submit a new 
RBP within 30 calendar days of receiving notice of disapproval of its 
initial RBP, unless it is notified in writing by the

[[Page 771]]

NCUA Board that the new RBP is to be filed within a different period.
    (2) Notice of decision on revised plan. Within 30 calendar days 
after receiving an RBP under paragraph (f)(1) of this section, the NCUA 
Board shall notify the credit union in writing whether the new RBP is 
approved. The Board may extend the time within which notice of its 
decision shall be provided.
    (3) Submission of multiple unapproved RBPs. The submission of more 
than two RBPs that are not approved is considered an unsafe and unsound 
condition and may subject the credit union to administrative enforcement 
action pursuant to section 206 of the FCUA, 12 U.S.C. 1786 and 1790d.
    (g) Amendment of plan. A credit union that has filed an approved RBP 
may, after prior written notice to and approval by the NCUA Board, amend 
it to reflect a change in circumstance. Pending approval of an amended 
RBP, the new credit union shall implement its existing RBP as originally 
approved.
    (h) Publication. An RBP need not be published to be enforceable 
because publication would be contrary to the public interest.



Sec. 702.207  Incentives for new credit unions.

    (a) Assistance in revising business plans. Upon timely request by a 
credit union having total assets of less than $10 million (regardless 
how long it has been in operation), the NCUA Board shall provide 
assistance in preparing a revised business plan required to be filed 
under Sec. 702.206.
    (b) Assistance. Management training and other assistance to new 
credit unions will be provided in accordance with policies approved by 
the NCUA Board.
    (c) Small credit union program. A new credit union is eligible to 
join and receive comprehensive benefits and assistance under NCUA's 
Small Credit Union Program.



Sec. 702.208  Reserves.

    Each new credit union shall establish and maintain such reserves as 
may be required by the FCUA, by state law, by regulation, or in special 
cases by the NCUA Board or appropriate state official.



Sec. 702.209  Full and fair disclosure of financial condition.

    (a) Full and fair disclosure defined. ``Full and fair disclosure'' 
is the level of disclosure which a prudent person would provide to a 
member of a new credit union, to NCUA, or, at the discretion of the 
board of directors, to creditors to fairly inform them of the financial 
condition and the results of operations of the credit union.
    (b) Full and fair disclosure implemented. The financial statements 
of a new credit union shall provide for full and fair disclosure of all 
assets, liabilities, and members' equity, including such valuation 
(allowance) accounts as may be necessary to present fairly the financial 
condition; and all income and expenses necessary to present fairly the 
statement of income for the reporting period.
    (c) Declaration of officials. The Statement of Financial Condition, 
when presented to members, to creditors or to NCUA, shall contain a dual 
declaration by the treasurer and the chief executive officer, or in the 
latter's absence, by any other officer designated by the board of 
directors of the reporting credit union to make such declaration, that 
the report and related financial statements are true and correct to the 
best of their knowledge and belief and present fairly the financial 
condition and the statement of income for the period covered.
    (d) Charges for loan and lease losses. Full and fair disclosure 
demands that a new credit union properly address charges for loan losses 
as follows:
    (1) Charges for loan and lease losses shall be made timely in 
accordance with generally accepted accounting principles (GAAP);
    (2) The ALLL must be maintained in accordance with GAAP; and
    (3) At a minimum, adjustments to the ALLL shall be made prior to the 
distribution or posting of any dividend to the accounts of members.



Sec. 702.210  Payment of dividends.

    (a) Restriction on dividends. Dividends shall be available only from 
net worth, net of any special reserves established under Sec. 702.208, 
if any.
    (b) Payment of dividends and interest refunds. The board of 
directors may not pay a dividend or interest refund that will cause the 
credit union's capital classification to fall below adequately 
capitalized under subpart A of this part unless the appropriate regional 
director and, if state-chartered, the appropriate state official, have 
given prior written approval (in an RBP or otherwise). The request for 
written approval must include the plan for eliminating any negative 
retained earnings balance.



  Subpart C_Alternative Prompt Corrective Action for New Credit Unions

    Effective Date Note: At 80 FR 66722, Oct. 29, 2015, subpart C to 
part 702 was removed, effective Jan. 1, 2019.



Sec. 702.301  Scope and definition.

    (a) Scope. This subpart C applies in lieu of subpart B of this part 
exclusively to credit unions defined in paragraph (b) of this section as 
``new'' pursuant to 12 U.S.C. 1790d(b)(2).

[[Page 772]]

    (b) New credit union defined. A ``new'' credit union for purposes of 
this subpart is a federally-insured credit union that both has been in 
operation for less than ten (10) years and has total assets of not more 
than $10 million. A credit union which exceeds $10 million in total 
assets may become ``new'' if its total assets subsequently decline below 
$10 million while it is still in operation for less than 10 years.
    (c) Effect of spin-offs. A credit union formed as the result of a 
``spin-off'' of a group from the field of membership of an existing 
credit union is deemed to be in operation since the effective date of 
the ``spin-off.'' A credit union whose total assets decline below $10 
million because a group within its field of membership has been ``spun-
off'' is deemed ``new'' if it has been in operation less than 10 years.
    (d) Actions to evade prompt corrective action. If the NCUA Board 
determines that a credit union was formed, or was reduced in asset size 
as a result of a ``spin-off,'' or was merged, primarily to qualify as 
``new'' under this subpart, the credit union shall be deemed subject to 
prompt corrective action under subpart A of this part.



Sec. 702.302  Net worth categories for new credit unions.

    (a) Net worth measures. For purposes of this part, a new credit 
union must determine its net worth category classification quarterly 
according to its net worth ratio as defined in Sec. 702.2(g).
    (b) Effective date of net worth classification of new credit union. 
For purposes of subpart C, the effective date of a new federally-insured 
credit union's classification within a net worth category in paragraph 
(c) of this section shall be determined as provided in Sec. 702.101(b); 
and written notice to the NCUA Board of a decline in net worth category 
in paragraph (c) of this section shall be given as required by section 
702.101(c).
    (c) Net worth categories. A federally-insured credit union defined 
as ``new'' under this section shall be classified (Table 6)--
    (1) Well capitalized if it has a net worth ratio of seven percent 
(7%) or greater;
    (2) Adequately capitalized if it has a net worth ratio of six 
percent (6%) or more but less than seven percent (7%);
    (3) Moderately capitalized if it has a net worth ratio of three and 
one-half percent (3.5%) or more but less than six percent (6%);
    (4) Marginally capitalized if it has a net worth ratio of two 
percent (2%) or more but less than three and one-half percent (3.5%);
    (5) Minimally capitalized if it has a net worth ratio of zero 
percent (0%) or greater but less than two percent (2%); and
    (6) Uncapitalized if it has a net worth ratio of less than zero 
percent (0%) (e.g., a deficit in retained earnings).
[GRAPHIC] [TIFF OMITTED] TR29NO02.071

    (d) Reclassification based on supervisory criteria other than net 
worth. Subject to Sec. 702.102(b) and (c), the NCUA Board may reclassify 
a ``well capitalized,'' ``adequately capitalized'' or ``moderately 
capitalized'' new credit

[[Page 773]]

union to the next lower net worth category (each of such actions is 
hereinafter referred to generally as ``reclassification'') in either of 
the circumstances prescribed in Sec. 702.102(b).
    (e) Consultation with State officials. The NCUA Board shall consult 
and seek to work cooperatively with the appropriate State official 
before reclassifying a federally-insured State-chartered credit union 
under paragraph (d) of this section, and shall promptly notify the 
appropriate State official of its decision to reclassify.

[65 FR 8584, Feb. 18, 2000, as amended at 65 FR 44974, July 20, 2000; 65 
FR 55439, Sept. 14, 2000; 67 FR 71092, Nov. 29, 2002]



Sec. 702.303  Prompt corrective action for ``adequately capitalized''
new credit unions.

    Beginning on the effective date of classification, an ``adequately 
capitalized'' new credit union must increase the dollar amount of its 
net worth by the amount reflected in its approved initial or revised 
business plan in accordance with Sec. 702.304(a)(2), or in the absence 
of such a plan, in accordance with Sec. 702.201, and quarterly transfer 
that amount from undivided earnings to its regular reserve account, 
until it is ``well capitalized.''

[67 FR 71092, Nov. 29, 2002]



Sec. 702.304  Prompt corrective action for ``moderately capitalized,''
``marginally capitalized'' or ``minimally capitalized''
new credit unions.

    (a) Mandatory supervisory actions by new credit union. Beginning on 
the date of classification as ``moderately capitalized,'' ``marginally 
capitalized'' or minimally capitalized'' (including by reclassification 
under Sec. 702.302(d)), a new credit union must--
    (1) Earnings retention. Increase the dollar amount of its net worth 
by the amount reflected in its approved initial or revised business plan 
and quarterly transfer that amount from undivided earnings to its 
regular reserve account;
    (2) Submit revised business plan. Submit a revised business plan 
within the time provided by Sec. 702.306 if the credit union either:
    (i) Has not increased its net worth ratio consistent with its then-
present approved business plan;
    (ii) Has no then-present approved business plan; or
    (iii) Has failed to comply with paragraph (a)(3) of this section; 
and
    (3) Restrict member business loans. Not increase the total dollar 
amount of member business loans (defined as loans outstanding and unused 
commitments to lend) as of the preceding quarter-end unless it is 
granted an exception under 12 U.S.C. 1757a(b).
    (b) Discretionary supervisory actions by NCUA. Subject to the 
applicable procedures set forth in subpart L of part 747 of this chapter 
for issuing, reviewing and enforcing directives, the NCUA Board may, by 
directive, take one or more of the actions prescribed in Sec. 702.204(b) 
if the credit union's net worth ratio has not increased consistent with 
its then-present business plan, or the credit union has failed to 
undertake any mandatory supervisory action prescribed in paragraph (a) 
of this section.
    (c) Discretionary conservatorship or liquidation. Notwithstanding 
any other actions required or permitted to be taken under this section, 
the NCUA Board may place a new credit union which is ``moderately 
capitalized,'' ``marginally capitalized'' or ``minimally capitalized'' 
(including by reclassification under Sec. 702.302(d)) into 
conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), or into liquidation 
pursuant to 12 U.S.C. 1787(a)(3)(A)(i), provided that the credit union 
has no reasonable prospect of becoming ``adequately capitalized.''

[65 FR 8584, Feb. 18, 2000, as amended at 67 FR 71093, Nov. 29, 2002]



Sec. 702.305  Prompt corrective action for ``uncapitalized'' 
new credit unions.

    (a) Mandatory supervisory actions by new credit union. Beginning on 
the effective date of classification as ``uncapitalized,'' a new credit 
union must--
    (1) Earnings retention. Increase the dollar amount of its net worth 
by the amount reflected in the credit union's approved initial or 
revised business plan;
    (2) Submit revised business plan. Submit a revised business plan 
within the time provided by Sec. 702.306, providing for alternative 
means of funding the credit

[[Page 774]]

union's earnings deficit, if the credit union either:
    (i) Has not increased its net worth ratio consistent with its then-
present approved business plan;
    (ii) Has no then-present approved business plan; or
    (iii) Has failed to comply with paragraph (a)(3) of this section; 
and
    (3) Restrict member business loans. Not increase the total dollar 
amount of member business loans as provided in Sec. 702.304(a)(3).
    (b) Discretionary supervisory actions by NCUA. Subject to the 
procedures set forth in subpart L of part 747 of this chapter for 
issuing, reviewing and enforcing directives, the NCUA Board may, by 
directive, take one or more of the actions prescribed in Sec. 702.204(b) 
if the credit union's net worth ratio has not increased consistent with 
its then-present business plan, or the credit union has failed to 
undertake any mandatory supervisory action prescribed in paragraph (a) 
of this section.
    (c) Mandatory liquidation or conservatorship. Notwithstanding any 
other actions required or permitted to be taken under this section, the 
NCUA Board--
    (1) Plan not submitted. May place into liquidation pursuant to 12 
U.S.C. 1787(a)(3)(A)(ii), or conservatorship pursuant to 12 U.S.C. 
1786(h)(1)(F), an ``uncapitalized'' new credit union which fails to 
submit a revised business plan within the time provided under paragraph 
(a)(2) of this section; or
    (2) Plan rejected, approved, implemented. Except as provided in 
paragraph (c)(3) of this section, must place into liquidation pursuant 
to 12 U.S.C. 1787(a)(3)(A)(ii), or conservatorship pursuant to 12 U.S.C. 
1786(h)(1)(F), an ``uncapitalized'' new credit union that remains 
``uncapitalized'' one hundred twenty (120) calendar days after the later 
of:
    (i) The effective date of classification as ``uncapitalized''; or
    (ii) The last day of the calendar month following expiration of the 
time period provided in the credit union's initial business plan 
(approved at the time its charter was granted) to remain 
``uncapitalized,'' regardless whether a revised business plan was 
rejected, approved or implemented.
    (3) Exception. The NCUA Board may decline to place a new credit 
union into liquidation or conservatorship as provided in paragraph 
(c)(2) of this section if the credit union documents to the NCUA Board 
why it is viable and has a reasonable prospect of becoming ``adequately 
capitalized.''
    (d) Mandatory liquidation of ``uncapitalized'' federal credit union. 
In lieu of paragraph (c) of this section, an ``uncapitalized'' federal 
credit union may be placed into liquidation on grounds of insolvency 
pursuant to 12 U.S.C. 1787(a)(1)(A).

[65 FR 8584, Feb. 18, 2000, as amended at 67 FR 71093, Nov. 29, 2002]



Sec. 702.306  Revised business plans for new credit unions.

    (a) Schedule for filing--(1) Generally. Except as provided in 
paragraph (a)(2) of this section, a new credit union classified 
``moderately capitalized'' or lower must file a written revised business 
plan (RBP) with the appropriate Regional Director and, if State-
chartered, with the appropriate State official, within 30 calendar days 
of either:
    (i) The last of the calendar month following the end of the calendar 
quarter that the credit union's net worth ratio has not increased 
consistent with its the-present approved business plan;
    (ii) The effective date of classification as less than ``adequately 
capitalized'' if the credit union has no then-present approved business 
plan; or
    (iii) The effective date of classification as less than ``adequately 
capitalized'' if the credit union has increased the total amount of 
member business loans in violation of Sec. 702.304(a)(3).
    (2) Exception. The NCUA Board may notify the credit union in writing 
that its RBP is to be filed within a different period or that it is not 
necessary to file an RBP.
    (3) Failure to timely file plan. When a new credit union fails to 
file an RBP as provided under paragraphs (a)(1) or (a)(2) of this 
section, the NCUA Board shall promptly notify the credit union that it 
has failed to file an RBP and that it has 15 calendar days from receipt 
of that notice within which to do so.

[[Page 775]]

    (b) Contents of revised business plan. A new credit union's RBP 
must, at a minimum--
    (1) Address changes, since the new credit union's current business 
plan was approved, in any of the business plan elements required for 
charter approval under Chapter 1, section IV.D. of NCUA's Chartering and 
Field of Membership Manual (IRPS 99-1), 63 FR 71998, 72019 (Dec. 30, 
1998), or its successor(s), or for State-chartered credit unions under 
applicable State law;
    (2) Establish a timetable of quarterly targets for net worth during 
each year in which the RBP is in effect so that the credit union becomes 
``adequately capitalized'' by the time it no longer qualifies as ``new'' 
per Sec. 702.301(b);
    (3) Specify the projected amount of earnings to be transferred 
quarterly to its regular reserve as provided under Sec. 702.304(a)(1) or 
702.305(a)(1);
    (4) Explain how the new credit union will comply with the mandatory 
and discretionary supervisory actions imposed on it by the NCUA Board 
under this subpart;
    (5) Specify the types and levels of activities in which the new 
credit union will engage;
    (6) In the case of a new credit union reclassified to a lower 
category under Sec. 702.302(d), specify the steps the credit union will 
take to correct the unsafe or unsound condition or practice; and
    (7) Include such other information as the NCUA Board may require.
    (c) Criteria for approval. The NCUA Board shall not approve a new 
credit union's RBP unless it--
    (1) Addresses the items enumerated in paragraph (b) of this section;
    (2) Is based on realistic assumptions, and is likely to succeed in 
building the credit union's net worth; and
    (3) Would not unreasonably increase the credit union's exposure to 
risk (including credit risk, interest-rate risk, and other types of 
risk).
    (d) Consideration of regulatory capital. To minimize possible long-
term losses to the NCUSIF while the credit union takes steps to become 
``adequately capitalized,'' the NCUA Board shall, in evaluating an RBP 
under this section, consider the type and amount of any form of 
regulatory capital which may become established by NCUA regulation, or 
authorized by State law and recognized by NCUA, which the credit union 
holds, but which is not included in its net worth.
    (e) Review of revised business plan--(1) Notice of decision. Within 
30 calendar days after receiving an RBP under this section, the NCUA 
Board shall notify the credit union in writing whether its RBP is 
approved, and shall provide reasons for its decision in the event of 
disapproval. The NCUA Board may extend the time within which notice of 
its decision shall be provided.
    (2) Delayed decision. If no decision is made within the time 
prescribed in paragraph (e)(1) of this section, the RBP is deemed 
approved.
    (3) Consultation with State officials. When evaluating an RBP 
submitted by a federally-insured State-chartered new credit union 
(whether an original, new or additional RBP), the NCUA Board shall seek 
and consider the views of the appropriate State official, and provide 
prompt notice of its decision to the appropriate State official.
    (f) Plan not approved--(1) Submission of new revised plan. If an RBP 
is rejected by the NCUA Board, the new credit union shall submit a new 
RBP within 30 calendar days of receiving notice of disapproval of its 
initial RBP, unless it is notified in writing by the NCUA Board that the 
new RBP is to be filed within a different period.
    (2) Notice of decision on revised plan. Within 30 calendar days 
after receiving an RBP under paragraph (f)(1) of this section, the NCUA 
Board shall notify the credit union in writing whether the new RBP is 
approved. The Board may extend the time within which notice of its 
decision shall be provided.
    (g) Amendment of plan. A credit union that has filed an approved RBP 
may, after prior written notice to and approval by the NCUA Board, amend 
it to reflect a change in circumstance. Pending approval of an amended 
RBP, the new credit union shall implement its existing RBP as originally 
approved.
    (h) Publication. An RBP need not be published to be enforceable 
because publication would be contrary to the public interest.

[65 FR 8584, Feb. 18, 2000, as amended at 67 FR 71093, Nov. 29, 2002]

[[Page 776]]



Sec. 702.307  Incentives for new credit unions.

    (a) Assistance in revising business plans. Upon timely request by a 
credit union having total assets of less than $10 million (regardless 
how long it has been in operation), the NCUA Board shall provide 
assistance in preparing a revised business plan required to be filed 
under Sec. 702.306.
    (b) Assistance. Management training and other assistance to new 
credit unions will be provided in accordance with policies approved by 
the NCUA Board.
    (c) Small credit union program. A new credit union is eligible to 
join and receive comprehensive benefits and assistance under NCUA's 
Small Credit Union Program.



                           Subpart D_Reserves

    Effective Date Note: At 80 FR 66722, Oct. 29, 2015, subpart D to 
part 702 was removed, effective Jan. 1, 2019.



Sec. 702.401  Reserves.

    (a) Special reserve. Each federally-insured credit union shall 
establish and maintain such reserves as may be required by the FCUA, by 
state law, by regulation, or in special cases by the NCUA Board or 
appropriate State official.
    (b) Regular reserve. Each federally-insured credit union shall 
establish and maintain a regular reserve account for the purpose of 
absorbing losses that exceed undivided earnings and other appropriations 
of undivided earnings, subject to paragraph (c) of this section. 
Earnings required to be transferred annually to a credit union's regular 
reserve under subparts B or C of this part shall be held in this 
account.
    (c) Charges to regular reserve after depleting undivided earnings. 
The board of directors of a federally-insured credit union may authorize 
losses to be charged to the regular reserve after first depleting the 
balance of the undivided earnings account and other reserves, provided 
that the authorization states the amount and provides an explanation of 
the need for the charge, and either--
    (1) The charge will not cause the credit union's net worth 
classification to fall below ``adequately capitalized'' under subparts B 
or C of this part; or
    (2) If the charge will cause the net worth classification to fall 
below ``adequately capitalized,'' the appropriate Regional Director and, 
if State-chartered, the appropriate State official, have given written 
approval (in an NWRP or otherwise) for the charge.
    (d) Transfers to regular reserve. The transfer of earnings to a 
federally-insured credit union's regular reserve account when required 
under subparts B or C of this part must occur after charges for loan or 
other losses are addressed as provided in paragraph (c) of this section 
and Sec. 702.402(d), but before payment of any dividends to members.

[65 FR 8584, Feb. 18, 2000, as amended at 67 FR 71093, Nov. 29, 2002]



Sec. 702.402  Full and fair disclosure of financial condition.

    (a) Full and fair disclosure defined. ``Full and fair disclosure'' 
is the level of disclosure which a prudent person would provide to a 
member of a federally-insured credit union, to NCUA, or, at the 
discretion of the board of directors, to creditors to fairly inform them 
of the financial condition and the results of operations of the credit 
union.
    (b) Full and fair disclosure implemented. The financial statements 
of a federally-insured credit union shall provide for full and fair 
disclosure of all assets, liabilities, and members' equity, including 
such valuation (allowance) accounts as may be necessary to present 
fairly the financial condition; and all income and expenses necessary to 
present fairly the statement of income for the reporting period.
    (c) Declaration of officials. The Statement of Financial Condition, 
when presented to members, to creditors or to the NCUA, shall contain a 
dual declaration by the treasurer and the chief executive officer, or in 
the latter's absence, by any other officer designated by the board of 
directors of the reporting credit union to make such declaration, that 
the report and related financial statements are true and correct to the 
best of their knowledge and belief and present fairly the financial 
condition and the statement of income for the period covered.

[[Page 777]]

    (d) Charges for loan losses. Full and fair disclosure demands that a 
credit union properly address charges for loan losses as follows:
    (1) Charges for loan losses shall be made in accordance with 
generally accepted accounting principles (GAAP);
    (2) The allowance for loan and lease losses (ALL) established for 
loans must fairly present the probable losses for all categories of 
loans and the proper valuation of loans. The valuation allowance must 
encompass specifically identified loans, as well as estimated losses 
inherent in the loan portfolio, such as loans and pools of loans for 
which losses have been incurred but are not identifiable on a specific 
loan-by-loan basis;
    (3) Adjustments to the valuation ALL will be recorded in the expense 
account ``Provision for Loan and Lease Losses'';
    (4) The maintenance of an ALL shall not affect the requirement to 
transfer earnings to a credit union's regular reserve when required 
under subparts B or C of this part; and
    (5) At a minimum, adjustments to the ALL shall be made prior to the 
distribution or posting of any dividend to the accounts of members.



Sec. 702.403  Payment of dividends.

    (a) Restriction on dividends. Dividends shall be available only from 
undivided earnings, if any.
    (b) Payment of dividends if undivided earnings depleted. The board 
of directors of a ``well capitalized'' federally-insured credit union 
that has depleted the balance of its undivided earnings account may 
authorize a transfer of funds from the credit union's regular reserve 
account to undivided earnings to pay dividends, provided that either--
    (1) The payment of dividends will not cause the credit union's net 
worth classification to fall below ``adequately capitalized'' under 
subpart B or C of this part; or
    (2) If the payment of dividends will cause the net worth 
classification to fall below ``adequately capitalized,'' the appropriate 
Regional Director and, if State-chartered, the appropriate State 
official, have given prior written approval (in an NWRP or otherwise) to 
pay a dividend.

[65 FR 8584, Feb. 18, 2000, as amended at 67 FR 71093, Nov. 29, 2002]



              Subpart E_Capital Planning and Stress Testing

    Source: 79 FR 24315, Apr. 30, 2014, unless otherwise noted.

    Effective Date Note: At 80 FR 66722, Oct. 29, 2015, subpart E to 
part 702 was redesignated as subpart C, effective Jan. 1, 2019.



Sec. 702.501  Authority, purpose, and reservation of authority.

    (a) Authority. This subpart is issued by the National Credit Union 
Administration (NCUA).
    (b) Purpose. This subpart requires covered credit unions to develop 
and maintain capital plans and describes stress testing requirements and 
actions on covered credit union capital plans.
    (c) Reservation of authority. Notwithstanding any other provisions 
of this subpart, NCUA may modify some or all of the requirements of this 
subpart. Any exercise of authority under this section by NCUA will be in 
writing and will consider the financial condition, size, complexity, 
risk profile, scope of operations, and level of capital of the covered 
credit union, in addition to any other relevant factors. Nothing in this 
subpart limits the authority of NCUA under any other provision of law or 
regulation to take supervisory or enforcement action, including action 
to address unsafe and unsound practices or conditions, or violations of 
law or regulation.



Sec. 702.502  Definitions.

    For purposes of this subpart--
    Adverse scenario means a scenario that is more adverse than that 
associated with the baseline scenario.
    Baseline scenario means a scenario that reflects the consensus views 
of the economic and financial outlook.
    Capital plan means a written presentation of a covered credit 
union's capital planning strategies and capital adequacy process that 
includes the mandatory elements set forth in this subpart.

[[Page 778]]

    Capital planning process means development of a capital policy and 
formulation of a capital plan that conforms to this part.
    Covered credit union means a federally insured credit union whose 
assets are $10 billion or more. A credit union that crosses the asset 
threshold as of March 31 of a given calendar year is subject to the 
capital planning and stress testing requirements of this subpart in the 
following calendar year.
    Planning horizon means the period of 3 years over which capital 
planning projections extend.
    Pre-provision net revenue means the sum of net interest income and 
non-interest income, less expenses, before adjusting for loss 
provisions.
    Provision for loan and lease losses means the provision for loan and 
lease losses as reported by the covered credit union on its Call Report.
    Reverse stress test means a test that defines severely unfavorable 
outcomes and then identifies events or scenarios that lead to these 
outcomes. Examples of severely unfavorable outcomes are breaching 
regulatory capital, failing to meet obligations, or being unable to 
continue independent operations.
    Scenarios are those sets of conditions that affect the U.S. economy 
or the financial condition of a covered credit union that serve as the 
basis for stress testing, including, but not limited to, NCUA-
established baseline, adverse, and severely adverse scenarios.
    Sensitivity testing means testing the relationship between specific 
variables, parameters, and inputs and their impacts on analytical 
results.
    Severely adverse scenario means a scenario that overall is more 
severe than that associated with the adverse scenario.
    Stress test means the process to assess the potential impact of 
expected and stressed economic conditions on the consolidated earnings, 
losses, and capital of a covered credit union over the planning horizon, 
taking into account the current state of the covered credit union and 
the covered credit union's risks, exposures, strategies, and activities.
    Stress test capital means net worth (less assistance provided under 
Section 208 of the Federal Credit Union Act, subordinated debt included 
in net worth, and NCUSIF deposit) under stress test scenarios.
    Stress test capital ratio means a covered credit union's stress test 
capital divided by its total consolidated assets less NCUSIF deposit.

[79 FR 24315, Apr. 30, 2014, as amended at 80 FR 48012, Aug. 11, 2015]



Sec. 702.503  Capital policy.

    (a) General requirements. The extent and sophistication of a covered 
credit union's governance over its capital planning and analysis process 
must align with the extent and sophistication of that process. The 
process must be consistent with the financial condition, size, 
complexity, risk profile, scope of operations, and level of capital of 
the covered credit union. The ultimate responsibility for governance 
over a covered credit union's capital planning and analysis process 
rests with the credit union's board of directors. Senior management must 
establish a comprehensive, integrated, and effective process that fits 
into the broader risk management of the credit union. Senior management 
responsible for capital planning and analysis must provide regular 
reports on capital planning and analysis to the credit union's board of 
directors (or a designated committee of the board).
    (b) Mandatory elements. A covered credit union's board of directors 
(or a designated committee of the board) must review and approve a 
capital policy, along with procedures to implement it. The capital 
policy must:
    (1) State goals and limits for capital levels and risk exposure.
    (2) Establish requirements for reviewing and reporting capital 
levels and breaches of capital limits, with contingency plans for 
remedying any breaches.
    (3) State the governance over the capital analysis process, 
including all the activities that contribute to the analysis;
    (4) Specify capital analysis roles and responsibilities, including 
controls over external resources used for any part of capital analysis 
(such as vendors and data providers);

[[Page 779]]

    (5) Specify the internal controls that govern capital planning, 
including review by internal audit, control of changes in capital 
planning procedures, and required documentation;
    (6) Describe the frequency with which capital analyses will be 
conducted;
    (7) State how capital analysis results are used and by whom; and
    (8) Be reviewed at least annually and updated as necessary to ensure 
that it remains current with changes in market conditions, credit union 
products and strategies, credit union risk exposures and activities, the 
credit union's established risk appetite, and industry practices.



Sec. 702.504  Capital planning.

    (a) Annual capital planning. (1) A covered credit union must develop 
and maintain a capital plan. It must submit this plan and its capital 
policy to NCUA by May 31 each year, or such later date as directed by 
NCUA. The plan must be based on the credit union's financial data as of 
December 31 of the preceding calendar year, or such other date as 
directed by NCUA. NCUA will assess whether the capital planning and 
analysis process is sufficiently robust in determining whether to accept 
a credit union's capital plan.
    (2) A covered credit union's board of directors (or a designated 
committee of the board) must at least annually, and prior to the 
submission of the capital plan under paragraph (a)(1) of this section:
    (i) Review the credit union's process for assessing capital 
adequacy;
    (ii) Ensure that any deficiencies in the credit union's process for 
assessing capital adequacy are appropriately remedied; and
    (iii) Approve the credit union's capital plan.
    (b) Mandatory elements. A capital plan must contain at least the 
following elements:
    (1) A quarterly assessment of the expected sources and levels of 
stress test capital over the planning horizon that reflects the covered 
credit union's financial state, size, complexity, risk profile, scope of 
operations, and existing level of capital, assuming both expected and 
unfavorable conditions, including:
    (i) Estimates of projected revenues, losses, reserves, and pro forma 
capital levels, over each quarter of the planning horizon under expected 
and unfavorable conditions; and
    (ii) A detailed description of the credit union's process for 
assessing capital adequacy;
    (2) A discussion of how the credit union will, under expected and 
unfavorable conditions, maintain stress test capital commensurate with 
all of its risks, including reputational, strategic, legal, and 
compliance risks;
    (3) A discussion of how the credit union will, under expected and 
unfavorable conditions, maintain ready access to funding, meet its 
obligations to all creditors and other counterparties, and continue to 
serve as an intermediary for its members;
    (4) If the credit union conducts its own stress test under 
Sec. 702.506(c), a discussion of how the credit union will maintain a 
stress test capital ratio of 5 percent or more under baseline, adverse, 
and severely adverse conditions in each quarter of the 9-quarter 
horizon;
    (5) A discussion of any expected changes to the credit union's 
business plan that are likely to have a material impact on the credit 
union's capital adequacy and liquidity; and
    (6) A program to:
    (i) Conduct sensitivity testing to analyze the effect on the credit 
union's stress test capital of changes in variables, parameters, and 
inputs used by the credit union in preparing its capital plan;
    (ii) Conduct reverse stress testing to identify events and 
circumstances that cause severely unfavorable outcomes for the credit 
union; and
    (iii) Analyze the impact of credit risk and interest rate risk to 
capital under unfavorable economic conditions, both separately and in 
combination with each other.

[79 FR 24315, Apr. 30, 2014, as amended at 80 FR 48012, Aug. 11, 2015; 
81 FR 7198, Feb. 11, 2016]

    Effective Date Note: At 80 FR 66722, Oct. 29, 2015, Sec. 702.504 was 
amended in paragraph (b)(4) by removing the citation ``Sec. 702.506(c)'' 
and adding in its place ``Sec. 702.306(c)'', effective Jan. 1, 2019.

[[Page 780]]



Sec. 702.505  NCUA action on capital plans.

    (a) Timing. NCUA will notify the covered credit union of the 
acceptance or rejection of its capital plan by August 31 of the year in 
which the credit union submitted its plan.
    (b) Grounds for rejection of capital plan. NCUA may reject a capital 
plan if it determines that:
    (1) The covered credit union has material unresolved supervisory 
issues associated with its capital planning process;
    (2) The capital analysis underlying the covered credit union's 
capital plan, or the covered credit union's methodologies for reviewing 
the robustness of its capital adequacy, are not reasonable or 
appropriate;
    (3) Data utilized for the capital analysis is insufficiently 
detailed to capture the risks of the covered credit union, or the data 
lacks integrity;
    (4) The plan does not meet all of the requirements of Sec. 702.504;
    (5) Unacceptable weakness in the capital plan or policy, the capital 
planning analysis, or any critical system or process supporting capital 
analysis;
    (6) The covered credit union's capital planning process constitutes 
an unsafe or unsound practice, or would violate any law, regulation, 
NCUA order, directive, or any condition imposed by, or written agreement 
with, NCUA. In determining whether a capital plan would constitute an 
unsafe or unsound practice, NCUA considers whether the covered credit 
union is and would remain in sound financial condition after giving 
effect to the capital plan.
    (c) Notification in writing. NCUA will notify the credit union in 
writing of the reasons for a decision to reject a capital plan.
    (d) Resubmission of a capital plan. If NCUA rejects a credit union's 
capital plan, the credit union must update and resubmit an acceptable 
capital plan to NCUA by November 30 of the year in which the credit 
union submitted its plan. The resubmitted capital plan must, at a 
minimum, address:
    (1) NCUA-noted deficiencies in the credit union's original capital 
plan or policy; and
    (2) Remediation plans for unresolved supervisory issues contributing 
to the rejection of the credit union's original capital plan.
    (e) Supervisory actions. Any covered credit union operating without 
a capital plan accepted by NCUA may be subject to supervisory actions on 
the part of NCUA.
    (f) Consultation on proposed action. Before taking any action under 
this section on the capital plan of a federally insured, state-chartered 
credit union, NCUA will consult and work cooperatively with the 
appropriate State official.

[79 FR 24315, Apr. 30, 2014, as amended at 80 FR 48012, Aug. 11, 2015]

    Effective Date Note: At 80 FR 66722, Oct. 29, 2015, Sec. 702.505 was 
amended in paragraph (b)(4) by removing the citation ``Sec. 702.504'' 
and adding in its place ``Sec. 702.304'', effective Jan. 1, 2019.



Sec. 702.506  Annual supervisory stress testing.

    (a) General requirements. The supervisory stress tests consist of 
baseline, adverse, and severely adverse scenarios, which NCUA will 
provide by February 28 of each year. The tests will be based on the 
credit union's financial data as of December 31 of the preceding 
calendar year, or such other date as directed by NCUA. The tests will 
take into account all relevant exposures and activities of a credit 
union to evaluate its ability to absorb losses in specified scenarios 
over a 9-quarter horizon. The minimum stress test capital ratio is 5 
percent.
    (b) NCUA-run tests. Except as provided in paragraph (c) of this 
section, NCUA will conduct the tests described in this section.
    (c) Credit union-run tests under NCUA supervision. After NCUA has 
completed three consecutive supervisory stress tests of a covered credit 
union, the covered credit union may, with NCUA approval, conduct the 
tests described in this subpart. A covered credit union must submit its 
request to NCUA to conduct its own stress test by November 30 for the 
following annual cycle. NCUA will approve or decline the credit union's 
request by December 31 of the year in which the credit union submitted 
its request. NCUA reserves the right to conduct the tests described in 
this section on any covered credit

[[Page 781]]

union at any time. Where both NCUA and a covered credit union have 
conducted the tests, the results of NCUA's tests will determine whether 
the covered credit union has met the requirements of this subpart.
    (d) Potential impact on capital. In conducting stress tests under 
this subpart, NCUA or the covered credit union will estimate the 
following for each scenario during each quarter of the stress test 
horizon:
    (1) Losses, pre-provision net revenues, loan and lease loss 
provisions, and net income; and
    (2) The potential impact on the stress test capital ratio, 
incorporating the effects of any capital action over the 9-quarter 
stress test horizon and maintenance of an allowance for loan losses 
appropriate for credit exposures throughout the horizon. NCUA or the 
covered credit union will conduct the stress tests without assuming any 
risk mitigation actions on the part of the covered credit union, except 
those existing and identified as part of the covered credit union's 
balance sheet, or off-balance sheet positions, such as asset sales or 
derivatives positions, on the date of the stress test.
    (e) Information collection. Upon request, the covered credit union 
must provide NCUA with any relevant qualitative or quantitative 
information requested by NCUA pertinent to the stress tests under this 
subpart.
    (f) Stress test results. NCUA will provide each covered credit union 
with the results of the stress tests by August 31 of the year in which 
it conducted the tests. A credit union conducting its own stress tests 
must incorporate the test results in its capital plan.
    (g) Supervisory actions. If NCUA-run stress tests show that a 
covered credit union does not have the ability to maintain a stress test 
capital ratio of 5 percent or more under expected and stressed 
conditions in each quarter of the 9-quarter horizon, the credit union 
must provide NCUA, by November 30 of the calendar year in which NCUA 
conducted the tests, a stress test capital enhancement plan showing how 
it will meet that target. If credit union-run stress tests show that a 
covered credit union does not have the ability to maintain a stress test 
capital ratio of 5 percent or more under expected and stressed 
conditions in each quarter of the 9-quarter horizon, the credit union 
must incorporate a stress test capital enhancement plan into its capital 
plan. Any affected credit union operating without a stress test capital 
enhancement plan accepted by NCUA may be subject to supervisory actions.
    (h) Consultation on proposed action. Before taking any action under 
this section against a federally insured, state-chartered credit union, 
NCUA will consult and work cooperatively with the appropriate State 
official.

[79 FR 24315, Apr. 30, 2014, as amended at 80 FR 48012, Aug. 11, 2015]



    Sec. Appendix A to Part 702--Gross-Up Approach, and Look-Through 
                               Approaches

    Instead of using the risk weights assigned in Sec. 702.104(c)(2) a 
credit union may determine the risk weight of certain investment funds, 
and the risk weight of a non-subordinated or subordinated tranche of any 
investment as follows:
    (a) Gross-up approach--(1) Applicability. Section 
702.104(c)(3)(iii)(A) of this part provides that, a credit union may use 
the gross-up approach in this appendix to determine the risk weight of 
the carrying value of non-subordinated or subordinated tranches of any 
investment.
    (2) Calculation. To use the gross-up approach, a credit union must 
calculate the following four inputs:
    (i) Pro rata share, which is the par value of the credit union's 
exposure as a percent of the par value of the tranche in which the 
securitization exposure resides;
    (ii) Enhanced amount, which is the par value of tranches that are 
more senior to the tranche in which the credit union's securitization 
resides;
    (iii) Exposure amount, which is the amortized cost for investments 
classified as held-to-maturity and available-for-sale, and the fair 
value for trading securities; and
    (iv) Risk weight, which is the weighted-average risk weight of 
underlying exposures of the securitization as calculated under this 
appendix.
    (3) Credit equivalent amount. The ``credit equivalent amount'' of a 
securitization exposure under this part equals the sum of:
    (i) The exposure amount of the credit union's exposure; and
    (ii) The pro rata share multiplied by the enhanced amount, each 
calculated in accordance with paragraph (a)(2) of this appendix.
    (4) Risk-weighted assets. To calculate risk-weighted assets for a 
securitization exposure

[[Page 782]]

under the gross-up approach, a credit union must apply the risk weight 
required under paragraph (a)(2) of this appendix to the credit 
equivalent amount calculated in paragraph (a)(3) of this appendix.
    (5) Securitization exposure defined. For purposes of this this 
paragraph (a), ``securitization exposure'' means:
    (i) A credit exposure that arises from a securitization; or
    (ii) An exposure that directly or indirectly references a 
securitization exposure described in paragraph (a)(5)(i) of this 
appendix.
    (6) Securitization defined. For purposes of this paragraph (a), 
``securitization'' means a transaction in which:
    (i) The credit risk associated with the underlying exposures has 
been separated into at least two tranches reflecting different levels of 
seniority;
    (ii) Performance of the securitization exposures depends upon the 
performance of the underlying exposures; and
    (iii) All or substantially all of the underlying exposures are 
financial exposures (such as loans, receivables, asset-backed 
securities, mortgage-backed securities, or other debt securities).
    (b) Look-through approaches.--(1) Applicability. Section 
702.104(c)(3)(iii)(B) provides that, a credit union may use one of the 
look-through approaches in this appendix to determine the risk weight of 
the exposure amount of any investment fund, or the holding of separate 
account insurance.
    (2) Full look-through approach. (i) General. A credit union that is 
able to calculate a risk-weighted asset amount for its proportional 
ownership share of each exposure held by the investment fund may set the 
risk-weighted asset amount of the credit union's exposure to the fund 
equal to the product of:
    (A) The aggregate risk-weighted asset amounts of the exposures held 
by the fund as if they were held directly by the credit union; and
    (B) The credit union's proportional ownership share of the fund.
    (ii) Holding report. To calculate the risk-weighted amount under 
paragraph (b)(2)(i) of this appendix, a credit union should:
    (A) Use the most recently issued investment fund holding report; and
    (B) Use an investment fund holding report that reflects holding that 
are not older than 6-months from the quarter-end effective date (as 
defined in Sec. 702.101(c)(1).
    (3) Simple modified look-through approach. Under the simple modified 
look-through approach, the risk-weighted asset amount for a credit 
union's exposure to an investment fund equals the exposure amount 
multiplied by the highest risk weight that applies to any exposure the 
fund is permitted to hold under the prospectus, partnership agreement, 
or similar agreement that defines the fund's permissible investments 
(excluding derivative contracts that are used for hedging rather than 
speculative purposes and that do not constitute a material portion of 
the fund's exposures).
    (4) Alternative modified look-through approach. Under the 
alternative modified look-through approach, a credit union may assign 
the credit union's exposure amount to an investment fund on a pro rata 
basis to different risk weight categories under subpart A of this part 
based on the investment limits in the fund's prospectus, partnership 
agreement, or similar contract that defines the fund's permissible 
investments. The risk-weighted asset amount for the credit union's 
exposure to the investment fund equals the sum of each portion of the 
exposure amount assigned to an exposure type multiplied by the 
applicable risk weight under subpart A of this part. If the sum of the 
investment limits for all exposure types within the fund exceeds 100 
percent, the credit union must assume that the fund invests to the 
maximum extent permitted under its investment limits in the exposure 
type with the highest applicable risk weight under subpart A of this 
part and continues to make investments in order of the exposure type 
with the next highest applicable risk weight under subpart A of this 
part until the maximum total investment level is reached. If more than 
one exposure type applies to an exposure, the credit union must use the 
highest applicable risk weight. A credit union may exclude derivative 
contracts held by the fund that are used for hedging rather than for 
speculative purposes and do not constitute a material portion of the 
fund's exposures.

    Effective Date Note: At 80 FR 66722, Oct. 29, 2015, appendix A to 
part 702 was added, effective Jan. 1, 2019.



PART 703_INVESTMENT AND DEPOSIT ACTIVITIES--Table of Contents



           Subpart A_General Investment and Deposit Activities

Sec.
703.1  Purpose and scope.
703.2  Definitions.
703.3  Investment policies.
703.4  Recordkeeping and documentation requirements.
703.5  Discretionary control over investments and investment advisers.
703.6  Credit analysis.
703.7  Notice of non-compliant investments.
703.8  Broker-dealers.
703.9  Safekeeping of investments.
703.10  Monitoring non-security investments.
703.11  Valuing securities.
703.12  Monitoring securities.
703.13  Permissible investment activities.

[[Page 783]]

703.14  Permissible investments.
703.15  Prohibited investment activities.
703.16  Prohibited investments.
703.17  Conflicts of interest.
703.18  Grandfathered investments.
703.19  Investment pilot program.
703.20  Request for additional authority.

                     Subpart B_Derivatives Authority

703.100  Purpose and scope.
703.101  Definitions.
703.102  Permissible derivatives.
703.103  Derivative authority.
703.104  Requirements for derivative counterparty agreements, collateral 
          and margining.
703.105  Reporting requirements.
703.106  Operational support requirements.
703.107  External service providers.
703.108  Eligibility.
703.109  Applying for derivatives authority.
703.110  Application content.
703.111  NCUA approval.
703.112  Applying for additional products or characteristics.
703.113  Pilot program participants with active derivatives positions.
703.114  Regulatory violation.

Appendix to Subpart B of Part 703--Examples of Derivative Limit 
          Authority Calculations

    Authority: 12 U.S.C. 1757(7), 1757(8), 1757(15).

    Source: 68 FR 32960, June 3, 2003, unless otherwise noted.



           Subpart A_General Investment and Deposit Activities



Sec. 703.1  Purpose and scope.

    (a) This part interprets several of the provisions of Sections 
107(7), 107(8), and 107(15) of the Federal Credit Union Act (Act), 12 
U.S.C. 1757(7), 1757(8), 1757(15), which list those securities, 
deposits, and other obligations in which a Federal credit union may 
invest. Part 703 identifies certain investments and deposit activities 
permissible under the Act and prescribes regulations governing those 
investments and deposit activities on the basis of safety and soundness 
concerns. Additionally, part 703 identifies and prohibits certain 
investments and deposit activities. Investments and deposit activities 
that are permissible under the Act and not prohibited or otherwise 
regulated by part 703 remain permissible for Federal credit unions.
    (b) This part does not apply to:
    (1) Investment in loans to members and related activities, which is 
governed by Secs. 701.21, 701.22, 701.23, and part 723 of this chapter;
    (2) The purchase of real estate-secured loans pursuant to Section 
107(15)(A) of the Act, which is governed by Sec. 701.23 of this chapter, 
except those real estate-secured loans purchased as a part of an 
investment repurchase transaction, which is governed by Secs. 703.13 and 
703.14 of this chapter;
    (3) Investment in credit union service organizations, which is 
governed by part 712 of this chapter;
    (4) Investment in fixed assets, which is governed by Sec. 701.36 of 
this chapter;
    (5) Investment by corporate credit unions, which is governed by part 
704 of this chapter.
    (6) Investment activity by State-chartered credit unions, except as 
provided in Secs. 741.3(a)(2) and 741.219 of this chapter; or
    (7) Funding a Charitable Donation Account pursuant to Sec. 721.3(b) 
of this chapter.

[68 FR 32960, June 3, 2003, as amended at 69 FR 27828, May 17, 2004; 71 
FR 76124, Dec. 20, 2006; 78 FR 76730, Dec. 19, 2013]



Sec. 703.2  Definitions.

    The following definitions apply to this part:
    Adjusted trading means selling an investment to a counterparty at a 
price above its current fair value and simultaneously purchasing or 
committing to purchase from the counterparty another investment at a 
price above its current fair value.
    Associated personnel means a person engaged in the investment 
banking or securities business who is directly or indirectly controlled 
by a National Association of Securities Dealers (NASD) member, whether 
or not this person is registered or exempt from registration with NASD. 
Associated personnel includes every sole proprietor, partner, officer, 
director, or branch manager of any NASD member.
    Banker's acceptance means a time draft that is drawn on and accepted 
by a bank and that represents an irrevocable obligation of the bank.
    Bank note means a direct, unconditional, and unsecured general 
obligation of a bank that ranks equally with

[[Page 784]]

all other senior unsecured indebtedness of the bank, except deposit 
liabilities and other obligations that are subject to any priorities or 
preferences.
    Borrowing repurchase transaction means a transaction in which the 
Federal credit union agrees to sell a security to a counterparty and to 
repurchase the same or an identical security from that counterparty at a 
specified future date and at a specified price.
    Call means an option that gives the holder the right to buy a 
specified quantity of a security at a specified price during a fixed 
time period.
    Collateralized Mortgage Obligation (CMO) means a multi-class 
mortgage related security.
    Collective investment fund means a fund maintained by a national 
bank under 12 CFR part 9 (Comptroller of the Currency's regulations).
    Commercial mortgage related security means a mortgage related 
security, as defined below, except that it is collateralized entirely by 
commercial real estate, such as a warehouse or office building, or a 
multi-family dwelling consisting of more than four units.
    Counterparty means the party on the other side of the transaction.
    Custodial Agreement means a contract in which one party agrees to 
hold securities in safekeeping for others.
    Delivery versus payment means payment for an investment must occur 
simultaneously with its delivery.
    Derivative means a financial contract which derives its value from 
the value and performance of some other underlying financial instrument 
or variable, such as an index or interest rate.
    Embedded option means a characteristic of an investment that gives 
the issuer or holder the right to alter the level and timing of the cash 
flows of the investment. Embedded options include call and put 
provisions and interest rate caps and floors. Since a prepayment option 
in a mortgage is a type of call provision, a mortgage-backed security 
composed of mortgages that may be prepaid is an example of an investment 
with an embedded option.
    Eurodollar deposit means a U.S. dollar-denominated deposit in a 
foreign branch of a United States depository institution.
    European financial options contract means an option that can be 
exercised only on its expiration date.
    Exchangeable Collateralized Mortgage Obligation means a class of a 
collateralized mortgage obligation (CMO) that, at the time of purchase, 
represents beneficial ownership interests in a combination of two or 
more underlying classes of the same CMO structure. The holder of an 
exchangeable CMO may pay a fee and take delivery of the underlying 
classes of the CMO.
    Fair value means the price that would be received to sell an asset, 
or paid to transfer a liability, in an orderly transaction between 
market participants at the measurement date, as defined by GAAP.
    Financial options contract means an agreement to make or take 
delivery of a standardized financial instrument upon demand by the 
holder of the contract as specified in the agreement.
    Forward sales commitment means an agreement to sell an asset at a 
price and future date specified in the agreement.
    Immediate family member means a spouse or other family member living 
in the same household.
    Independent qualified agent means an agent independent of an 
investment repurchase counterparty that does not receive a transaction 
fee from the counterparty and has at least two years experience 
assessing the value of mortgage loans.
    Industry-recognized information provider means an organization that 
obtains compensation by providing information to investors and receives 
no compensation for the purchase or sale of investments.
    Interest rate lock commitment means an agreement by a credit union 
to hold a certain interest rate and points for a specified amount of 
time while a prospective borrower's application is processed.
    Investment means any security, obligation, account, deposit, or 
other item authorized for purchase by a Federal credit union under 
Sections 107(7), 107(8), or 107(15) of the Act, or this part, other than 
loans to members.
    Investment grade means the issuer of a security has an adequate 
capacity to

[[Page 785]]

meet the financial commitments under the security for the projected life 
of the asset or exposure, even under adverse economic conditions. An 
issuer has an adequate capacity to meet financial commitments if the 
risk of default by the obligor is low and the full and timely repayment 
of principal and interest on the security is expected. A Federal credit 
union may consider any or all of the following factors, to the extent 
appropriate, with respect to the credit risk of a security: Credit 
spreads; securities-related research; internal or external credit risk 
assessments; default statistics; inclusion on an index; priorities and 
enhancements; price, yield, and/or volume; and asset class-specific 
factors. This list of factors is not meant to be exhaustive or mutually 
exclusive.
    Investment repurchase transaction means a transaction in which an 
investor agrees to purchase a security from a counterparty and to resell 
the same or an identical security to that counterparty at a specified 
future date and at a specified price.
    Maturity means the date the last principal amount of a security is 
scheduled to come due and does not mean the call date or the weighted 
average life of a security.
    Mortgage related security means a security as defined in section 
3(a)(41) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(41)).
    Mortgage servicing rights means a contractual obligation to perform 
mortgage servicing and the right to receive compensation for performing 
those services. Mortgage servicing is the administration of a mortgage 
loan, including collecting monthly payments and fees, providing 
recordkeeping and escrow functions, and, if necessary curing defaults 
and foreclosing.
    Negotiable instrument means an instrument that may be freely 
transferred from the purchaser to another person or entity by delivery, 
or endorsement and delivery, with full legal title becoming vested in 
the transferee.
    Net worth means the retained earnings balance of the credit union at 
quarter end as determined under generally accepted accounting principles 
and as further defined in Sec. 702.2(f) of this chapter.
    Official means any member of a Federal credit union's board of 
directors, credit committee, supervisory committee, or investment-
related committee.
    Ordinary care means the degree of care, which an ordinarily prudent 
and competent person engaged in the same line of business or endeavor 
should exercise under similar circumstances.
    Pair-off transaction means an investment purchase transaction that 
is closed or sold on, or before the settlement date. In a pair-off, an 
investor commits to purchase an investment, but then pairs-off the 
purchase with a sale of the same investment before or on the settlement 
date.
    Put means an option that gives the holder the right to sell a 
specified quantity of a security at a specified price during a fixed 
time period.
    Registered investment company means an investment company that is 
registered with the Securities and Exchange Commission under the 
Investment Company Act of 1940 (15 U.S.C. 80a). Examples of registered 
investment companies are mutual funds and unit investment trusts.
    Regular way settlement means delivery of a security from a seller to 
a buyer within the time frame that the securities industry has 
established for immediate delivery of that type of security. For 
example, regular way settlement of a Treasury security includes 
settlement on the trade date (cash), the business day following the 
trade date (regular way), and the second business day following the 
trade date (skip day).
    Residual interest means the remainder cash flows from collateralized 
mortgage obligations/real estate mortgage investment conduits (CMOs/
REMICs), or other mortgage-backed security transaction, after payments 
due bondholders and trust administrative expenses have been satisfied.
    Securities lending means lending a security to a counterparty, 
either directly or through an agent, and accepting collateral in return.
    Security means a share, participation, or other interest in property 
or in an enterprise of the issuer or an obligation of the issuer that:
    (1) Either is represented by an instrument issued in bearer or 
registered

[[Page 786]]

form or, if not represented by an instrument, is registered in books 
maintained to record transfers by or on behalf of the issuer;
    (2) Is of a type commonly dealt in on securities exchanges or 
markets or, when represented by an instrument, is commonly recognized in 
any area in which it is issued or dealt in as a medium for investment; 
and
    (3) Either is one of a class or series or by its terms is divisible 
into a class or series of shares, participations, interests, or 
obligations.
    Senior management employee means a Federal credit union's chief 
executive officer (typically this individual holds the title of 
President or Treasurer/Manager), an assistant chief executive officer, 
and the chief financial officer.
    Small business related security means a security as defined in 
section 3(a)(53) of the securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(53)). This definition does not include Small Business 
Administration securities permissible under section 107(7) of the 
Federal Credit Union Act.
    Weighted average life means the weighted-average time to the return 
of a dollar of principal, calculated by multiplying each portion of 
principal received by the time at which it is expected to be received 
(based on a reasonable and supportable estimate of that time) and then 
summing and dividing by the total amount of principal.
    When-issued trading of securities means the buying and selling of 
securities in the period between the announcement of an offering and the 
issuance and payment date of the securities.
    Yankee dollar deposit means a deposit in a United States branch of a 
foreign bank licensed to do business in the State in which it is 
located, or a deposit in a State-chartered, foreign controlled bank.
    Zero coupon investment means an investment that makes no periodic 
interest payments but instead is sold at a discount from its face value. 
The holder of a zero coupon investment realizes the rate of return 
through the gradual appreciation of the investment, which is redeemed at 
face value on a specified maturity date.

[68 FR 32960, June 3, 2003, as amended at 69 FR 39831, July 1, 2004; 71 
FR 76124, Dec. 20, 2006; 77 FR 74109, Dec. 13, 2012; 79 FR 5241, Jan. 
31, 2014]



Sec. 703.3  Investment policies.

    A Federal credit union's board of directors must establish written 
investment policies consistent with the Act, this part, and other 
applicable laws and regulations and must review the policy at least 
annually. These policies may be part of a broader, asset-liability 
management policy. Written investment policies must address the 
following:
    (a) The purposes and objectives of the Federal credit union's 
investment activities;
    (b) The characteristics of the investments the Federal credit union 
may make including the issuer, maturity, index, cap, floor, coupon rate, 
coupon formula, call provision, average life, and interest rate risk;
    (c) How the Federal credit union will manage interest rate risk;
    (d) How the Federal credit union will manage liquidity risk;
    (e) How the Federal credit union will manage credit risk including 
specifically listing institutions, issuers, and counterparties that may 
be used, or criteria for their selection, and limits on the amounts that 
may be invested with each;
    (f) How the Federal credit union will manage concentration risk, 
which can result from dealing with a single or related issuers, lack of 
geographic distribution, holding obligations with similar 
characteristics like maturities and indexes, holding bonds having the 
same trustee, and holding securitized loans having the same originator, 
packager, or guarantor;
    (g) Who has investment authority and the extent of that authority. 
Those with authority must be qualified by education or experience to 
assess the risk characteristics of investments and investment 
transactions. Only officials or employees of the Federal credit union 
may be voting members of an investment-related committee;
    (h) The broker-dealers the Federal credit union may use;

[[Page 787]]

    (i) The safekeepers the Federal credit union may use;
    (j) How the Federal credit union will handle an investment that, 
after purchase, is outside of board policy or fails a requirement of 
this part; and
    (k) How the Federal credit union will conduct investment trading 
activities, if applicable, including addressing:
    (1) Who has purchase and sale authority;
    (2) Limits on trading account size;
    (3) Allocation of cash flow to trading accounts;
    (4) Stop loss or sale provisions;
    (5) Dollar size limitations of specific types, quantity and maturity 
to be purchased;
    (6) Limits on the length of time an investment may be inventoried in 
a trading account; and
    (7) Internal controls, including segregation of duties.



Sec. 703.4  Recordkeeping and documentation requirements.

    (a) Federal credit unions with assets of $10,000,000 or greater must 
comply with all generally accepted accounting principles applicable to 
reports or statements required to be filed with NCUA. Federal credit 
unions with assets less than $10,000,000 are encouraged to do the same, 
but are not required to do so.
    (b) A Federal credit union must maintain documentation for each 
investment transaction for as long as it holds the investment and until 
the documentation has been audited in accordance with Sec. 715.4 of this 
chapter and examined by NCUA. The documentation should include, where 
applicable, bids and prices at purchase and sale and for periodic 
updates, relevant disclosure documents or a description of the security 
from an industry-recognized information provider, financial data, and 
tests and reports required by the Federal credit union's investment 
policy and this part.
    (c) A Federal credit union must maintain documentation its board of 
directors used to approve a broker-dealer or a safekeeper for as long as 
the broker-dealer or safekeeper is approved and until the documentation 
has been audited in accordance with Sec. 715.4 of this chapter and 
examined by NCUA.
    (d) A Federal credit union must obtain an individual confirmation 
statement from each broker-dealer for each investment purchased or sold.

[68 FR 32960, June 3, 2003, as amended at 69 FR 27828, May 17, 2004; 72 
FR 30246, May 31, 2007]



Sec. 703.5  Discretionary control over investments and investment
advisers.

    (a) Except as provided in paragraph (b) of this section, a Federal 
credit union must retain discretionary control over its purchase and 
sale of investments. A Federal credit union has not delegated 
discretionary control to an investment adviser when the Federal credit 
union reviews all recommendations from investment advisers and is 
required to authorize a recommended purchase or sale transaction before 
its execution.
    (b)(1) A Federal credit union may delegate discretionary control 
over the purchase and sale of investments to a person other than a 
Federal credit union official or employee:
    (i) Provided the person is an investment adviser registered with the 
Securities and Exchange Commission under the Investment Advisers Act of 
1940 (15 U.S.C. 80b); and
    (ii) In an amount up to 100 percent of its net worth in the 
aggregate at the time of delegation.
    (2) At least annually, the Federal credit union must adjust the 
amount of funds held under discretionary control to comply with the 100 
percent of net worth cap. The Federal credit union's board of directors 
must receive notice as soon as possible, but no later than the next 
regularly scheduled board meeting, of the amount exceeding the net worth 
cap and notify in writing the appropriate regional director within 5 
days after the board meeting. The credit union must develop a plan to 
comply with the cap within a reasonable period of time.
    (3) Before transacting business with an investment adviser, a 
Federal credit union must analyze his or her background and information 
available from State or Federal securities regulators, including any 
enforcement actions against the adviser, associated personnel, and the 
firm for which the adviser works.

[[Page 788]]

    (c) A Federal credit union may not compensate an investment adviser 
with discretionary control over the purchase and sale of investments on 
a per transaction basis or based on capital gains, capital appreciation, 
net income, performance relative to an index, or any other incentive 
basis.
    (d) A Federal credit union must obtain a report from its investment 
adviser at least monthly that details the investments under the 
adviser's control and their performance.



Sec. 703.6  Credit analysis.

    A Federal credit union must conduct and document a credit analysis 
on an investment and the issuing entity before purchasing it, except for 
investments issued or fully guaranteed as to principal and interest by 
the U.S. government or its agencies, enterprises, or corporations or 
fully insured (including accumulated interest) by the National Credit 
Union Administration or the Federal Deposit Insurance Corporation. A 
Federal credit union must update this analysis at least annually for as 
long as it holds the investment.



Sec. 703.7  Notice of non-compliant investments.

    A Federal credit union's board of directors must receive notice as 
soon as possible, but no later than the next regularly scheduled board 
meeting, of any investment that either is outside of board policy after 
purchase or has failed a requirement of this part. The board of 
directors must document its action regarding the investment in the 
minutes of the board meeting, including a detailed explanation of any 
decision not to sell it. The Federal credit union must notify in writing 
the appropriate regional director of an investment that has failed a 
requirement of this part within 5 days after the board meeting.



Sec. 703.8  Broker-dealers.

    (a) A Federal credit union may purchase and sell investments through 
a broker-dealer as long as the broker-dealer is registered as a broker-
dealer with the Securities and Exchange Commission under the Securities 
Exchange Act of 1934 (15 U.S.C. 78a et seq.) or is a depository 
institution whose broker-dealer activities are regulated by a Federal or 
State regulatory agency.
    (b) Before purchasing an investment through a broker-dealer, a 
Federal credit union must analyze and annually update the following:
    (1) The background of any sales representative with whom the Federal 
credit union is doing business;
    (2) Information available from State or Federal securities 
regulators and securities industry self-regulatory organizations, such 
as the National Association of Securities Dealers and the North American 
Securities Administrators Association, about any enforcement actions 
against the broker-dealer, its affiliates, or associated personnel; and
    (3) If the broker-dealer is acting as the Federal credit union's 
counterparty, the ability of the broker-dealer and its subsidiaries or 
affiliates to fulfill commitments, as evidenced by capital strength, 
liquidity, and operating results. The Federal credit union should 
consider current financial data, annual reports, external assessments of 
creditworthiness, relevant disclosure documents, and other sources of 
financial information.
    (c) The requirements of paragraph (a) of this section do not apply 
when the Federal credit union purchases a certificate of deposit or 
share certificate directly from a bank, credit union, or other 
depository institution.

[68 FR 32960, June 3, 2003, as amended at 69 FR 39831, July 1, 2004; 77 
FR 74109, Dec. 13, 2012]



Sec. 703.9  Safekeeping of investments.

    (a) A Federal credit union's purchased investments and repurchase 
collateral must be in the Federal credit union's possession, recorded as 
owned by the Federal credit union through the Federal Reserve Book-Entry 
System, or held by a board-approved safekeeper under a written custodial 
agreement that requires the safekeeper to exercise, at least, ordinary 
care.
    (b) Any safekeeper used by a Federal credit union must be regulated 
and supervised by either the Securities and Exchange Commission, a 
Federal or State depository institution regulatory agency, or a State 
trust company regulatory agency.

[[Page 789]]

    (c) A Federal credit union must obtain and reconcile monthly a 
statement of purchased investments and repurchase collateral held in 
safekeeping.
    (d) Annually, the Federal credit union must analyze the ability of 
the safekeeper to fulfill its custodial responsibilities, as evidenced 
by capital strength, liquidity, and operating results. The Federal 
credit union should consider current financial data, annual reports, 
external assessments of creditworthiness, relevant disclosure documents, 
and other sources of financial information.

[68 FR 32960, June 3, 2003, as amended at 69 FR 39831, July 1, 2004; 77 
FR 74109, Dec. 13, 2012]



Sec. 703.10  Monitoring non-security investments.

    (a) At least quarterly, a Federal credit union must prepare a 
written report listing all of its shares and deposits in banks, credit 
unions, and other depository institutions, that have one or more of the 
following features:
    (1) Embedded options;
    (2) Remaining maturities greater than 3 years; or
    (3) Coupon formulas that are related to more than one index or are 
inversely related to, or multiples of, an index.
    (b) The requirement of paragraph (a) of this section does not apply 
to shares and deposits that are securities.
    (c) If a Federal credit union does not have an investment-related 
committee, then each member of its board of directors must receive a 
copy of the report described in paragraph (a) of this section. If a 
Federal credit union has an investment-related committee, then each 
member of the committee must receive a copy of the report, and each 
member of the board must receive a summary of the information in the 
report.



Sec. 703.11  Valuing securities.

    (a) Before purchasing or selling a security, a Federal credit union 
must obtain either price quotations on the security from at least two 
broker-dealers or a price quotation on the security from an industry-
recognized information provider. This requirement to obtain price 
quotations does not apply to new issues purchased at par or at original 
issue discount.
    (b) At least monthly, a Federal credit union must determine the fair 
value of each security it holds. It may determine fair value by 
obtaining a price quotation on the security from an industry-recognized 
information provider, a broker-dealer, or a safekeeper.
    (c) At least annually, the Federal credit union's supervisory 
committee or its external auditor must independently assess the 
reliability of monthly price quotations received from a broker-dealer or 
safekeeper. The Federal credit union's supervisory committee or external 
auditor must follow generally accepted auditing standards, which require 
either re-computation or reference to market quotations.
    (d) If a Federal credit union is unable to obtain a price quotation 
required by this section for a particular security, then it may obtain a 
quotation for a security with substantially similar characteristics.



Sec. 703.12  Monitoring securities.

    (a) At least monthly, a Federal credit union must prepare a written 
report setting forth, for each security held, the fair value and dollar 
change since the prior month-end, with summary information for the 
entire portfolio.
    (b) At least quarterly, a Federal credit union must prepare a 
written report setting forth the sum of the fair values of all fixed and 
variable rate securities held that have one or more of the following 
features:
    (1) Embedded options;
    (2) Remaining maturities greater than 3 years; or
    (3) Coupon formulas that are related to more than one index or are 
inversely related to, or multiples of, an index.
    (c) Where the amount calculated in paragraph (b) of this section is 
greater than a Federal credit union's net worth, the report described in 
that paragraph must provide a reasonable and supportable estimate of the 
potential impact, in percentage and dollar terms, of an immediate and 
sustained parallel shift in market interest rates of plus and minus 300 
basis points on:
    (1) The fair value of each security in the Federal credit union's 
portfolio;

[[Page 790]]

    (2) The fair value of the Federal credit union's portfolio as a 
whole; and
    (3) The Federal credit union's net worth.
    (d) If the Federal credit union does not have an investment-related 
committee, then each member of its board of directors must receive a 
copy of the reports described in paragraphs (a) through (c) of this 
section. If the Federal credit union has an investment-related 
committee, then each member of the committee must receive copies of the 
reports, and each member of the board of directors must receive a 
summary of the information in the reports.



Sec. 703.13  Permissible investment activities.

    (a) Regular way settlement and delivery versus payment basis. A 
Federal credit union may only contract for the purchase or sale of a 
security as long as the delivery of the security is by regular way 
settlement and the transaction is accomplished on a delivery versus 
payment basis.
    (b) Federal funds. A Federal credit union may sell Federal funds to 
an institution described in Section 107(8) of the Act and credit unions, 
as long as the interest or other consideration received from the 
financial institution is at the market rate for Federal funds 
transactions.
    (c) Investment repurchase transaction. A Federal credit union may 
enter into an investment repurchase transaction so long as:
    (1) Any securities the Federal credit union receives are permissible 
investments for Federal credit unions, the Federal credit union, or its 
agent, either takes physical possession or control of the repurchase 
securities or is recorded as owner of them through the Federal Reserve 
Book Entry Securities Transfer System, the Federal credit union, or its 
agent, receives a daily assessment of their market value, including 
accrued interest, and the Federal credit union maintains adequate 
margins that reflect a risk assessment of the securities and the term of 
the transaction; and
    (2) The Federal credit union has entered into signed contracts with 
all approved counterparties.
    (d) Borrowing repurchase transaction. A Federal credit union may 
enter into a borrowing repurchase transaction so long as:
    (1) The transaction meets the requirements of paragraph (c) of this 
section;
    (2) Any cash the Federal credit union receives is subject to the 
borrowing limit specified in Section 107(9) of the Act, and any 
investments the Federal credit union purchases with that cash are 
permissible for Federal credit unions; and
    (3) The investments referenced in paragraph (d)(2) of this section 
must mature under the following conditions:
    (i) No later than the maturity of the borrowing repurchase 
transaction;
    (ii) No later than thirty days after the borrowing repurchase 
transaction, unless authorized under Sec. 703.20, provided the value of 
all investments purchased with maturities later than borrowing 
repurchase transactions does not exceed 100 percent of the federal 
credit union's net worth; or
    (iii) At any time later than the maturity of the borrowing 
repurchase transaction, provided the value of all investments purchased 
with maturities later than borrowing repurchase transactions does not 
exceed 100 percent of the federal credit union's net worth and the 
credit union received a composite CAMEL rating of ``1'' or ``2'' for the 
last two (2) full examinations and maintained a net worth classification 
of ``well capitalized'' under part 702 of this chapter for the six (6) 
immediately preceding quarters or, if subject to a risk-based net worth 
(RBNW) requirement under part 702 of this chapter, has remained ``well 
capitalized'' for the six (6) immediately preceding quarters after 
applying the applicable RBNW requirement.
    (e) Securities lending transaction. A Federal credit union may enter 
into a securities lending transaction so long as:
    (1) The Federal credit union receives written confirmation of the 
loan;
    (2) Any collateral the Federal credit union receives is a legal 
investment for Federal credit unions, the Federal credit union, or its 
agent, obtains a first priority security interest in the

[[Page 791]]

collateral by taking physical possession or control of the collateral, 
or is recorded as owner of the collateral through the Federal Reserve 
Book Entry Securities Transfer System; and the Federal credit union, or 
its agent, receives a daily assessment of the market value of the 
collateral, including accrued interest, and maintains adequate margin 
that reflects a risk assessment of the collateral and the term of the 
loan;
    (3) Any cash the Federal credit union receives is subject to the 
borrowing limit specified in Section 107(9) of the Act, and any 
investments the Federal credit union purchases with that cash are 
permissible for Federal credit unions and mature no later than the 
maturity of the transaction; and
    (4) The Federal credit union has executed a written loan and 
security agreement with the borrower.
    (f)(1) Trading securities. A Federal credit union may trade 
securities, including engaging in when-issued trading and pair-off 
transactions, so long as the Federal credit union can show that it has 
sufficient resources, knowledge, systems, and procedures to handle the 
risks.
    (2) A Federal credit union must record any security it purchases or 
sells for trading purposes at fair value on the trade date. The trade 
date is the date the Federal credit union commits, orally or in writing, 
to purchase or sell a security.
    (3) At least monthly, the Federal credit union must give its board 
of directors or investment-related committee a written report listing 
all purchase and sale transactions of trading securities and the 
resulting gain or loss on an individual basis.

[68 FR 32960, June 3, 2003, as amended at 77 FR 31991, May 31, 2012]



Sec. 703.14  Permissible investments.

    (a) Variable rate investment. A federal credit union may invest in a 
variable rate investment, as long as the index is tied to domestic 
interest rates. Except in the case of Treasury Inflation Protected 
Securities, the variable rate investment cannot, for example, be tied to 
foreign currencies, foreign interest rates, domestic or foreign 
commodity prices, equity prices, or inflation rates. For purposes of 
this part, the U.S. dollar-denominated London Interbank Offered Rate 
(LIBOR) is a domestic interest rate.
    (b) Corporate credit union shares or deposits. A Federal credit 
union may purchase shares or deposits in a corporate credit union, 
except where the NCUA Board has notified it that the corporate credit 
union is not operating in compliance with part 704 of this chapter. A 
Federal credit union's aggregate amount of perpetual and nonperpetual 
capital, as defined in part 704 of this chapter, in one corporate credit 
union is limited to two percent of the federal credit union's assets 
measured at the time of investment or adjustment. A Federal credit 
union's aggregate amount of contributed capital in all corporate credit 
unions is limited to four percent of assets measured at the time of 
investment or adjustment.
    (c) Registered investment company. A Federal credit union may invest 
in a registered investment company or collective investment fund, as 
long as the prospectus of the company or fund restricts the investment 
portfolio to investments and investment transactions that are 
permissible for Federal credit unions.
    (d) Collateralized mortgage obligation/real estate mortgage 
investment conduit. A Federal credit union may invest in a fixed or 
variable rate collateralized mortgage obligation/real estate mortgage 
investment conduit.
    (e) Municipal security. A Federal credit union may purchase and hold 
a municipal security, as defined in section 107(7)(K) of the Act, only 
if it conducts and documents an analysis that reasonably concludes the 
security is at least investment grade. The Federal credit union must 
also limit its aggregate municipal securities holdings to no more than 
75 percent of the Federal credit union's net worth and limit its 
holdings of municipal securities issued by any single issuer to no more 
than 25 percent of the Federal credit union's net worth.
    (f) Instruments issued by institutions described in Section 107(8) 
of the Act. A Federal credit union may invest in the following 
instruments issued by an institution described in Section 107(8) of the 
Act:

[[Page 792]]

    (1) Yankee dollar deposits;
    (2) Eurodollar deposits;
    (3) Banker's acceptances;
    (4) Deposit notes; and
    (5) Bank notes with weighted average maturities of less than 5 
years.
    (g) European financial options contract. A Federal credit union may 
purchase a European financial options contract or a series of European 
financial options contracts only to fund the payment of dividends on 
member share certificates where the dividend rate is tied to an equity 
index provided:
    (1) The option and dividend rate are based on a domestic equity 
index;
    (2) Proceeds from the options are used only to fund dividends on the 
equity-linked share certificates;
    (3) Dividends on the share certificates are derived solely from the 
change in the domestic equity index over a specified period;
    (4) The options' expiration dates are no later than the maturity 
date of the share certificate.
    (5) The certificate may be redeemed prior to the maturity date only 
upon the member's death or termination of the corresponding option;
    (6) The total costs associated with the purchase of the option is 
known by the Federal credit union prior to effecting the transaction;
    (7) The options are purchased at the same time the certificate is 
issued to the member.
    (8) The counterparty to the transaction is a domestic counterparty 
and has been approved by the Federal credit union's board of directors;
    (9) The counterparty to the transaction meets the minimum credit 
quality standards as approved by the Federal credit union's board of 
directors.
    (10) Any collateral posted by the counterparty is a permissible 
investment for Federal credit unions and is valued daily by an 
independent third party along with the value of the option;
    (11) The aggregate amount of equity-linked member share certificates 
does not exceed 50 percent of the Federal credit union's net worth;
    (12) The terms of the share certificate include a guarantee that 
there can be no loss of principal to the member regardless of changes in 
the value of the option unless the certificate is redeemed prior to 
maturity; and
    (13) The Federal credit union provides its board of directors with a 
monthly report detailing at a minimum:
    (i) The dollar amount of outstanding equity-linked share 
certificates;
    (ii) Their maturities; and
    (iii) The fair value of the options as determined by an independent 
third party.
    (h) Mortgage note repurchase transactions. A federal credit union 
may invest in securities that are offered and sold pursuant to section 
4(5) of the Securities Act of 1933, 15 U.S.C. 77d(5), only as a part of 
an investment repurchase agreement under Sec. 703.13(c), subject to the 
following conditions:
    (1) The aggregate of the investments with any one counterparty is 
limited to 25 percent of the Federal credit union's net worth and 50 
percent of its net worth with all counterparties;
    (2) At the time the Federal credit union purchases the securities, 
the counterparty, or a party fully guaranteeing the counterparty, must 
meet the minimum credit quality standards as approved by the Federal 
credit union's board of directors.
    (3) The federal credit union must obtain a daily assessment of the 
market value of the securities under Sec. 703.13(c)(1) using an 
independent qualified agent;
    (4) The mortgage note repurchase transaction is limited to a maximum 
term of 90 days;
    (5) All mortgage note repurchase transactions will be conducted 
under tri-party custodial agreements; and
    (6) A federal credit union must obtain an undivided interest in the 
securities.
    (i) Zero-coupon investments. A federal credit union may only 
purchase a zero-coupon investment with a maturity date that is no 
greater than 10 years from the related settlement date, unless 
authorized under Sec. 703.20 or otherwise provided in this paragraph. A 
federal credit union that received a composite CAMEL rating of ``1'' or 
``2'' for the last two (2) full examinations and maintained a net worth 
classification of ``well capitalized'' under part 702 of this chapter 
for the six (6) immediately preceding quarters or, if subject to a

[[Page 793]]

risk-based net worth (RBNW) requirement under part 702 of this chapter, 
has remained ``well capitalized'' for the six (6) immediately preceding 
quarters after applying the applicable RBNW requirement, may purchase a 
zero-coupon investment with a maturity date that is no greater than 30 
years from the related settlement date.
    (j) Commercial mortgage related security (CMRS). A federal credit 
union may purchase a CMRS permitted by Section 107(7)(E) of the Act; 
and, pursuant to Section 107(15)(B) of the Act, a CMRS of an issuer 
other than a government-sponsored enterprise enumerated in Section 
107(7)(E) of the Act, provided:
    (1) The Federal credit union conducts and documents a credit 
analysis that reasonably concludes the CMRS is at least investment 
grade.
    (2) The CMRS meets the definition of mortgage related security as 
defined in 15 U.S.C. 78c(a)(41) and the definition of commercial 
mortgage related security as defined in Sec. 703.2 of this part;
    (3) The CMRS's underlying pool of loans contains more than 50 loans 
with no one loan representing more than 10 percent of the pool; and
    (4) The aggregate amount of private label CMRS purchased by the 
federal credit union does not exceed 25 percent of its net worth, unless 
authorized under Sec. 703.20 or as otherwise provided in this 
subparagraph. A federal credit union that has received a composite CAMEL 
rating of ``1'' or ``2'' for the last two (2) full examinations and 
maintained a net worth classification of ``well capitalized'' under part 
702 of this chapter for the six (6) immediately preceding quarters or, 
if subject to a risk-based net worth (RBNW) requirement under part 702 
of this chapter, has remained ``well capitalized'' for the six (6) 
immediately preceding quarters after applying the applicable RBNW 
requirement, may hold private label CMRS in an aggregate amount not to 
exceed 50% of its net worth.
    (k) Derivatives. A Federal credit union may only enter into in the 
following derivatives transactions:
    (1) Any derivatives permitted under Sec. 701.21(i) of this chapter, 
Sec. 703.14(g), or subpart B of this part;
    (2) Embedded options not required under generally accepted 
accounting principles (GAAP) adopted in the United States to be 
accounted for separately from the host contract; and
    (3) Interest rate lock commitments or forward sales commitments made 
in connection with a loan originated by a Federal credit union.

[68 FR 32960, June 3, 2003, as amended at 69 FR 39831, July 1, 2004; 71 
FR 76124, Dec. 20, 2006; 75 FR 64826, Oct. 20, 2010; 77 FR 31991, May 
31, 2012; 77 FR 74110, Dec. 13, 2012; 78 FR 13213 Feb. 27, 2013; 79 FR 
5241, Jan. 31, 2014; 81 FR 17602, Mar. 30, 2016]

    Effective Date Note: At 80 FR 66722, Oct. 29, 2015, Sec. 703.14 was 
amended by: 1. in paragraph (i), removing the words ``net worth 
classification'' and adding in their place the words ``capital 
classification'', and removing the words ``or, if subject to a risk-
based net worth (RBNW) requirement under part 702 of this chapter, has 
remained 'well capitalized' for the six (6) immediately preceding 
quarters after applying the applicable RBNW requirement,'', and 2. in 
paragraph (j)(4), removing the words ``net worth classification'' and 
adding in their place the words ``capital classification'', and removing 
the words ``or, if subject to a risk-based net worth (RBNW) requirement 
under part 702 of this chapter, has remained 'well capitalized' for the 
six (6) immediately preceding quarters after applying the applicable 
RBNW requirement,'', effective Jan. 1, 2019.



Sec. 703.15  Prohibited investment activities.

    Adjusted trading or short sales. A Federal credit union may not 
engage in adjusted trading or short sales.



Sec. 703.16  Prohibited investments.

    (a) Mortgage servicing rights. A Federal credit union may not 
purchase mortgage servicing rights as an investment but may perform 
mortgage servicing functions as a financial service for a member as long 
as the mortgage loan is owned by a member;
    (b) Stripped mortgage backed securities (SMBS). A Federal credit 
union may not invest in SMBS or securities that represent interests in 
SMBS except as described in paragraphs (1) and (3) below.
    (1) A Federal credit union may invest in and hold exchangeable 
collateralized mortgage obligations (exchangeable CMOs) representing 
beneficial ownership interests in one or more interest-only classes of a 
CMO (IO CMOs) or

[[Page 794]]

principal-only classes of a CMO (PO CMOs), but only if:
    (i) At the time of purchase, the ratio of the market price to the 
remaining principal balance is between .8 and 1.2, meaning that the 
discount or premium of the market price to par must be less than 20 
points;
    (ii) The offering circular or other official information available 
at the time of purchase indicates that the notional principal on each 
underlying IO CMO should decline at the same rate as the principal on 
one or more of the underlying non-IO CMOs, and that the principal on 
each underlying PO CMO should decline at the same rate as the principal, 
or notional principal, on one or more of the underlying non-PO CMOs; and
    (iii) The credit union staff has the expertise dealing with 
exchangeable CMOs to apply the conditions in paragraphs (e)(1)(i) and 
(e)(1)(ii) of this section.
    (2) A Federal credit union that invests in an exchangeable CMO may 
exercise the exchange option only if all of the underlying CMOs are 
permissible investments for that credit union.
    (3) A Federal credit union may accept an exchangeable CMO 
representing beneficial ownership interests in one or more IO CMOs or PO 
CMOs as an asset associated with an investment repurchase transaction or 
as collateral in a securities lending transaction. When the exchangeable 
CMO is associated with one of these two transactions, it need not 
conform to the conditions in paragraphs (e)(1)(i) and (ii) of this 
section.
    (c) Other prohibited investments. A Federal credit union may not 
purchase residual interests in collateralized mortgage obligations, real 
estate mortgage investment conduits, or small business related 
securities.

[68 FR 32960, June 3, 2003, as amended at 69 FR 39832, July 1, 2004; 77 
FR 31991, May 31, 2012; 79 FR 5241, Jan. 31, 2014]



Sec. 703.17  Conflicts of interest.

    (a) A Federal credit union's officials and senior management 
employees, and their immediate family members, may not receive anything 
of value in connection with its investment transactions. This 
prohibition also applies to any other employee, such as an investment 
officer, if the employee is directly involved in investments, unless the 
Federal credit union's board of directors determines that the employee's 
involvement does not present a conflict of interest. This prohibition 
does not include compensation for employees.
    (b) A Federal credit union's officials and employees must conduct 
all transactions with business associates or family members that are not 
specifically prohibited by paragraph (a) of this section at arm's length 
and in the Federal credit union's best interest.



Sec. 703.18  Grandfathered investments.

    (a) Subject to safety and soundness considerations, a Federal credit 
union may hold a CMO/REMIC residual, stripped mortgage-backed 
securities, or zero coupon security with a maturity greater than 10 
years, if it purchased the investment:
    (1) Before December 2, 1991; or
    (2) On or after December 2, 1991, but before January 1, 1998, if for 
the purpose of reducing interest rate risk and if the Federal credit 
union meets the following:
    (i) The Federal credit union has a monitoring and reporting system 
in place that provides the documentation necessary to evaluate the 
expected and actual performance of the investment under different 
interest rate scenarios;
    (ii) The Federal credit union uses the monitoring and reporting 
system to conduct and document an analysis that shows, before purchase, 
that the proposed investment will reduce its interest rate risk;
    (iii) After purchase, the Federal credit union evaluates the 
investment at least quarterly to determine whether or not it actually 
has reduced the interest rate risk; and
    (iv) The Federal credit union accounts for the investment consistent 
with generally accepted accounting principles.
    (b) A federal credit union may hold a zero-coupon investment with a 
maturity greater than 10 years, a borrowing repurchase transaction in 
which the investment matures at any time later than the maturity of the 
borrowing, or CMRS that cause the credit union's aggregate amount of 
CMRS from issuers

[[Page 795]]

other than government-sponsored enterprises to exceed 25% of its net 
worth, in each case if it purchased the investment or entered the 
transaction under the Regulatory Flexibility Program before July 2, 
2012.
    (c) All grandfathered investments are subject to the valuation and 
monitoring requirements of Secs. 703.10, 703.11, and 703.12 of this 
part.

[68 FR 32960, June 3, 2003, as amended at 77 FR 31991, May 31, 2012]



Sec. 703.19  Investment pilot program.

    (a) Under the investment pilot program, NCUA will permit a limited 
number of Federal credit unions to engage in investment activities 
prohibited by this part but permitted by the Act.
    (b) Except as provided in paragraph (c) of this section, before a 
Federal credit union may engage in additional activities it must obtain 
written approval from NCUA. To obtain approval, a Federal credit union 
must submit a request to its regional director that addresses the 
following items:
    (1) Certification that the Federal credit union is ``well-
capitalized'' under part 702 of this chapter;
    (2) Board policies approving the activities and establishing limits 
on them;
    (3) A complete description of the activities, with specific examples 
of how they will benefit the Federal credit union and how they will be 
conducted;
    (4) A demonstration of how the activities will affect the Federal 
credit union's financial performance, risk profile, and asset-liability 
management strategies;
    (5) Examples of reports the Federal credit union will generate to 
monitor the activities;
    (6) Projections of the associated costs of the activities, including 
personnel, computer, audit, and so forth;
    (7) Descriptions of the internal systems that will measure, monitor, 
and report the activities;
    (8) Qualifications of the staff and officials responsible for 
implementing and overseeing the activities; and
    (9) Internal control procedures that will be implemented, including 
audit requirements.
    (c) A third-party seeking approval of an investment pilot program 
must submit a request to the Director of the Office of Capital Markets 
and Planning that addresses the following items:
    (1) A complete description of the activities with specific examples 
of how a credit union will conduct and account for them, and how they 
will benefit a Federal credit union;
    (2) A description of any risks to a Federal credit union from 
participating in the program; and
    (3) Contracts that must be executed by the Federal credit union.
    (d) A Federal credit union need not obtain individual written 
approval to engage in investment activities prohibited by this part but 
permitted by statute where the activities are part of a third-party 
investment program that NCUA has approved under this section.

[68 FR 32960, June 3, 2003, as amended at 69 FR 39832, July 1, 2004; 70 
FR 55517, Sept. 22, 2005]



Sec. 703.20  Request for additional authority.

    (a) Additional authority. A federal credit union may submit a 
written request to its regional director seeking expanded authority 
above the following limits in this part:
    (1) Borrowing repurchase transaction maximum maturity mismatch of 30 
days under Sec. 703.13(d)(3)(ii).
    (2) Zero-coupon investment 10-year maximum maturity under 
Sec. 703.14(i), up to a maturity of no more than 30 years.
    (3) CMRS aggregate limit of 25% of net worth under Sec. 703.14(j), 
up to no more than 50% of net worth. To obtain approval for additional 
authority, the federal credit union must demonstrate three consecutive 
years of effective CMRS portfolio management and the ability to evaluate 
key risk factors.
    (b) Written request. A federal credit union desiring additional 
authority must submit a written request to the NCUA regional office 
having jurisdiction over the geographical area in which the credit 
union's main office is located, that includes the following:
    (1) A copy of the credit union's investment policy;
    (2) The higher limit sought;
    (3) An explanation of the need for additional authority;

[[Page 796]]

    (4) Documentation supporting the credit union's ability to manage 
the investment or activity; and
    (5) An analysis of the credit union's prior experience with the 
investment or activity.
    (c) Approval process. A regional director will provide a written 
determination on a request for expanded authority within 60 calendar 
days after receipt of the request; however, the 60-day period will not 
begin until the requesting credit union has submitted all necessary 
information to the regional director. The regional director will inform 
the requesting credit union, in writing, of the date the request was 
received and of any additional documentation that the regional director 
requires in support of the request. If the regional director approves 
the request, the regional director will establish a limit on the 
investment or activity as appropriate and subject to the limitations in 
this part. If the regional director does not notify the credit union of 
the action taken on its request within 60 calendar days of the receipt 
of the request or the receipt of additional requested supporting 
information, whichever occurs later, the credit union may proceed with 
its proposed investment or investment activity.
    (d) Appeal to NCUA Board. A federal credit union may appeal any part 
of the determination made under paragraph (c) to the NCUA Board by 
submitting its appeal through the regional director within 30 days of 
the date of the determination.

[77 FR 31991, May 31, 2012]



                     Subpart B_Derivatives Authority

    Source: 79 FR 5241, Jan. 31, 2014, unless otherwise noted.



Sec. 703.100  Purpose and scope.

    (a) Purpose. This subpart allows Federal credit unions to enter into 
certain derivatives transactions exclusively for the purpose of reducing 
interest rate risk exposure.
    (b) Scope. (1) This subpart applies to all Federal credit unions. 
Except as provided in Sec. 741.219, this rule does not apply to 
federally insured, state-chartered credit unions.
    (2) Mutual funds. This subpart does not permit a Federal credit 
union to invest in registered investment companies or collective 
investment funds under Sec. 703.14(c) of this part, where the prospectus 
of the company or fund permit the investment portfolio to contain 
derivatives.



Sec. 703.101  Definitions.

    For purposes of this subpart:
    Amortizing notional amount means a characteristic of a derivative, 
in which the notional amount declines on a predetermined fixed basis 
over the term of the contract, according to an amortization schedule to 
which the parties agree when executing the contract;
    Basis swap means an agreement between two parties in which the 
parties make periodic payments to each other based on floating rate 
indices multiplied by a notional amount;
    Cleared swap has the meaning as defined by the Commodity Futures 
Trading Commission in 17 CFR 22.1;
    Counterparty means a swap dealer, derivatives clearing organization, 
or exchange that participates as the other party in a derivatives 
transaction with a Federal credit union;
    Credit support annex means the terms or rules under which collateral 
is posted or transferred between a Federal credit union and a 
counterparty to mitigate credit risk that may result from changes in the 
fair value of derivatives positions;
    Derivative means a financial contract which derives its value from 
the value and performance of some other underlying financial instrument 
or variable, such as an index or interest rate;
    Derivatives clearing organization has the meaning as defined by the 
Commodity Futures Trading Commission in 17 CFR 1.3(d);
    Economic effectiveness means the extent to which a derivatives 
transaction results in offsetting changes in the interest rate risk that 
the transaction was, and is, intended to provide;
    Exchange means a central financial clearing market where end users 
can trade futures, as defined in this section of this subpart;

[[Page 797]]

    External service provider means any entity that provides services to 
assist a Federal credit union in carrying out its derivatives program 
and the requirements of this subpart;
    Fair value has the meaning specified in Sec. 703.2 of subpart A of 
this part;
    Field director means an NCUA Regional Director or the Director of 
the Office of National Examinations and Supervision;
    Forward start date means an agreement that delays the settlement 
date of a derivatives transaction for a specified period of time;
    Futures means a U.S. Treasury note financial contract that obligates 
the buyer to take delivery of Treasury notes (or the seller to deliver 
Treasury notes) at a predetermined future date and price. Futures 
contracts are standardized to facilitate trading on an exchange;
    Futures commission merchant (FCM) has the meaning as defined by the 
Commodity Futures Trading Commission in 17 CFR 1.3(p);
    Hedge means to enter into a derivatives transaction to mitigate 
interest rate risk;
    Interest rate cap means a contract, based on a reference interest 
rate, for payment to the purchaser when the reference interest rate 
rises above the level specified in the contract;
    Interest rate floor means a contract, based on a reference interest 
rate, for payment to the purchaser when the reference interest rate 
falls below the level specified in the contract;
    Interest rate risk means the vulnerability of a Federal credit 
union's earnings or economic value to movements in market interest 
rates;
    Interest rate swap means an agreement to exchange future payments of 
interest on a notional amount at specific times and for a specified time 
period;
    Introducing broker means a futures brokerage firm that deals 
directly with the client, while the trade execution is done by a futures 
commission merchant;
    ISDA protocol means a multilateral contractual amendment mechanism 
that has been used to address changes to International Swap and 
Derivatives Association (ISDA) standard contracts since 1998;
    Leveraged derivative means a derivative where the value of the 
transaction does not change in a one to one proportion with the 
contractual rate or index;
    (x) Margin means the minimum amount of funds that must be deposited 
between parties to a derivatives transaction, as detailed in a credit 
support annex or clearing arrangement;
    Master service agreement means a document agreed upon between two 
parties that sets out standard terms that apply to all derivatives 
transactions entered into between those parties. Each time the same two 
parties enter into a transaction, the terms of the master service 
agreement apply automatically and do not need to be re-negotiated. The 
most common form of a master service agreement is a master ISDA 
agreement;
    Minimum transfer amount means the minimum amount of collateral that 
a party to a derivatives transaction will require, per transfer, to 
cover exposure in excess of the collateral threshold;
    Net economic value means the economic value of assets minus the 
economic value of liabilities;
    Net worth has the meaning specified in Sec. 702.2 of this chapter;
    Non-cleared means transactions that do not go through a derivatives 
clearing organization;
    Notional amount means the contracted amount of a derivatives 
contract for swaps and options on which interest payments or other 
payments are based. For futures contracts, the notional amount is 
represented by the contract size;
    Novation means the substitution of an old obligation with a new one 
that either replaces an existing obligation with a new obligation or 
replaces an original party with a new party;
    Reference interest rate means the index or rate to be used as the 
variable rate for resetting derivatives transactions;
    Reporting date means the end of the business day on the date used to 
report positions and fair values for limit compliance (e.g., daily, 
month-end, quarter-end and fiscal year-end);
    Senior executive officer has the meaning specified in Sec. 701.14 of 
this chapter

[[Page 798]]

and any other similar employee that is directly within the chain of 
command for the oversight of a Federal credit union's derivatives 
program, as identified in a Federal credit union's process and 
responsibility framework, as discussed in Sec. 703.106(b)(1) of this 
subpart;
    Structured liability offering means a share product created by a 
Federal credit union with contractual option features, such as periodic 
caps and calls, similar to those found in structured securities or 
structured notes;
    Swap dealer has the meaning as defined by the Commodity Futures 
Trading Commission in 17 CFR 1.3(ggg);
    Swap execution facility means a Commodities and Futures Trading 
Commission-registered facility that provides a system or platform for 
participants to execute cleared derivatives transactions;
    Threshold amount means an unsecured credit exposure that a party to 
a derivatives transaction is prepared to accept before requesting 
additional collateral from the other party;
    Trade date means the date that a derivatives order (new 
transactions, terminations, or assignments) is executed in the market; 
and
    Unamortized premium means the balance of the upfront premium payment 
that has not been amortized.



Sec. 703.102  Permissible derivatives.

    (a) Products and characteristics. A Federal credit union with 
derivatives authority may apply to use each of the following products 
and characteristics, subject to the limits in Sec. 703.103 of this 
subpart:
    (1) Interest rate swaps with the following characteristics:
    (i) Settle within three business days, unless the Federal credit 
union is approved for a forward start date of no more than 90 days from 
the trade date; and
    (ii) Do not have fluctuating notional amounts, unless the Federal 
credit union is approved to use derivatives with amortizing notional 
amounts.
    (2) Basis swaps with the following characteristics:
    (i) Settle within three business days, unless the Federal credit 
union is approved for a forward start date of no more than 90 days from 
the trade date; and
    (ii) Do not have fluctuating notional amounts, unless the Federal 
credit union is approved to use derivatives with amortizing notional 
amounts.
    (3) Purchased interest rate caps with no fluctuating notional 
amounts, unless the Federal credit union is approved to use derivatives 
with amortizing notional amounts.
    (4) Purchased interest rate floors with no fluctuating notional 
amounts, unless the Federal credit union is approved to use derivatives 
with amortizing notional amounts.
    (5) U.S. Treasury note futures (2-, 3-, 5-, and 10-year contracts).
    (b) Overall program characteristics. A Federal credit union may only 
enter into derivatives, as identified and described in paragraph (a) of 
this section, that have the following characteristics:
    (1) Not leveraged;
    (2) Based on domestic rates, as defined in Sec. 703.14(a) of subpart 
A of this part;
    (3) Denominated in U.S. dollars;
    (4) Except as provided in Sec. 703.14(g) of subpart A of this part, 
not used to create structured liability offerings for members or 
nonmembers;
    (5) Have contract maturity terms of equal to or less than 15 years, 
at the trade date; and
    (6) Meet the definition of a derivative under GAAP.



Sec. 703.103  Derivative authority.

    (a) General authority. A Federal credit union that is approved for 
derivatives authority under Sec. 703.111 of this subpart may use any of 
the products and characteristics, described in Sec. 703.102(a), subject 
to the following limits, which are described in more detail in appendix 
A to this subpart:
    (1) Entry limits authority. Unless a Federal credit union is 
permitted to use standard limits authority under this subpart, the 
aggregate fair value loss (as defined in appendix A) on all of a Federal 
credit union's derivatives positions may not exceed 15 percent of net 
worth, and a Federal credit union's weighted average remaining maturity 
notional (as defined in appendix A), may not exceed 65 percent of net 
worth.

[[Page 799]]

    (2) Standard limits authority. A Federal credit union that is 
permitted to use standard limits authority may not exceed an aggregate 
fair value loss on all of the Federal credit union's derivatives 
positions of 25 percent of net worth, and a weighted average remaining 
maturity notional of 100 percent of net worth, provided:
    (i) The Federal credit union has engaged in derivatives at the entry 
limits authority for a continuous period of one year (beginning on the 
trade date of its first derivatives transaction); and
    (ii) The Federal credit union has not been notified in writing by 
NCUA of any relevant safety and soundness concerns while engaged in 
derivatives at the entry limits authority.
    (b) Limit description--(1) Fair value limit. The fair value limit is 
calculated by aggregating the fair values for all derivatives positions 
at the reporting date. If an aggregate loss exists, it must be less than 
the limit set forth in this subpart. A further description of this limit 
and example calculations are detailed in appendix A to this subpart.
    (2) Weighted average remaining maturity notional limit. The weighted 
average remaining maturity notional limit is calculated by aggregating 
the notional amount for all derivatives positions based on each 
derivative's pricing sensitivity and maturity. A further description of 
this limit and example calculations are detailed in appendix A to this 
subpart.



Sec. 703.104  Requirements for derivative counterparty agreements,
collateral and margining.

    (a) A Federal credit union may have exchange-traded, centrally 
cleared, or non-cleared derivatives, in accordance with the following:
    (1) Exchange-traded and cleared derivatives. A Federal credit union 
with derivatives that are exchange-traded or centrally cleared must:
    (i) Comply with the Commodity Futures Trading Commission's rules;
    (ii) Use only swap dealers, introducing brokers, and/or futures 
commission merchants that are current registrants of the Commodity 
Futures Trading Commission; and
    (iii) Comply with the margining requirements required by the futures 
commission merchant.
    (2) Non-cleared derivative transactions. A Federal credit union with 
derivatives that are non-cleared must:
    (i) Have a master service agreement and credit support annex with a 
registered swap dealer that are in accordance with ISDA protocol for 
standard bilateral agreements;
    (ii) Utilize margining requirements contracted through a credit 
support annex and have a minimum transfer amount of $250,000 for daily 
margining requirements; and
    (iii) Accept as collateral, for margin requirements, only cash (U.S. 
dollars), U.S. Treasuries, government-sponsored enterprise debt, and 
government-sponsored enterprise residential mortgage-backed security 
pass-through securities.
    (b) Counterparty, collateral, and margining management. A Federal 
credit union must:
    (1) Have systems in place to effectively manage collateral and 
margining requirements;
    (2) Have a collateral management process that monitors the Federal 
credit union's collateral and margining requirements daily and ensures 
that its derivatives positions are collateralized at all times and in 
accordance with the collateral requirements of this subpart and the 
Federal credit union's agreement with its counterparty. This includes 
the posting, tracking, valuation, and reporting of collateral using fair 
value; and
    (3) Analyze and measure potential liquidity needs related to its 
derivatives program and stemming from additional collateral requirements 
due to changes in interest rates. The Federal credit union must 
calculate and track contingent liquidity needs in the event a 
derivatives transaction needs to be novated or terminated, and must 
establish effective controls for liquidity exposures arising from both 
market or product liquidity and instrument cash flows.



Sec. 703.105  Reporting requirements.

    (a) Board reporting. At least quarterly, a Federal credit union's 
senior

[[Page 800]]

executive officers must deliver a comprehensive derivatives report to 
the Federal credit union's board of directors. The report may be 
delivered separately or as part of the standard funds management or 
asset/liability report.
    (b) Senior executive officer and asset liability committee. At least 
monthly, Federal credit union staff must deliver a comprehensive 
derivatives report to the Federal credit union's senior executive 
officers and, if applicable, the Federal credit union's asset liability 
committee.
    (c) Comprehensive derivatives report. At a minimum, the reports 
required in paragraphs (a) and (b) of this section must include:
    (1) Identification of any areas of noncompliance with any provision 
of this subpart or the Federal credit union's policies;
    (2) Utilization of the limits in Sec. 703.103 and any additional 
limits in the Federal credit union's policies;
    (3) An itemization of the Federal credit union's individual 
positions and aggregate current fair values, and a comparison with the 
Federal credit union's fair value loss and notional limit authority, as 
described in appendix A to this subpart;
    (4) A comprehensive view of the Federal credit union's statement of 
financial condition, including, but not limited to, net economic value 
calculations for the Federal credit union's statement of financial 
condition done with derivatives included and excluded;
    (5) An evaluation of the effectiveness of the derivatives 
transactions in mitigating interest rate risk; and
    (6) An evaluation of effectiveness of the hedge relationship and 
reporting for derivatives in compliance with GAAP.



Sec. 703.106  Operational support requirements.

    (a) Required experience and competencies. A Federal credit union 
operating with derivatives authority must internally possess the 
following experience and competencies:
    (1) Board. Before entering into any derivatives transactions, and 
annually thereafter, a Federal credit union's board members must receive 
training that provides a general understanding of derivatives and the 
knowledge required to provide strategic oversight of the Federal credit 
union's derivatives program. This requirement includes understanding how 
derivatives fit into the Federal credit union's business model and risk 
management process. The Federal credit union must maintain evidence of 
this training, in accordance with its document retention policy, until 
its next NCUA examination.
    (2) Senior executive officers. A Federal credit union's senior 
executive officers must be able to understand, approve, and provide 
oversight for the derivatives activities. These individuals must have a 
comprehensive understanding of how derivatives fit into the Federal 
credit union's business model and risk management process.
    (3) Qualified derivatives personnel. To engage in derivatives 
transactions, a Federal credit union must employ staff with experience 
in the following areas:
    (i) Asset/liability risk management. Staff must be qualified to 
understand and oversee asset/liability risk management, including the 
appropriate role of derivatives. This requirement includes identifying 
and assessing risk in transactions, developing asset/liability risk 
management strategies, testing the effectiveness of asset/liability risk 
management, determining the effectiveness of managing interest rate risk 
under a range of stressed rates and statement of financial condition 
scenarios, and evaluating the relative effectiveness of alternative 
strategies. Staff must also be qualified to understand and undertake or 
oversee the appropriate modeling and analytics related to scope of risk 
to earnings and economic value over the expected maturity of derivatives 
positions;
    (ii) Accounting and financial reporting. Staff must be qualified to 
understand and oversee appropriate accounting and financial reporting 
for derivatives transactions in accordance with GAAP;
    (iii) Derivatives execution and oversight. Staff must be qualified 
to undertake or oversee trade executions; and
    (iv) Counterparty, collateral, and margining management. Staff must 
be qualified to evaluate counterparty, collateral, and margining risk as 
described in Sec. 703.104 of this subpart.

[[Page 801]]

    (b) Required management and internal controls structure. To 
effectively manage its derivatives activities, a Federal credit union 
must assess the effectiveness of its management and internal controls 
structure. At a minimum, the internal controls structure must include:
    (1) Transaction support. Before executing any derivatives 
transaction, a Federal credit union must identify and document the 
circumstances that lead to the decision to hedge, specify the 
derivatives strategy the Federal credit union will employ, and 
demonstrate the economic effectiveness of the hedge;
    (2) Internal controls review. For the first two years after 
commencing its derivatives program, a Federal credit union must have an 
internal controls review that is focused on the integration and 
introduction of derivatives functions. This review must be performed by 
an independent external unit or, if applicable, the Federal credit 
union's internal auditor. The review must ensure the timely 
identification of weaknesses in internal controls, modeling 
methodologies, risk, and all operational and oversight processes;
    (3) Financial statement audit. Any Federal credit union engaging in 
derivatives transactions pursuant to this subpart must obtain an annual 
financial statement audit, as defined in Sec. 715.2(d) of this chapter, 
and be compliant with GAAP for all derivatives-related accounting and 
reporting;
    (4) Process and responsibility framework. A Federal credit union 
must maintain a written and schematic description (e.g., flow chart or 
organizational chart) of the derivatives management process in its 
derivatives policies and procedures. The description must include the 
roles of staff, qualified personnel, external service providers, senior 
executive officers, the board of directors, and any others involved in 
the derivatives program;
    (5) Separation of duties. A Federal credit union's process, whether 
conducted internally or by an external service provider, must have 
appropriate separation of duties for the following functions defined in 
paragraph (a)(3) of this section:
    (i) Asset/liability risk management;
    (ii) Accounting and financial reporting;
    (iii) Derivatives execution and oversight; and
    (iv) Collateral, counterparty, and margining management.
    (c) Legal review. A Federal credit union with derivatives authority 
must hire or engage legal counsel to reasonably ensure that all 
derivatives contracts adequately protect the legal and business 
interests of the Federal credit union. The Federal credit union's 
counsel must have legal expertise with derivatives contracts and related 
matters.
    (d) Policies and procedures. A Federal credit union with derivatives 
authority must operate according to comprehensive written policies and 
procedures for control, measurement, and management of derivatives 
transactions. At a minimum, the policies and procedures must address the 
requirements of this subpart, except for those in Secs. 703.108 through 
703.114, and any additional limitations imposed by the Federal credit 
union's board of directors. A Federal credit union's board of directors 
must review the policies and procedures described in this section 
annually and update them when necessary.



Sec. 703.107  External service providers.

    (a) General. A Federal credit union with derivatives authority may 
use external service providers to support or conduct aspects of its 
derivatives program, provided:
    (1) The external service provider, including affiliates, does not:
    (i) Act as a counterparty to any derivatives transactions that 
involve the Federal credit union;
    (ii) Act as a principal or agent in any derivatives transactions 
that involve the Federal credit union; or
    (iii) Have discretionary authority to execute any of the Federal 
credit union's derivatives transactions.
    (2) The Federal credit union has the internal capacity, experience, 
and skills to oversee and manage any external service providers it uses; 
and
    (3) The Federal credit union documents the specific uses of external 
service providers in its process and responsibility framework, as 
described in

[[Page 802]]

Sec. 703.106(b)(1) of this subpart and the application.
    (b) Support functions. A Federal credit union must perform the 
following functions internally and independently. A Federal credit union 
may have assistance and input from an external service provider, 
provided the external service provider does not conduct the following 
functions in lieu of the Federal credit union:
    (1) Asset/liability risk management; and
    (2) Liquidity risk management.



Sec. 703.108  Eligibility.

    (a) A Federal credit union may apply for derivatives authority under 
this subpart if it meets the following criteria:
    (1) The Federal credit union's most recent NCUA-assigned composite 
CAMEL code rating is 1, 2, or 3, with a management component of 1 or 2; 
and
    (2) The Federal credit union has assets of at least $250 million as 
of its most recent call report.
    (b) Notwithstanding paragraph (a)(2) of this section, a Federal 
credit union may request permission from the appropriate field director 
to apply for derivatives authority, subject to requirements imposed by 
the field director. If the field director grants such permission, the 
application will be subject to Secs. 703.109 through 703.111.



Sec. 703.109  Applying for derivatives authority.

    An eligible Federal credit union must receive written approval to 
use derivatives by submitting a detailed application, consistent with 
this subpart and any guidance issued by NCUA. A Federal credit union 
must submit its application to the applicable field director.



Sec. 703.110  Application content.

    A Federal credit union applying for derivatives authority must 
document how it will comply with the requirements of this subpart and 
any guidance issued by NCUA, and must include all of the following in 
its application:
    (a) An interest rate risk mitigation plan that shows how derivatives 
are one aspect of the Federal credit union's overall interest rate risk 
mitigation strategy, and an analysis showing how the Federal credit 
union will use derivatives in conjunction with other on-balance sheet 
instruments and strategies to effectively manage its interest rate risk;
    (b) A list of the products and characteristics the Federal credit 
union is seeking approval to use, a description of how it intends to use 
the products and characteristics listed, an analysis of how the products 
and characteristics fit within its interest rate risk mitigation plan, 
and a justification for each product and characteristic listed;
    (c) Draft policies and procedures that the Federal credit union has 
prepared in accordance with Sec. 703.106(d) of this subpart;
    (d) How the Federal credit union plans to acquire, employ, and/or 
create the resources, policies, processes, systems, internal controls, 
modeling, experience, and competencies to meet the requirements of this 
subpart. This includes a description of how the Federal credit union 
will ensure that senior executive officers, board of directors, and 
personnel have the knowledge and experience in accordance with the 
requirements of this subpart;
    (e) A description of how the Federal credit union intends to use 
external service providers as part of its derivatives program, and a 
list of the name(s) of and service(s) provided by the external service 
providers it intends to use;
    (f) A description of how the Federal credit union will support the 
operations of margining and collateral; and
    (g) A description of how the Federal credit union will comply with 
GAAP.



Sec. 703.111  NCUA approval.

    (a) Interim approval. The field director will notify the Federal 
credit union in writing if the field director has approved or denied its 
application and, if applicable, the reason(s) for any denial. A Federal 
credit union approved for derivatives authority may not enter into any 
derivatives transactions until it receives final approval from NCUA 
under paragraph (c) of this section.
    (b) Notice of readiness. A Federal credit union approved under 
paragraph (a) of this section must provide written notification to NCUA 
when it is ready to begin using derivatives.

[[Page 803]]

    (c) Final approval. NCUA will review every approved Federal credit 
union's derivatives program to ensure compliance with this subpart and 
evaluate the Federal credit union's implementation of the items in its 
application. This supervisory review may be conducted on site. After 
NCUA has completed its review, the field director will notify the 
Federal credit union in writing if the field director has granted final 
approval and the Federal credit union may begin entering into 
derivatives transactions. If applicable, the notification will include 
the reason(s) for any denial. A Federal credit union may not enter into 
any derivatives transactions under this subpart until it receives this 
determination from the applicable field director. At a field director's 
discretion, a Federal credit union may reapply under this subsection if 
the field director has determined that the Federal credit union has 
demonstrated compliance with this subpart and its application.
    (d) Right to appeal. A Federal credit union may submit a written 
appeal to the NCUA Board within 60 days from the date of denial by NCUA 
under paragraph (b) or (c) of this section.



Sec. 703.112  Applying for additional products or characteristics.

    (a) A Federal credit union with derivatives authority may 
subsequently apply for approval to use additional products and 
characteristics, described in Sec. 703.102 of this subpart, that it did 
not request in its initial application, subject to the following:
    (1) A Federal credit union must submit an application to NCUA;
    (2) A Federal credit union's application must include a list of the 
products and/or characteristics for which it is applying; and
    (3) A Federal credit union must include a justification for each 
product and/or characteristic requested in the application and an 
explanation of how the Federal credit union will use each product and/or 
characteristic requested.
    (b) The field director will notify the Federal credit union in 
writing if the field director has approved or denied its application for 
additional products or characteristics. If applicable, the notification 
will include the reason(s) for denial.
    (c) A Federal credit union may appeal any denial of an application 
for additional products and/or characteristics in accordance with 
Sec. 703.111(d).



Sec. 703.113  Pilot program participants with active derivatives
positions.

    (a) A Federal credit union with outstanding derivatives positions 
under NCUA's derivatives pilot program as of January 1, 2013, must 
comply with the requirements of this subpart within 12 months of the 
effective date of this subpart, including the requirement to submit an 
application for derivatives authority. During the 12-month interim 
period, the Federal credit union may continue to operate its derivatives 
program in accordance with its pilot program terms and conditions.
    (b) A Federal credit union with outstanding derivatives positions 
under NCUA's derivatives pilot program as of January 1, 2013, that does 
not comply with the requirements of this subpart within 12 months of the 
effective date of this subpart, or does not want to continue engaging in 
derivatives transactions, must:
    (1) Stop entering into new derivatives transactions; and
    (2) Within 30 days, present a corrective action plan to NCUA 
describing how the Federal credit union will cure any deficiencies or 
wind down its derivatives program.



Sec. 703.114  Regulatory violation.

    (a) A Federal credit union with derivatives authority that no longer 
meets the requirements of this subpart or fails to comply with its 
approved strategy (including employing the resources, policies, 
procedures, accounting, and competencies that formed the basis for the 
approval) must:
    (1) Immediately stop entering into any new derivatives transactions 
until the Federal credit union is in compliance with this subpart. 
During this period, however, the Federal credit union may terminate 
existing derivatives transactions. NCUA may permit a Federal credit 
union to enter into offsetting transactions if NCUA determines these 
transactions are part of a corrective action strategy.

[[Page 804]]

    (2) Within three business days from the regulatory violation, 
provide the appropriate field director notification of the regulatory 
violation, which must include a description of the violation and the 
immediate corrective action the Federal credit union is taking; and
    (3) Within 15 business days after notifying the appropriate field 
director, submit a written corrective action plan to the appropriate 
field director.
    (b) NCUA may revoke a Federal credit union's derivatives authority 
at any time if a Federal credit union fails to comply with the 
requirements of this subpart. Revocation will prohibit a Federal credit 
union from executing any new derivatives transactions under this 
subpart, and may require the Federal credit union to terminate existing 
derivatives transactions if, in the discretion of the applicable field 
director, doing so would not pose a safety and soundness concern.
    (c) Within 60 days from the date of the related field director's 
action, a Federal credit union may appeal the following to the NCUA 
Board:
    (1) NCUA's revocation of a Federal credit union's derivatives 
authority; and
    (2) NCUA's order that a Federal credit union terminate existing 
derivatives positions.
    (d) With respect to an appeal regarding revocation of a Federal 
credit union's derivatives authority, the Federal credit union may not 
enter into any new derivatives transactions until the NCUA Board renders 
a final decision on the appeal. The Federal credit union may, however, 
elect to terminate existing derivatives positions. With respect to an 
appeal regarding an order to terminate a Federal credit union's existing 
derivatives positions, the Federal credit union is not required to 
terminate any existing positions until the NCUA Board renders a final 
decision on the appeal.
    (3) Through the originator's initial written communication with a 
consumer, if any, whether on paper or electronically.



   Sec. Appendix to Subpart B--Examples of Derivative Limit Authority 
                              Calculations

    Limit authority. A Federal credit union that is approved for 
derivatives authority under Sec. 703.111 may use any of the products and 
characteristics described in Sec. 703.102(a), subject to the following 
position and risk limits:

                                            Table 1--Authority Limits
----------------------------------------------------------------------------------------------------------------
                                               Entry limits (first 12
              Limit authority                  months of transactions)                Standard limits
----------------------------------------------------------------------------------------------------------------
Fair Value Loss (See (a) below)...........  15% of net worth............  25% of net worth.
Weighted Average Remaining Maturity         65% of net worth............  100% of net worth.
 Notional (WARMN) (See (b) below).
----------------------------------------------------------------------------------------------------------------

    (a) Calculating the fair value loss limit for compliance with this 
subpart. To demonstrate compliance with the fair value loss limit 
authority of this subpart, a Federal credit union must combine the total 
fair value (as defined by product group below) of all derivatives 
transactions. The fair value loss limit is exclusive to the derivatives 
positions (not net of offsetting gains and losses in the hedged item).
    (1) The resulting figure, if a loss, must not exceed the Federal 
credit union's authorized fair value loss limit:
    (i) Options--the gain or loss is the difference between the fair 
value and the unamortized premium at the reporting date;
      
      
    (ii) Swaps--the gain or loss is the fair value at the reporting 
date; and
    (iii) Futures--the gain or loss is the difference between the 
exchange closing price at the reporting date and the purchase or sales 
price.
    (2) Example calculations for compliance with this subpart: fair 
value loss limit. The table below provides an example of the fair value 
loss limit calculations for a sample Federal credit union that has entry 
level authority. The sample Federal credit union has a net worth of $100 
million and total assets of $1 billion; its fair value loss limit is 
-$15 million (15 percent of net worth).

[[Page 805]]



                                                      Table 2--Example Fair Value Loss Calculations
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Fair value gains (losses)
                                          ------------------------------------------------------------------------ % of Net worth     Limit violation
                                                Options            Swaps            Futures            Total          (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Scenario A...............................        $1,000,000        $2,000,000          $200,000        $3,200,000               3  No.
Scenario B...............................         5,000,000        10,000,000         2,000,000        17,000,000              17  No.
Scenario C...............................         1,000,000       (3,000,000)           250,000       (1,750,000)             (2)  No.
Scenario D...............................         1,000,000      (20,000,000)       (2,000,000)      (21,000,000)            (21)  Yes.
Scenario E...............................       (2,000,000)      (10,000,000)         1,000,000      (11,000,000)            (11)  No.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (b) Calculating the WARMN exposure for compliance with this subpart. 
The WARMN calculation adjusts the gross notional of a derivative to take 
into account its price sensitivity and remaining maturity. The WARMN 
limit is correlated to the fair value loss limit, as described in 
paragraph (a) of this appendix, for a 300 basis point parallel shift in 
interest rates. To demonstrate compliance with the WARMN limit authority 
of this subpart, a Federal credit union must calculate the WARMN using 
the following reference table, definitions, and calculation steps:

                                      Table 3--Summary of WARMN Calculation
----------------------------------------------------------------------------------------------------------------
                                                   Adjustment
            Product               Step 1 gross      factor       Step 2 adjusted           Step 3 WARM
                                    notional        (percent)         notional
----------------------------------------------------------------------------------------------------------------
Options (Caps).................         Current              33  33% of current      Time remaining to maturity.
                                       notional                   notional.
Options (Floors)...............         Current              33  33% of current      Time remaining to maturity.
                                       notional                   notional.
Swaps..........................         Current             100  100% of current     Time remaining to maturity.
                                       notional                   notional.
Futures........................   Contract size             100  100% of contract    Underlying contract.
                                                                  size.
                                                                 Sum = Total         Sum = Overall WARM
                                                                  Adjusted Notional.
----------------------------------------------------------------------------------------------------------------
Step 4 WARMN = Adjusted Notional x (WARM/10)
----------------------------------------------------------------------------------------------------------------

    (1) Step 1--Calculate the gross notional of all outstanding 
derivative transactions. (i) For options and swaps, all gross notional 
amounts must be absolute, with no netting (i.e., offsetting a pay-fixed 
transaction with a receive-fixed transaction). The gross notional for 
derivatives transactions with amortizing notional amounts is the current 
contracted notional amount, in accordance with the amortization 
schedule.
    (ii) For futures, the gross notional is the underlying contract size 
as designated by the Chicago Mercantile Exchange (CME) product 
specifications (e.g., a five-year Treasury note futures contract will 
use $100,000 for each contract purchased or sold and reported here on a 
gross basis for limit purposes.)
    (2) Step 2--Convert each gross notional by its derivative 
adjustment factor to produce an adjusted gross notional. The derivative 
adjustment factor approximates the price sensitivity for each of the 
product groups in order to weight the notional amount by sensitivity 
before weighting for maturity.
    (i) For cap and floor options, the derivative adjustment factor is 
33 percent. For example, an interest rate cap with a $1 million notional 
amount has an adjusted gross notional of $330,000 ($1,000,000  x  0.33 + 
$330,000).
    (ii) For interest rate swaps and Treasury futures, the derivative 
adjustment factor is 100 percent. For example, an interest rate swap 
with a $1 million notional amount has an adjusted gross notional of 
$1,000,000 ($1,000,000  x  1.00 = $1,000,000).
    (iii) The total adjusted notional for all derivatives positions is 
the sum of (i) and (ii) above.
    (3) Step 3--Produce the weighted average remaining time to maturity 
(WARM) for all derivatives positions. (i) For interest rate caps, 
interest rate floors, and interest rate swaps, the remaining maturity is 
the time left between the reporting date and the contracted maturity 
date, expressed in years (round up to two decimals);
    (ii) For Treasury futures, the remaining maturity is the underlying 
deliverable Treasury note's maximum maturity (e.g., a five-year Treasury 
note future has a five-year remaining maturity); and
    (iii) Determine the WARM using the adjusted gross notional, as set 
forth in subsection (2) of this section, and the remaining time to 
maturity as defined for each product group above in paragraphs (b)(3)(i) 
and (ii) of this appendix.

[[Page 806]]

    (4) Step 4--Produce the WARMN by converting the WARM to a 
percentage and then multiplying the percentage by the total adjusted 
gross notional. (i) Divide the WARM, as calculated in paragraph (b)(3) 
of this appendix, by ten to convert it to a percentage (e.g., 7.75 WARMN 
is translated to 77.5 percent); and
    (ii) Multiply the WARM converted to a percentage, as described in 
paragraph (c)(4)(i) of this appendix, by total adjusted gross notional, 
described in paragraph (c)(2) of this appendix.
    (5) Compare WARMN calculation to the WARNM limit for compliance. The 
total in step four (4) must be less than the limit in paragraph 
(a)(1)(ii) or (a)(2)(ii) of this appendix, as applicable.
    (6) Example calculations for compliance with this subpart: WARMN. 
The table below provides an illustrative example of the WARMN limit 
calculations for a sample Federal credit union that has entry level 
authority. The sample Federal credit union has a net worth of $100 
million and total assets of $1 billion; its notional limit authority is 
$65 million (65 percent of net worth).

                                    Table 4--Example WARMN Limit Calculation
----------------------------------------------------------------------------------------------------------------
                                               Options            Swaps            Futures            Total
----------------------------------------------------------------------------------------------------------------
Gross Notional (Step 1)................      $100,000,000       $50,000,000        $5,000,000      $155,000,000
Adjustment Factor.......................               33%              100%              100%
Adjusted Notional (Step 2).............       $33,000,000       $50,000,000        $5,000,000       $88,000,000
Weighted Average Remaining Maturity                   7.00              8.50              5.00              7.74
 (WARM) (Step 3).......................
----------------------------------------------------------------------------------------------------------------
                                                                Weighted Average Remaining       \1\ $68,100,000
                                                              Maturity Notional (WARMN) (Step
                                                                           4):
                                                             Notional Limit Authority (65% of        $65,000,000
                                                                        net worth)
                                                                Under/(Over) Notional Limit         ($3,100,000)
                                                                         Authority
----------------------------------------------------------------------------------------------------------------
\1\ (77.4% of Step 3.)



PART 704_CORPORATE CREDIT UNIONS--Table of Contents



Sec.
704.1  Scope.
704.2  Definitions.
704.3  Corporate credit union capital.
704.4  Prompt corrective action
704.5  Investments.
704.6  Credit risk management.
704.7  Lending.
704.8  Asset and liability management.
704.9  Liquidity management.
704.10  Investment action plan.
704.11  Corporate Credit Union Service Organizations (Corporate CUSOs).
704.12  Permissible services.
704.13  Board responsibilities.
704.14  Representation.
704.15  Audit and reporting requirements.
704.16  Contracts/written agreements.
704.17  State-chartered corporate credit unions.
704.18  Fidelity bond coverage.
704.19  Disclosure of executive compensation.
704.21  Enterprise risk management.
704.22  Membership fees.

Appendix A to Part 704--Capital Prioritization and Model Forms
Appendix B to Part 704--Expanded Authorities and Requirements
Appendix C to Part 704--Risk-Based Capital Credit Risk-Weight Categories

    Authority: 12 U.S.C. 1766(a), 1781, 1789.

    Source: 62 FR 12938, Mar. 19, 1997, unless otherwise noted.



Sec. 704.1  Scope.

    (a) This part establishes special rules for all federally insured 
corporate credit unions. Non federally insured corporate credit unions 
must agree, by written contract, to both adhere to the requirements of 
this part and submit to examinations, as determined by NCUA, as a 
condition of receiving shares or deposits from federally insured credit 
unions. This part grants certain additional authorities to federal 
corporate credit unions. Except to the extent that they are inconsistent 
with this part, other provisions of NCUA's Rules and Regulations (12 CFR 
chapter VII) and the Federal Credit Union Act apply to federally 
chartered corporate credit unions and federally insured state-chartered 
corporate credit unions to the same extent that they apply to other 
federally chartered and federally insured state-chartered credit unions, 
respectively.
    (b) The Board has the authority to issue orders which vary from this 
part.

[[Page 807]]

This authority is provided under Section 120(a) of the Federal Credit 
Union Act, 12 U.S.C. 1766(a). Requests by state-chartered corporate 
credit unions for waivers to this part and for expansions of authority 
under appendix B of this part must be approved by the state regulator 
before being submitted to NCUA.



Sec. 704.2  Definitions.

    As used in this part:
    Adjusted trading means any method or transaction whereby a corporate 
credit union sells a security to a vendor at a price above its current 
market price and simultaneously purchases or commits to purchase from 
the vendor another security at a price above its current market price.
    Applicable state regulator means the prudential state regulator of a 
state chartered corporate credit union.
    Asset-backed security (ABS) means a security that is primarily 
serviced by the cashflows of a discrete pool of receivables or other 
financial assets, either fixed or revolving, that by their terms convert 
into cash within a finite time period plus any rights or other assets 
designed to assure the servicing or timely distribution of proceeds to 
the security holders. Mortgage-backed securities are a type of asset-
backed security.
    Available to cover losses that exceed retained earnings means that 
the funds are available to cover operating losses realized, in 
accordance with generally accepted accounting principles (GAAP), by the 
corporate credit union that exceed retained earnings and equity acquired 
in a combination. Likewise, available to cover losses that exceed 
retained earnings and perpetual contributed capital (PCC) means that the 
funds are available to cover operating losses realized, in accordance 
with GAAP, by the corporate credit union that exceed retained earnings 
and equity acquired in a combination and PCC. Any such losses must be 
distributed pro rata at the time the loss is realized first among the 
holders of PCC, and when all PCC is exhausted, then pro rata among all 
nonperpetual capital accounts (NCAs) and unconverted membership capital 
accounts, all subject to the optional prioritization described in 
appendix A of this part. To the extent that any contributed capital 
funds are used to cover losses, the corporate credit union must not 
restore or replenish the affected capital accounts under any 
circumstances. In addition, contributed capital that is used to cover 
losses in a calendar year previous to the year of liquidation has no 
claim against the liquidation estate.
    CLF-related bridge loan means interim financing, extending up to ten 
business days, that a corporate credit union provides for a natural 
person credit union from the time the CLF approves a loan to the natural 
person credit union until the CLF funds the loan. To repay a CLF-related 
bridge loan, the borrowing natural person credit union assigns the 
proceeds of the CLF advance to the corporate credit union making the 
CLF-related bridge loan for the duration of the bridge loan.
    Collateralized debt obligation (CDO) means a debt security 
collateralized by mortgage-backed securities, asset-backed securities, 
or corporate obligations in the form of loans or debt. Senior tranches 
of Re-REMIC's consisting of senior mortgage- and asset-backed securities 
are excluded from this definition.
    Collateralized mortgage obligation (CMO) means a multi-class 
mortgage-backed security.
    Commercial mortgage-backed security (CMBS) means a mortgage-backed 
security collateralized primarily by multi-family and commercial 
property loans.
    Compensation means all salaries, fees, wages, bonuses, severance 
payments, current year contributions to employee benefit plans (for 
example, medical, dental, life insurance, and disability), current year 
contributions to deferred compensation plans and future severance 
payments, including payments in connection with a merger or similar 
combination (whether or not funded; whether or not vested; and whether 
or not the deferred compensation plan is a qualified plan under Section 
401(a) of the IRS Code). Compensation also includes expense accounts and 
other allowances (for example, the value of the personal use of housing, 
automobiles or other assets owned by the corporate

[[Page 808]]

credit union; expense allowances or reimbursements that recipients must 
report as income on their separate income tax return; payments made 
under indemnification arrangements; and payments made for the benefit of 
friends or relatives). In calculating required compensation disclosures, 
reasonable estimates may be used if precise cost figures are not readily 
available.
    Consolidated Credit Union Service Organization (Consolidated CUSO) 
means any corporation, partnership, business trust, joint venture, 
association or similar organization in which a corporate credit union 
directly or indirectly holds an ownership interest (as permitted by 
Sec. 704.11 of this part) and the assets of which are consolidated with 
those of the corporate credit union for purposes of reporting under 
Generally Accepted Accounting Principles (GAAP). Generally, consolidated 
CUSOs are majority-owned CUSOs.
    Contributed capital means either perpetual or nonperpetual capital.
    Corporate credit union means an organization that:
    (1) Is chartered under Federal or state law as a credit union;
    (2) Receives shares from and provides loan services to credit 
unions;
    (3) Is operated primarily for the purpose of serving other credit 
unions;
    (4) Is designated by NCUA as a corporate credit union;
    (5) Limits natural person members to the minimum required by state 
or federal law to charter and operate the credit union; and
    (6) Does not condition the eligibility of any credit union to become 
a member on that credit union's membership in any other organization.
    Critical accounting policies means those policies that are most 
important to the portrayal of a corporate credit union's financial 
condition and results and that require management's most difficult, 
subjective, or complex judgments, often as a result of the need to make 
estimates about the effect of matters that are inherently uncertain.
    Daily average net assets means the average of net assets calculated 
for each day during the period.
    Derivatives means a financial contract which derives its value from 
the value and performance of some other underlying financial instrument 
or variable, such as an index or interest rate.
    Dollar roll means the purchase or sale of a mortgage-backed security 
to a counterparty with an agreement to resell or repurchase a 
substantially identical security at a future date and at a specified 
price.
    Embedded option means a characteristic of certain assets and 
liabilities which gives the issuer of the instrument the ability to 
change the features such as final maturity, rate, principal amount and 
average life. Options include, but are not limited to, calls, caps, and 
prepayment options.
    Enterprise risk management means the process of addressing risk on 
an entity-wide basis. The purpose of this process is not to eliminate 
risk but, rather, to provide the knowledge the board of directors and 
management need to effectively measure, monitor, and control risk and to 
then plan appropriate strategies to achieve the entity's business 
objectives with a reasonable amount of risk taking.
    Equity investment means an investment in an equity security and 
other ownership interest, including, for example, an investment in a 
partnership or limited liability company.
    Equity security means any security representing an ownership 
interest in an enterprise (for example, common, preferred, or other 
capital stock) or the right to acquire (for example, warrants and call 
options) or dispose of (for example, put options) an ownership interest 
in an enterprise at fixed or determinable prices. However, the term does 
not include Federal Home Loan Bank stock, convertible debt, or preferred 
stock that by its terms either must be redeemed by the issuing 
enterprise or is redeemable at the option of the investor.
    Examination of internal control means an engagement of an 
independent public accountant to report directly on internal control or 
on management's assertions about internal control. An examination of 
internal control over financial reporting includes controls over the 
preparation of financial statements in accordance with accounting 
principles generally accepted in the

[[Page 809]]

United States of America (GAAP) and NCUA regulatory reporting 
requirements.
    Exchangeable collateralized mortgage obligation means a class of a 
collateralized mortgage obligation (CMO) that, at the time of purchase, 
represents beneficial ownership interests in a combination of two or 
more underlying classes of the same CMO structure. The holder of an 
exchangeable CMO may pay a fee and take delivery of the underlying 
classes of the CMO.
    Fair value means the price that would be received to sell an asset, 
or paid to transfer a liability, in an orderly transaction between 
market participants at the measurement date, as defined by GAAP.
    Federal funds transaction means a short-term or open-ended unsecured 
transfer of immediately available funds by one depository institution to 
another depository institution or entity.
    Financial statements means the presentation of a corporate credit 
union's financial data, including accompanying notes, derived from 
accounting records of the credit union, and intended to disclose the 
credit union's economic resources or obligations at a point in time, or 
the changes therein for a period of time, in conformity with GAAP. Each 
of the following is considered to be a financial statement: a balance 
sheet or statement of financial condition; statement of income or 
statement of operations; statement of undivided earnings; statement of 
cash flows; statement of changes in members' equity; statement of 
revenue and expenses; and statement of cash receipts and disbursements.
    Financial statement audit means an audit of the financial statements 
of a corporate credit union performed in accordance with generally 
accepted auditing standards by an independent person who is licensed by 
the appropriate State or jurisdiction. The objective of a financial 
statement audit is to express an opinion as to whether those financial 
statements of the credit union present fairly, in all material respects, 
the financial position and the results of its operations and its cash 
flows in conformity with GAAP.
    Foreign bank means an institution which is organized under the laws 
of a country other than the United States, is engaged in the business of 
banking, and is recognized as a bank by the banking supervisory 
authority of the country in which it is organized.
    Generally accepted auditing standards (GAAS) means the standards 
approved and adopted by the American Institute of Certified Public 
Accountants which apply when an independent, licensed certified public 
accountant audits private company financial statements in the United 
States of America. Auditing standards differ from auditing procedures in 
that procedures address acts to be performed, whereas standards measure 
the quality of the performance of those acts and the objectives to be 
achieved by use of the procedures undertaken. In addition, auditing 
standards address the auditor's professional qualifications as well as 
the judgment exercised in performing the audit and in preparing the 
report of the audit.
    Immediate family member means a spouse or other family member living 
in the same household.
    Independent public accountant (IPA) means a person who is licensed 
by, or otherwise authorized by, the appropriate State or jurisdiction to 
practice public accounting. An IPA must be able to exercise fairness 
toward credit union officials, members, creditors and others who may 
rely upon the report of a supervisory committee audit and to demonstrate 
the impartiality necessary to produce dependable findings. As used in 
this part, IPA is synonymous with the terms ``auditor'' and 
``accountant.'' The term IPA does not include a licensed person working 
in his or her capacity as an employee of an unlicensed entity and 
issuing an audit opinion in the unlicensed entity's name, e.g., a 
licensed league auditor or licensed retired examiner working for a non-
licensed entity.
    Intangible assets means assets considered to be intangible assets 
under GAAP. These assets include, but are not limited to, core deposit 
premiums, purchased credit card relationships, favorable leaseholds, and 
servicing assets (mortgage and non-mortgage). Interest-only strips 
receivable are not intangible assets under this definition.

[[Page 810]]

    Internal control means the process, established by the corporate 
credit union's board of directors, officers and employees, designed to 
provide reasonable assurance of reliable financial reporting and 
safeguarding of assets against unauthorized acquisition, use, or 
disposition. A credit union's internal control structure generally 
consists of five components: Control environment; risk assessment; 
control activities; information and communication; and monitoring. 
Reliable financial reporting refers to preparation of Call Reports as 
well as financial data published and presented to members that meet 
management's financial reporting objectives. Internal control over 
safeguarding of assets against unauthorized acquisition, use, or 
disposition refers to prevention or timely detection of transactions 
involving such unauthorized access, use, or disposition of assets which 
could result in a loss that is material to the financial statements.
    Internal control framework means criteria such as that established 
in Internal Control--Integrated Framework, issued by the Committee of 
Sponsoring Organizations of the Treadway Commission (COSO), or 
comparable, reasonable, and U.S.-recognized criteria.
    Internal control over financial reporting means a process effected 
by those charged with governance, management, and other personnel, 
designed to provide reasonable assurance regarding the preparation of 
reliable financial statements in accordance with accounting principles 
generally accepted in the United States of America. A corporate credit 
union's internal control over financial reporting includes those 
policies and procedures that:
    (1) Pertain to the maintenance of records that, in reasonable 
detail, accurately and fairly reflect the transactions and dispositions 
of the assets of the entity;
    (2) Provide reasonable assurance that transactions are recorded as 
necessary to permit preparation of financial statements in accordance 
with accounting principles generally accepted in the United States of 
America, and that receipts and expenditures of the entity are being made 
only in accordance with authorizations of management and those charged 
with governance; and
    (3) Provide reasonable assurance regarding prevention, or timely 
detection and correction, of unauthorized acquisition, use, or 
disposition of the entity's assets that could have a material effect on 
the financial statements.
    Investment grade means the issuer of the security has an adequate 
capacity to meet the financial commitments under the security for the 
projected life of the asset or exposure, even under adverse economic 
conditions. An issuer has an adequate capacity to meet financial 
commitments if the risk of default by the obligor is low and the full 
and timely repayment of principal and interest on the security is 
expected. A corporate credit union may consider any or all of the 
following factors, to the extent appropriate, with respect to the credit 
risk of a security: Credit spreads; securities-related research; 
internal or external credit risk assessments; default statistics; 
inclusion on an index; priorities and enhancements; price, yield, and/or 
volume; and asset class-specific factors. This list of factors is not 
meant to be exhaustive or mutually exclusive.
    Leverage ratio means the ratio of Tier 1 capital to moving daily 
average net assets.
    Limited liquidity investment means a private placement or funding 
agreement.
    Member reverse repurchase transaction means an integrated 
transaction in which a corporate credit union purchases a security from 
one of its member credit unions under agreement by that member credit 
union to repurchase the same security at a specified time in the future. 
The corporate credit union then sells that same security, on the same 
day, to a third party, under agreement to repurchase it on the same date 
on which the corporate credit union is obligated to return the security 
to its member credit union.
    Minimal amount of credit risk means the amount of credit risk when 
the issuer of a security has a very strong capacity to meet all 
financial commitments under the security for the projected life of the 
asset or exposure,

[[Page 811]]

even under adverse economic conditions. An issuer has a very strong 
capacity to meet all financial commitments if the risk of default by the 
obligor is very low, and the full and timely repayment of principal and 
interest on the security is expected. A corporate credit union may 
consider any or all of the following factors, to the extent appropriate, 
with respect to the credit risk of a security: Credit spreads; 
securities-related research; internal or external credit risk 
assessments; default statistics; inclusion on an index; priorities and 
enhancements; price, yield, and/or volume; asset class-specific factors. 
This list of factors is not meant to be exhaustive or mutually 
exclusive.
    Mortgage-backed security (MBS) means a security backed by first or 
second mortgages secured by real estate upon which is located a 
dwelling, mixed residential and commercial structure, residential 
manufactured home, or commercial structure.
    Moving daily average net assets means the average of daily average 
net assets for the month being measured and the previous eleven (11) 
months.
    Moving monthly average net risk-weighted assets means the average of 
the net risk-weighted assets for the month being measured and the 
previous eleven (11) months. Measurements must be taken on the last day 
of each month.
    Mutual combination means a transaction or event in which a corporate 
credit union acquires another credit union, or acquires an integrated 
set of activities and assets that is capable of being conducted and 
managed as a credit union.
    NCUA means NCUA Board (Board), unless the particular action has been 
delegated by the Board.
    Net assets means total assets less Central Liquidity Facility (CLF) 
stock subscriptions, CLF-related bridge loans, loans guaranteed by the 
National Credit Union Share Insurance Fund (NCUSIF), and member reverse 
repurchase transactions. For its own account, a corporate credit union's 
payables under reverse repurchase agreements and receivables under 
repurchase agreements may be netted out if the GAAP conditions for 
offsetting are met. Also, any amounts deducted in calculating Tier 1 
capital are also deducted from net assets.
    Net economic value (NEV) means the fair value of assets minus the 
fair value of liabilities. All fair value calculations must include the 
value of forward settlements and embedded options. Perpetual contributed 
capital, and the unamortized portion of nonperpetual capital that is, 
the portion that qualifies as capital for purposes of any of the minimum 
capital ratios, is excluded from liabilities for purposes of this 
calculation. The NEV ratio is calculated by dividing NEV by the fair 
value of assets.
    Net interest margin security means a security collateralized by 
residual interests in collateralized mortgage obligations, residual 
interests in real estate mortgage investment conduits, or residual 
interests in other asset-backed securities.
    Net risk-weighted assets means risk-weighted assets less CLF stock 
subscriptions, CLF-related bridge loans, loans guaranteed by the NCUSIF, 
and member reverse repurchase transactions. For its own account, a 
corporate credit union's payables under reverse repurchase agreements 
and receivables under repurchase agreements may be netted out if the 
GAAP conditions for offsetting are met. Also, any amounts deducted in 
calculating Tier 1 capital are also deducted from net risk-weighted 
assets.
    Nonperpetual capital means funds contributed by members or 
nonmembers that: are term certificates with an original minimum term of 
five years or that have an indefinite term (i.e., no maturity) with a 
minimum withdrawal notice of five years; are available to cover losses 
that exceed retained earnings and perpetual contributed capital; are not 
insured by the NCUSIF or other share or deposit insurers; and cannot be 
pledged against borrowings. In the event the corporate is liquidated, 
the holders of nonperpetual capital accounts (NCAs) will claim equally. 
These claims will be subordinate to all other claims (including NCUSIF 
claims), except that any claims by the holders of perpetual contributed 
capital (PCC) will be subordinate to the claims of holders of NCAs.

[[Page 812]]

    Obligor means the primary party obligated to repay an investment, 
e.g., the issuer of a security, such as a Qualified Special Purpose 
Entity (QSPE) trust; the taker of a deposit; or the borrower of funds in 
a federal funds transaction. Obligor does not include an originator of 
receivables underlying an asset-backed security, the servicer of such 
receivables, or an insurer of an investment.
    Official means any director or committee member.
    Pair-off transaction means a security purchase transaction that is 
closed out or sold at, or prior to, the settlement or expiration date.
    Perpetual contributed capital (PCC) means accounts or other 
interests of a corporate credit union that: are perpetual, non-
cumulative dividend accounts; are available to cover losses that exceed 
retained earnings; are not insured by the NCUSIF or other share or 
deposit insurers; and cannot be pledged against borrowings. In the event 
the corporate is liquidated, any claims made by the holders of perpetual 
contributed capital will be subordinate to all other claims (including 
NCUSIF claims).
    Private label security means a security that is not issued or 
guaranteed by the U.S. government, its agencies, or its government-
sponsored enterprises (GSEs).
    Quoted market price means a recent sales price or a price based on 
current bid and asked quotations.
    Repurchase transaction means a transaction in which a corporate 
credit union agrees to purchase a security from a counterparty and to 
resell the same or any identical security to that counterparty at a 
specified future date and at a specified price.
    Residential mortgage-backed security (RMBS) means a mortgage-backed 
security collateralized primarily by mortgage loans on residential 
properties.
    Residential properties means houses, condominiums, cooperative 
units, and manufactured homes. This definition does not include boats or 
motor homes, even if used as a primary residence, or timeshare 
properties.
    Residual interest means the ownership interest in remainder cash 
flows from a CMO or ABS transaction after payments due bondholders and 
trust administrative expenses have been satisfied.
    Retained earnings means undivided earnings, regular reserve, reserve 
for contingencies, supplemental reserves, reserve for losses, and other 
appropriations from undivided earnings as designated by management or 
NCUA.
    Risk-weighted assets means a corporate credit union's risk-weighted 
assets as calculated in accordance with appendix C of this part.
    Section 107(8) institution means an institution described in Section 
107(8) of the Federal Credit Union Act (12 U.S.C. 1757(8)).
    Securities lending means lending a security to a counterparty, 
either directly or through an agent, and accepting collateral in return.
    Securitization means the pooling and repackaging by a special 
purpose entity of assets or other credit exposures that can be sold to 
investors. Securitization includes transactions that create stratified 
credit risk positions whose performance is dependent upon an underlying 
pool of credit exposures, including loans and commitments.
    Senior executive officer means a chief executive officer, any 
assistant chief executive officer (e.g., any assistant president, any 
vice president or any assistant treasurer/manager), and the chief 
financial officer (controller). This term also includes employees of any 
entity hired to perform the functions described above.
    Settlement date means the date originally agreed to by a corporate 
credit union and a counterparty for settlement of the purchase or sale 
of a security.
    Short sale means the sale of a security not owned by the seller.
    Small business related security means a security that represents an 
interest in one or more promissory notes or leases of personal property 
evidencing the obligation of a small business concern and originated by 
an insured depository institution, insured credit union, insurance 
company, or similar institution which is supervised and examined by a 
Federal or State authority, or a finance company or leasing company.

[[Page 813]]

This definition does not include Small Business Administration 
securities permissible under section 107(7) of the Act.
    Stripped mortgage-backed security means a security that represents 
either the principal-only or interest-only portion of the cash flows of 
an underlying pool of mortgages.
    Subordinated security means a security that, at the time of 
purchase, has a junior claim on the underlying collateral or assets to 
other securities in the same issuance. If a security is junior only to 
money market fund eligible securities in the same issuance, the former 
security is not subordinated for purposes of this definition.
    Supervisory committee means, for federally chartered corporate 
credit unions, the supervisory committee as defined in Section 111(b) of 
the Federal Credit Union Act, 12 U.S.C. 1761(b). For state chartered 
corporate credit unions, the term supervisory committee refers to the 
audit committee, or similar committee, designated by state statute or 
regulation.
    Tier 1 capital means the sum of paragraphs (1) through (4) of this 
definition from which paragraphs (5) through (9) of this definition are 
deducted:
    (1) Retained earnings;
    (2) Perpetual contributed capital;
    (3) The retained earnings of any acquired credit union, or of an 
integrated set of activities and assets, calculated at the point of 
acquisition, if the acquisition was a mutual combination;
    (4) Minority interests in the equity accounts of CUSOs that are 
fully consolidated;
    (5) Deduct the amount of the corporate credit union's intangible 
assets that exceed one half percent of its moving daily average net 
assets (however, NCUA may direct the corporate credit union to add back 
some of these assets on NCUA's own initiative, by petition from the 
applicable state regulator, or upon application from the corporate 
credit union);
    (6) Deduct investments, both equity and debt, in unconsolidated 
CUSOs;
    (7) Deduct an amount equal to any PCC or NCA that the corporate 
credit union maintains at another corporate credit union;
    (8) Beginning on October 20, 2016, and ending on October 20, 2020, 
deduct any amount of PCC that causes PCC minus retained earnings, all 
divided by moving daily net average assets, to exceed two percent; and
    (9) Beginning after October 20, 2020, deduct any amount of PCC that 
causes PCC to exceed retained earnings.
    Tier 1 risk-based capital ratio means the ratio of Tier 1 capital to 
the moving monthly average net risk-weighted assets.
    Tier 2 capital means the sum of paragraphs (1) through (4) of this 
definition:
    (1) Nonperpetual capital accounts, as amortized under 
Sec. 704.3(b)(3);
    (2) Allowance for loan and lease losses calculated under GAAP to a 
maximum of 1.25 percent of risk-weighted assets;
    (3) Any PCC deducted from Tier 1 capital; and
    (4) Forty-five percent of unrealized gains on available-for-sale 
equity securities with readily determinable fair values. Unrealized 
gains are unrealized holding gains, net of unrealized holding losses, 
calculated as the amount, if any, by which fair value exceeds historical 
cost. NCUA may disallow such inclusion in the calculation of Tier 2 
capital if NCUA determines that the securities are not prudently valued.
    Total assets means the sum of all a corporate credit union's assets 
as calculated under GAAP.
    Total capital means the sum of Tier 1 capital and Tier 2 capital, 
less the corporate credit union's equity investments not otherwise 
deducted when calculating Tier 1 capital.
    Total risk-based capital ratio means the ratio of total capital to 
moving monthly average net risk-weighted assets.
    Trade date means the date a corporate credit union originally 
agrees, whether orally or in writing, to enter into the purchase or sale 
of a security.
    Trigger means an event in a securitization that will redirect cash-
flows if predefined thresholds are breached. Examples of triggers are 
delinquency and cumulative loss triggers.
    Weighted average life means the weighted-average time to the return 
of a dollar of principal, calculated by multiplying each portion of 
principal

[[Page 814]]

received by the time at which it is expected to be received (based on a 
reasonable and supportable estimate of that time) and then summing and 
dividing by the total amount of principal. The calculation of weighted 
average life for interest only securities means the weighted-average 
time to the return of a dollar of interest, calculated by multiplying 
each portion of interest received by the time at which it is expected to 
be received (based on a reasonable and supportable estimate of that 
time) and then summing and dividing by the total amount of interest to 
be received.
    When-issued trading means the buying and selling of securities in 
the period between the announcement of an offering and the issuance and 
payment date of the securities.

[75 FR 64829, Oct. 20, 2010, as amended at 76 FR 23867, Apr. 29, 2011; 
76 FR 79533, Dec. 22, 2011; 77 FR 74110, Dec. 13, 2012; 78 FR 32544, May 
31, 2013; 80 FR 25936, May 6, 2015; 80 FR 57284, Sept. 23, 2015]



Sec. 704.3  Corporate credit union capital.

    (a) Capital requirements. (1) A corporate credit union must maintain 
at all times:
    (i) A leverage ratio of 4.0 percent or greater;
    (ii) A Tier 1 risk-based capital ratio of 4.0 percent or greater; 
and
    (iii) A total risk-based capital ratio of 8.0 percent or greater.
    (2) To ensure it meets its capital requirements, a corporate credit 
union must develop and ensure implementation of written short- and long-
term capital goals, objectives, and strategies which provide for the 
building of capital consistent with regulatory requirements, the 
maintenance of sufficient capital to support the risk exposures that may 
arise from current and projected activities, and the periodic review and 
reassessment of the capital position of the corporate credit union.
    (3) Beginning with the first call report submitted on or after 
October 21, 2013, a corporate credit union must calculate and report to 
NCUA the ratio of its retained earnings to its moving daily average net 
assets. If this ratio is less than 0.45 percent, the corporate credit 
union must, within 30 days, submit a retained earnings accumulation plan 
to the NCUA for NCUA's approval. The plan must contain a detailed 
explanation of how the corporate credit union will accumulate earnings 
sufficient to meet all its future minimum leverage ratio requirements, 
including specific semiannual milestones for accumulating retained 
earnings. In the case of a state-chartered corporate credit union, the 
NCUA will consult with the appropriate state supervisory authority (SSA) 
before making a determination to approve or disapprove the plan, and 
will provide the SSA a copy of the completed plan. If the corporate 
credit union fails to submit a plan acceptable to NCUA, or fails to 
comply with any element of a plan approved by NCUA, the corporate will 
immediately be classified as significantly undercapitalized or, if 
already significantly undercapitalized, as critically undercapitalized 
for purposes of prompt corrective actions. The corporate credit union 
will be subject to all the associated actions under Sec. 704.4.
    (b) Requirements for nonperpetual capital accounts (NCAs)--(1) Form. 
NCA funds may be in the form of a term certificate or a no-maturity 
notice account.
    (2) Disclosure. The terms and conditions of a nonperpetual capital 
account must be disclosed to the recorded owner of the account at the 
time the account is opened and at least annually thereafter.
    (i) The initial NCA disclosure must be signed by either all of the 
directors of the member credit union or, if authorized by board 
resolution, the chair and secretary of the board; and
    (ii) The annual disclosure notice must be signed by the chair of the 
corporate credit union. The chair must sign a statement that certifies 
that the notice has been sent to all entities with NCAs. The 
certification must be maintained in the corporate credit union's files 
and be available for examiner review.
    (3) Five-year remaining maturity. When a no-maturity NCA has been 
placed on notice, or a term account has a remaining maturity of less 
than five years, the corporate will reduce the amount of the account 
that can be considered as nonperpetual capital by a constant monthly 
amortization that ensures the

[[Page 815]]

capital is fully amortized one year before the date of maturity or one 
year before the end of the notice period. The full balance of an NCA 
being amortized, not just the remaining non-amortized portion, is 
available to absorb losses in excess of the sum of retained earnings and 
perpetual contributed capital until the funds are released by the 
corporate credit union at the time of maturity or the conclusion of the 
notice period.
    (4) Release. Nonperpetual capital may not be released due solely to 
the merger, charter conversion, or liquidation of the account holder. In 
the event of a merger, the capital account transfers to the continuing 
entity. In the event of a charter conversion, the capital account 
transfers to the new institution. In the event of liquidation, the 
corporate may release a member capital account to facilitate the payout 
of shares, but only with the prior written approval of the NCUA.
    (5) Redemption. A corporate credit union may redeem NCAs prior to 
maturity or prior to the end of the notice period only if it meets its 
minimum required capital and net economic value ratios after the funds 
are redeemed and only with the prior approval of NCUA and, for state 
chartered corporate credit unions, the applicable state regulator.
    (6) Sale. A member may transfer its interest in a nonperpetual 
capital account to another member or to a nonmember (other than a 
natural person). At least 14 days before consummating such a transfer, 
the member must notify the corporate credit union of the pending 
transfer. The corporate credit union must, within 10 days of such 
notice, provide the member and the potential transferee all financial 
information about the corporate credit union that is available to the 
public or that the corporate credit union has provided to its members, 
including any call report data submitted by the corporate credit union 
to NCUA but not yet posted on NCUA's Web site.
    (7) Merger. In the event of a merger of a corporate credit union, 
nonperpetual capital will transfer to the continuing corporate credit 
union. The minimum five-year notice period for withdrawal of no-maturity 
capital remains in effect.
    (c) Requirements for perpetual contributed capital (PCC)--(1) 
Disclosure. The terms and conditions of any perpetual contributed 
capital instrument must be disclosed to the recorded owner of the 
instrument at the time the instrument is created and must be signed by 
either all of the directors of the member credit union or, if authorized 
by board resolution, the chair and secretary of the board.
    (2) Release. Perpetual contributed capital may not be released due 
solely to the merger, charter conversion or liquidation of a member 
credit union. In the event of a merger, the perpetual contributed 
capital transfers to the continuing credit union. In the event of a 
charter conversion, the perpetual contributed capital transfers to the 
new institution. In the event of liquidation, the perpetual contributed 
capital may be released to facilitate the payout of shares with NCUA's 
prior written approval.
    (3) Callability. A corporate credit union may call PCC instruments 
only if it meets its minimum required capital and net economic value 
ratios after the funds are called and only with the prior approval of 
the NCUA and, for state chartered corporate credit unions, the 
applicable state regulator. PCC accounts are callable on a pro-rata 
basis across an issuance class.
    (4) Perpetual contributed capital. A corporate credit union may 
issue perpetual contributed capital to both members and nonmembers.
    (5) The holder of a PCC instrument may transfer its interests in the 
instrument to another member or to a nonmember (other than a natural 
person). At least 14 days before consummating such a transfer, the 
member must notify the corporate credit union of the pending transfer. 
The corporate credit union must, within 10 days of such notice, provide 
the member and the potential transferee all financial information about 
the corporate credit union that is available to the public or that the 
corporate credit union has provided to its members, including any call 
report data submitted by the corporate credit union to NCUA but not yet 
posted on NCUA's Web site.

[[Page 816]]

    (6) A corporate credit union is permitted to condition membership, 
services, or prices for services on a member's ownership of PCC, 
provided the corporate credit union gives existing members at least six 
months written notice of:
    (i) The requirement to purchase PCC, including specific amounts; and
    (ii) The effects of a failure to purchase the requisite PCC on the 
pricing of services or on the member's access to membership or services.
    (d) Individual minimum capital requirements--(1) General. The rules 
and procedures specified in this paragraph apply to the establishment of 
an individual minimum capital requirement for a corporate credit union 
that varies from any of the risk-based capital requirement(s) or 
leverage ratio requirements that would otherwise apply to the corporate 
credit union under this part.
    (2) Appropriate considerations for establishing individual minimum 
capital requirements. Minimum capital levels higher than the risk-based 
capital requirements or the leverage ratio requirement under this part 
may be appropriate for individual corporate credit unions. The NCUA may 
establish increased individual minimum capital requirements, including 
modification of the minimum capital requirements related to being either 
significantly and critically undercapitalized for purposes of Sec. 704.4 
of this part, upon a determination that the corporate credit union's 
capital is or may become inadequate in view of the credit union's 
circumstances. For example, higher capital levels may be appropriate 
when NCUA determines that:
    (i) A corporate credit union is receiving special supervisory 
attention;
    (ii) A corporate credit union has or is expected to have losses 
resulting in capital inadequacy;
    (iii) A corporate credit union has a high degree of exposure to 
interest rate risk, prepayment risk, credit risk, concentration risk, 
certain risks arising from nontraditional activities or similar risks, 
or a high proportion of off-balance sheet risk including standby letters 
of credit;
    (iv) A corporate credit union has poor liquidity or cash flow;
    (v) A corporate credit union is growing, either internally or 
through acquisitions, at such a rate that supervisory problems are 
presented that are not dealt with adequately by other NCUA regulations 
or other guidance;
    (vi) A corporate credit union may be adversely affected by the 
activities or condition of its CUSOs or other persons or entities with 
which it has significant business relationships, including 
concentrations of credit;
    (vii) A corporate credit union with a portfolio reflecting weak 
credit quality or a significant likelihood of financial loss, or has 
loans or securities in nonperforming status or on which borrowers fail 
to comply with repayment terms;
    (viii) A corporate credit union has inadequate underwriting 
policies, standards, or procedures for its loans and investments;
    (ix) A corporate credit union has failed to properly plan for, or 
execute, necessary retained earnings growth, or
    (ix) A corporate credit union has a record of operational losses 
that exceeds the average of other, similarly situated corporate credit 
unions; has management deficiencies, including failure to adequately 
monitor and control financial and operating risks, particularly the 
risks presented by concentrations of credit and nontraditional 
activities; or has a poor record of supervisory compliance.
    (3) Standards for determination of appropriate individual minimum 
capital requirements. The appropriate minimum capital levels for an 
individual corporate credit union cannot be determined solely through 
the application of a rigid mathematical formula or wholly objective 
criteria. The decision is necessarily based, in part, on subjective 
judgment grounded in agency expertise. The factors to be considered in 
NCUA's determination will vary in each case and may include, for 
example:
    (i) The conditions or circumstances leading to the determination 
that a higher minimum capital requirement is appropriate or necessary 
for the corporate credit union;
    (ii) The exigency of those circumstances or potential problems;

[[Page 817]]

    (iii) The overall condition, management strength, and future 
prospects of the corporate credit union and, if applicable, its 
subsidiaries, affiliates, and business partners;
    (iv) The corporate credit union's liquidity, capital and other 
indicators of financial stability, particularly as compared with those 
of similarly situated corporate credit unions; and
    (v) The policies and practices of the corporate credit union's 
directors, officers, and senior management as well as the internal 
control and internal audit systems for implementation of such adopted 
policies and practices.
    (4) Procedures--(i) In the case of a state chartered corporate 
credit union, NCUA will consult with the appropriate state regulator 
when considering imposing a new minimum capital requirement.
    (ii) When the NCUA determines that a minimum capital requirement is 
necessary or appropriate for a particular corporate credit union, it 
will notify the corporate credit union in writing of its proposed 
individual minimum capital requirement; the schedule for compliance with 
the new requirement; and the specific causes for determining that the 
higher individual minimum capital requirement is necessary or 
appropriate for the corporate credit union. The NCUA shall forward the 
notifying letter to the appropriate state supervisory authority (SSA) if 
a state-chartered corporate credit union would be subject to an 
individual minimum capital requirement.
    (iii) The corporate credit union's response must include any 
information that the credit union wants the NCUA to consider in deciding 
whether to establish or to amend an individual minimum capital 
requirement for the corporate credit union, what the individual capital 
requirement should be, and, if applicable, what compliance schedule is 
appropriate for achieving the required capital level. The responses of 
the corporate credit union and SSA must be in writing and must be 
delivered to the NCUA within 30 days after the date on which the 
notification was received. The NCUA may extend the time period for good 
cause, and the time period for response by the insured corporate credit 
union may be shortened for good cause:
    (A) When, in the opinion of the NCUA, the condition of the corporate 
credit union so requires, and the NCUA informs the corporate credit 
union of the shortened response period in the notice;
    (B) With the consent of the corporate credit union; or
    (C) When the corporate credit union already has advised the NCUA 
that it cannot or will not achieve its applicable minimum capital 
requirement.
    (iv) Failure by the corporate credit union to respond within 30 
days, or such other time period as may be specified by the NCUA, may 
constitute a waiver of any objections to the proposed individual minimum 
capital requirement or to the schedule for complying with it, unless the 
NCUA has provided an extension of the response period for good cause.
    (v) After expiration of the response period, the NCUA will decide 
whether or not the proposed individual minimum capital requirement 
should be established for the corporate credit union, or whether that 
proposed requirement should be adopted in modified form, based on a 
review of the corporate credit union's response and other relevant 
information. The NCUA's decision will address comments received within 
the response period from the corporate credit union and the appropriate 
state supervisory authority (SSA) (if a state-chartered corporate credit 
union is involved) and will state the level of capital required, the 
schedule for compliance with this requirement, and any specific remedial 
action the corporate credit union could take to eliminate the need for 
continued applicability of the individual minimum capital requirement. 
The NCUA will provide the corporate credit union and the appropriate SSA 
(if a state-chartered corporate credit union is involved) with a written 
decision on the individual minimum capital requirement, addressing the 
substantive comments made by the corporate credit union and setting 
forth the decision and the basis for that decision. Upon receipt of this 
decision by the corporate credit union, the individual minimum capital 
requirement becomes

[[Page 818]]

effective and binding upon the corporate credit union. This decision 
represents final agency action.
    (vi) In lieu of the procedures established above, a corporate credit 
union may request an informal hearing. The corporate credit union must 
make the request for a hearing in writing, and NCUA must receive the 
request no later than 10 days following the date of the notice described 
in paragraph (d)(4)(ii) of this section. Upon receipt of the request for 
hearing, NCUA will conduct an informal hearing and render a decision 
using the procedures described in paragraphs (d), (e), and (f) of 
Sec. 747.3003 of this chapter.
    (5) Failure to comply. Failure to satisfy any individual minimum 
capital requirement, or to meet any required incremental additions to 
capital under a schedule for compliance with such an individual minimum 
capital requirement, will constitute a basis to take action as described 
in Sec. 704.4.
    (6) Change in circumstances. If, after a decision is made under 
paragraph (b)(3)(iv) of this section, there is a change in the 
circumstances affecting the corporate credit union's capital adequacy or 
its ability to reach its required minimum capital level by the specified 
date, the NCUA may amend the individual minimum capital requirement or 
the corporate credit union's schedule for such compliance. The NCUA may 
decline to consider a corporate credit union's request for such changes 
that are not based on a significant change in circumstances or that are 
repetitive or frivolous. Pending the NCUA's reexamination of the 
original decision, that original decision and any compliance schedule 
established in that decision will continue in full force and effect.
    (e) Reservation of authority--(1) Transactions for purposes of 
evasion. The NCUA may disregard any transaction entered into primarily 
for the purpose of reducing the minimum required amount of regulatory 
capital or otherwise evading the requirements of this section.
    (2) Period-end versus average figures. The NCUA reserves the right 
to require a corporate credit union to compute its capital ratios on the 
basis of period-end assets rather than average assets when the NCUA 
determines this requirement is appropriate to carry out the purposes of 
this part.
    (3) Reservation of authority. (i) Notwithstanding the definitions of 
Tier 1 capital and Tier 2 capital in paragraph (d) of this section, NCUA 
may find that a particular asset or Tier 1 capital or Tier 2 capital 
component has characteristics or terms that diminish its contribution to 
a corporate credit union's ability to absorb losses, and NCUA may 
require the discounting or deduction of such asset or component from the 
computation of Tier 1 capital, Tier 2 capital, or total capital.
    (ii) Notwithstanding appendix C to this part, the NCUA will look to 
the substance of a transaction and may find that the assigned risk-
weight for any asset, or credit equivalent amount or credit conversion 
factor for any off-balance sheet item does not appropriately reflect the 
risks imposed on the corporate credit union. The NCUA may require the 
corporate credit union to apply another risk-weight, credit equivalent 
amount, or credit conversion factor that NCUA deems appropriate.
    (iii) If appendix C to this part does not specifically assign a 
risk-weight, credit equivalent amount, or credit conversion factor to a 
particular asset or activity of the corporate credit union, the NCUA may 
assign any risk-weight, credit equivalent amount, or credit conversion 
factor that it deems appropriate. In making this determination, NCUA 
will consider the risks associated with the asset or off-balance sheet 
item as well as other relevant factors.
    (4) Where practicable, the NCUA will consult with the appropriate 
state regulator before taking any action under this paragraph (e) that 
involves a state chartered corporate credit union.
    (5) Before taking any action under this paragraph (e), NCUA will 
provide the corporate credit union with written notice of the intended 
action and the reasons for such action. The corporate credit union will 
have seven days to provide the NCUA with a written response, and the 
NCUA will consider the response before taking the action. Upon the 
timely request of the corporate credit union, and for good cause,

[[Page 819]]

NCUA may extend the seven day response period.
    (f) Former capital accounts. This paragraph addresses membership 
capital accounts (MCAs) that qualified as corporate capital prior to 
October 20, 2011 but which no longer satisfy the definitions of capital 
because the accounts have not been converted by the member to 
nonperpetual capital accounts (NCAs) or to perpetual contributed capital 
(PCC).
    (1) For MCAs structured as adjustable balance accounts, the 
corporate will immediately place the account on notice of withdrawal if 
the member has not already done so. The corporate will continue to 
adjust the balance of the MCA account in accordance with the original 
terms of the account until the entire notice period has run and then 
return the remaining balance, less any losses, to the member. Until the 
expiration of the notice period the entire adjusted balance will be 
available to cover losses at the corporate credit union that exceed 
retained earnings and PCC (excluding, if a corporate credit union 
exercises the capital prioritization option under Part I of appendix A 
to this part, any PCC with priority under that option).
    (2) For term MCAs, the corporate credit union will return the 
balance of the MCA account to the member at the expiration of the term. 
Until the expiration of term, the entire account balance will be 
available to cover losses that exceed retained earnings and PCC 
(excluding, if a corporate credit union exercises the capital 
prioritization option under part I of appendix A to this part, any PCC 
with priority under that option).
    (3) A corporate credit union may count a portion of unconverted MCAs 
as Tier 2 capital. Beginning on the date of issuance (for term MCAs) or 
the date of notice of withdrawal (for other MCAs), the corporate may 
count the entire account balance as Tier 2 capital, but will then reduce 
the amount of the account that can be considered as Tier 2 capital by a 
constant monthly amortization that ensures the capital is fully 
amortized one year before the date of maturity or one year before the 
end of the notice period. For adjustable balance account MCAs where the 
adjustment is determined based on some impermanent measure, such as 
shares on deposit with the corporate, the corporate credit union may not 
treat any part of the account as capital.

[75 FR 64829, Oct. 20, 2010, as amended at 80 FR 25937, May 6, 2015]



Sec. 704.4  Prompt corrective action.

    (a) Purpose. The principal purpose of this section is to define, for 
corporate credit unions that are not adequately capitalized, the capital 
measures and capital levels that are used for determining appropriate 
supervisory actions. This section establishes procedures for submission 
and review of capital restoration plans and for issuance and review of 
capital directives, orders, and other supervisory directives.
    (b) Scope. This section applies to corporate credit unions, 
including officers, directors, and employees.
    (1) This section does not limit the authority of NCUA in any way to 
take supervisory actions to address unsafe or unsound practices, 
deficient capital levels, violations of law, unsafe or unsound 
conditions, or other practices. The NCUA may take action under this 
section independently of, in conjunction with, or in addition to any 
other enforcement action available to the NCUA, including issuance of 
cease and desist orders, approval or denial of applications or notices, 
assessment of civil money penalties, or any other actions authorized by 
law.
    (2) Unless permitted by the NCUA or otherwise required by law, no 
corporate credit union may state in any advertisement or promotional 
material its capital category under this part or that the NCUA has 
assigned the corporate credit union to a particular category.
    (3) Any group of credit unions applying for a new corporate credit 
union charter will submit, as part of the charter application, a 
detailed draft plan for soliciting contributed capital and building 
retained earnings. The draft plan will include specific levels of 
contributed capital and retained earnings and the anticipated timeframes 
for achieving those levels. The Board will review the draft plan and 
modify it as necessary. If the Board approves the

[[Page 820]]

plan, the Board will include any necessary waivers of this section or 
part.
    (c) Notice of capital category. (1) Effective date of determination 
of capital category. A corporate credit union will be deemed to be 
within a given capital category as of the most recent date:
    (i) A 5310 Financial Report is required to be filed with the NCUA;
    (ii) A final NCUA report of examination is delivered to the 
corporate credit union; or
    (iii) Written notice is provided by the NCUA to the corporate credit 
union that its capital category has changed as provided in paragraphs 
(c)(2) or (d)(3) of this section.
    (2) Adjustments to reported capital levels and category--
    (i) Notice of adjustment by corporate credit union. A corporate 
credit union must provide the NCUA with written notice that an 
adjustment to the corporate credit union's capital category may have 
occurred no later than 15 calendar days following the date that any 
material event has occurred that would cause the corporate credit union 
to be placed in a lower capital category from the category assigned to 
the corporate credit union for purposes of this section on the basis of 
the corporate credit union's most recent call report or report of 
examination.
    (ii) Determination by the NCUA to change capital category. After 
receiving notice pursuant to paragraph (c)(1) of this section, or on its 
own initiative, the NCUA will determine whether to change the capital 
category of the corporate credit union and will notify the corporate 
credit union of the NCUA's determination.
    (d) Capital measures and capital category definitions--(1) Capital 
measures. For purposes of this section, the relevant capital measures 
are:
    (i) The total risk-based capital ratio;
    (ii) The Tier 1 risk-based capital ratio; and
    (iii) The leverage ratio.
    (2) Capital categories. For purposes of this section, a corporate 
credit union is:
    (i) Well capitalized if the corporate credit union:
    (A) Has a total risk-based capital ratio of 10.0 percent or greater; 
and
    (B) Has a Tier 1 risk-based capital ratio of 6.0 percent or greater; 
and
    (C) Has a leverage ratio of 5.0 percent or greater; and
    (D) Is not subject to any written agreement, order, capital 
directive, or prompt corrective action directive issued by NCUA to meet 
and maintain a specific capital level for any capital measure.
    (ii) Adequately capitalized if the corporate credit union:
    (A) Has a total risk-based capital ratio of 8.0 percent or greater; 
and
    (B) Has a Tier 1 risk-based capital ratio of 4.0 percent or greater; 
and
    (C) Has:
    (1) A leverage ratio of 4.0 percent or greater; and
    (2) Does not meet the definition of a well capitalized corporate 
credit union.
    (iii) Undercapitalized if the corporate credit union:
    (A) Has a total risk-based capital ratio that is less than 8.0 
percent; or
    (B) Has a Tier 1 risk-based capital ratio that is less than 4.0 
percent; or
    (C) Has a leverage ratio that is less than 4.0 percent.
    (iv) Significantly undercapitalized if the corporate credit union 
has:
    (A) A total risk-based capital ratio that is less than 6.0 percent; 
or
    (B) A Tier 1 risk-based capital ratio that is less than 3.0 percent; 
or
    (C) A leverage ratio that is less than 3.0 percent.
    (v) Critically undercapitalized if the corporate credit union has:
    (A) A total risk-based capital ratio that is less than 4.0 percent; 
or
    (B) A Tier 1 risk-based capital ratio that is less than 2.0 percent; 
or
    (C) A leverage ratio that is less than 2.0 percent.
    (3) Reclassification based on supervisory criteria other than 
capital. Notwithstanding the elements of paragraph (d)(2) of this 
section, the NCUA may reclassify a well capitalized corporate credit 
union as adequately capitalized, and may require an adequately 
capitalized or undercapitalized corporate credit union to comply with 
certain mandatory or discretionary supervisory actions as if the 
corporate credit union were in the next lower capital category, in the 
following circumstances:

[[Page 821]]

    (i) Unsafe or unsound condition. The NCUA has determined, after 
notice and opportunity for hearing pursuant to paragraph (h)(1) of this 
section, that the corporate credit union is in an unsafe or unsound 
condition; or
    (ii) Unsafe or unsound practice. NCUA has determined, after notice 
and an opportunity for hearing pursuant to paragraph (h)(1) of this 
section, that the corporate credit union received a less-than-
satisfactory CAMEL rating (i.e., three or lower) for any rating category 
(other than in a rating category specifically addressing capital 
adequacy) and has not corrected the conditions that served as the basis 
for the less than satisfactory rating. Ratings under this paragraph 
(d)(3)(ii) refer to the most recent ratings (as determined either on-
site or off-site by the most recent examination) of which the corporate 
credit union has been notified in writing.
    (4) The NCUA may, for good cause, modify any of the percentages in 
paragraph (d)(2) of this section as described in Sec. 704.3(d).
    (e) Capital restoration plans--(1) Schedule for filing plan--(i) In 
general. A corporate credit union must file a written capital 
restoration plan with the NCUA within 45 days of the date that the 
corporate credit union receives notice or is deemed to have notice that 
the corporate credit union is undercapitalized, significantly 
undercapitalized, or critically undercapitalized, unless the NCUA 
notifies the corporate credit union in writing that the plan is to be 
filed within a different period. An adequately capitalized corporate 
credit union that has been required pursuant to paragraph (d)(3) of this 
section to comply with supervisory actions as if the corporate credit 
union were undercapitalized is not required to submit a capital 
restoration plan solely by virtue of the reclassification.
    (ii) Additional capital restoration plans. Notwithstanding paragraph 
(e)(1)(i) of this section, a corporate credit union that has already 
submitted and is operating under a capital restoration plan approved 
under this section is not required to submit an additional capital 
restoration plan based on a revised calculation of its capital measures 
or a reclassification of the institution under paragraph (d)(3) of this 
section unless the NCUA notifies the corporate credit union that it must 
submit a new or revised capital plan. A corporate credit union that is 
notified that it must submit a new or revised capital restoration plan 
must file the plan in writing with the NCUA within 45 days of receiving 
such notice, unless the NCUA notifies the corporate credit union in 
writing that the plan is to be filed within a different period.
    (2) Contents of plan. All financial data submitted in connection 
with a capital restoration plan must be prepared in accordance with the 
instructions provided on the call report, unless the NCUA instructs 
otherwise. The capital restoration plan must include all of the 
information required to be filed under paragraph (k)(2)(ii) of this 
section. A corporate credit union required to submit a capital 
restoration plan as the result of a reclassification of the corporate 
credit union pursuant to paragraph (d)(3) of this section must include a 
description of the steps the corporate credit union will take to correct 
the unsafe or unsound condition or practice.
    (3) Failure to submit a capital restoration plan. A corporate credit 
union that is undercapitalized and that fails to submit a written 
capital restoration plan within the period provided in this section 
will, upon the expiration of that period, be subject to all of the 
provisions of this section applicable to significantly undercapitalized 
credit unions.
    (4) Review of capital restoration plans. Within 60 days after 
receiving a capital restoration plan under this section, the NCUA will 
provide written notice to the corporate credit union of whether it has 
approved the plan. The NCUA may extend this time period.
    (5) Disapproval of capital plan. If the NCUA does not approve a 
capital restoration plan, the corporate credit union must submit a 
revised capital restoration plan, when directed to do so, within the 
time specified by the NCUA. An undercapitalized corporate credit union 
is subject to the provisions applicable to significantly 
undercapitalized credit unions until it has submitted, and NCUA has 
approved, a capital restoration plan. If the NCUA

[[Page 822]]

directs that the corporate submit a revised plan, it must do so in time 
frame specified by the NCUA.
    (6) Failure to implement a capital restoration plan. Any 
undercapitalized corporate credit union that fails in any material 
respect to implement a capital restoration plan will be subject to all 
of the provisions of this section applicable to significantly 
undercapitalized institutions.
    (7) Amendment of capital plan. A corporate credit union that has 
filed an approved capital restoration plan may, after prior written 
notice to and approval by the NCUA, amend the plan to reflect a change 
in circumstance. Until such time as NCUA has approved a proposed 
amendment, the corporate credit union must implement the capital 
restoration plan as approved prior to the proposed amendment.
    (f) Mandatory and discretionary supervisory actions--(1) Mandatory 
supervisory actions. (i) Provisions applicable to all corporate credit 
unions. All corporate credit unions are subject to the restrictions 
contained in paragraph (k)(1) of this section on capital distributions.
    (ii) Provisions applicable to undercapitalized, significantly 
undercapitalized, and critically undercapitalized corporate credit 
unions. Immediately upon receiving notice or being deemed to have 
notice, as provided in paragraph (c) or (e) of this section, that the 
corporate credit union is undercapitalized, significantly 
undercapitalized, or critically undercapitalized, the corporate credit 
union will be subject to the following provisions of paragraph (k) of 
this section:
    (A) Restricting capital distributions (paragraph (k)(1));
    (B) NCUA monitoring of the condition of the corporate credit union 
(paragraph (k)(2)(i));
    (C) Requiring submission of a capital restoration plan (paragraph 
(k)(2)(ii));
    (D) Restricting the growth of the corporate credit union's assets 
(paragraph (k)(2)(iii)); and
    (E) Requiring prior approval of certain expansion proposals 
(paragraph (k)(2)(iv)).
    (iii) Additional provisions applicable to significantly 
undercapitalized, and critically undercapitalized corporate credit 
unions. In addition to the mandatory requirements described in paragraph 
(f)(1) of this section, immediately upon receiving notice or being 
deemed to have notice that the corporate credit union is significantly 
undercapitalized, or critically undercapitalized, or that the corporate 
credit union is subject to the provisions applicable to corporate credit 
unions that are significantly undercapitalized because the credit union 
failed to submit or implement in any material respect an acceptable 
capital restoration plan, the corporate credit union will become subject 
to the provisions of paragraph (k)(3)(iii) of this section that restrict 
compensation paid to senior executive officers of the institution.
    (iv) Additional provisions applicable to critically undercapitalized 
corporate credit unions. In addition to the provisions described in 
paragraphs (f)(1)(ii) and (f)(1)(iii) of this section, immediately upon 
receiving notice or being deemed to have notice that the corporate 
credit union is critically undercapitalized, the corporate credit union 
will become subject to these additional provisions of paragraph (k) of 
this section:
    (A) Restricting the activities of the corporate credit union 
((k)(5)(i)); and
    (B) Restricting payments on subordinated debt of the corporate 
credit union ((k)(5)(ii)).
    (2) Discretionary supervisory actions. (i) All PCA actions listed in 
paragraph (k) of this section that are not discussed in paragraph (f)(1) 
of this section are discretionary.
    (ii) All discretionary actions available to NCUA in the case of an 
undercapitalized corporate credit union are available to NCUA in the 
case of a significantly undercapitalized credit union. All discretionary 
actions available to NCUA in the case of an undercapitalized corporate 
credit union or a significantly undercapitalized corporate credit union 
are available to NCUA in the case of a critically undercapitalized 
corporate credit union.
    (iii) In taking any discretionary PCA actions with a corporate 
credit union that is deemed to be undercapitalized,

[[Page 823]]

significantly undercapitalized or critically undercapitalized, or has 
been reclassified as undercapitalized, or significantly 
undercapitalized; or an action in connection with an officer or director 
of such corporate credit union; the NCUA will follow the procedures for 
issuing directives under paragraphs (g) and (i) of this section.
    (iv) NCUA will consult and seek to work cooperatively with the 
appropriate state supervisory authority (SSA) before taking any 
discretionary supervisory action with respect to a state-chartered 
corporate credit union; will provide notice of its decision to the SSA; 
and will allow the appropriate SSA an opportunity to take the proposed 
action independently or jointly with NCUA.
    (g) Directives to take prompt corrective action. The NCUA will 
provide an undercapitalized, significantly undercapitalized, or 
critically undercapitalized corporate credit union prior written notice 
of the NCUA's intention to issue a directive requiring such corporate 
credit union to take actions or to follow proscriptions described in 
this part. Section 747.3002 of this chapter prescribes the notice 
content and associated process.
    (h) Procedures for reclassifying a corporate credit union based on 
criteria other than capital. When the NCUA intends to reclassify a 
corporate credit union or subject it to the supervisory actions 
applicable to the next lower capitalization category based on an unsafe 
or unsound condition or practice, the NCUA will provide the credit union 
with prior written notice of such intent. Section 747.3003 of this 
chapter prescribes the notice content and associated process.
    (i) Order to dismiss a Director or senior executive officer. When 
the NCUA issues and serves a directive on a corporate credit union 
requiring it to dismiss from office any director or senior executive 
officer under paragraphs (k)(3) of this section, the NCUA will also 
serve upon the person the corporate credit union is directed to dismiss 
(Respondent) a copy of the directive (or the relevant portions, where 
appropriate) and notice of the Respondent's right to seek reinstatement. 
Section 747.3004 of this chapter prescribes the content of the notice of 
right to seek reinstatement and the associated process.
    (j) Enforcement of directives. Section 747.3005 of this chapter 
prescribes the process for enforcement of directives.
    (k) Remedial actions towards undercapitalized, significantly 
undercapitalized, and critically undercapitalized corporate credit 
unions. (1) Provision applicable to all corporate credit unions. A 
corporate credit union is prohibited from making any capital 
distribution, including payment of dividends on perpetual and 
nonperpetual capital accounts, if, after making the distribution, the 
credit union would be undercapitalized.
    (2) Provisions applicable to undercapitalized corporate credit 
unions.
    (i) Monitoring required. The NCUA will--
    (A) Closely monitor the condition of any undercapitalized corporate 
credit union;
    (B) Closely monitor compliance with capital restoration plans, 
restrictions, and requirements imposed under this section; and
    (C) Periodically review the plan, restrictions, and requirements 
applicable to any undercapitalized corporate credit union to determine 
whether the plan, restrictions, and requirements are achieving the 
purpose of this section.
    (ii) Capital restoration plan required.
    (A) Any undercapitalized corporate credit union must submit an 
acceptable capital restoration plan to the NCUA.
    (B) The capital restoration plan will--
    (1) Specify--
    (i) The steps the corporate credit union will take to become 
adequately capitalized;
    (ii) The levels of capital to be attained during each year in which 
the plan will be in effect;
    (iii) How the corporate credit union will comply with the 
restrictions or requirements then in effect under this section; and
    (iv) The types and levels of activities in which the corporate 
credit union will engage; and
    (2) Contain such other information as the NCUA may require.

[[Page 824]]

    (C) The NCUA will not accept a capital restoration plan unless the 
NCUA determines that the plan--
    (1) Complies with paragraph (k)(2)(ii)(B) of this section;
    (2) Is based on realistic assumptions, and is likely to succeed in 
restoring the corporate credit union's capital; and
    (3) Would not appreciably increase the risk (including credit risk, 
interest-rate risk, and other types of risk) to which the corporate 
credit union is exposed.
    (iii) Asset growth restricted. An undercapitalized corporate credit 
union must not permit its daily average net assets during any calendar 
month to exceed its moving daily average net assets unless--
    (A) The NCUA has accepted the corporate credit union's capital 
restoration plan; and
    (B) Any increase in total assets is consistent with the plan.
    (iv) Prior approval required for acquisitions, branching, and new 
lines of business. An undercapitalized corporate credit union must not, 
directly or indirectly, acquire any interest in any entity, establish or 
acquire any additional branch office, or engage in any new line of 
business unless the NCUA has accepted the corporate credit union's 
capital restoration plan, the corporate credit union is implementing the 
plan, and the NCUA determines that the proposed action is consistent 
with and will further the achievement of the plan.
    (3) Provisions applicable to significantly undercapitalized 
corporate credit unions and undercapitalized corporate credit unions 
that fail to submit and implement capital restoration plans.
    (i) In general. This paragraph applies with respect to any corporate 
credit union that--
    (A) Is significantly undercapitalized; or
    (B) Is undercapitalized and--
    (1) Fails to submit an acceptable capital restoration plan within 
the time allowed by the NCUA under paragraph (e)(1) of this section; or
    (2) Fails in any material respect to implement a plan accepted by 
the NCUA.
    (ii) Specific actions authorized. The NCUA may take one or more of 
the following actions:
    (A) Requiring recapitalization.
    (1) Requiring the corporate credit union to seek and obtain 
additional contributed capital.
    (2) Requiring the corporate credit union to increase its rate of 
earnings retention.
    (3) Requiring the corporate credit union to combine, in whole or 
part, with another insured depository institution, if one or more 
grounds exist under this section or the Federal Credit Union Act for 
appointing a conservator or liquidating agent.
    (B) Restricting any ongoing or future transactions with affiliates.
    (C) Restricting interest rates paid.
    (1) In general. Restricting the rates of dividends and interest that 
the corporate credit union pays on shares and deposits to the prevailing 
rates on shares and deposits of comparable amounts and maturities in the 
region where the institution is located, as determined by the NCUA.
    (2) Retroactive restrictions prohibited. Paragraph (k)(3)(ii)(c) of 
this section does not authorize the NCUA to restrict interest rates paid 
on time deposits or shares made before (and not renewed or renegotiated 
after) the date the NCUA announced this restriction.
    (D) Restricting asset growth. Restricting the corporate credit 
union's asset growth more stringently than in paragraph (k)(2)(iii) of 
this section, or requiring the corporate credit union to reduce its 
total assets.
    (E) Restricting activities. Requiring the corporate credit union or 
any of its CUSOs to alter, reduce, or terminate any activity that the 
NCUA determines poses excessive risk to the corporate credit union.
    (F) Improving management. Doing one or more of the following:
    (1) New election of directors. Ordering a new election for the 
corporate credit union's board of directors.
    (2) Dismissing directors or senior executive officers. Requiring the 
corporate credit union to dismiss from office any director or senior 
executive officer who had held office for more than

[[Page 825]]

180 days immediately before the corporate credit union became 
undercapitalized.
    (3) Employing qualified senior executive officers. Requiring the 
corporate credit union to employ qualified senior executive officers 
(who, if the NCUA so specifies, will be subject to approval by the 
NCUA).
    (G) Requiring divestiture. Requiring the corporate credit union to 
divest itself of or liquidate any interest in any entity if the NCUA 
determines that the entity is in danger of becoming insolvent or 
otherwise poses a significant risk to the corporate credit union;
    (H) Conserve or liquidate the corporate credit union if NCUA 
determines the credit union has no reasonable prospect of becoming 
adequately capitalized; and
    (I) Requiring other action. Requiring the corporate credit union to 
take any other action that the NCUA determines will better carry out the 
purpose of this section than any of the actions described in this 
paragraph.
    (iii) Senior executive officers' compensation restricted.
    (A) In general. The corporate credit union is prohibited from doing 
any of the following without the prior written approval of the NCUA:
    (1) Pay any bonus or profit-sharing to any senior executive officer.
    (2) Provide compensation to any senior executive officer at a rate 
exceeding that officer's average rate of compensation (excluding bonuses 
and profit-sharing) during the 12 calendar months preceding the calendar 
month in which the corporate credit union became undercapitalized.
    (B) Failing to submit plan. The NCUA will not grant approval with 
respect to a corporate credit union that has failed to submit an 
acceptable capital restoration plan.
    (iv) Discretion to impose certain additional restrictions. The NCUA 
may impose one or more of the restrictions prescribed by regulation 
under paragraph (k)(5) of this section if the NCUA determines that those 
restrictions are necessary to carry out the purpose of this section.
    (4) More stringent treatment based on other supervisory criteria.
    (i) In general. If the NCUA determines, after notice and an 
opportunity for hearing as described in subpart M of part 747 of this 
chapter, that a corporate credit union is in an unsafe or unsound 
condition or deems the corporate credit union to be engaging in an 
unsafe or unsound practice, the NCUA may--
    (A) If the corporate credit union is well capitalized, reclassify 
the corporate credit union as adequately capitalized;
    (B) If the corporate credit union is adequately capitalized (but not 
well capitalized), require the corporate credit union to comply with one 
or more provisions of paragraphs (k)(1) and (k)(2) of this section, as 
if the corporate credit union were undercapitalized; or
    (C) If the corporate credit union is undercapitalized, take any one 
or more actions authorized under paragraph (k)(3)(ii) of this section as 
if the corporate credit union were significantly undercapitalized.
    (ii) Contents of plan. Any plan required under paragraph (k)(4)(i) 
of this section will specify the steps that the corporate credit union 
will take to correct the unsafe or unsound condition or practice. 
Capital restoration plans, however, will not be required under paragraph 
(k)(4)(i)(B) of this section.
    (5) Provisions applicable to critically undercapitalized corporate 
credit unions.
    (i) Activities restricted. Any critically undercapitalized corporate 
credit union must comply with restrictions prescribed by the NCUA under 
paragraph (k)(6) of this section.
    (ii) Payments on contributed capital and subordinated debt 
prohibited. A critically undercapitalized corporate credit union must 
not, beginning no later than 60 days after becoming critically 
undercapitalized, make any payment of dividends on contributed capital 
or any payment of principal or interest on the corporate credit union's 
subordinated debt unless the NCUA determines that an exception would 
further the purpose of this section. Interest, although not payable, may 
continue to accrue under the terms of any subordinated debt to the 
extent otherwise permitted by law. Dividends on

[[Page 826]]

contributed capital do not, however, continue to accrue.
    (iii) Conservatorship, liquidation, or other action. The NCUA may, 
at any time, conserve or liquidate any critically undercapitalized 
corporate credit union or require the credit union to combine, in whole 
or part, with another institution. NCUA will consider, not later than 90 
days after a corporate credit union becomes critically undercapitalized, 
whether NCUA should liquidate, conserve, or combine the institution.
    (6) Restricting activities of critically undercapitalized corporate 
credit unions. To carry out the purpose of this section, the NCUA will, 
by order--
    (i) Restrict the activities of any critically undercapitalized 
corporate credit union; and
    (ii) At a minimum, prohibit any such corporate credit union from 
doing any of the following without the NCUA's prior written approval:
    (A) Entering into any material transaction other than in the usual 
course of business, including any investment, expansion, acquisition, 
sale of assets, or other similar action.
    (B) Extending credit for any transaction NCUA determines to be 
highly leveraged.
    (C) Amending the corporate credit union's charter or bylaws, except 
to the extent necessary to carry out any other requirement of any law, 
regulation, or order.
    (D) Making any material change in accounting methods.
    (E) Paying compensation or bonuses NCUA determines to be excessive.
    (F) Paying interest on new or renewed liabilities at a rate that 
would increase the corporate credit union's weighted average cost of 
funds to a level significantly exceeding the prevailing rates of 
interest on insured deposits in the corporate credit union's normal 
market areas.

[75 FR 64836, Oct. 20, 2010, as amended at 78 FR 77565, Dec. 26, 2013]



Sec. 704.5  Investments.

    (a) Policies. A corporate credit union must operate according to an 
investment policy that is consistent with its other risk management 
policies, including, but not limited to, those related to credit risk 
management, asset and liability management, and liquidity management. 
The policy must address, at a minimum:
    (1) Appropriate tests and criteria for evaluating investments and 
investment transactions before purchase; and
    (2) Reasonable and supportable concentration limits for limited 
liquidity investments in relation to capital.
    (b) General. All investments must be U.S. dollar-denominated and 
subject to the credit policy restrictions set forth in Sec. 704.6.
    (c) Authorized activities. A corporate credit union may invest in:
    (1) Securities, deposits, and obligations set forth in Sections 
107(7), 107(8), and 107(15) of the Federal Credit Union Act, 12 U.S.C. 
1757(7), 1757(8), and 1757(15), except as provided in this section;
    (2) Deposits in, the sale of federal funds to, and debt obligations 
of corporate credit unions, Section 107(8) institutions, and state 
banks, trust companies, and mutual savings banks not domiciled in the 
state in which the corporate credit union does business;
    (3) Corporate CUSOs, as defined in and subject to the limitations of 
Sec. 704.11;
    (4) Marketable debt obligations of corporations chartered in the 
United States. This authority does not apply to debt obligations that 
are convertible into the stock of the corporation; and
    (5) Domestically-issued asset-backed securities.
    (d) Repurchase agreements. A corporate credit union may enter into a 
repurchase agreement provided that:
    (1) The corporate credit union, directly or through its agent, 
receives written confirmation of the transaction, and either takes 
physical possession or control of the repurchase securities or is 
recorded as owner of the repurchase securities through the Federal 
Reserve Book-Entry Securities Transfer System;
    (2) The repurchase securities are legal investments for that 
corporate credit union;
    (3) The corporate credit union, directly or through its agent, 
receives daily assessment of the market value of the repurchase 
securities and maintains adequate margin that reflects a

[[Page 827]]

risk assessment of the repurchase securities and the term of the 
transaction; and
    (4) The corporate credit union has entered into signed contracts 
with all approved counterparties and agents, and ensures compliance with 
the contracts. Such contracts must address any supplemental terms and 
conditions necessary to meet the specific requirements of this part. 
Third party arrangements must be supported by tri-party contracts in 
which the repurchase securities are priced and reported daily and the 
tri-party agent ensures compliance; and
    (e) Securities Lending. A corporate credit union may enter into a 
securities lending transaction provided that:
    (1) The corporate credit union, directly or through its agent, 
receives written confirmation of the loan, obtains a first priority 
security interest in the collateral by taking physical possession or 
control of the collateral, or is recorded as owner of the collateral 
through the Federal Reserve Book-Entry Securities Transfer System;
    (2) The collateral is a legal investment for that corporate credit 
union;
    (3) The corporate credit union, directly or through its agent, 
receives daily assessment of the market value of collateral and 
maintains adequate margin that reflects a risk assessment of the 
collateral and terms of the loan; and
    (4) The corporate credit union has entered into signed contracts 
with all agents and, directly or through its agent, has executed a 
written loan and security agreement with the borrower. The corporate or 
its agent ensures compliance with the agreements.
    (f) Investment companies. A corporate credit union may invest in an 
investment company registered with the Securities and Exchange 
Commission under the Investment Company Act of 1940 (15 U.S.C. 80a), or 
a collective investment fund maintained by a national bank under 12 CFR 
9.18 or a mutual savings bank under 12 CFR 550.260, provided that the 
company or fund prospectus restricts the investment portfolio to 
investments and investment transactions that are permissible for that 
corporate credit union.
    (g) Investment settlement. A corporate credit union may only 
contract for the purchase or sale of an investment if the transaction is 
settled on a delivery versus payment basis within 60 days for mortgage-
backed securities, within 30 days for new issues (other than mortgage-
backed securities), and within three days for all other securities.
    (h) Prohibitions. A corporate credit union is prohibited from:
    (1) Purchasing or selling derivatives, except for embedded options 
not required under GAAP to be accounted for separately from the host 
contract or forward sales commitments on loans to be purchased by the 
corporate credit union;
    (2) Engaging in trading securities unless accounted for on a trade 
date basis;
    (3) Engaging in adjusted trading or short sales;
    (4) Purchasing mortgage servicing rights, small business related 
securities, residual interests in collateralized mortgage obligations, 
residual interests in real estate mortgage investment conduits, or 
residual interests in asset-backed securities;
    (5) Purchasing net interest margin securities;
    (6) Purchasing collateralized debt obligations;
    (7) Purchasing private label residential mortgage-backed securities;
    (8) Purchasing subordinated securities; and
    (9) Purchasing stripped mortgage-backed securities (SMBS), or 
securities that represent interests in SMBS, except as described in 
subparagraphs (i) and (iii) below.
    (i) A corporate credit union may invest in exchangeable 
collateralized mortgage obligations (exchangeable CMOs) representing 
beneficial ownership interests in one or more interest-only classes of a 
CMO (IO CMOs) or principal-only classes of a CMO (PO CMOs), but only if:
    (A) At the time of purchase, the ratio of the market price to the 
remaining principal balance is between .8 and 1.2, meaning that the 
discount or premium of the market price to par must be less than 20 
points;
    (B) The offering circular or other official information available at 
the time

[[Page 828]]

of purchase indicates that the notional principal on each underlying IO 
CMO should decline at the same rate as the principal on one or more of 
the underlying non-IO CMOs, and that the principal on each underlying PO 
CMO should decline at the same rate as the principal, or notional 
principal, on one or more of the underlying non-PO CMOs; and
    (C) The credit union investment staff has the expertise dealing with 
exchangeable CMOs to apply the conditions in paragraphs (h)(5)(i)(A) and 
(B) of this section.
    (ii) A corporate credit union that invests in an exchangeable CMO 
may exercise the exchange option only if all of the underlying CMOs are 
permissible investments for that credit union.
    (iii) A corporate credit union may accept an exchangeable CMO 
representing beneficial ownership interests in one or more IO CMOs or PO 
CMOs as an asset associated with an investment repurchase transaction or 
as collateral in a securities lending transaction. When the exchangeable 
CMO is associated with one of these two transactions, it need not 
conform to the conditions in paragraphs (h)(5)(i)(A) or (B) of this 
section.
    (i) Conflicts of interest. A corporate credit union's officials, 
employees, and immediate family members of such individuals, may not 
receive pecuniary consideration in connection with the making of an 
investment or deposit by the corporate credit union. Employee 
compensation is exempt from this prohibition. All transactions not 
specifically prohibited by this paragraph must be conducted at arm's 
length and in the interest of the corporate credit union.
    (j) Grandfathering. A corporate credit union's authority to hold an 
investment is governed by the regulation in effect at the time of 
purchase. However, all grandfathered investments are subject to the 
other requirements of this part.

[75 FR 64839, Oct. 20, 2010, as amended at 80 FR 25937, May 6, 2015]



Sec. 704.6  Credit risk management.

    (a) Policies. A corporate credit union must operate according to a 
credit risk management policy that is commensurate with the investment 
risks and activities it undertakes. The policy must address at a 
minimum:
    (1) The approval process associated with credit limits;
    (2) Due diligence analysis requirements;
    (3) Maximum credit limits with each obligor and transaction 
counterparty, set as a percentage of capital. In addition to addressing 
deposits and securities, limits with transaction counterparties must 
address aggregate exposures of all transactions including, but not 
limited to, repurchase agreements, securities lending, and forward 
settlement of purchases or sales of investments; and
    (4) Concentrations of credit risk (e.g., originator of receivables, 
servicer of receivables, insurer, industry type, sector type, 
geographic, collateral type, and tranche priority).
    (b) Exemption. The limitations and requirements of this section do 
not apply to certain assets, whether or not considered investments under 
this part, including fixed assets, individual loans and loan 
participation interests, investments in CUSOs, investments that are 
issued or fully guaranteed as to principal and interest by the U.S. 
government or its agencies or its sponsored enterprises (but not 
exempting, for purposes of paragraph (d) of this section, mortgage 
backed securities), investments that are fully insured or guaranteed 
(including accumulated dividends and interest) by the NCUSIF or the 
Federal Deposit Insurance Corporation, and settlement funds in federally 
insured depository institutions.
    (c) Issuer concentration limits--(1) General rule. The aggregate 
value recorded on the books of the corporate credit union of all 
investments in any single obligor is limited to 25 percent of total 
capital or $5 million, whichever is greater.
    (2) Exceptions. (i) Investments in one obligor where the remaining 
maturity of all obligations is less than 30 days are limited to 50 
percent of total capital;
    (ii) Investments in credit card master trust asset-backed securities 
are limited to 50 percent of total capital in any single obligor;

[[Page 829]]

    (iii) Aggregate investments in repurchase and securities lending 
agreements with any one counterparty are limited to 200 percent of total 
capital;
    (iv) Investments in non-money market registered investment companies 
are limited to 50 percent of total capital in any single obligor;
    (v) Investments in money market registered investment companies are 
limited to 100 percent of total capital in any single obligor; and
    (vi) Investments in corporate CUSOs are subject to the limitations 
of section 11 of this part.
    (d) Sector concentration limits. (1) A corporate credit union must 
establish sector limits based on the value recorded on the books of the 
corporate credit union that do not exceed the following maximums:
    (i) Mortgage-backed securities (inclusive of commercial mortgage-
backed securities)--the lower of 1000 percent of total capital or 50 
percent of assets;
    (ii) Commercial mortgage-backed securities--the lower of 300 percent 
of total capital or 15 percent of assets;
    (iii) Federal Family Education Loan Program student loan asset-
backed securities--the lower of 1000 percent of total capital or 50 
percent of assets;
    (iv) Private student loan asset-backed securities--the lower of 500 
percent of total capital or 25 percent of assets;
    (v) Auto loan/lease asset-backed securities--the lower of 500 
percent of total capital or 25 percent of assets;
    (vi) Credit card asset-backed securities--the lower of 500 percent 
of total capital or 25 percent of assets;
    (vii) Other asset-backed securities not listed in paragraphs 
(d)(1)(ii) through (vi) of this section--the lower of 500 percent of 
total capital or 25 percent of assets;
    (viii) Corporate debt obligations--the lower of 1000 percent of 
total capital or 50 percent of assets; and
    (ix) Municipal securities--the lower of 1000 percent of total 
capital or 50 percent of assets.
    (2) Registered investment companies--A corporate credit union must 
limit its investment in registered investment companies to the lower of 
1000 percent of total capital or 50 percent of assets. In addition to 
applying the limit in this paragraph, a corporate credit union must also 
include the underlying assets in each registered investment company in 
the relevant sectors described in paragraph (d)(1) of this section when 
calculating those sector limits.
    (3) A corporate credit union must limit its aggregate holdings in 
any investments not described in paragraphs (d)(1) or (2) of this 
section to the lower of 100 percent of total capital or 5 percent of 
assets. The NCUA may approve a higher percentage in appropriate cases.
    (4) Investments in other federally insured credit unions, deposits 
and federal funds investments in other federally insured depository 
institutions, and investment repurchase agreements are excluded from the 
concentration limits in paragraphs (d)(1), (2), and (3) of this section.
    (e) Corporate debt obligation subsector limits. In addition to the 
limitations in paragraph (d)(1)(viii) of this section, a corporate 
credit union must not exceed the lower of 200 percent of total capital 
or 10 percent of assets in any single North American Industry 
Classification System (NAICS) industry sector based on the value 
recorded on the books of the corporate credit union. If a corporation in 
which a corporate credit union is interested in investing does not have 
a readily ascertainable NAICS classification, a corporate credit union 
will use its reasonable judgment in assigning such a classification. 
NCUA may direct, however, that the corporate credit union change the 
classification.
    (f) Credit ratings. (1) Before purchasing an investment, a corporate 
credit union must conduct and document an analysis that reasonably 
concludes the investment has no more than a minimal amount of credit 
risk.
    (2) A corporate credit union must identify and monitor any changes 
in credit quality of the investment and retain appropriate supporting 
documentation as long as the corporate owns the investment.
    (g) Reporting and documentation. (1) At least annually, a written 
evaluation of each credit limit with each obligor or transaction 
counterparty must be prepared and formally approved by the

[[Page 830]]

board or an appropriate committee. At least monthly, the board or an 
appropriate committee must receive an investment watch list of existing 
and/or potential credit problems and summary credit exposure reports, 
which demonstrate compliance with the corporate credit union's risk 
management policies.
    (2) At a minimum, the corporate credit union must maintain:
    (i) A justification for each approved credit limit;
    (ii) Disclosure documents, if any, for all instruments held in 
portfolio. Documents for an instrument that has been sold must be 
retained until completion of the next NCUA examination; and
    (iii) The latest available financial reports, industry analyses, and 
internal and external analyst evaluations sufficient to support each 
approved credit limit.
    (h) Requirements for investment action plans. An investment is 
subject to the requirements of Sec. 704.10 of this part if:
    (1) Appropriate monitoring of the investment would reasonably lead 
to the conclusion that the investment presents more than a minimal 
amount of credit risk; or
    (2) The investment is part of an asset class or group of investments 
that exceeds the issuer, sector, or subsector concentration limits of 
this section. For purposes of measurement, each new credit transaction 
must be evaluated in terms of the corporate credit union's capital at 
the time of the transaction. An investment that fails a requirement of 
this section because of a subsequent reduction in capital will be deemed 
nonconforming. A corporate credit union is required to exercise 
reasonable efforts to bring nonconforming investments into conformity 
within 90 calendar days. Investments that remain nonconforming for more 
than 90 calendar days will be deemed to fail a requirement of this 
section and the corporate credit union will have to comply with 
Sec. 704.10 of this part.

[75 FR 64841, Oct. 20, 2010, as amended at 75 FR 71528, Nov. 24, 2010; 
76 FR 79533, Dec. 22, 2011; 77 FR 74110, Dec. 13, 2012; 80 FR 25937, May 
6, 2015]



Sec. 704.7  Lending.

    (a) Policies. A corporate credit union must operate according to a 
lending policy which addresses, at a minimum:
    (1) Loan types and limits;
    (2) Required documentation and collateral; and
    (3) Analysis and monitoring standards.
    (b) General. Each loan or line of credit limit will be determined 
after analyzing the financial and operational soundness of the borrower 
and the ability of the borrower to repay the loan.
    (c) Loans to members--(1) Credit unions. (i) The maximum aggregate 
amount in unsecured loans and lines of credit from a corporate credit 
union to any one member credit union, excluding CLF-related bridge loans 
and pass-through and guaranteed loans from the CLF and the NCUSIF, must 
not exceed 50 percent of the corporate credit union's total capital.
    (ii) The maximum aggregate amount in secured loans (excluding those 
secured by shares or marketable securities and member reverse repurchase 
transactions) and unsecured loans (excluding pass-through and guaranteed 
loans from the CLF and the NCUSIF) and lines of credit from a corporate 
credit union to any one member credit union must not exceed 150 percent 
of the corporate credit union's total capital.
    (2) Corporate CUSOs. Any loan or line of credit from a corporate 
credit union to a corporate CUSO must comply with Sec. 704.11.
    (3) Other members. The maximum aggregate amount of loans and lines 
of credit from a corporate credit union to any other one member must not 
exceed 15 percent of the corporate credit union's total capital plus 
pledged shares.
    (d) Loans to nonmembers--(1) Credit unions. A loan to a nonmember 
credit union, other than through a loan participation with another 
corporate credit union or a CLF-related bridge loan, is only permissible 
if the loan is for an overdraft related to the providing of 
correspondent services pursuant to Sec. 704.12. Generally, such a loan 
will have a maturity of one business day.
    (2) Corporate CUSOs. Any loan or line of credit must comply with 
Sec. 704.11.

[[Page 831]]

    (e) Member business loan rule. Loans, lines of credit and letters of 
credit to:
    (1) Member credit unions are exempt from part 723 of this chapter;
    (2) Corporate CUSOs are not subject to part 723 of this chapter.
    (3) Other members not excluded under Sec. 723.1(b) of this chapter 
must comply with part 723 of this chapter unless the loan or line of 
credit is fully guaranteed by a credit union or fully secured by U.S. 
Treasury or agency securities. Those guaranteed and secured loans must 
comply with the aggregate limits of Sec. 723.16 but are exempt from the 
other requirements of part 723.
    (f) Participation loans with other corporate credit unions. A 
corporate credit union is permitted to participate in a loan with 
another corporate credit union provided the corporate retains an 
interest of at least 5 percent of the face amount of the loan and a 
master participation loan agreement is in place before the purchase or 
the sale of a participation. A participating corporate credit union must 
exercise the same due diligence as if it were the originating corporate 
credit union.
    (g) Prepayment penalties. If provided for in the loan contract, a 
corporate credit union is authorized to assess prepayment penalties on 
loans.

[62 FR 12938, Mar. 19, 1997, as amended at 64 FR 57365, Oct. 25, 1999; 
67 FR 65655, Oct. 25, 2002; 68 FR 56550, Oct. 1, 2003; 75 FR 34621, June 
18, 2010; 80 FR 25938, May 6, 2015; 80 FR 57284, Sept. 23, 2015]



Sec. 704.8  Asset and liability management.

    (a) Policies. A corporate credit union must operate according to a 
written asset and liability management policy which addresses, at a 
minimum:
    (1) The purpose and objectives of the corporate credit union's asset 
and liability activities;
    (2) The maximum allowable percentage decline in net economic value 
(NEV), compared to base case NEV;
    (3) The minimum allowable NEV ratio;
    (4) Policy limits and specific test parameters for the NEV 
sensitivity analysis requirements set forth in paragraphs (d), (e), and 
(f) of this section;
    (5) The modeling of indexes that serve as references in financial 
instrument coupon formulas; and
    (6) The tests that will be used, prior to purchase, to estimate the 
impact of investments on the percentage decline in NEV compared to base 
case NEV. The most recent NEV analysis, as determined under paragraph 
(d)(1)(i) of this section may be used as a basis of estimation.
    (b) Asset and liability management committee (ALCO). A corporate 
credit union's ALCO must have at least one member who is also a member 
of the board of directors. The ALCO must review asset and liability 
management reports on at least a monthly basis. These reports must 
address compliance with Federal Credit Union Act, NCUA Rules and 
Regulations (12 CFR chapter VII), and all related risk management 
policies.
    (c) Penalty for early withdrawals. A corporate credit union that 
permits early certificate/share withdrawals must assess market-based 
penalties sufficient to cover the estimated replacement cost of the 
certificate redeemed. This means the minimum penalty must be reasonably 
related to the rate that the corporate credit union would be required to 
offer to attract funds for a similar term with similar characteristics.
    (d) Interest rate sensitivity analysis. (1) A corporate credit union 
must:
    (i) Evaluate the risk in its balance sheet by measuring, at least 
quarterly, including once on the last day of the calendar quarter, the 
impact of an instantaneous, permanent, and parallel shock in the yield 
curve of plus and minus 100, 200, and 300 BP on its NEV and NEV ratio. 
If the base case NEV ratio falls below 3 percent at the last testing 
date, these tests must be calculated at least monthly, including once on 
the last day of the month, until the base case NEV ratio again exceeds 3 
percent;
    (ii) Limit its risk exposure to levels that do not result in a base 
case NEV ratio or any NEV ratio resulting from the tests set forth in 
paragraph (d)(1)(i) of this section below 2 percent; and
    (iii) Limit its risk exposures to levels that do not result in a 
decline in NEV of more than 15 percent.

[[Page 832]]

    (2) A corporate credit union must assess annually if it should 
conduct periodic additional tests to address market factors that may 
materially impact that corporate credit union's NEV. These factors 
should include, but are not limited to, the following:
    (i) Changes in the shape of the Treasury yield curve;
    (ii) Adjustments to prepayment projections used for amortizing 
securities to consider the impact of significantly faster/slower 
prepayment speeds; and
    (iii) Adjustments to volatility assumptions to consider the impact 
that changing volatilities have on embedded option values.
    (e) Net interest income modeling. A corporate credit union must 
perform net interest income (NII) modeling to project earnings in 
multiple interest rate environments for a period of no less than 2 
years. NII modeling must, at minimum, be performed at least quarterly, 
including once on the last day of the calendar quarter.
    (f) Weighted average asset life. The weighted average life (WAL) of 
a corporate credit union's financial assets, consisting of cash, 
investments, and loans, but excluding derivative contracts and equity 
investments, may not exceed 2 years. A corporate credit union must test 
its financial assets at least quarterly, including once on the last day 
of the calendar quarter, for compliance with this WAL limitation. When 
calculating its WAL, a corporate credit union must assume that no issuer 
or market options will be exercised. If the WAL of a corporate credit 
union's assets exceeds 2 years on the testing date, this test must be 
calculated at least monthly, including once on the last day of the 
month, until the WAL is below 2 years.
    (g) Weighted average asset life with 50 percent slowdown in 
prepayment speeds. The weighted average life (WAL) of a corporate credit 
union's financial assets, consisting of cash, investments, and loans, 
but excluding derivative contracts and equity investments, may not 
exceed 2.25 years when prepayment speeds are reduced by 50 percent. A 
corporate credit union must test its financial assets at least 
quarterly, including once on the last day of the calendar quarter, for 
compliance with this WAL limitation. When calculating its WAL, a 
corporate credit union must assume that no issuer or market options will 
be exercised. If the WAL of a corporate credit union's assets exceeds 
2.25 years, this test must be calculated at least monthly, including 
once on the last day of the month, until the WAL with the 50 slowdown in 
prepayment speeds is below 2.25 years.
    (h) Government issued or guaranteed securities. The WAL of 
investments that are issued or fully guaranteed as to principal and 
interest by the U.S. government, its agencies or sponsored enterprises, 
including investments that are fully insured or guaranteed (including 
accumulated dividends and interest) by the NCUSIF or the Federal Deposit 
Insurance Corporation, will be multiplied by a factor of 0.50 for 
purposes of the WAL tests of paragraphs (f) and (g) of this section.
    (i) Effective and spread durations. A corporate credit union must 
measure at least once a quarter, including once on the last day of the 
calendar quarter, the effective duration and spread durations of each of 
its assets and liabilities, where the values of these are affected by 
changes in interest rates or credit spreads.
    (j) Limit breaches. (1)(i) If a corporate credit union's decline in 
NEV, base case NEV ratio, or any NEV ratio calculated under paragraph 
(d) of this section exceeds established or permitted limits, or the 
corporate is unable to satisfy the tests in paragraphs (f) or (g) of 
this section, the operating management of the corporate must immediately 
report this information to its board of directors and ALCO; and
    (ii) If the corporate credit union cannot adjust its balance sheet 
to meet the requirements of paragraphs (d), (f), or (g) of this section 
within 10 calendar days after detection by the corporate, the corporate 
must notify in writing the Director of the Office of National 
Examinations and Supervision.
    (2) If any breach described in paragraph (j)(1) of this section 
persists for 30 or more calendar days, the corporate credit union:
    (i) Must immediately submit a detailed, written action plan to the 
NCUA that sets forth the time needed and means by which it intends to 
come

[[Page 833]]

into compliance and, if the NCUA determines that the plan is 
unacceptable, the corporate credit union must immediately restructure 
its balance sheet to bring the exposure back within compliance or adhere 
to an alternative course of action determined by the NCUA; and
    (ii) If presently categorized as adequately capitalized or well 
capitalized for prompt corrective action purposes, and the breach was of 
paragraph (d) of this section, the corporate credit union will 
immediately be recategorized as undercapitalized until coming into 
compliance, and
    (iii) If presently categorized as less than adequately capitalized 
for prompt corrective action purposes, and the breach was of paragraph 
(d) of this section, the corporate credit union will immediately be 
downgraded one additional capital category.
    (k) Overall limit on business generated from individual credit 
unions. On or after April 22, 2013, a corporate credit union is 
prohibited from accepting from any member, or any nonmember credit 
union, any investment, including shares, loans, PCC, or NCAs if, 
following that investment, the aggregate of all investments from that 
entity in the corporate would exceed 15 percent of the corporate credit 
union's moving daily average net assets.

[75 FR 64842, Oct. 20, 2010, as amended at 76 FR 79533, Dec. 22, 2011; 
80 FR 25938, May 6, 2015]



Sec. 704.9  Liquidity management.

    (a) General. In the management of liquidity, a corporate credit 
union must:
    (1) Evaluate the potential liquidity needs of its membership in a 
variety of economic scenarios;
    (2) Regularly monitor and demonstrate accessibility to sources of 
internal and external liquidity;
    (3) Keep a sufficient amount of cash and cash equivalents on hand to 
support its payment system obligations;
    (4) Demonstrate that the accounting classification of investment 
securities is consistent with its ability to meet potential liquidity 
demands; and
    (5) Develop a contingency funding plan that addresses alternative 
funding strategies in successively deteriorating liquidity scenarios. 
The plan must:
    (i) List all sources of liquidity, by category and amount, that are 
available to service an immediate outflow of funds in various liquidity 
scenarios;
    (ii) Analyze the impact that potential changes in fair value will 
have on the disposition of assets in a variety of interest rate 
scenarios; and
    (iii) Be reviewed by the board or an appropriate committee no less 
frequently than annually or as market or business conditions dictate.
    (b) Borrowing limits. A corporate credit union may borrow up to 10 
times its total capital.
    (1) Secured borrowings. A corporate credit union may borrow on a 
secured basis for liquidity purposes, but the maturity of the borrowing 
may not exceed 180 days. Only a corporate credit union with Tier 1 
capital in excess of five percent of its moving daily average net assets 
(DANA) may borrow on a secured basis for nonliquidity purposes, and the 
outstanding amount of secured borrowing for nonliquidity purposes may 
not exceed an amount equal to the difference between the corporate 
credit union's Tier 1 capital and five percent of its moving DANA.
    (2) Exclusions. CLF borrowings and borrowed funds created by the use 
of member reverse repurchase agreements are excluded from the limit in 
paragraph (b)(1) of this section.

[75 FR 64843, Oct. 20, 2010, as amended at 80 FR 25938, May 6, 2015]



Sec. 704.10  Investment action plan.

    (a) Any corporate credit union in possession of an investment, 
including a derivative, that fails to meet a requirement of this part 
must, within 30 calendar days of the failure, report the failed 
investment to its board of directors, supervisory committee and the 
Director of the Office of National Examinations and Supervision (ONES). 
If the corporate credit union does not sell the failed investment, and 
the investment continues to fail to meet a requirement of this part, the 
corporate credit union must, within 30 calendar days of the failure, 
provide to the ONES Director a written action plan that addresses:
    (1) The investment's characteristics and risks;

[[Page 834]]

    (2) The process to obtain and adequately evaluate the investment's 
market pricing, cash flows, and risk;
    (3) How the investment fits into the credit union's asset and 
liability management strategy;
    (4) The impact that either holding or selling the investment will 
have on the corporate credit union's earnings, liquidity, and capital in 
different interest rate environments; and
    (5) The likelihood that the investment may again pass the 
requirements of this part.
    (b) The ONES Director may require, for safety and soundness reasons, 
a shorter time period for plan development than that set forth in 
paragraph (a) of this section.
    (c) If the plan described in paragraph (a) of this section is not 
approved by the ONES Director, the credit union must adhere to the ONES 
Director's directed course of action.

[62 FR 12938, Mar. 19, 1997, as amended at 67 FR 65656, 65659, Oct. 25, 
2002; 78 FR 32544, May 31, 2013]



Sec. 704.11  Corporate Credit Union Service Organizations 
(Corporate CUSOs).

    (a) A corporate CUSO is an entity that:
    (1) Is at least partly owned by a corporate credit union;
    (2) Primarily serves credit unions;
    (3) Restricts its services to those related to the normal course of 
business of credit unions as specified in paragraph (e) of this section; 
and
    (4) Is structured as a corporation, limited liability company, or 
limited partnership under state law.
    (b) Investment and loan limitations. (1) The aggregate of all 
investments in member and non-member corporate CUSOs that a corporate 
credit union may make must not exceed 15 percent of a corporate credit 
union's total capital.
    (2) The aggregate of all investments in and loans to member and 
nonmember corporate CUSOs a corporate credit union may make must not 
exceed 30 percent of a corporate credit union's total capital. A 
corporate credit union may lend to member and nonmember corporate CUSOs 
an additional 15 percent of total capital if the loan is collateralized 
by assets in which the corporate has a perfected security interest under 
state law.
    (3) If the limitations in paragraphs (b)(1) and (b)(2) of this 
section are reached or exceeded because of the profitability of the CUSO 
and the related GAAP valuation of the investment under the equity method 
without an additional cash outlay by the corporate, divestiture is not 
required. A corporate credit union may continue to invest up to the 
regulatory limit without regard to the increase in the GAAP valuation 
resulting from the corporate CUSO's profitability.
    (c) Due diligence. A corporate credit union must comply with the due 
diligence requirements of Secs. 723.5 and 723.6(f) through (j) of this 
chapter for all loans to corporate CUSOs. This requirement does not 
apply to loans excluded under Sec. 723.1(b).
    (d) Separate entity. (1) A corporate CUSO must be operated as an 
entity separate from a corporate credit union.
    (2) A corporate credit union investing in or lending to a corporate 
CUSO must obtain a written legal opinion that concludes the corporate 
CUSO is organized and operated in a manner that the corporate credit 
union will not reasonably be held liable for the obligations of the 
corporate CUSO. This opinion must address factors that have led courts 
to ``pierce the corporate veil,'' such as inadequate capitalization, 
lack of corporate identity, common boards of directors and employees, 
control of one entity over another, and lack of separate books and 
records.
    (e) Permissible activities. (1) A corporate CUSO must agree to limit 
its activities to:
    (i) Brokerage services,
    (ii) Investment advisory services, and
    (iii) Other categories of activities as approved in writing by NCUA 
and published on NCUA's Web site.
    (2) Once NCUA has approved an activity and published that activity 
on its Web site as provided for in paragraph (e)(1)(iii) of this 
section, NCUA will not remove that particular activity the approved 
list, or make substantial changes to the content or description of that 
approved activity, except through the formal rulemaking process.

[[Page 835]]

    (f) An official of a corporate credit union which has invested in or 
loaned to a corporate CUSO may not receive, either directly or 
indirectly, any salary, commission, investment income, or other income, 
compensation, or consideration from the corporate CUSO. This prohibition 
also extends to immediate family members of officials.
    (g) Prior to making an investment in or loan to a corporate CUSO, a 
corporate credit union must obtain a written agreement that the CUSO:
    (1) Will follow GAAP;
    (2) Will provide financial statements to the corporate credit union 
at least quarterly;
    (3) Will obtain an annual CPA opinion audit and provide a copy to 
the corporate credit union. A wholly owned or majority owned CUSO is not 
required to obtain a separate annual audit if it is included in the 
corporate credit union's annual consolidated audit;
    (4) Will provide the reports as required by Sec. 712.3(d)(4) and (5) 
of this chapter;
    (5) Will not acquire control, directly or indirectly, of another 
depository financial institution or to invest in shares, stocks, or 
obligations of an insurance company, trade association, liquidity 
facility, or similar organization;
    (6) Will allow the auditor, board of directors, and NCUA complete 
access to the CUSO's personnel, facilities, equipment, books, records, 
and any other documentation that the auditor, directors, or NCUA deem 
pertinent;
    (7) Will inform the corporate, at least quarterly, of all the 
compensation paid by the CUSO to its employees who are also employees of 
the corporate credit union; and
    (8) Will comply with all the requirements of this section.
    (h) Corporate credit union authority to invest in or loan to a CUSO 
is limited to that provided in this section. A corporate credit union is 
not authorized to invest in or loan to a CUSO under part 712 of this 
chapter.

[75 FR 64843, Oct. 20, 2010, as amended at 76 FR 23868, Apr. 29, 2011; 
80 FR 25938, May 6, 2015]



Sec. 704.12  Permissible services.

    (a) Preapproved services. A corporate credit union may provide to 
members the preapproved services set out in this section. NCUA may at 
any time, based upon supervisory, legal, or safety and soundness 
reasons, limit or prohibit any preapproved service. The specific 
activities listed within each preapproved category are provided as 
illustrations of activities permissible under the particular category, 
not as an exclusive or exhaustive list.
    (1) Correspondent services agreement. A corporate credit union may 
only provide financial services to nonmembers through a correspondent 
services agreement. A correspondent services agreement is an agreement 
between two corporate credit unions, whereby one of the corporate credit 
unions agrees to provide services to the other corporate credit union or 
its members.
    (2) Credit and investment services. Credit and investment services 
are advisory and consulting activities that assist the member in lending 
or investment management. These services may include loan reviews, 
investment portfolio reviews and investment advisory services.
    (3) Electronic financial services. Electronic financial services are 
any services, products, functions, or activities that a corporate credit 
union is otherwise authorized to perform, provide or deliver to its 
members but performed through electronic means. Electronic services may 
include automated teller machines, online transaction processing through 
a website, website hosting services, account aggregation services, and 
internet access services to perform or deliver products or services to 
members.
    (4) Excess capacity. Excess capacity is the excess use or capacity 
remaining in facilities, equipment or services that: a corporate credit 
union properly invested in or established, in good faith, with the 
intent of serving its members; and it reasonably anticipates will be 
taken up by the future expansion of services to its members. A corporate 
credit union may sell or lease the excess capacity in facilities, 
equipment or services, such as office space, employees and data 
processing.

[[Page 836]]

    (5) Liquidity and asset and liability management. Liquidity and 
asset and liability management services are any services, functions or 
activities that assist the member in liquidity and balance sheet 
management. These services may include liquidity planning and balance 
sheet modeling and analysis.
    (6) Operational services. Operational services are services 
established to deliver financial products and services that enhance 
member service and promote safe and sound operations. Operational 
services may include tax payment, electronic fund transfers and 
providing coin and currency service.
    (7) Payment systems. Payment systems are any methods used to 
facilitate the movement of funds for transactional purposes. Payment 
systems may include Automated Clearing House, wire transfer, item 
processing and settlement services.
    (8) Trustee or custodial services. Trustee services are services in 
which the corporate credit union is authorized to act under a written 
trust agreement to the extent permitted under part 724 of this chapter. 
Custodial and safekeeping services are services a corporate credit union 
performs on behalf of its member to act as custodian or safekeeper of 
investments.
    (b) Procedure for adding services that are not preapproved. To 
provide a service to its members that is not preapproved by NCUA:
    (1) A federal corporate credit union must request approval from 
NCUA. The request must include a full explanation and complete 
documentation of the service and how the service relates to a corporate 
credit union's authority to provide services to its members. The request 
must be submitted jointly to the Director of the Office of National 
Examinations and Supervision and the Secretary of the Board. The request 
will be treated as a petition to amend Sec. 704.12 and NCUA will request 
public comment or otherwise act on the petition within a reasonable 
period of time. Before engaging in the formal approval process, a 
corporate credit union should seek an advisory opinion from NCUA's 
Office of General Counsel as to whether a proposed service is already 
covered by one of the authorized categories without filing a petition to 
amend the regulation; and
    (2) A state-chartered corporate credit union must submit a request 
for a waiver that complies with Sec. 704.1(b) to the Director of the 
Office of National Examinations and Supervision.
    (c) Prohibition. A corporate credit union is prohibited from 
purchasing loan servicing rights.

[67 FR 65656, Oct. 25, 2002, as amended at 78 FR 32544, May 31, 2013]



Sec. 704.13  Board responsibilities.

    (a) General. A corporate credit union's board of directors must 
approve comprehensive written strategic plans and policies, review them 
annually, and provide them upon request to the auditors, supervisory 
committee, and NCUA.
    (b) Policies. A corporate credit union's policies must be 
commensurate with the scope and complexity of the corporate credit 
union.
    (c) Other requirements. The board of directors of a corporate credit 
union must ensure:
    (1) Senior managers have an in-depth, working knowledge of their 
direct areas of responsibility and are capable of identifying, hiring, 
and retaining qualified staff;
    (2) Qualified personnel are employed or under contract for all line 
support and audit areas, and designated back-up personnel or resources 
with adequate cross-training are in place;
    (3) GAAP is followed, except where law or regulation has provided 
for a departure from GAAP;
    (4) Accurate balance sheets, income statements, and internal risk 
assessments (e.g., risk management measures of liquidity, market, and 
credit risk associated with current activities) are produced timely in 
accordance with Secs. 704.6, 704.8, and 704.9;
    (5) Systems are audited periodically in accordance with industry-
established standards;
    (6) Financial performance is evaluated to ensure that the objectives 
of the corporate credit union and the responsibilities of management are 
met;
    (7) Planning addresses the retention of external consultants, as 
appropriate, to review the adequacy of technical,

[[Page 837]]

human, and financial resources dedicated to support major risk areas; 
and
    (8) For each item before the board, the meeting minutes list the 
names of directors and their votes, as well as the names of any 
directors who did not vote, except that if the minutes include a 
complete list of directors attending the meeting, the vote tally need 
only list the names of directors who voted against the item or who 
abstained.

[62 FR 12938, Mar. 19, 1997, as amended at 67 FR 65654, Oct. 25, 2002. 
Redesignated at 75 FR 64836, Oct. 20, 2010; 76 FR 23868, Apr. 29, 2011]



Sec. 704.14  Representation.

    (a) Board representation. The board will be determined as stipulated 
in its bylaws governing election procedures, provided that:
    (1) At least a majority of directors, including the chair of the 
board, must serve on the board as representatives of member credit 
unions;
    (2) Only an individual who currently holds the position of chief 
executive officer, chief financial officer, chief operating officer, or 
treasurer/manager at a member credit union, and will hold that position 
at the time he or she is seated on the corporate credit union board if 
elected, may seek election or re-election to the corporate credit union 
board;
    (3) No individual may be elected or appointed to serve on the board 
if, after such election or appointment, the individual would be a 
director at more than one corporate credit union;
    (4) No individual may be elected or appointed to serve on the board 
if, after such election or appointment, any member of the corporate 
credit union would have more than one representative on the board of the 
corporate;
    (5) The chair of the board may not serve simultaneously as an 
officer, director, or employee of a credit union trade association;
    (6) A majority of directors may not serve simultaneously as 
officers, directors, or employees of the same credit union trade 
association or its affiliates (not including chapters or other subunits 
of a state trade association);
    (7) For purposes of meeting the requirements of paragraphs (a)(5) 
and (a)(6) of this section, an individual may not serve as a director or 
chair of the board if that individual holds a subordinate employment 
relationship to another employee who serves as an officer, director, or 
employee of a credit union trade association;
    (8) In the case of a corporate credit union whose membership is 
composed of more than 25 percent non credit unions, the majority of 
directors serving as representatives of member credit unions, including 
the chair, must be elected only by member credit unions, and
    (9) At least a majority of directors of every corporate credit 
union, including the chair of the board, must serve on the corporate 
board as representatives of natural person credit union members.
    (b) Credit union trade association. As used in this section, a 
credit union trade association includes but is not limited to, state 
credit union leagues and league service corporations and national credit 
union trade associations.
    (c) Representatives of organizational members. (1) An organizational 
member of a corporate credit union is a member that is not a natural 
person. An organizational member may appoint one of its members or 
officials as a representative to the corporate credit union. The 
representative shall be empowered to attend membership meetings, to 
vote, and to stand for election on behalf of the member. No individual 
may serve as the representative of more than one organizational member 
in the same corporate credit union.
    (2) Any vacancy on the board of a corporate credit union caused by a 
representative being unable to complete his or her term shall be filled 
by the board of the corporate credit union according to its bylaws 
governing the filling of board vacancies.
    (d) Recusal provision. (1) No director, committee member, officer, 
or employee of a corporate credit union shall in any manner, directly or 
indirectly, participate in the deliberation upon or the determination of 
any question affecting his or her pecuniary interest or the pecuniary 
interest of any entity (other than the corporate credit union) in which 
he or she is interested, except if the matter involves general policy

[[Page 838]]

applicable to all members, such as setting dividend or loan rates or 
fees for services.
    (2) An individual is ``interested'' in an entity if he or she:
    (i) Serves as a director, officer, or employee of the entity;
    (ii) Has a business, ownership, or deposit relationship with the 
entity; or
    (iii) Has a business, financial, or familial relationship with an 
individual whom he or she knows has a pecuniary interest in the entity.
    (3) In the event of the disqualification of any directors, by 
operation of paragraph (c)(1) of this section, the remaining qualified 
directors present at the meeting, if constituting a quorum with the 
disqualified directors, may exercise, by majority vote, all the powers 
of the board with respect to the matter under consideration. Where all 
of the directors are disqualified, the matter must be decided by the 
members of the corporate credit union.
    (4) In the event of the disqualification of any committee member by 
operation of paragraph (c)(1) of this section, the remaining qualified 
committee members, if constituting a quorum with the disqualified 
committee members, may exercise, by majority vote, all the powers of the 
committee with respect to the matter under consideration. Where all of 
the committee members are disqualified, the matter shall be decided by 
the board of directors.
    (e) Administration. (1) A corporate credit union shall be under the 
direction and control of its board of directors. While the board may 
delegate the performance of administrative duties, the board is not 
relieved of its responsibility for their performance. The board may 
employ a chief executive officer who shall have such authority and such 
powers as delegated by the board to conduct business from day to day. 
Such chief executive officer must answer solely to the board of the 
corporate credit union, and may not be an employee of a credit union 
trade association.
    (2) The provisions of Sec. 701.14 of this chapter apply to corporate 
credit unions, except that where ``Regional Director'' is used, read 
``Director of the Office of National Examinations and Supervision.''

[62 FR 12938, Mar. 19, 1997, as amended at 67 FR 65657, Oct. 25, 2002; 
75 FR 64844, Oct. 20, 2010; 80 FR 25938, May 6, 2015]



Sec. 704.15  Audit and reporting requirements.

    (a) Annual reporting requirements--(1) Audited financial statements. 
A corporate credit union must prepare annual financial statements in 
accordance with generally accepted accounting principles (GAAP), which 
must be audited by an independent public accountant in accordance with 
generally accepted auditing standards. The annual financial statements 
and regulatory reports must reflect all material correcting adjustments 
necessary to conform with GAAP that were identified by the corporate 
credit union's independent public accountant.
    (2) Management report. Each corporate credit union must prepare, as 
of the end of the previous calendar year, an annual management report 
that contains the following:
    (i) A statement of management's responsibilities for preparing the 
corporate credit union's annual financial statements, for establishing 
and maintaining an adequate internal control structure and procedures 
for financial reporting, and for complying with laws and regulations 
relating to safety and soundness in the following areas: affiliate 
transactions, legal lending limits, loans to insiders, restrictions on 
capital and share dividends, and regulatory reporting that meets full 
and fair disclosure;
    (ii) An assessment by management of the corporate credit union's 
compliance with such laws and regulations during the past calendar year. 
The assessment must state management's conclusion as to whether the 
corporate credit union has complied with the designated safety and 
soundness laws and regulations during the calendar year and disclose any 
noncompliance with the laws and regulations; and
    (iii) An assessment by management of the effectiveness of the 
corporate credit union's internal control structure and procedures as of 
the end of the past calendar year that must include the following:

[[Page 839]]

    (A) A statement identifying the internal control framework used by 
management to evaluate the effectiveness of the corporate credit union's 
internal control over financial reporting;
    (B) A statement that the assessment included controls over the 
preparation of regulatory financial statements in accordance with 
regulatory reporting instructions including identification of such 
regulatory reporting instructions; and
    (C) A statement expressing management's conclusion as to whether the 
corporate credit union's internal control over financial reporting is 
effective as of the end of the previous calendar year. Management must 
disclose all material weaknesses in internal control over financial 
reporting, if any, that it has identified that have not been remediated 
prior to the calendar year-end. Management may not conclude that the 
corporate credit union's internal control over financial reporting is 
effective if there are one or more material weaknesses.
    (3) Management report signatures. The chief executive officer and 
either the chief accounting officer or chief financial officer of the 
corporate credit union must sign the management report.
    (b) Independent public accountant--(1) Annual audit of financial 
statements. Each corporate credit union must engage an independent 
public accountant to audit and report on its annual financial statements 
in accordance with generally accepted auditing standards. The scope of 
the audit engagement must be sufficient to permit such accountant to 
determine and report whether the financial statements are presented 
fairly and in accordance with GAAP. A corporate credit union must 
provide its independent public accountant with a copy of its most recent 
Call Report and NCUA examination report. It must also provide its 
independent public accountant with copies of any notice that its capital 
category is being changed or reclassified and any correspondence from 
NCUA regarding compliance with this section.
    (2) Internal control over financial reporting. The independent 
public accountant who audits the corporate credit union's financial 
statements must examine, attest to, and report separately on the 
assertion of management concerning the effectiveness of the corporate 
credit union's internal control structure and procedures for financial 
reporting. The attestation and report must be made in accordance with 
generally accepted standards for attestation engagements. The 
accountant's report must not be dated prior to the date of the 
management report and management's assessment of the effectiveness of 
internal control over financial reporting. Notwithstanding the 
requirements set forth in applicable professional standards, the 
accountant's report must include the following:
    (i) A statement identifying the internal control framework used by 
the independent public accountant, which must be the same as the 
internal control framework used by management, to evaluate the 
effectiveness of the corporate credit union's internal control over 
financial reporting;
    (ii) A statement that the independent public accountant's evaluation 
included controls over the preparation of regulatory financial 
statements in accordance with regulatory reporting instructions 
including identification of such regulatory reporting instructions; and
    (iii) A statement expressing the independent public accountant's 
conclusion as to whether the corporate credit union's internal control 
over financial reporting is effective as of the end of the previous 
calendar year. The report must disclose all material weaknesses in 
internal control over financial reporting that the independent public 
accountant has identified that have not been remediated prior to the 
calendar year-end. The independent public accountant may not conclude 
that the corporate credit union's internal control over financial 
reporting is effective if there are one or more material weaknesses.
    (3) Notice by accountant of termination of services. An independent 
public accountant performing an audit under this part who ceases to be 
the accountant for a corporate credit union must notify NCUA in writing 
of such termination within 15 days after the occurrence of such event 
and set forth in

[[Page 840]]

reasonable detail the reasons for such termination.
    (4) Communications with supervisory committee. In addition to the 
requirements for communications with audit committees set forth in 
applicable professional standards, the independent public accountant 
must report the following on a timely basis to the supervisory 
committee:
    (i) All critical accounting policies and practices to be used by the 
corporate credit union;
    (ii) All alternative accounting treatments within GAAP for policies 
and practices related to material items that the independent public 
accountant has discussed with management, including the ramifications of 
the use of such alternative disclosures and treatments, and the 
treatment preferred by the independent public accountant; and
    (iii) Other written communications the independent public accountant 
has provided to management, such as a management letter or schedule of 
unadjusted differences.
    (5) Retention of working papers. The independent public accountant 
must retain the working papers related to the audit of the corporate 
credit union's financial statements and, if applicable, the evaluation 
of the corporate credit union's internal control over financial 
reporting for seven years from the report release date, unless a longer 
period of time is required by law.
    (6) Independence. The independent public accountant must comply with 
the independence standards and interpretations of the American Institute 
of Certified Public Accountants (AICPA).
    (7) Peer reviews and inspection reports. (i) Prior to commencing any 
services for a corporate credit union under this section, the 
independent public accountant must have received a peer review, or be 
enrolled in a peer review program, that meets acceptable guidelines. 
Acceptable peer reviews include peer reviews performed in accordance 
with the AICPA's Peer Review Standards and inspections conducted by the 
Public Company Accounting Oversight Board (PCAOB).
    (ii) Within 15 days of receiving notification that the AICPA has 
accepted a peer review or the PCAOB has issued an inspection report, or 
before commencing any audit under this section, whichever is earlier, 
the independent public accountant must file a copy of the most recent 
peer review report and the public portion of the most recent PCAOB 
inspection report, if any, accompanied by any letters of comments, 
response, and acceptance, with NCUA if the report has not already been 
filed.
    (iii) Within 15 days of the PCAOB making public a previously 
nonpublic portion of an inspection report, the independent public 
accountant must file a copy of the previously nonpublic portion of the 
inspection report with NCUA.
    (c) Filing and notice requirements--(1) Annual Report. Each 
corporate credit union must, no later than 180 days after the end of the 
calendar year, file an Annual Report with NCUA consisting of the 
following documents:
    (i) The audited comparative annual financial statements;
    (ii) The independent public accountant's report on the audited 
financial statements;
    (iii) The management report; and
    (iv) The independent public accountant's attestation report on 
management's assessment concerning the corporate credit union's internal 
control structure and procedures for financial reporting.
    (2) Public availability. The annual report in paragraph (c)(1) of 
this section will be made available by NCUA for public inspection.
    (3) Independent public accountant's letters and reports. Each 
corporate credit union must file with NCUA a copy of any management 
letter or other report issued by its independent public accountant with 
respect to such corporate credit union and the services provided by such 
accountant pursuant to this part (except for the independent public 
accountant's reports that are included in the Annual Report) within 15 
days after receipt by the corporate credit union. Such reports include, 
but are not limited to:
    (i) Any written communication regarding matters that are required to 
be communicated to the supervisory committee (for example, critical 
accounting policies, alternative accounting

[[Page 841]]

treatments discussed with management, and any schedule of unadjusted 
differences); and
    (ii) Any written communication of significant deficiencies and 
material weaknesses in internal control required by the AICPA's auditing 
standards.
    (4) Notice of engagement or change of accountants. Each corporate 
credit union that engages an independent public accountant, or that 
loses an independent public accountant through dismissal or resignation, 
must notify NCUA within 15 days after the engagement, dismissal, or 
resignation. The corporate credit union must include with the notice a 
reasonably detailed statement of the reasons for any dismissal or 
resignation. The corporate credit union must also provide a copy of the 
notice to the independent public accountant at the same time the notice 
is filed with NCUA.
    (5) Notification of late filing. A corporate credit union that is 
unable to timely file any part of its Annual Report or any other report 
or notice required by this paragraph (c) must submit a written notice of 
late filing to NCUA. The notice must disclose the corporate credit 
union's inability to timely file all or specified portions of its Annual 
Report or other report or notice and the reasons therefore in reasonable 
detail. The late filing notice must also state the date by which the 
report or notice will be filed. The written notice must be filed with 
NCUA before the deadline for filing the Annual Report or any other 
report or notice, as appropriate. NCUA may take appropriate enforcement 
action for failure to timely file any report, or notice of late filing, 
required by this section.
    (6) Report to Members. A corporate credit union must submit a 
preliminary Annual Report to the membership at the next calendar year's 
annual meeting.
    (d) Supervisory committee--(1) Composition. Each corporate credit 
union must establish a supervisory committee, all of whose members must 
be independent. A committee member is independent if:
    (i) Neither the committee member, nor any immediate family member of 
the committee member, is supervised by, or has any material business or 
professional relationship with, the chief executive officer (CEO) of the 
corporate credit union, or anyone directly or indirectly supervised by 
the CEO, and
    (ii) Neither the committee member, nor any immediate family member 
of the committee member, has had any of the relationships described in 
paragraph (d)(1)(i) for at least the past three years.
    (2) Duties. In addition to any duties specified under the corporate 
credit union's bylaws and these regulations, the duties of the credit 
union's supervisory committee include the appointment, compensation, and 
oversight of the independent public accountant who performs services 
required under this section and reviewing with management and the 
independent public accountant the basis for all the reports prepared and 
issued under this section. The supervisory committee must submit the 
audited comparative annual financial statements and the independent 
public accountant's report on those statements to the corporate credit 
union's board of directors.
    (3) Independent public accountant engagement letters. (i) In 
performing its duties with respect to the appointment of the corporate 
credit union's independent public accountant, the supervisory committee 
must ensure that engagement letters and/or any related agreements with 
the independent public accountant for services to be performed under 
this section:
    (A) Obligate the independent public accountant to comply with the 
requirements of paragraph (b) of this section (including, but not 
limited to, the notice of termination of services, communications with 
the supervisory committee, and notifications of peer reviews and 
inspection reports); and
    (B) Do not contain any limitation of liability provisions that:
    (1) Indemnify the independent public accountant against claims made 
by third parties;
    (2) Hold harmless or release the independent public accountant from 
liability for claims or potential claims that might be asserted by the 
client corporate credit union, other than claims for punitive damages; 
or

[[Page 842]]

    (3) Limit the remedies available to the client corporate credit 
union.
    (ii) Engagement letters may include alternative dispute resolution 
agreements and jury trial waiver provisions provided that the letters do 
not incorporate any limitation of liability provisions set forth in 
paragraph (d)(3)(i)(B) of this section.
    (4) Outside counsel. The supervisory committee of any corporate 
credit union must, when deemed necessary by the committee, have access 
to its own outside counsel.
    (e) Internal audit. A corporate credit union with average daily 
assets in excess of $400 million for the preceding calendar year, or as 
ordered by NCUA, must employ or contract, on a full- or part-time basis, 
the services of an internal auditor. The internal auditor's 
responsibilities will, at a minimum, comply with the Standards and 
Professional Practices of Internal Auditing, as established by the 
Institute of Internal Auditors. The internal auditor will report 
directly to the chair of the corporate credit union's supervisory 
committee, who may delegate supervision of the internal auditor's daily 
activities to the chief executive officer of the corporate credit union. 
The internal auditor's reports, findings, and recommendations will be in 
writing and presented to the supervisory committee no less than 
quarterly, and will be provided upon request to the IPA and NCUA.

[76 FR 23868, Apr. 29, 2011, as amended at 80 FR 25939, May 6, 2015]



Sec. 704.16  Contracts/written agreements.

    Services, facilities, personnel, or equipment shared with any party 
shall be supported by a written contract, with the duties and 
responsibilities of each party specified and the allocation of service 
fee/expenses fully supported and documented.



Sec. 704.17  State-chartered corporate credit unions.

    (a) This part does not expand the powers and authorities of any 
state-chartered corporate credit union, beyond those powers and 
authorities provided under the laws of the state in which it was 
chartered.
    (b) A state-chartered corporate credit union that is not insured by 
the NCUSIF, but that receives funds from federally insured credit 
unions, is considered an ``institution-affiliated party'' within the 
meaning of Section 206(r) of the Federal Credit Union Act, 12 U.S.C. 
1786(r).
    (c) NCUA will notify, consult with, and provide explanation to the 
appropriate state supervisory authority before taking administrative 
action against a state-chartered corporate credit union.



Sec. 704.18  Fidelity bond coverage.

    (a) Scope. This section provides the fidelity bond requirements for 
employees and officials in corporate credit unions.
    (b) Review of coverage. The board of directors of each corporate 
credit union shall, at least annually, carefully review the bond 
coverage in force to determine its adequacy in relation to risk exposure 
and to the minimum requirements in this section.
    (c) Minimum coverage; approved forms. Every corporate credit union 
will maintain bond coverage with a company holding a certificate of 
authority from the Secretary of the Treasury. All bond forms, and any 
riders and endorsements which limit the coverage provided by approved 
bond forms, must receive the prior written approval of NCUA. Fidelity 
bonds must provide coverage for the fraud and dishonesty of all 
employees, directors, officers, and supervisory and credit committee 
members. Notwithstanding the foregoing, all bonds must include a 
provision, in a form approved by NCUA, requiring written notification by 
surety to NCUA:
    (1) When the bond of a credit union is terminated in its entirety;
    (2) When bond coverage is terminated, by issuance of a written 
notice, on an employee, director, officer, supervisory or credit 
committee member; or
    (3) When a deductible is increased above permissible limits. Said 
notification shall be sent to NCUA and shall include a brief statement 
of cause for termination or increase.
    (d) Minimum coverage amounts. (1) The minimum amount of bond 
coverage

[[Page 843]]

will be computed based on the corporate credit union's daily average net 
assets for the preceding calendar year. The following table lists the 
minimum requirements:

------------------------------------------------------------------------
                                                               Minimum
                  Daily average net assets                       bond
                                                              (million)
------------------------------------------------------------------------
Less than $50 million......................................         $1.0
$50-$99 million............................................          2.0
$100-$499 million..........................................          4.0
$500-$999 million..........................................          6.0
$1.0-$1.999 billion........................................          8.0
$2.0-$4.999 billion........................................         10.0
$5.0-$9.999 billion........................................         15.0
$10.0-$24.999 billion......................................         20.0
$25.0 billion plus.........................................         25.0
------------------------------------------------------------------------

    (2) It is the duty of the board of directors of each corporate 
credit union to provide adequate protection to meet its unique 
circumstances by obtaining, when necessary, bond coverage in excess of 
the minimums in the table in paragraph (d)(1) of this section.
    (e) Deductibles. (1) The maximum amount of deductibles allowed are 
based on the corporate credit union's leverage ratio. The following 
table sets out the maximum deductibles, except that in each category the 
maximum deductible shall be $5 million:

------------------------------------------------------------------------
             Leverage ratio                     Maximum deductible
------------------------------------------------------------------------
Less than 1.0 percent...................  7.5 percent of Tier 1 capital.
1.0-1.74 percent........................  10.0 percent of Tier 1
                                           capital.
1.75-2.24 percent.......................  12.0 percent of Tier 1
                                           capital.
Greater than 2.25 percent...............  15.0 percent of Tier 1
                                           capital.
------------------------------------------------------------------------

    (2) A deductible may be applied separately to one or more insuring 
clauses in a blanket bond. Deductibles in excess of those showing in 
this section must have the written approval of NCUA at least 30 calendar 
days prior to the effective date of the deductibles.
    (f) Additional coverage. NCUA may require additional coverage for 
any corporate credit union when, in the opinion of NCUA, current 
coverage is insufficient. The board of directors of the corporate credit 
union must obtain additional coverage within 30 calendar days after the 
date of written notice from NCUA.

[62 FR 12938, Mar. 19, 1997, as amended at 67 FR 65657, Oct. 25, 2002; 
76 FR 79533, Dec. 22, 2011; 80 FR 25939, May 6, 2015]



Sec. 704.19  Disclosure of executive compensation.

    (a) Annual disclosure. A corporate credit union must annually 
prepare and maintain a disclosure of the dollar amount of compensation 
paid to its most highly compensated employees, including compensation 
from any corporate CUSO in which the corporate has invested or made a 
loan, in accordance with the following schedule:
    (1) For corporate credit unions with forty-one or more full time 
employees, disclosure is required of the compensation paid to the five 
most highly compensated employees;
    (2) For corporate credit unions with between thirty and forty-one 
full time employees, disclosure is required of the compensation paid to 
the four most highly compensated employees;
    (3) For corporate credit unions with thirty or fewer full time 
employees, disclosure is required of the compensation paid to the three 
most highly compensated employees; and
    (4) In all cases, compensation paid to the corporate credit union's 
chief executive officer must also be disclosed, if the chief executive 
officer is not already included among the most highly compensated 
employees described in paragraphs (a)(1) through (a)(3) of this section.
    (b) Availability of disclosure. Any member may obtain a copy of the 
most current disclosure, and all disclosures for the previous three 
years, on request made in person or in writing. The corporate credit 
union must provide the disclosure(s), at no cost to the member, within 
five business days of receiving the request. In addition, the corporate 
must distribute the most current disclosure to all its members at least 
once a year, either in the annual report or in some other manner of the 
corporate's choosing.
    (c) Supplemental information. In providing the disclosure required 
by this section, a corporate credit union may also provide supplementary 
information to put the disclosure in context, for example, salary 
surveys, a discussion of compensation in relation to other credit union 
expenses, or compensation information from similarly sized credit unions 
or financial institutions.

[[Page 844]]

    (d) Special rule for mergers. With respect to any merger involving a 
corporate credit union that would result in a material increase in 
compensation, i.e., an increase of more than 15 percent or $10,000, 
whichever is greater, for any senior executive officer or director of 
the merging corporate, the corporate must:
    (1) Describe the compensation arrangement in the merger plan 
documents submitted to NCUA for approval of the merger, pursuant to 
Sec. 708b of this part; and
    (2) In the case of any federally chartered corporate credit union, 
describe the compensation arrangement in the materials provided to the 
membership of the merging credit union before the member vote on 
approving the merger.

[75 FR 64844, Oct. 20, 2010, as amended at 76 FR 23871, Apr. 29, 2011; 
76 FR 79534, Dec. 22, 2011]



Sec. 704.21  Enterprise risk management.

    (a) A corporate credit union must develop and follow an enterprise 
risk management policy.
    (b) The board of directors of a corporate credit union must 
establish an enterprise risk management committee (ERMC) responsible for 
reviewing the enterprise-wide risk management practices of the corporate 
credit union. The ERMC must report at least quarterly to the board of 
directors.
    (c) The ERMC must include at least one independent risk management 
expert. The risk management expert must have at least five years of 
experience in identifying, assessing, and managing risk exposures. This 
experience must be commensurate with the size of the corporate credit 
union and the complexity of its operations. The board of directors may 
hire the independent risk management expert to work full-time or part-
time for the ERMC or as a consultant for the ERMC.
    (d) A risk management expert qualifies as independent if:
    (1) The expert reports to the ERMC and to the corporate credit 
union's board of directors;
    (2) Neither the expert, nor any immediate family member of the 
expert, is supervised by, or has any material business or professional 
relationship with, the chief executive officer (CEO) of the corporate 
credit union, or anyone directly or indirectly supervised by the CEO; 
and
    (3) Neither the expert, nor any immediate family member of the 
expert, has had any of the relationships described in paragraph (d)(2) 
of this section for at least the past three years.
    (e) The risk management expert is not required to be a director of 
the corporate credit union.

[76 FR 23871, Apr. 29, 2011, as amended at 80 FR 25939, May 6, 2015]



Sec. 704.22  Membership fees.

    (a) A corporate credit union may charge its members a membership 
fee. The fee may be one-time or periodic.
    (b) The corporate credit union must calculate the fee uniformly for 
all members as a percentage of each member's assets, except that the 
corporate credit union may reduce the amount of the fee for members that 
have contributed capital to the corporate. Any reduction must be 
proportional to the amount of the member's nondepleted contributed 
capital.
    (c) The corporate credit union must give its members at least six 
months advance notice of any initial or new fee, including terms and 
conditions, before invoicing the fee. For a recurring fee, the corporate 
credit union must also give six months notice of any material change to 
the terms and conditions of the fee.
    (d) The corporate credit union may terminate the membership of any 
credit union that fails to pay the fee in full within 60 days of the 
invoice date.

[76 FR 23871, Apr. 29, 2011]



   Sec. Appendix A to Part 704--Capital Prioritization and Model Forms

                 Part I--Optional Capital Prioritization

    Notwithstanding any other provision in this chapter, a corporate 
credit union, at its option, may determine that capital contributed to 
the corporate on or after January 18, 2011 will have priority, for 
purposes of availability to absorb losses and payout in liquidation, 
over capital contributed to the corporate before that date. The board of 
directors at a corporate credit union that desires to make this 
determination must:
    (a) On or before January 18, 2011, adopt a resolution implementing 
its determination.

[[Page 845]]

    (b) Inform the credit union's members and NCUA, in writing and as 
soon as practicable after adoption of the resolution, of the contents of 
the board resolution.
    (c) Ensure the credit union uses the appropriate initial and 
periodic Model Form disclosures in Part II below.

                          Part II--Model Forms

    Part II contains model forms intended for use by corporate credit 
unions to aid in compliance with the capital disclosure requirements of 
Sec. 704.3 and Part I of this Appendix.

                              Model Form A

              Terms and Conditions of Nonperpetual Capital

    Note: This form is for use on and after October 20, 2011 in the 
circumstances where the credit union has determined NOT to give newly 
issued capital priority over older capital as described in Part I of 
this Appendix. Also, corporate credit unions should ensure that existing 
membership capital accounts that do not meet the qualifying conditions 
for nonperpetual capital are modified so as to meet those conditions.

          Terms and Conditions of Nonperpetual Capital Account

    (1) A nonperpetual capital account is not subject to share insurance 
coverage by the NCUSIF or other deposit insurer.
    (2) A nonperpetual capital account is not releasable due solely to 
the merger, charter conversion or liquidation of the member credit 
union. In the event of a merger, the nonperpetual capital account 
transfers to the continuing credit union. In the event of a charter 
conversion, the nonperpetual capital account transfers to the new 
institution. In the event of liquidation, the nonperpetual capital 
account may be released to facilitate the payout of shares with the 
prior written approval of NCUA.
    (3) If the nonperpetual capital account is a notice account, a 
member credit union may withdraw the nonperpetual capital with a minimum 
of five years' notice. If the nonperpetual capital account is a term 
instrument it may be redeemed only at maturity. The corporate credit 
union may not redeem any account prior to the expiration of the notice 
period, or maturity, without the prior written approval of the NCUA.
    (4) Nonperpetual capital cannot be used to pledge borrowings.
    (5) Nonperpetual capital is available to cover losses that exceed 
retained earnings and perpetual contributed capital. Any such losses 
will be distributed pro rata among nonperpetual capital account holders 
at the time the loss is realized. To the extent that NCA funds are used 
to cover losses, the corporate credit union is prohibited from restoring 
or replenishing the affected accounts under any circumstances.
    (6) Where the corporate credit union is liquidated, nonperpetual 
capital accounts are payable only after satisfaction of all liabilities 
of the liquidation estate including uninsured obligations to 
shareholders and the NCUSIF. However, nonperpetual capital that is used 
to cover losses in a calendar year previous to the year of liquidation 
has no claim against the liquidation estate.
    (7) Where the corporate credit union is merged into another 
corporate credit union, the nonperpetual capital account will transfer 
to the continuing corporate credit union. For notice accounts, the five-
year notice period for withdrawal of the nonperpetual capital account 
will remain in effect. For term accounts, the original term will remain 
in effect.
    (8) If a term certificate--: The nonperpetual capital account is a 
term certificate that will mature on--(date)--(insert date with a 
minimum five-year original maturity).
    I have read the above terms and conditions and I understand them.
    I further agree to maintain in the credit union's files the annual 
notice of terms and conditions of the nonperpetual capital account.
    The notice form must be signed by either all of the directors of the 
member credit union or, if authorized by board resolution, the chair and 
secretary of the board of the credit union.
    The annual disclosure notice form must be signed by the chair of the 
corporate credit union. The chair must then sign a statement that 
certifies that the notice has been sent to member credit unions with 
nonperpetual capital accounts. The certification must be maintained in 
the corporate credit union's files and be available for examiner review.

                              Model Form B

              Terms and Conditions of Nonperpetual Capital

    Note: This form is for use on and after October 20, 2011, in the 
circumstances where the corporate credit union has determined that it 
will give newly issued capital priority over older capital as described 
in Part I of this Appendix.

          Terms and Conditions of Nonperpetual Capital Account

    (1) A nonperpetual capital account is not subject to share insurance 
coverage by the NCUSIF or other deposit insurer.
    (2) A nonperpetual capital account is not releasable due solely to 
the merger, charter conversion or liquidation of the member credit 
union. In the event of a merger, the nonperpetual capital account 
transfers to the continuing credit union. In the event of

[[Page 846]]

a charter conversion, the nonperpetual capital account transfers to the 
new institution. In the event of liquidation, the nonperpetual capital 
account may be released to facilitate the payout of shares with the 
prior written approval of NCUA.
    (3) If the nonperpetual capital account is a notice account, a 
member credit union may withdraw the nonperpetual capital with a minimum 
of five years' notice. If the nonperpetual capital account is a term 
instrument it may be redeemed only at maturity. The corporate credit 
union may not redeem any account prior to the expiration of the notice 
period, or maturity, without the prior written approval of the NCUA.
    (4) Nonperpetual capital cannot be used to pledge borrowings.
    (5)(a) Nonperpetual capital that is issued on or after January 18, 
2011 is available to cover losses that exceed retained earnings, all 
contributed capital issued before January 18, 2011, and perpetual 
capital issued on or after January 18, 2011. Any such losses will be 
distributed pro rata, at the time the loss is realized, among 
nonperpetual capital account holders with accounts issued on or after 
January 18, 2011. To the extent that NCA funds are used to cover losses, 
the corporate credit union is prohibited from restoring or replenishing 
the affected accounts under any circumstances.
    (b) Nonperpetual capital that is issued before January 18, 2011, is 
available to cover losses that exceed retained earnings and perpetual 
capital issued before January 18, 2011. Any such losses will be 
distributed pro rata, at the time the loss is realized, among 
nonperpetual capital account holders with accounts issued before January 
18, 2011. To the extent that NCA funds are used to cover losses, the 
corporate credit union is prohibited from restoring or replenishing the 
affected accounts under any circumstances.
    (c) Attached to this disclosure is a statement that describes the 
amount of NCA the credit union has with the corporate credit union in 
each of the categories described in paragraphs (5)(a) and (5)(b) above.
    (6) If the corporate credit union is liquidated:
    (a) Nonperpetual capital accounts issued on or after January 18, 
2011 are payable only after satisfaction of all liabilities of the 
liquidation estate including uninsured obligations to shareholders and 
the NCUSIF, but not including contributed capital accounts issued before 
January 18, 2011 or perpetual capital accounts issued on or after 
January 18, 2011. However, nonperpetual capital that is used to cover 
losses in a calendar year previous to the year of liquidation has no 
claim against the liquidation estate.
    (b) Nonperpetual capital accounts issued before January 18, 2011 are 
payable only after satisfaction of all liabilities of the liquidation 
estate including uninsured obligations to shareholders and the NCUSIF, 
but not including perpetual capital accounts issued before January 18, 
2011. However, nonperpetual capital that is used to cover losses in a 
calendar year previous to the year of liquidation has no claim against 
the liquidation estate.
    (7) Where the corporate credit union is merged into another 
corporate credit union, the nonperpetual capital account will transfer 
to the continuing corporate credit union. For notice accounts, the five-
year notice period for withdrawal of the nonperpetual capital account 
will remain in effect. For term accounts, the original term will remain 
in effect.
    (8) If a term certificate--: The nonperpetual capital account is a 
term certificate that will mature on--(date)--(insert date with a 
minimum five-year original maturity).
    I have read the above terms and conditions and I understand them.
    I further agree to maintain in the credit union's files the annual 
notice of terms and conditions of the nonperpetual capital account.
    The notice form must be signed by either all of the directors of the 
member credit union or, if authorized by board resolution, the chair and 
secretary of the board of the credit union.
    The annual disclosure notice form must be signed by the chair of the 
corporate credit union. The chair must then sign a statement that 
certifies that the notice has been sent to member credit unions with 
nonperpetual capital accounts. The certification must be maintained in 
the corporate credit union's files and be available for examiner review.

                              Model Form C

          Terms and Conditions of Perpetual Contributed Capital

    Note: This form is for use on and after October 20, 2011 in the 
circumstances where the credit union has determined NOT to give newly 
issued capital priority over older capital as described in Part I of 
this Appendix.
    (1) A perpetual contributed capital account is not subject to share 
insurance coverage by the NCUSIF or other deposit insurer.
    (2) A perpetual contributed capital account is not releasable due 
solely to the merger, charter conversion or liquidation of the member 
credit union. In the event of a merger, the perpetual contributed 
capital account transfers to the continuing credit union. In the event 
of a charter conversion, the perpetual contributed capital account 
transfers to the new institution. In the event of liquidation, the 
perpetual contributed capital account may be released to facilitate the 
payout of shares with the prior written approval of NCUA.

[[Page 847]]

    (3) The funds are callable only at the option of the corporate 
credit union and only if the corporate credit union meets its minimum 
required capital and NEV ratios after the funds are called. The 
corporate must also obtain the prior, written approval of the NCUA 
before releasing any perpetual contributed capital funds.
    (4) Perpetual contributed capital cannot be used to pledge 
borrowings.
    (5) Perpetual contributed capital is perpetual maturity and 
noncumulative dividend.
    (6) Perpetual contributed capital is available to cover losses that 
exceed retained earnings. Any such losses must be distributed pro rata 
among perpetual contributed capital holders at the time the loss is 
realized. To the extent that perpetual contributed capital funds are 
used to cover losses, the corporate credit union is prohibited from 
restoring or replenishing the affected accounts under any circumstances.
    (7) Where the corporate credit union is liquidated, perpetual 
contributed capital accounts are payable only after satisfaction of all 
liabilities of the liquidation estate including uninsured obligations to 
shareholders and the NCUSIF, and nonperpetual capital holders. However, 
perpetual contributed capital that is used to cover losses in a calendar 
year previous to the year of liquidation has no claim against the 
liquidation estate.
    I have read the above terms and conditions and I understand them. I 
further agree to maintain in the credit union's files the annual notice 
of terms and conditions of the perpetual contributed capital instrument.
    The notice form must be signed by either all of the directors of the 
credit union or, if authorized by board resolution, the chair and 
secretary of the board of the credit union.

                              Model Form D

          Terms and Conditions of Perpetual Contributed Capital

    Note: This form is for use on and after October 20, 2011, in the 
circumstances where the corporate credit union has determined that it 
will give newly issued capital priority over older capital as described 
in Part I of this Appendix.
    (1) A perpetual contributed capital account is not subject to share 
insurance coverage by the NCUSIF or other deposit insurer.
    (2) A perpetual contributed capital account is not releasable due 
solely to the merger, charter conversion or liquidation of the member 
credit union. In the event of a merger, the perpetual contributed 
capital account transfers to the continuing credit union. In the event 
of a charter conversion, the perpetual contributed capital account 
transfers to the new institution. In the event of liquidation, the 
perpetual contributed capital account may be released to facilitate the 
payout of shares with the prior written approval of NCUA.
    (3) The funds are callable only at the option of the corporate 
credit union and only if the corporate credit union meets its minimum 
required capital and NEV ratios after the funds are called. The 
corporate must also obtain the prior, written approval of the NCUA 
before releasing any perpetual contributed capital funds.
    (4) Perpetual contributed capital cannot be used to pledge 
borrowings.
    (5) Perpetual contributed capital is perpetual maturity and 
noncumulative dividend.
    (6) Availability to cover losses.
    (a) Perpetual contributed capital issued before January 18, 2011 is 
available to cover losses that exceed retained earnings. Any such losses 
must be distributed pro rata, at the time the loss is realized, among 
holders of perpetual contributed capital issued before January 18, 2011. 
To the extent that perpetual contributed capital funds are used to cover 
losses, the corporate credit union is prohibited from restoring or 
replenishing the affected accounts under any circumstances.
    (b) Perpetual contributed capital issued on or after January 18, 
2011 is available to cover losses that exceed retained earnings and any 
contributed capital issued before January 18, 2011. Any such losses must 
be distributed pro rata, at the time the loss is realized, among holders 
of perpetual contributed capital issued on or after January 18, 2011. To 
the extent that perpetual contributed capital funds are used to cover 
losses, the corporate credit union is prohibited from restoring or 
replenishing the affected accounts under any circumstances.
    (c) Attached to this disclosure is a statement that describes the 
amount of perpetual capital the credit union has with the corporate 
credit union in each of the categories described in paragraphs (6)(a) 
and (6)(b) above.
    (7) Where the corporate credit union is liquidated:
    (a) Perpetual contributed capital accounts issued on or after 
January 18, 2011 are payable only after satisfaction of all liabilities 
of the liquidation estate including uninsured obligations to 
shareholders and the NCUSIF, but not including contributed capital 
accounts issued before January 18, 2011. However, perpetual contributed 
capital that is used to cover losses in a calendar year previous to the 
year of liquidation has no claim against the liquidation estate.
    (b) Perpetual contributed capital accounts issued before January 18, 
2011 are payable only after satisfaction of all liabilities of the 
liquidation estate including uninsured obligations to shareholders and 
the NCUSIF, nonperpetual capital accounts issued before January 18, 
2011, and all contributed capital

[[Page 848]]

accounts issued on or after January 18, 2011. However, perpetual 
contributed capital that is used to cover losses in a calendar year 
previous to the year of liquidation has no claim against the liquidation 
estate.
    I have read the above terms and conditions and I understand them. I 
further agree to maintain in the credit union's files the annual notice 
of terms and conditions of the perpetual contributed capital instrument.
    The notice form must be signed by either all of the directors of the 
credit union or, if authorized by board resolution, the chair and 
secretary of the board of the credit union.

[75 FR 64848, Oct. 20, 2010, as amended at 75 FR 71528, Nov. 24, 2010; 
76 FR 79534, Dec. 22, 2011; 80 FR 25939, May 6, 2015]



   Sec. Appendix B to Part 704--Expanded Authorities and Requirements

    A corporate credit union may obtain all or part of the expanded 
authorities contained in this appendix if it meets the applicable 
requirements of part 704 and appendix B, fulfills additional management, 
infrastructure, and asset and liability requirements, and receives 
NCUA's written approval. Additional guidance is set forth in the NCUA 
publication Guidelines for Submission of Requests for Expanded 
Authority.
    A corporate credit union seeking expanded authorities must submit to 
NCUA a self-assessment plan supporting its request. A corporate credit 
union may adopt expanded authorities when NCUA has provided final 
approval. If NCUA denies a request for expanded authorities, it will 
advise the corporate credit union of the reason(s) for the denial and 
what it must do to resubmit its request. NCUA may revoke these expanded 
authorities at any time if an analysis indicates a significant 
deficiency. NCUA will notify the corporate credit union in writing of 
the identified deficiency. A corporate credit union may request, in 
writing, reinstatement of the revoked authorities by providing a self-
assessment plan detailing how it has corrected the deficiency.
    A state chartered corporate credit union may not exercise any 
expanded authority that exceeds the powers and authorities provided for 
under its state laws. Accordingly, requests by state chartered corporate 
credit unions for expansions under this part must be approved by the 
state regulator before being submitted to NCUA.

                           Minimum Requirement

    In order to participate in any of the authorities set forth in Base-
Plus, Part I, Part II, Part III, or Part IV of this Appendix, a 
corporate credit union must evaluate monthly, including once on the last 
day of the month, the changes in NEV, NEV ratio, NII, WAL, and duration 
as required by paragraphs (d)(1)(i), (e), (f), (g), and (i) of 
Sec. 704.8.

                                Base-Plus

    A corporate that has met the requirements for this Base-plus 
authority may, in performing the rate stress tests set forth in 
704.8(d)(1)(i), allow its NEV to decline as much as 20 percent.

                                 Part I

    (a) A corporate credit union that has met all the requirements 
established by NCUA for this Part I, including a minimum leverage ratio 
of at least six percent, may:
    (1) Purchase an investment after conducting and documenting an 
analysis that reasonably concludes the investment is at least investment 
grade;
    (2) Engage in short sales of permissible investments to reduce 
interest rate risk;
    (3) Purchase principal only (PO) stripped mortgage-backed securities 
to reduce interest rate risk; and
    (4) Enter into a dollar roll transaction.
    (b) In performing the rate stress tests set forth in Sec. 704.8(d), 
the NEV of a corporate credit union that has met the requirements of 
this Part I may decline as much as:
    (1) 20 percent;
    (2) 28 percent if the corporate credit union has a seven percent 
minimum leverage ratio and is specifically approved by NCUA; or
    (3) 35 percent if the corporate credit union has an eight percent 
minimum leverage ratio and is specifically approved by NCUA.
    (c) The maximum aggregate amount in unsecured loans and lines of 
credit to any one member credit union, excluding pass-through and 
guaranteed loans from the CLF and the NCUSIF, must not exceed 100 
percent of the corporate credit union's total capital. The board of 
directors must establish the limit, as a percent of the corporate credit 
union's total capital plus pledged shares, for secured loans and lines 
of credit.
    (d) The aggregate total of investments purchased under the authority 
of Part I (a)(1) and Part I (a)(2) may not exceed the lower of 500 
percent of the corporate credit union's total capital or 25 percent of 
assets.

                                 Part II

    (a) A corporate credit union that has met the requirements of Part I 
of this Appendix and the additional requirements established by NCUA for 
Part II may invest in:
    (1) Debt obligations of a foreign country;
    (2) Deposits and debt obligations of foreign banks or obligations 
guaranteed by these banks;
    (3) Marketable debt obligations of foreign corporations. This 
authority does not apply to debt obligations that are convertible into 
the stock of the corporation; and
    (4) Foreign issued asset-backed securities.

[[Page 849]]

    (b) All foreign investments are subject to the following 
requirements:
    (1) Investments must be made pursuant to an explicit policy 
established by the corporate credit union's board of directors. Before 
purchasing an investment, the corporate credit union must conduct and 
document an analysis that reasonably concludes the foreign issue or 
issuer has no more than a minimal amount of credit risk;
    (2) For each approved foreign bank line, the corporate credit union 
must identify the specific banking centers and branches to which it will 
lend funds;
    (3) Obligations of any single foreign obligor may not exceed 25 
percent of total capital or $5 million, whichever is greater; and
    (4) Obligations in any single foreign country may not exceed 250 
percent of capital.

                                Part III

    (a) A corporate credit union that has met the requirements 
established by NCUA for this Part III may enter into derivative 
transactions specifically approved by NCUA to:
    (1) Create structured products;
    (2) Mitigate interest rate risk and credit risk on its own balance 
sheet; and
    (3) Hedge the balance sheets of its members.
    (b) Credit Quality:
    All derivative transactions are subject to the following 
requirements:
    (1) If the intended counterparty is domestic, the counterparty must 
meet minimum credit quality standards as established by the corporate's 
board of directors;
    (2) If the intended counterparty is foreign, the corporate must have 
Part II expanded authority and the counterparty must meet minimum credit 
quality standards as established by the corporate's board of directors;
    (3) The corporate must identify the criteria relied upon to 
determine that the counterparty meets the credit quality requirements of 
this part at the time the transaction is entered into and monitor those 
criteria for as long as the contract remains open; and
    (4) The corporate must comply with Sec. 704.10 of this part if the 
credit quality of the counterparty deteriorates below the minimum credit 
quality standards established by the corporate's board of directors.

                                 Part IV

    A corporate credit union that has met all the requirements 
established by NCUA for this Part IV may participate in loans with 
member natural person credit unions as approved by the NCUA and subject 
to the following:
    (a) The maximum aggregate amount of participation loans with any one 
member credit union must not exceed 25 percent of capital; and
    (b) The maximum aggregate amount of participation loans with all 
member credit unions will be determined on a case-by-case basis by the 
NCUA.

[75 FR 64851, Oct. 20, 2010, as amended at 77 FR 74111, Dec. 13, 2012; 
80 FR 25939, May 6, 2015]



   Sec. Appendix C to Part 704--Risk-Based Capital Credit Risk-Weight 
                               Categories

                            Table of Contents

 I. Introduction
 (a) Scope
 (b) Definitions
 II. Risk-Weightings
 (a) On-balance sheet assets
 (b) Off-balance sheet activities
 (c) Recourse obligations, direct credit substitutes, and certain other 
          positions
 (d) Collateral

                          Part I: Introduction

                                (a) Scope

    (1) This Appendix explains how a corporate credit union must compute 
its risk-weighted assets for purposes of determining its capital ratios.
    (2) Risk-weighted assets equal risk-weighted on-balance sheet assets 
(computed under Section II(a) of this Appendix), plus risk-weighted off-
balance sheet activities (computed under Section II(b) of this 
Appendix), plus risk-weighted recourse obligations, direct credit 
substitutes, and certain other positions (computed under Section II(c) 
of this Appendix).
    (3) Assets not included (i.e., deducted from capital) for purposes 
of calculating capital under part 704 are not included in calculating 
risk-weighted assets.
    (4) Although this Appendix describes risk-weightings for various 
assets and activities, this Appendix does not provide authority for 
corporate credit unions to invest in or purchase any particular type of 
asset or to engage in any particular type of activity. A corporate 
credit union must have other identifiable authority for any investment 
it makes or activity it engages in. So, for example, this Appendix 
describes risk weightings for subordinated securities. Section 704.5, 
however, prohibits corporate credit unions from investing in 
subordinated securities, and so a corporate credit union cannot invest 
in subordinated securities.

                             (b) Definitions

    The following definitions apply to this Appendix. Additional 
definitions, applicable to this entire part, are located in Sec. 704.2 
of this part.
    Cash items in the process of collection means checks or drafts in 
the process of collection

[[Page 850]]

that are drawn on another depository institution, including a central 
bank, and that are payable immediately upon presentation; U.S. 
Government checks that are drawn on the United States Treasury or any 
other U.S. Government or Government-sponsored agency and that are 
payable immediately upon presentation; broker's security drafts and 
commodity or bill-of-lading drafts payable immediately upon 
presentation; and unposted debits.
    Commitment means any arrangement that obligates a corporate credit 
union to:
    (1) Purchase loans or securities;
    (2) Extend credit in the form of loans or leases, participations in 
loans or leases, overdraft facilities, revolving credit facilities, home 
equity lines of credit, eligible ABCP liquidity facilities, or similar 
transactions.
    Depository institution means a financial institution that engages in 
the business of providing financial services; that is recognized as a 
bank or a credit union by the supervisory or monetary authorities of the 
country of its incorporation and the country of its principal banking 
operations; that receives deposits to a substantial extent in the 
regular course of business; and that has the power to accept demand 
deposits. In the United States, this definition encompasses all 
federally insured offices of commercial banks, mutual and stock savings 
banks, savings or building and loan associations (stock and mutual), 
cooperative banks, credit unions, and international banking facilities 
of domestic depository institutions.
    Bank holding companies and savings and loan holding companies are 
excluded from this definition. For the purposes of assigning risk-
weights, the differentiation between OECD depository institutions and 
non-OECD depository institutions is based on the country of 
incorporation. Claims on branches and agencies of foreign banks located 
in the United States are to be categorized on the basis of the parent 
bank's country of incorporation.
    Direct credit substitute means an arrangement in which a corporate 
credit union assumes, in form or in substance, credit risk associated 
with an on-balance sheet or off-balance sheet asset or exposure that was 
not previously owned by the corporate credit union (third-party asset) 
and the risk assumed by the corporate credit union exceeds the pro rata 
share of the corporate credit union's interest in the third-party asset. 
If a corporate credit union has no claim on the third-party asset, then 
the corporate credit union's assumption of any credit risk is a direct 
credit substitute. Direct credit substitutes include:
    (1) Financial standby letters of credit that support financial 
claims on a third party that exceed a corporate credit union's pro rata 
share in the financial claim;
    (2) Guarantees, surety arrangements, credit derivatives, and similar 
instruments backing financial claims that exceed a corporate credit 
union's pro rata share in the financial claim;
    (3) Purchased subordinated interests that absorb more than their pro 
rata share of losses from the underlying assets, including any tranche 
of asset-backed securities that is not the most senior tranche;
    (4) Credit derivative contracts under which the corporate credit 
union assumes more than its pro rata share of credit risk on a third-
party asset or exposure;
    (5) Loans or lines of credit that provide credit enhancement for the 
financial obligations of a third party;
    (6) Purchased loan servicing assets if the servicer is responsible 
for credit losses or if the servicer makes or assumes credit-enhancing 
representations and warranties with respect to the loans serviced. 
Servicer cash advances as defined in this section are not direct credit 
substitutes;
    (7) Clean-up calls on third-party assets. However, clean-up calls 
that are 10 percent or less of the original pool balance and that are 
exercisable at the option of the corporate credit union are not direct 
credit substitutes; and
    (8) Liquidity facilities that provide support to asset-backed 
commercial paper.
    Exchange rate contracts means cross-currency interest rate swaps; 
forward foreign exchange rate contracts; currency options purchased; and 
any similar instrument that, in the opinion of the NCUA, may give rise 
to similar risks.
    Face amount means the notational principal, or face value, amount of 
an off-balance sheet item or the amortized cost of an on-balance sheet 
asset.
    Financial asset means cash or other monetary instrument, evidence of 
debt, evidence of an ownership interest in an entity, or a contract that 
conveys a right to receive or exchange cash or another financial 
instrument from another party.
    Financial standby letter of credit means a letter of credit or 
similar arrangement that represents an irrevocable obligation to a 
third-party beneficiary:
    (1) To repay money borrowed by, or advanced to, or for the account 
of, a second party (the account party); or
    (2) To make payment on behalf of the account party, in the event 
that the account party fails to fulfill its obligation to the 
beneficiary.
    OECD-based country means a member of that grouping of countries that 
are full members of the Organization for Economic Cooperation and 
Development (OECD) plus countries that have concluded special lending 
arrangements with the International Monetary Fund (IMF) associated with 
the IMF's General Arrangements To Borrow.

[[Page 851]]

This term excludes any country that has rescheduled its external 
sovereign debt within the previous five years. A rescheduling of 
external sovereign debt generally would include any renegotiation of 
terms arising from a country's inability or unwillingness to meet its 
external debt service obligations, but generally would not include 
renegotiations of debt in the normal course of business, such as a 
renegotiation to allow the borrower to take advantage of a decline in 
interest rates or other change in market conditions.
    Original maturity means, with respect to a commitment, the earliest 
date after a commitment is made on which the commitment is scheduled to 
expire (i.e., it will reach its stated maturity and cease to be binding 
on either party), provided that either:
    (1) The commitment is not subject to extension or renewal and will 
actually expire on its stated expiration date; or
    (2) If the commitment is subject to extension or renewal beyond its 
stated expiration date, the stated expiration date will be deemed the 
original maturity only if the extension or renewal must be based upon 
terms and conditions independently negotiated in good faith with the 
member at the time of the extension or renewal and upon a new, bona fide 
credit analysis utilizing current information on financial condition and 
trends.
    Performance-based standby letter of credit means any letter of 
credit, or similar arrangement, however named or described, which 
represents an irrevocable obligation to the beneficiary on the part of 
the issuer to make payment on account of any default by a third party in 
the performance of a nonfinancial or commercial obligation. Such letters 
of credit include arrangements backing subcontractors' and suppliers' 
performance, labor and materials contracts, and construction bids.
    Prorated assets means the total assets (as determined in the most 
recently available GAAP report but in no event more than one year old) 
of a consolidated CUSO multiplied by the corporate credit union's 
percentage of ownership of that consolidated CUSO.
    Qualifying mortgage loan means a loan that:
    (1) Is fully secured by a first lien on a one-to four-family 
residential property;
    (2) Is underwritten in accordance with prudent underwriting 
standards, including standards relating the ratio of the loan amount to 
the value of the property (LTV ratio), as presented in the Interagency 
Guidelines for Real Estate Lending Policies, 57 FR 62890 (December 31, 
1992). A nonqualifying mortgage loan that is paid down to an appropriate 
LTV ratio (calculated using value at origination, appraisal obtained 
within the prior six months, or updated value using an automated 
valuation model) may become a qualifying loan if it meets all other 
requirements of this definition;
    (3) Maintains an appropriate LTV ratio based on the amortized 
principal balance of the loan; and
    (4) Is performing and is not more than 90 days past due.
    If a corporate credit union holds the first and junior lien(s) on a 
residential property and no other party holds an intervening lien, the 
transaction is treated as a single loan secured by a first lien for the 
purposes of determining the LTV ratio and the appropriate risk-weight 
under Appendix C. Also, a loan to an individual borrower for the 
construction of the borrower's home may be included as a qualifying 
mortgage loan.
    Qualifying multifamily mortgage loan. (1) Qualifying multifamily 
mortgage loan means a loan secured by a first lien on multifamily 
residential properties consisting of 5 or more dwelling units, provided 
that:
    (i) The amortization of principal and interest occurs over a period 
of not more than 30 years;
    (ii) The original minimum maturity for repayment of principal on the 
loan is not less than seven years;
    (iii) When considering the loan for placement in a lower risk-weight 
category, all principal and interest payments have been made on a timely 
basis in accordance with its terms for the preceding year;
    (iv) The loan is performing and not 90 days or more past due;
    (v) The loan is made in accordance with prudent underwriting 
standards; and
    (vi) If the interest rate on the loan does not change over the term 
of the loan, the current loan balance amount does not exceed 80 percent 
of the value of the property securing the loan, and for the property's 
most recent calendar year, the ratio of annual net operating income 
generated by the property (before payment of any debt service on the 
loan) to annual debt service on the loan is not less than 120 percent, 
or in the case of cooperative or other not-for-profit housing projects, 
the property generates sufficient cash flows to provide comparable 
protection to the institution; or
    (vii) If the interest rate on the loan changes over the term of the 
loan, the current loan balance amount does not exceed 75 percent of the 
value of the property securing the loan, and for the property's most 
recent calendar year, the ratio of annual net operating income generated 
by the property (before payment of any debt service on the loan) to 
annual debt service on the loan is not less than 115 percent, or in the 
case of cooperative or other not-for-profit housing projects, the 
property generates sufficient cash flows to provide comparable 
protection to the institution.
    (2) For purposes of paragraphs (1)(vi) and (1)(vii) of this 
definition, the term value of the property means, at origination of a 
loan to purchase a multifamily property, the

[[Page 852]]

lower of the purchase price or the amount of the initial appraisal, or 
if appropriate, the initial evaluation. In cases not involving purchase 
of a multifamily loan, the value of the property is determined by the 
most current appraisal, or if appropriate, the most current evaluation. 
In cases where a borrower refinances a loan on an existing property, as 
an alternative to paragraphs (1)(iii), (1)(vi), and (1)(vii) of this 
definition:
    (i) All principal and interest payments on the loan being refinanced 
have been made on a timely basis in accordance with the terms of that 
loan for the preceding year; and
    (ii) The net income on the property for the preceding year would 
support timely principal and interest payments on the new loan in 
accordance with the applicable debt service requirement.
    Qualifying residential construction loan, also referred to as a 
residential bridge loan, means a loan made in accordance with sound 
lending principles satisfying the following criteria:
    (1) The builder must have substantial project equity in the home 
construction project;
    (2) The residence being constructed must be a 1-4 family residence 
sold to a home purchaser;
    (3) The lending entity must obtain sufficient documentation from a 
permanent lender (which may be the construction lender) demonstrating 
that the home buyer intends to purchase the residence and has the 
ability to obtain a permanent qualifying mortgage loan sufficient to 
purchase the residence;
    (4) The home purchaser must have made a substantial earnest money 
deposit;
    (5) The construction loan must not exceed 80 percent of the sales 
price of the residence;
    (6) The construction loan must be secured by a first lien on the 
lot, residence under construction, and other improvements;
    (7) The lending credit union must retain sufficient undisbursed loan 
funds throughout the construction period to ensure project completion;
    (8) The builder must incur a significant percentage of direct costs 
(i.e., the actual costs of land, labor, and material) before any 
drawdown on the loan;
    (9) If at any time during the life of the construction loan any of 
the criteria of this rule are no longer satisfied, the corporate must 
immediately recategorize the loan at a 100 percent risk-weight and must 
accurately report the loan in the corporate's next quarterly call 
report;
    (10) The home purchaser must intend that the home will be owner-
occupied;
    (11) The home purchaser(s) must be an individual(s), not a 
partnership, joint venture, trust corporation, or any other entity 
(including an entity acting as a sole proprietorship) that is purchasing 
the home(s) for speculative purposes; and
    (12) The loan must be performing and not more than 90 days past due.
    The NCUA retains the discretion to determine that any loans not 
meeting sound lending principles must be placed in a higher risk-weight 
category. The NCUA also reserves the discretion to modify these criteria 
on a case-by-case basis provided that any such modifications are not 
inconsistent with the safety and soundness objectives of this 
definition.
    Qualifying securities firm means:
    (1) A securities firm incorporated in the United States that is a 
broker-dealer that is registered with the Securities and Exchange 
Commission (SEC) and that complies with the SEC's net capital 
regulations (17 CFR 240.15c3(1)); and
    (2) A securities firm incorporated in any other OECD-based country, 
if the corporate credit union is able to demonstrate that the securities 
firm is subject to consolidated supervision and regulation (covering its 
subsidiaries, but not necessarily its parent organizations) comparable 
to that imposed on depository institutions in OECD countries. Such 
regulation must include risk-based capital requirements comparable to 
those imposed on depository institutions under the Accord on 
International Convergence of Capital Measurement and Capital Standards 
(1988, as amended in 1998).
    Recourse means a corporate credit union's retention, in form or in 
substance, of any credit risk directly or indirectly associated with an 
asset it has sold (in accordance with Generally Accepted Accounting 
Principles) that exceeds a pro rata share of that corporate credit 
union's claim on the asset. If a corporate credit union has no claim on 
an asset it has sold, then the retention of any credit risk is recourse. 
A recourse obligation typically arises when a corporate credit union 
transfers assets in a sale and retains an explicit obligation to 
repurchase assets or to absorb losses due to a default on the payment of 
principal or interest or any other deficiency in the performance of the 
underlying obligor or some other party. Recourse may also exist 
implicitly if a corporate credit union provides credit enhancement 
beyond any contractual obligation to support assets it has sold. 
Recourse obligations include:
    (1) Credit-enhancing representations and warranties made on 
transferred assets;
    (2) Loan servicing assets retained pursuant to an agreement under 
which the corporate credit union will be responsible for losses 
associated with the loans serviced. Servicer cash advances as defined in 
this section are not recourse obligations;
    (3) Retained subordinated interests that absorb more than their pro 
rata share of losses from the underlying assets;
    (4) Assets sold under an agreement to repurchase, if the assets are 
not already included on the balance sheet;

[[Page 853]]

    (5) Loan strips sold without contractual recourse where the maturity 
of the transferred portion of the loan is shorter than the maturity of 
the commitment under which the loan is drawn;
    (6) Credit derivatives that absorb more than the corporate credit 
union's pro rata share of losses from the transferred assets;
    (7) Clean-up calls on assets the corporate credit union has sold. 
However, clean-up calls that are 10 percent or less of the original pool 
balance and that are exercisable at the option of the corporate credit 
union are not recourse arrangements; and
    (8) Liquidity facilities that provide support to asset-backed 
commercial paper.
    Replacement cost means, with respect to interest rate and exchange-
rate contracts, the loss that would be incurred in the event of a 
counterparty default, as measured by the net cost of replacing the 
contract at the current market value. If default would result in a 
theoretical profit, the replacement value is considered to be zero. This 
mark-to-market process must incorporate changes in both interest rates 
and counterparty credit quality.
    Residential properties means houses, condominiums, cooperative 
units, and manufactured homes. This definition does not include boats or 
motor homes, even if used as a primary residence, or timeshare 
properties.
    Residual interest. (1) Residual interest means any on-balance sheet 
asset that:
    (i) Represents an interest (including a beneficial interest) created 
by a transfer that qualifies as a sale (in accordance with Generally 
Accepted Accounting Principles) of financial assets, whether through a 
securitization or otherwise; and
    (ii) Exposes a corporate credit union to credit risk directly or 
indirectly associated with the transferred asset that exceeds a pro rata 
share of that corporate credit union's claim on the asset, whether 
through subordination provisions or other credit enhancement techniques.
    (2) Residual interests generally include spread accounts, cash 
collateral accounts, retained subordinated interests (and other forms of 
overcollateralization), and similar assets that function as a credit 
enhancement. Residual interests further include those exposures that, in 
substance, cause the corporate credit union to retain the credit risk of 
an asset or exposure that had qualified as a residual interest before it 
was sold.
    (3) Corporate credit unions will use this definition of the term 
``residual interests,'' and not the definition in Sec. 704.2, for 
purposes of applying this Appendix.
    Risk participation means a participation in which the originating 
party remains liable to the beneficiary for the full amount of an 
obligation (e.g., a direct credit substitute), notwithstanding that 
another party has acquired a participation in that obligation.
    Risk-weighted assets means the sum total of risk-weighted on-balance 
sheet assets, as calculated under Section II(a) of this Appendix, and 
the total of risk-weighted off-balance sheet credit equivalent amounts. 
The total of risk-weighted off-balance sheet credit equivalent amounts 
equals the risk-weighted off-balance sheet activities as calculated 
under Section II(b) of this Appendix plus the risk-weighted recourse 
obligations, risk-weighted direct credit substitutes, and certain other 
risk-weighted positions as calculated under Section II(c) of this 
Appendix.
    Servicer cash advance means funds that a residential mortgage 
servicer advances to ensure an uninterrupted flow of payments, including 
advances made to cover foreclosure costs or other expenses to facilitate 
the timely collection of the loan. A servicer cash advance is not a 
recourse obligation or a direct credit substitute if:
    (1) The servicer is entitled to full reimbursement and this right is 
not subordinated to other claims on the cash flows from the underlying 
asset pool; or
    (2) For any one loan, the servicer's obligation to make 
nonreimbursable advances is contractually limited to an insignificant 
amount of the outstanding principal amount on that loan.
    Structured financing program means a program where receivable 
interests and asset-or mortgage-backed securities issued by multiple 
participants are purchased by a special purpose entity that repackages 
those exposures into securities that can be sold to investors. 
Structured financing programs allocate credit risk, generally, between 
the participants and credit enhancement provided to the program.
    Unconditionally cancelable means, with respect to a commitment-type 
lending arrangement, that the corporate credit union may, at any time, 
with or without cause, refuse to advance funds or extend credit under 
the facility.
    United States Government or its agencies means an instrumentality of 
the U.S. Government whose debt obligations are fully and explicitly 
guaranteed as to the timely payment of principal and interest by the 
full faith and credit of the United States Government.
    United States Government-sponsored agency or corporation means an 
agency or corporation originally established or chartered to serve 
public purposes specified by the United States Congress but whose 
obligations are not explicitly guaranteed by the full faith and credit 
of the United States Government.

[[Page 854]]

                        Part II: Risk-Weightings

                       (a) On-Balance Sheet Assets

    Except as provided in Section II(b) of this Appendix, risk-weighted 
on-balance sheet assets are computed by multiplying the on-balance sheet 
asset amounts times the appropriate risk-weight categories. The risk-
weight categories are:
    (1) Zero percent Risk-Weight (Category 1).
    (i) Cash, including domestic and foreign currency owned and held in 
all offices of a corporate credit union or in transit. Any foreign 
currency held by a corporate credit union must be converted into U.S. 
dollar equivalents;
    (ii) Securities issued by and other direct claims on the U.S. 
Government or its agencies (to the extent such securities or claims are 
unconditionally backed by the full faith and credit of the United States 
Government) or the central government of an OECD country;
    (iii) Notes and obligations issued or guaranteed by the Federal 
Deposit Insurance Corporation or the National Credit Union Share 
Insurance Fund and backed by the full faith and credit of the United 
States Government;
    (iv) Deposit reserves at, claims on, and balances due from Federal 
Reserve Banks;
    (v) The book value of paid-in Federal Reserve Bank stock;
    (vi) That portion of assets directly and unconditionally guaranteed 
by the United States Government or its agencies, or the central 
government of an OECD country.
    (viii) Claims on, and claims guaranteed by, a qualifying securities 
firm that are collateralized by cash on deposit in the corporate credit 
union or by securities issued or guaranteed by the United States 
Government or its agencies, or the central government of an OECD 
country. To be eligible for this risk-weight, the corporate credit union 
must maintain a positive margin of collateral on the claim on a daily 
basis, taking into account any change in a corporate credit union's 
exposure to the obligor or counterparty under the claim in relation to 
the market value of the collateral held in support of the claim.
    (2) 20 percent Risk-Weight (Category 2).
    (i) Cash items in the process of collection;
    (ii) That portion of assets conditionally guaranteed by the United 
States Government or its agencies, or the central government of an OECD 
country;
    (iii) That portion of assets collateralized by the current market 
value of securities issued or guaranteed by the United States government 
or its agencies, or the central government of an OECD country;
    (iv) Securities (not including equity securities) issued by and 
other claims on the U.S. Government or its agencies which are not backed 
by the full faith and credit of the United States Government;
    (v) Securities (not including equity securities) issued by, or other 
direct claims on, United States Government-sponsored agencies;
    (vi) That portion of assets guaranteed by United States Government-
sponsored agencies;
    (vii) That portion of assets collateralized by the current market 
value of securities issued or guaranteed by United States Government-
sponsored agencies;
    (viii) Claims on, and claims guaranteed by, a qualifying securities 
firm, subject to the following conditions:
    (A) A qualifying securities firm must meet the minimum credit 
quality standards as established by the corporate credit union's board 
of directors or have at least one issue of long-term unsecured debt that 
is reasonably determined to present no more than a minimal amount of 
credit risk, whichever requirement is more stringent. Alternatively, a 
qualifying securities firm may rely on the creditworthiness of its 
parent consolidated company, if the parent consolidated company 
guarantees the claim.
    (B) A collateralized claim on a qualifying securities firm does not 
have to comply with the requirements of paragraph (a) of this section of 
Appendix C if the claim arises under a contract that:
    (1) Is a reverse repurchase/repurchase agreement or securities 
lending/borrowing transaction executed using standard industry 
documentation;
    (2) Is collateralized by debt or equity securities that are liquid 
and readily marketable;
    (3) Is marked-to-market daily;
    (4) Is subject to a daily margin maintenance requirement under the 
standard industry documentation; and
    (5) Can be liquidated, terminated or accelerated immediately in 
bankruptcy or similar proceeding, and the security or collateral 
agreement will not be stayed or avoided under applicable law of the 
relevant jurisdiction. For example, a claim is exempt from the automatic 
stay in bankruptcy in the United States if it arises under a securities 
contract or a repurchase agreement subject to Section 555 or 559 of the 
Bankruptcy Code (11 U.S.C. 555 or 559), a qualified financial contract 
under Section 207(c)(8) of the Federal Credit Union Act (12 U.S.C. 
1787(c)(8)) or Section 11(e)(8) of the Federal Deposit Insurance Act (12 
U.S.C. 1821(e)(8)), or a netting contract between or among financial 
institutions under Sections 401-407 of the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407), or Regulation 
EE (12 CFR part 231).
    (C) If the securities firm uses the claim to satisfy its applicable 
capital requirements, the claim is not eligible for a risk-weight under 
this paragraph II(a)(2)(viii);
    (ix) Claims representing general obligations of any public-sector 
entity in an OECD

[[Page 855]]

country, and that portion of any claims guaranteed by any such public-
sector entity;
    (x) Balances due from and all claims on domestic depository 
institutions. This includes demand deposits and other transaction 
accounts, savings deposits and time certificates of deposit, federal 
funds sold, loans to other depository institutions, including overdrafts 
and term federal funds, holdings of the corporate credit union's own 
discounted acceptances for which the account party is a depository 
institution, holdings of bankers acceptances of other institutions and 
securities issued by depository institutions, except those that qualify 
as capital;
    (xi) The book value of paid-in Federal Home Loan Bank stock;
    (xii) Deposit reserves at, claims on and balances due from the 
Federal Home Loan Banks;
    (xiii) Assets collateralized by cash held in a segregated deposit 
account by the reporting corporate credit union;
    (xiv) Claims on, or guaranteed by, official multilateral lending 
institutions or regional development institutions in which the United 
States Government is a shareholder or contributing member; \1\
---------------------------------------------------------------------------

    \1\ These institutions include, but are not limited to, the 
International Bank for Reconstruction and Development (World Bank), the 
Inter-American Development Bank, the Asian Development Bank, the African 
Development Bank, the European Investments Bank, the International 
Monetary Fund and the Bank for International Settlements.
---------------------------------------------------------------------------

    (xv) That portion of assets collateralized by the current market 
value of securities issued by official multilateral lending institutions 
or regional development institutions in which the United States 
Government is a shareholder or contributing member.
    (xvi) All claims on depository institutions incorporated in an OECD 
country, and all assets backed by the full faith and credit of 
depository institutions incorporated in an OECD country. This includes 
the credit equivalent amount of participations in commitments and 
standby letters of credit sold to other depository institutions 
incorporated in an OECD country, but only if the originating bank 
remains liable to the member or beneficiary for the full amount of the 
commitment or standby letter of credit. Also included in this category 
are the credit equivalent amounts of risk participations in bankers' 
acceptances conveyed to other depository institutions incorporated in an 
OECD country. However, bank-issued securities that qualify as capital of 
the issuing bank are not included in this risk category;
    (xvii) Claims on, or guaranteed by depository institutions other 
than the central bank, incorporated in a non-OECD country, with a 
remaining maturity of one year or less;
    (xviii) That portion of local currency claims conditionally 
guaranteed by central governments of non-OECD countries, to the extent 
the corporate credit union has local currency liabilities in that 
country.
    (3) 50 percent Risk-Weight (Category 3).
    (i) Revenue bonds issued by any public-sector entity in an OECD 
country for which the underlying obligor is a public-sector entity, but 
which are repayable solely from the revenues generated from the project 
financed through the issuance of the obligations;
    (ii) Qualifying mortgage loans and qualifying multifamily mortgage 
loans;
    (iii) Privately-issued mortgage-backed securities (i.e., those that 
do not carry the guarantee of the U.S. Government, a U.S. government 
agency, or a U.S. government sponsored enterprise) representing an 
interest in qualifying mortgage loans or qualifying multifamily mortgage 
loans. If the security is backed by qualifying multifamily mortgage 
loans, the corporate credit union must receive timely payments of 
principal and interest in accordance with the terms of the security. 
Payments will generally be considered timely if they are not 30 days 
past due; and
    (iv) Qualifying residential construction loans.
    (4) 100 percent Risk-Weight (Category 4).
    All assets not specified above or deducted from calculations of 
capital pursuant to Sec. 704.2 and Sec. 704.3 of this part, including, 
but not limited to:
    (i) Consumer loans;
    (ii) Commercial loans;
    (iii) Home equity loans;
    (iv) Non-qualifying mortgage loans;
    (v) Non-qualifying multifamily mortgage loans;
    (vi) Residential construction loans;
    (vii) Land loans;
    (viii) Nonresidential construction loans;
    (ix) Obligations issued by any state or any political subdivision 
thereof for the benefit of a private party or enterprise where that 
party or enterprise, rather than the issuing state or political 
subdivision, is responsible for the timely payment of principal and 
interest on the obligations, e.g., industrial development bonds;
    (x) Debt securities not specifically risk-weighted in another 
category;
    (xi) Investments in fixed assets and premises;
    (xii) Servicing assets;
    (xiii) Interest-only strips receivable;
    (xiv) Equity investments;
    (xv) The prorated assets of subsidiaries (except for the assets of 
consolidated CUSOs) to the extent such assets are included in adjusted 
total assets;
    (xvi) All repossessed assets or assets that are more than 90 days 
past due; and

[[Page 856]]

    (xvii) Intangible assets not specifically weighted in some other 
category.
    (5) Indirect ownership interests in pools of assets. Assets 
representing an indirect holding of a pool of assets, e.g., mutual 
funds, are assigned to risk-weight categories under this section based 
upon the risk-weight that would be assigned to the assets in the 
portfolio of the pool. An investment in shares of a mutual fund whose 
portfolio consists primarily of various securities or money market 
instruments that, if held separately, would be assigned to different 
risk-weight categories, generally is assigned to the risk-weight 
category appropriate to the highest risk-weighted asset that the fund is 
permitted to hold in accordance with the investment objectives set forth 
in its prospectus. The corporate credit union may, at its option, assign 
the investment on a pro rata basis to different risk-weight categories 
according to the investment limits in its prospectus. In no case will an 
investment in shares in any such fund be assigned to a total risk-weight 
less than 20 percent. If the corporate credit union chooses to assign 
investments on a pro rata basis, and the sum of the investment limits of 
assets in the fund's prospectus exceeds 100 percent, the corporate 
credit union must assign the highest pro rata amounts of its total 
investment to the higher risk categories. If, in order to maintain a 
necessary degree of short-term liquidity, a fund is permitted to hold an 
insignificant amount of its assets in short-term, highly liquid 
securities of superior credit quality that do not qualify for a 
preferential risk-weight, such securities will generally be disregarded 
in determining the risk-weight category into which the corporate credit 
union's holding in the overall fund should be assigned. The prudent use 
of hedging instruments by a mutual fund to reduce the risk of its assets 
will not increase the risk-weighting of the mutual fund investment. For 
example, the use of hedging instruments by a mutual fund to reduce the 
interest rate risk of its government bond portfolio will not increase 
the risk-weight of that fund above the 20 percent category. Nonetheless, 
if the fund engages in any activities that appear speculative in nature 
or has any other characteristics that are inconsistent with the 
preferential risk-weighting assigned to the fund's assets, holdings in 
the fund will be assigned to the 100 percent risk-weight category.
    (6) Derivatives. Certain transactions or activities, such as 
derivatives transactions, may appear on a corporate's balance sheet but 
are not specifically described in the Section II(a) on-balance sheet 
risk-weight categories. These items will be assigned risk-weights as 
described in Section II(b) or II(c) below.

                       (b) Off-Balance Sheet Items

    Except as provided in Section II(c) of this Appendix, risk-weighted 
off-balance sheet items are determined by the following two-step 
process. First, the face amount of the off-balance sheet item must be 
multiplied by the appropriate credit conversion factor listed in this 
Section II(b). This calculation translates the face amount of an off-
balance sheet exposure into an on-balance sheet credit-equivalent 
amount. Second, the credit-equivalent amount must be assigned to the 
appropriate risk-weight category using the criteria regarding obligors, 
guarantors, and collateral listed in Section II(a) of this Appendix.\2\ 
The following are the credit conversion factors and the off-balance 
sheet items to which they apply.
---------------------------------------------------------------------------

    \2\ The sufficiency of collateral and guarantees for off-balance 
sheet items is determined by the market value of the collateral or the 
amount of the guarantee in relation to the face amount of the item, 
except for derivative contracts, for which this determination is 
generally made in relation to the credit equivalent amount. Collateral 
and guarantees are subject to the same provisions noted under paragraph 
II(d) of this Appendix C.
---------------------------------------------------------------------------

    (1) 100 percent credit conversion factor (Group A).
    (i) Risk participations purchased in bankers' acceptances;
    (ii) Forward agreements and other contingent obligations with a 
certain draw down, e.g., legally binding agreements to purchase assets 
at a specified future date. On the date a corporate credit union enters 
into a forward agreement or similar obligation, it should convert the 
principal amount of the assets to be purchased at 100 percent as of that 
date and then assign this amount to the risk-weight category appropriate 
to the obligor or guarantor of the item, or the nature of the 
collateral;
    (iii) Indemnification of members whose securities the corporate 
credit union has lent as agent. If the member is not indemnified against 
loss by the corporate credit union, the transaction is excluded from the 
risk-based capital calculation. When a corporate credit union lends its 
own securities, the transaction is treated as a loan. When a corporate 
credit union lends its own securities or is acting as agent, agrees to 
indemnify a member, the transaction is assigned to the risk-weight 
appropriate to the obligor or collateral that is delivered to the 
lending or indemnifying institution or to an independent custodian 
acting on their behalf; and
    (2) 50 percent credit conversion factor (Group B).
    (i) Transaction-related contingencies, including, among other 
things, performance

[[Page 857]]

bonds and performance-based standby letters of credit related to a 
particular transaction;
    (ii) Unused portions of commitments (including home equity lines of 
credit and eligible ABCP liquidity facilities) with an original maturity 
exceeding one year except those listed in paragraph II (b)(5) of this 
Appendix. For eligible ABCP liquidity facilities, the resulting credit 
equivalent amount is assigned to the risk category appropriate to the 
assets to be funded by the liquidity facility based on the assets or the 
obligor, after considering any collateral or guarantees.
    (iii) Revolving underwriting facilities, note issuance facilities, 
and similar arrangements pursuant to which the corporate credit union's 
CUSO or member can issue short-term debt obligations in its own name, 
but for which the corporate credit union has a legally binding 
commitment to either:
    (A) Purchase the obligations the member is unable to sell by a 
stated date; or
    (B) Advance funds to its member, if the obligations cannot be sold.
    (3) 20 percent credit conversion factor (Group C). Trade-related 
contingencies, i.e., short-term, self-liquidating instruments used to 
finance the movement of goods and collateralized by the underlying 
shipment. A commercial letter of credit is an example of such an 
instrument.
    (4) Zero percent credit conversion factor (Group E). (i) Unused 
portions of commitments with an original maturity of one year or less;
    (ii) Unused commitments with an original maturity greater than one 
year, if they are unconditionally cancelable at any time at the option 
of the corporate credit union and the corporate credit union has the 
contractual right to make, and in fact does make, either:
    (A) A separate credit decision based upon the borrower's current 
financial condition before each drawing under the lending facility; or
    (B) An annual (or more frequent) credit review based upon the 
borrower's current financial condition to determine whether or not the 
lending facility should be continued; and
    (iii) The unused portion of retail credit card lines or other 
related plans that are unconditionally cancelable by the corporate 
credit union in accordance with applicable law.
    (5) Off-balance sheet derivative contracts; interest rate and 
foreign exchange rate contracts (Group F).
    (i) Calculation of credit equivalent amounts. The credit equivalent 
amount of an off-balance sheet derivative contract that is not subject 
to a qualifying bilateral netting contract in accordance with paragraph 
II(b)(6)(ii) of this Appendix is equal to the sum of the current credit 
exposure, i.e., the replacement cost of the contract, and the potential 
future credit exposure of the contract. The calculation of credit 
equivalent amounts is measured in U.S. dollars, regardless of the 
currency or currencies specified in the contract.
    (A) Current credit exposure. The current credit exposure of an off-
balance sheet derivative contract is determined by the mark-to-market 
value of the contract. If the mark-to-market value is positive, then the 
current credit exposure equals that mark-to-market value. If the mark-
to-market value is zero or negative, then the current exposure is zero. 
In determining its current credit exposure for multiple off-balance 
sheet derivative contracts executed with a single counterparty, a 
corporate credit union may net positive and negative mark-to-market 
values of off-balance sheet derivative contracts if subject to a 
bilateral netting contract as provided in paragraph II(b)(6)(ii) of this 
Appendix.
    (B) Potential future credit exposure. The potential future credit 
exposure of an off-balance sheet derivative contract, including a 
contract with a negative mark-to-market value, is estimated by 
multiplying the notional principal by a credit conversion factor.\3\ 
Corporate credit unions, subject to examiner review, should use the 
effective rather than the apparent or stated notional amount in this 
calculation. The conversion factors are: \4\
---------------------------------------------------------------------------

    \3\ For purposes of calculating potential future credit exposure for 
foreign exchange contracts and other similar contracts, in which 
notional principal is equivalent to cash flows, total notional principal 
is defined as the net receipts to each party falling due on each value 
date in each currency.
    \4\ No potential future credit exposure is calculated for single 
currency interest rate swaps in which payments are made based upon two 
floating rate indices, so-called floating/floating or basis swaps; the 
credit equivalent amount is measured solely on the basis of the current 
credit exposure.

----------------------------------------------------------------------------------------------------------------
                                                             Interest rate    Foreign exchange  Other derivative
                    Remaining maturity                         contracts       rate contracts       contracts
                                                               (percent)          (percent)         (percent)
----------------------------------------------------------------------------------------------------------------
One year or less.........................................               0.0                1.0              10.0
Over one year but less than five years...................               0.50               5.0              12.0
Over five years..........................................               0.50               5.0              15.0
----------------------------------------------------------------------------------------------------------------


[[Page 858]]

    (ii) Off-balance sheet derivative contracts subject to bilateral 
netting contracts. In determining its current credit exposure for 
multiple off-balance sheet derivative contracts executed with a single 
counterparty, a corporate credit union may net off-balance sheet 
derivative contracts subject to a bilateral netting contract by 
offsetting positive and negative mark-to-market values, provided that:
    (A) The bilateral netting contract is in writing;
    (B) The bilateral netting contract creates a single legal obligation 
for all individual off-balance sheet derivative contracts covered by the 
bilateral netting contract. In effect, the bilateral netting contract 
provides that the corporate credit union has a single claim or 
obligation either to receive or pay only the net amount of the sum of 
the positive and negative mark-to-market values on the individual off-
balance sheet derivative contracts covered by the bilateral netting 
contract. The single legal obligation for the net amount is operative in 
the event that a counterparty, or a counterparty to whom the bilateral 
netting contract has been validly assigned, fails to perform due to any 
of the following events: Default, insolvency, bankruptcy, or other 
similar circumstances;
    (C) The corporate credit union obtains a written and reasoned legal 
opinion(s) representing, with a high degree of certainty, that in the 
event of a legal challenge, including one resulting from default, 
insolvency, bankruptcy or similar circumstances, the relevant court and 
administrative authorities would find the corporate credit union's 
exposure to be the net amount under:
    (1) The law of the jurisdiction in which the counterparty is 
chartered or the equivalent location in the case of noncorporate 
entities, and if a branch of the counterparty is involved, then also 
under the law of the jurisdiction in which the branch is located;
    (2) The law that governs the individual off-balance sheet derivative 
contracts covered by the bilateral netting contract; and
    (3) The law that governs the bilateral netting contract;
    (D) The corporate credit union establishes and maintains procedures 
to monitor possible changes in relevant law and to ensure that the 
bilateral netting contract continues to satisfy the requirements of this 
section; and
    (E) The corporate credit union maintains in its files documentation 
adequate to support the netting of an off-balance sheet derivative 
contract.\5\
---------------------------------------------------------------------------

    \5\ By netting individual off-balance sheet derivative contracts for 
the purpose of calculating its credit equivalent amount, a corporate 
credit union represents that documentation adequate to support the 
netting of an off-balance sheet derivative contract is in the corporate 
credit union's files and available for inspection by the NCUA. Upon 
determination by the NCUA that a corporate credit union's files are 
inadequate or that a bilateral netting contract may not be legally 
enforceable under any one of the bodies of law described in paragraphs 
II(b)(5)(ii) of this Appendix, the underlying individual off-balance 
sheet derivative contracts may not be netted for the purposes of this 
section.
---------------------------------------------------------------------------

    (iii) Walkaway clause. A bilateral netting contract that contains a 
walkaway clause is not eligible for netting for purposes of calculating 
the current credit exposure amount. The term ``walkaway clause'' means a 
provision in a bilateral netting contract that permits a nondefaulting 
counterparty to make a lower payment than it would make otherwise under 
the bilateral netting contract, or no payment at all, to a defaulter or 
the estate of a defaulter, even if the defaulter or the estate of the 
defaulter is a net creditor under the bilateral netting contract.
    (iv) Risk-weighting. Once the corporate credit union determines the 
credit equivalent amount for an off-balance sheet derivative contract, 
that amount is assigned to the risk-weight category appropriate to the 
counterparty, or, if relevant, to the nature of any collateral or 
guarantee. Collateral held against a netting contract is not recognized 
for capital purposes unless it is legally available for all contracts 
included in the netting contract. However, the maximum risk-weight for 
the credit equivalent amount of such off-balance sheet derivative 
contracts is 50 percent.
    (v) Exceptions. The following off-balance sheet derivative contracts 
are not subject to the above calculation, and therefore, are not part of 
the denominator of a corporate credit union's risk-based capital ratio:
    (A) A foreign exchange rate contract with an original maturity of 14 
calendar days or less; and
    (B) Any interest rate or foreign exchange rate contract that is 
traded on an exchange requiring the daily payment of any variations in 
the market value of the contract.

 (c) Recourse Obligations, Direct Credit Substitutes, and Certain Other 
                                Positions

    (1) In general. Except as otherwise permitted in this Section II(c), 
to determine the risk-weighted asset amount for a recourse obligation or 
a direct credit substitute (but not a residual interest):
    (i) Multiply the full amount of the credit-enhanced assets for which 
the corporate credit union directly or indirectly retains or assumes 
credit risk by a 100 percent conversion factor (For a direct credit 
substitute that is an on-balance sheet asset (e.g., a purchased 
subordinated security), a corporate

[[Page 859]]

credit union must use the amount of the direct credit substitute and the 
full amount of the asset it supports, i.e., all the more senior 
positions in the structure); and
    (ii) Assign this credit equivalent amount to the risk-weight 
category appropriate to the obligor in the underlying transaction, after 
considering any associated guarantees or collateral. Section II(a) lists 
the risk-weight categories.
    (2) Residual interests. Except as otherwise permitted under this 
Section II(c), a corporate credit union must maintain risk-based capital 
for residual interests as follows:
    (i) Other residual interests. A corporate credit union must maintain 
risk-based capital for a residual interest equal to the face amount of 
the residual interest, even if the amount of risk-based capital that 
must be maintained exceeds the full risk-based capital requirement for 
the assets transferred.
    (ii) Residual interests and other recourse obligations. Where a 
corporate credit union holds a residual interest and another recourse 
obligation in connection with the same transfer of assets, the corporate 
credit union must maintain risk-based capital equal to the greater of:
    (A) The risk-based capital requirement for the residual interest as 
calculated under Section II(c)(2)(i) through (ii) of this Appendix; or
    (B) The full risk-based capital requirement for the assets 
transferred, subject to the low-level recourse rules under Section 
II(c)(5) of this Appendix.
    (3) Internal ratings-based approach--
    (i) Calculation. Corporate credit unions with advanced risk 
management and reporting systems may seek NCUA approval to use credit 
risk models to calculate risk-weighted asset amounts for positions 
described in paragraphs II (c)(1) and (2) of this section of the 
Appendix C. In determining whether to grant approval, NCUA will consider 
the financial condition and risk management sophistication of the 
corporate credit union and the adequacy of the corporate's risk models 
and supporting management information systems.
    (ii) Consistent use of internal ratings-based approach. A corporate 
credit union that has been granted NCUA approval to use an internal 
ratings-based approach and that has determined to use such an approach 
must do so in a consistent manner for all securities so rated.
    (4) Limitations on risk-based capital requirements--
    (i) Low-level exposure rule. If the maximum contractual exposure to 
loss retained or assumed by a corporate credit union is less than the 
effective risk-based capital requirement, as determined in accordance 
with this Section II(c), for the assets supported by the corporate 
credit union's position, the risk-based capital requirement is limited 
to the corporate credit union's contractual exposure less any recourse 
liability account established in accordance with Generally Accepted 
Accounting Principles. This limitation does not apply when a corporate 
credit union provides credit enhancement beyond any contractual 
obligation to support assets it has sold.
    (ii) Mortgage-related securities or participation certificates 
retained in a mortgage loan swap. If a corporate credit union holds a 
mortgage-related security or a participation certificate as a result of 
a mortgage loan swap with recourse, it must hold risk-based capital to 
support the recourse obligation and that percentage of the mortgage-
related security or participation certificate that is not covered by the 
recourse obligation. The total amount of risk-based capital required for 
the security (or certificate) and the recourse obligation is limited to 
the risk-based capital requirement for the underlying loans, calculated 
as if the corporate credit union continued to hold these loans as an on-
balance sheet asset.
    (iii) Related on-balance sheet assets. If an asset is included in 
the calculation of the risk-based capital requirement under this Section 
II(c) and also appears as an asset on the corporate credit union's 
balance sheet, the corporate credit union must risk-weight the asset 
only under this Section II(c), except in the case of loan servicing 
assets and similar arrangements with embedded recourse obligations or 
direct credit substitutes. In that case, the corporate credit union must 
separately risk-weight the on-balance sheet servicing asset and the 
related recourse obligations and direct credit substitutes under this 
section, and incorporate these amounts into the risk-based capital 
calculation.
    (5) Obligations of CUSOs. All recourse obligations and direct credit 
substitutes retained or assumed by a corporate credit union on the 
obligations of CUSOs in which the corporate credit union has an equity 
investment are risk-weighted in accordance with this Section II(c), 
unless the corporate credit union's equity investment is deducted from 
the credit union's capital and assets under Sec. 704.2 and Sec. 704.3.
    (d) Collateral. The only forms of collateral that are recognized for 
risk-weighting purposes are cash on deposit in the corporate credit 
union; Treasuries, U.S. Government agency securities, and U.S. 
Government-sponsored enterprise securities; and securities issued by 
multilateral lending institutions or regional development banks. Claims 
secured by cash on deposit are assigned to the zero percent risk-weight 
category (to the extent of the cash amount). Claims secured

[[Page 860]]

by securities are assigned to the twenty percent risk-weight category 
(to the extent of the fair market value of the securities).

[75 FR 64852, Oct. 20, 2010, as amended at 77 FR 74111, Dec. 13, 2012; 
80 FR 25939, May 6, 2015]



PART 705_COMMUNITY DEVELOPMENT REVOLVING LOAN FUND ACCESS FOR CREDIT
UNIONS--Table of Contents



Sec.
705.1  Authority, purpose, and scope.
705.2  Definitions.
705.3  Eligibility requirements.
705.4  Permissible uses of loan funds.
705.5  Terms and conditions for loans.
705.6  Terms and conditions for technical assistance grants.
705.7  Application and award processes.
705.8  Urgency.
705.9  Reporting and monitoring.
705.10  Appeals.

    Authority: 12 U.S.C. 1756, 1757(5)(D), and (7)(I), 1766, 1782, 1784, 
1785 and 1786.

    Source: 76 FR 67587, Nov. 2, 2011, unless otherwise noted.



Sec. 705.1  Authority, purpose, and scope.

    (a) This part 705 is issued by the National Credit Union 
Administration (NCUA) under section 130 of the Federal Credit Union Act, 
12 U.S.C. 1772c-1, which implements the Community Development Credit 
Union Revolving Loan Fund Transfer Act (Pub. L. 99-609, 100 Stat. 3475 
(Nov. 6, 1986)).
    (b) This part describes how NCUA makes money available to credit 
unions from its Community Development Revolving Loan Fund (Fund). NCUA 
administers the Fund and makes both loans and technical assistance 
grants to credit unions in accordance with the eligibility criteria and 
other qualifications, subject to the terms and conditions set out in 
this part. All loans and technical assistance grants made under this 
part are subject to funds availability and NCUA's discretion.
    (c) NCUA's policy is to revolve the loan funds to credit unions as 
often as practical in order to achieve maximum economic impact on as 
many credit unions as possible.
    (d) The financial awards provided to credit unions through the Fund 
will better enable them to support the communities in which they 
operate; provide basic financial services to low-income residents of 
these communities, and result in more opportunities for the residents of 
those communities to improve their financial circumstances.
    (e) The Fund is intended to support the efforts of credit unions 
through loans and technical assistance grants needed for:
    (1) Providing basic financial and related services to residents in 
their communities;
    (2) Enhancing their capacity to better serve their members and the 
communities in which they operate; and
    (3) Responding to emergencies.

[76 FR 67587, Nov. 2, 2011, as amended at 81 FR 85112, Nov. 25, 2016]



Sec. 705.2  Definitions.

    For purposes of this part, the following terms shall have the 
meanings assigned to them in this section.
    Application means a form supplied by the NCUA by which a Qualifying 
Credit Union may apply for a loan or a technical assistance grant from 
the Fund.
    Loan is an award in the form of an extension of credit from the Fund 
to a Participating Credit Union that must be repaid, with interest.
    Low-income Members are those members defined in Sec. 701.34 of this 
chapter.
    Notice of Funding Opportunity means the Notice NCUA publishes 
describing one or more loan or technical assistance grant programs or 
initiatives currently being supported by the Fund and inviting 
Qualifying Credit Unions to submit applications to participate in the 
program(s) or initiatives(s).
    Participating Credit Union refers to a Qualifying Credit Union that 
has submitted an application for a loan or a technical assistance grant 
from the Fund which has been approved by NCUA. A Participating Credit 
Union shall not be deemed to be an agency, department, or 
instrumentality of the United States because of its receipt of a 
financial award from the Fund.
    Program means the Community Development Revolving Loan Fund Program 
under which NCUA makes loans and technical assistance grants available 
to credit unions.
    Qualifying Credit Union means a credit union that may be, or has 
agreed to be, examined by NCUA, with a current

[[Page 861]]

low-income designation pursuant to Sec. 701.34(a)(1) or Sec. 741.204 of 
this chapter or, in the case of a non-federally insured, state-chartered 
credit union, a low-income designation from a state regulator, made 
under appropriate state standards with the concurrence of NCUA. Services 
to low-income members must include, at a minimum, offering share 
accounts and loans.
    Technical Assistance Grant means an award of money from the Fund to 
a Participating Credit Union that does not have to be repaid.

[81 FR 85112, Nov. 25, 2016]



Sec. 705.3  Eligibility requirements.

    To be eligible to receive a CDRLF award, in the form of either a 
loan or a technical assistance grant, a Qualifying Credit Union must, 
within the timeframes specified in any Notice of Funding Opportunity:
    (a) Complete and submit an Application; and
    (b) Meet the underwriting standards established by NCUA, including 
those pertaining to financial viability, as set forth in the Application 
and any related materials developed by NCUA.



Sec. 705.4  Permissible uses of loan funds.

    NCUA may make loans from the Fund to Participating Credit Unions for 
various uses. The following is a non-exhaustive list of permissible uses 
or projects:
    (a) Development of new products or services for members, including 
new or expanded share draft or credit card programs;
    (b) Partnership arrangements with community-based service 
organizations or government agencies;
    (c) Loan programs, including, but not limited to, microbusiness 
loans, payday loan alternatives, education loans, and real estate loans;
    (d) Acquisition, expansion, or improvement of office space or 
equipment, including branch facilities, ATMs, and electronic banking 
facilities; and
    (e) Operational programs such as security or disaster recovery.



Sec. 705.5  Terms and conditions for loans.

    (a) NCUA may make loans, in such amounts and subject to such terms 
and conditions as it may determine, from the Fund to Participating 
Credit Unions.
    (b) Funding Limits. NCUA will publish any applicable loan funding 
limits in the applicable Notice of Funding Opportunity.
    (c) Recording of a loan. At the discretion of NCUA, a loan will be 
recorded by a Participating Credit Union as either a note payable or a 
nonmember deposit.
    (d) Interest rate. The rate of interest on loans is governed by the 
CDRLF Loan Interest Rate Policy, which can be found on NCUA's Web site 
or by contacting NCUA's Office of Small Credit Union Initiatives. The 
specific interest rate for a particular funding will be announced in the 
related Notice of Funding Opportunity. The Board will announce changes, 
if any, to the CDRLF Loan Interest Rate Policy and those changes will 
apply to loans made under future Notices of Funding Opportunities.
    (e) Repayment and maturity. (1) Awards made available through loans, 
whether recorded as a note payable or nonmember deposit, must be repaid 
to NCUA. All loans will be scheduled for repayment consistent with sound 
business practices and the objectives of the Program, but in no case 
will the term exceed five years.
    (2) Interest payments will be required semiannually beginning six 
months after the initial distribution of a loan.
    (3) NCUA may allow flexible repayment of loan principal. Details and 
specific provisions will be addressed in the Notice of Funding 
Opportunity and other program materials.
    (f) Acceleration. The terms of each loan agreement will provide for 
the immediate acceleration of the unpaid balance for breach or default 
in performance by the Participating Credit Union of the terms or 
conditions of the loan. Default and breach include misrepresentation; 
failure to make interest or principal payments when due; failure to file 
required reports; insolvency of the Participating Credit Union; and, if 
required by NCUA, failure to maintain adequate matching funds for the 
duration of the loan. Other specific causes of default and breach will 
be identified in the loan documents between the

[[Page 862]]

Participating Credit Union and NCUA. The unpaid balance will also be 
accelerated and immediately due if any part of the loan funds are 
improperly used or if uninvested loan proceeds remain unused for an 
unreasonable or unjustified period of time.
    (g) Matching requirements. At its discretion, NCUA may require a 
Participating Credit Union to develop and implement a plan to match all 
or a portion of the funds represented by loan proceeds. Such requirement 
will be based on the financial condition of the Participating Credit 
Union, which will be evaluated under criteria contained in the related 
Notice of Funding Opportunity. Matching funds must be from non-
governmental member or nonmember share deposits. Participating Credit 
Unions required to provide matching funds are subject to the following 
general provisions and any other conditions in the related Notice of 
Funding Opportunity and agreements between the Participating Credit 
Union and NCUA:
    (1) Loan monies made available generally must be matched by the 
Participating Credit Union in an amount equal to the loan amount. Any 
loan monies matched by nonmember share deposits are not subject to the 
20% limitation on nonmember deposits under Sec. 701.32 of this chapter. 
Participating Credit Unions must maintain the increase in the total 
amount of share deposits for the duration of the loan. Once the loan is 
repaid, nonmember share deposits accepted to meet the matching 
requirement are subject to Sec. 701.32 of this chapter.
    (2) Upon approval of its loan application, and before it meets its 
matching, if required, a Participating Credit Union may receive the 
entire loan commitment in a single payment. If, at NCUA's discretion, 
any funds are withheld, the remainder of the funds committed will be 
available to the Participating Credit Union only after it has documented 
that it has met the match requirement.
    (3) Failure of a Participating Credit Union to generate the required 
match within the time specified in the loan documents may result in the 
reduction of the loan proportionate to the amount of match actually 
generated. Payment of any additional funds initially approved may be 
limited as appropriate to reflect the revised amount of the loan 
approved. Any funds already advanced to the Participating Credit Union 
in excess of the revised amount of loan approval must be repaid 
immediately to NCUA. Failure to repay such funds to NCUA upon demand may 
result in the default of the entire loan.
    (h) Other terms and conditions. Other terms and conditions 
pertaining to loans, including but not necessarily limited to duration, 
repayment obligations, security agreements (if any), and covenants, will 
be specified in the related Notice of Funding Opportunity or applicable 
loan documents to be signed by the Participating Credit Union.

[76 FR 67587, Nov. 2, 2011, as amended at 81 FR 85112, Nov. 25, 2016]



Sec. 705.6  Terms and conditions for technical assistance grants.

    (a) Participating Credit Unions must comply with the terms and 
conditions for technical assistance grants specified for each funding 
opportunity offered under a Notice of Funding Opportunity.
    (b) NCUA will establish applicable funding limits for technical 
assistance grants in the Notice of Funding Opportunity.

[81 FR 85112, Nov. 25, 2016]



Sec. 705.7  Application and award processes.

    (a) Notice of Funding Opportunity. NCUA will publish a Notice of 
Funding Opportunity in the Federal Register and on its Web site. The 
Notice of Funding Opportunity will describe the loan and technical 
assistance grant programs for the period in which funds are available. 
It also will announce special initiatives, the amount of funds 
available, funding priorities, permissible uses of funds, funding 
limits, deadlines, and other pertinent details. The Notice of Funding 
Opportunity will also advise potential applicants on how to obtain an 
Application and related materials. NCUA may supplement the information 
contained in the Notice of Funding Opportunity through

[[Page 863]]

such other media as it determines appropriate, including Letters to 
Credit Unions, press releases, direct notices to Qualifying Credit 
Unions, and announcements on its Web site.
    (b) Application requirements. A Qualifying Credit Union must 
demonstrate a sound financial position and ability to manage its day-to-
day business affairs. It also must show that its planned use of proceeds 
is consistent with the purpose of the Program, the requirements of this 
part, and the related Notice of Funding Opportunity. The related Notice 
of Funding Opportunity may include additional details and requirements.
    (1) Applications to participate and qualify for a loan or technical 
assistance grant under the Program may be obtained from the National 
Credit Union Administration as outlined in the related Notice of Funding 
Opportunity.
    (2) With respect to loans, NCUA will also require a Qualifying 
Credit Union to develop and submit a narrative describing how the 
Qualifying Credit Union intends to use the money obtained from the Fund 
to enhance the products or services it provides to its membership and 
how those enhanced products or services support the membership and 
community served by the Qualifying Credit Union.
    (3) In addition to those items required in this section, a 
Qualifying Credit Union that is a non-federally insured state-chartered 
credit union must also include the following:
    (i) A copy of its most recent external audit report;
    (ii) Proof of deposit and surety bond insurance which states the 
maximum insurance levels permitted by the policies;
    (iii) A balance sheet, an income and expense statement, and a 
schedule of delinquent loans, for each of the four most recent quarter-
ends;
    (iv) Documentation of the credit union's status as a low-income 
credit union by the appropriate state supervisory agency consistent with 
NCUA Rules and Regulations at Secs. 701.34(a) and 741.204(b); and
    (v) An agreement to be subject to examination by NCUA.
    (c) Evaluation and selection of Qualifying Credit Unions. NCUA will 
generally evaluate applications submitted by Qualifying Credit Unions in 
accordance with the criteria described in this section. Nothing in this 
section, however, precludes NCUA from considering other criteria 
included in the related Notice of Funding Opportunity that NCUA 
determines to be necessary based on the type of funding initiative, 
economic environment, or other factors or conditions that warrant the 
evaluation of additional or alternative criteria. Generally, NCUA will 
evaluate complete applications to determine if the Qualifying Credit 
Union satisfies the following:
    (1) Financial and Performance. The Qualifying Credit Union must 
exhibit a safe and sound financial condition, including a demonstrated 
ability to perform the requirements associated with the type of award 
being sought and compliance with NCUA's underwriting standards. In this 
respect, NCUA will consider the Qualifying Credit Union's long-term 
financial viability, including absence of indicators suggesting the 
Qualifying Credit Union is a candidate for merger, a purchase and 
assumption transaction, or conservatorship. NCUA will also consider the 
Qualifying Credit Union's compliance with the provisions of any previous 
loan or technical assistance grant received. NCUA may also consider 
information concerning the Qualifying Credit Union to which it already 
has access, including information obtained through the examination 
process and data contained in Call Reports.
    (2) Compatibility. NCUA will evaluate whether the stated objectives 
to be accomplished through the use of the loan or technical assistance 
grant proceeds conform to the broad purposes and rationale underlying 
the Fund. Specifically, NCUA will consider whether the award will enable 
the Qualifying Credit Union to provide basic financial products and 
related services to its members or enhance its capacity to better serve 
its members and the community in which it operates. NCUA will also 
consider whether the use of the financial award will conform to any 
applicable funding priority, special initiative,

[[Page 864]]

or special instruction announced in the related Notice of Funding 
Opportunity.
    (3) Feasibility. NCUA will consider the likelihood of the Qualifying 
Credit Union's success in accomplishing its stated objectives, based on 
its Application and the factors NCUA determines are relevant.
    (4) Examination Information and Applicable Concurrence. In 
evaluating a Qualifying Credit Union, NCUA will consider all information 
provided by NCUA staff or state supervisory authority staff that 
performed the Qualifying Credit Union's most recent examination. In 
addition:
    (i) NCUA will only provide a loan to a qualifying federal credit 
union with the concurrence of that credit union's supervising Regional 
Director; and
    (ii) NCUA will only provide a loan to a qualifying state-charted 
credit union with the written concurrence of the applicable Regional 
Director and the credit union's state supervisory authority. A 
qualifying state-chartered credit union should notify its state 
supervisory authority that it is applying for a loan from the Fund 
before submitting its application to NCUA. However, a qualifying state-
chartered credit union is not required to obtain concurrence before 
applying for a loan. NCUA will obtain the concurrence directly from the 
state supervisory authority rather than through the qualifying state-
chartered credit union. Additionally, before NCUA will provide a loan to 
a qualifying state-charted credit union the credit union must make 
copies of its state examination reports available to NCUA and agree to 
examination by NCUA.
    (d) Requests for additional information. NCUA will make its funding 
determinations among the several qualified Applications based on its 
discretion and consideration of which best meet the priorities and 
initiatives established and announced by NCUA. During its evaluation 
process, however, NCUA may request a Qualifying Credit Union to provide 
additional clarifying or technical information to support its 
application. NCUA may determine not to provide further consideration of 
any Application failing to provide additional required information.
    (e) Timing. NCUA will announce, in the related Notice of Funding 
Opportunity, the deadline for Qualifying Credit Unions to submit all 
required documentation, including the Application. Failure to submit all 
of the requested information or to submit the information within the 
timeframe specified in the Notice of Funding Opportunity, or in the case 
of requests for additional clarifying or technical information, within 
the time specified by NCUA, may result in rejection of the Application 
without further consideration.
    (f) Notice of Award. NCUA will determine whether an application 
meets NCUA's standards established by this part and the related Notice 
of Funding Opportunity. NCUA will provide written notice to a Qualifying 
Credit Union as to whether or not it has qualified for a loan or 
technical assistance grant under this part. A Qualifying Credit Union 
whose application has been denied for failure of a qualification may 
appeal that decision in accordance with Sec. 705.10 of this part.
    (g) Disbursement--(1) Loans. Before NCUA will disburse a loan, the 
Participating Credit Union must sign the loan agreement, promissory 
note, and any other loan related documents. NCUA may, in its discretion, 
choose not to disburse the entire amount of the loan at once.
    (2) Technical Assistance Grants. NCUA will disburse technical 
assistance grants in such amounts, and in accordance with such terms and 
conditions, as NCUA may establish. In general, technical assistance 
grants are provided on a reimbursement basis, to cover expenditures 
approved in advance by NCUA and supported by receipts evidencing payment 
by the Participating Credit Union.

[76 FR 67587, Nov. 2, 2011. Redesignated and amended at 81 FR 85112, 
Nov. 25, 2016]



Sec. 705.8  Urgency.

    On an emergency basis, subject to funds availability, NCUA may 
consider a funding request from a Qualifying Credit Union experiencing 
an unplanned or unexpected expense that the Qualifying Credit Union is 
unable to meet with its own resources. The

[[Page 865]]

Qualifying Credit Union must demonstrate a compelling need for immediate 
assistance without which its continued operations would be threatened or 
severely disrupted. NCUA, in its discretion, will determine whether the 
situation constitutes an emergency and if the Qualifying Credit Union is 
required to submit any additional information to show why the funds are 
needed on an emergency basis. NCUA will determine and substantiate any 
reason to expedite funding in such case. Requests for loans or technical 
assistance grants under this section will be addressed on an ongoing 
basis and are outside the scope of the related Notice of Funding 
Opportunity. Technical assistance grants and loans provided on this 
basis must still demonstrate a purpose consistent with the goals of the 
Fund. Loans and technical assistance grants made under this section are 
not anticipated to be a regular source of funding for any Qualifying 
Credit Unions.

[76 FR 67587, Nov. 2, 2011. Redesignated at 81 FR 85112, Nov. 25, 2016]



Sec. 705.9  Reporting and monitoring.

    (a) General. NCUA's policy is to monitor Participating Credit Unions 
to assure that loan and technical assistance grant funds awarded under 
this part have been used in accordance with their intended purposes and 
to determine whether anticipated outcomes have been achieved. Particular 
emphasis will be placed on reviewing loan funds earmarked for programs 
or initiatives proposed by the Participating Credit Union to determine 
if the funds have been used as represented and whether the program or 
initiative has had the impact anticipated by the Participating Credit 
Union.
    (b) Reporting--(1) Reporting to NCUA. A Participating Credit Union 
must complete and submit to NCUA all required reports, at such times and 
in such formats as NCUA will direct. Such reports must describe how the 
Participating Credit Union has used the loan or technical assistance 
grant proceeds and the results it has obtained, in relation to the 
programs, policies, or initiatives identified by the Participating 
Credit Union in its application. NCUA may request additional information 
as it determines appropriate.
    (2) Reporting to Members--(i) Loans. A Participating Credit Union 
that receives a loan under this part must report on the progress of 
providing needed community services to the Participating Credit Union's 
members once a year, either at the annual meeting or in a written report 
sent to all members. The Participating Credit Union must also submit to 
NCUA the written report or a summary of the report provided to members.
    (ii) Technical Assistance Grants. A Participating Credit Union that 
receives a technical assistance grant under this part should report on 
the progress of providing needed community services to the Participating 
Credit Union's members once a year, either at the annual meeting or in a 
written report sent to all members.
    (c) Monitoring. At its discretion, for verification purposes and as 
part of its evaluation of the effectiveness of the loan and technical 
assistance grant programs, NCUA may elect to review information 
concerning Participating Credit Unions to which it already has access, 
including information obtained through the examination process and data 
contained in Call Reports.

[76 FR 67587, Nov. 2, 2011, as amended at 81 FR 85113, Nov. 25, 2016]



Sec. 705.10  Appeals.

    (a) Appeals of non-qualification. A Qualifying Credit Union whose 
application for a loan or technical assistance grant has been denied, 
under Sec. 705.7(f), for failure of a qualification may appeal that 
decision to the NCUA Board in accordance with the following:
    (1) Within thirty days of its receipt of a notice of non-
qualification, a credit union may appeal the decision to the NCUA Board. 
The scope of the NCUA Board's review is limited to the threshold 
question of qualification and not the issue of whether, among qualified 
applicants, a particular loan or technical assistance grant is funded.
    (2) The foregoing procedure shall apply only with respect to 
Applications received by NCUA during an open period in which funds are 
available and NCUA has called for Applications. Any Application 
submitted by an applicant during a period in which NCUA has not called 
for Applications will be rejected,

[[Page 866]]

except for those Applications submitted under Sec. 705.8. Any such 
rejection shall not be subject to appeal or review by the NCUA Board.
    (b) Appeals of technical assistance grant reimbursement denials. 
Pursuant to NCUA Interpretative Ruling and Policy Statement 11-1, any 
Participating Credit Union may appeal a denial of a technical assistance 
grant reimbursement to NCUA's Supervisory Review Committee. All appeals 
of technical assistance grant reimbursements must be submitted to the 
Supervisory Review Committee within 30 days from the date of the denial. 
The decisions of the Supervisory Review Committee are final and may not 
be appealed to the NCUA Board.

[81 FR 85113, Nov. 25, 2016]

                           PART 706 [RESERVED]



PART 707_TRUTH IN SAVINGS--Table of Contents



Sec.
707.1  Authority, purpose, coverage and effect on State laws.
707.2  Definitions.
707.3  General disclosure requirements.
707.4  Account disclosures.
707.5  Subsequent disclosures.
707.6  Periodic statement disclosures.
707.7  Payment of dividends.
707.8  Advertising.
707.9  Enforcement and record retention.
707.10  [Reserved]
707.11  Additional disclosure requirements for overdraft services.

Appendix A to Part 707--Annual Percentage Yield Calculation
Appendix B to Part 707--Model Clauses and Sample Forms
Appendix C to Part 707--Official Staff Interpretations

    Authority: 12 U.S.C. 4311.

    Source: 58 FR 50445, Sept. 27, 1993, unless otherwise noted.



Sec. 707.1  Authority, purpose, coverage and effect on State laws.

    (a) Authority. This regulation is issued by the National Credit 
Union Administration to implement the Truth in Savings Act of 1991 
(TISA), contained in the Federal Deposit Insurance Corporation 
Improvement Act of 1991, 12 U.S.C. 3201 et seq., Pub. L. 102-242, 105 
Stat. 2236. Information collection requirements in this regulation have 
been approved by the Office of Management and Budget under the 
provisions of 44 U.S.C. 3501 et seq. and have been assigned OMB No. 
3133-0134.
    (b) Purpose. The purpose of this part is to enable credit union 
members and potential members to make informed decisions about accounts 
at credit unions. This part requires credit unions to provide 
disclosures so that members and potential members can make meaningful 
comparisons among credit unions and depository institutions.
    (c) Coverage. This part applies to all credit unions whose accounts 
are either insured by, or eligible to be insured by, the National Credit 
Union Share Insurance Fund, except for any credit union that has been 
designated as a corporate credit union by the National Credit Union 
Administration and any credit union that has $2 million or less in 
assets, after subtracting any nonmember deposits, and is determined to 
be nonautomated by the National Credit Union Administration. In 
addition, the advertising rules in Sec. 707.8 apply to any person who 
advertises an account offered by a credit union, including any person 
who solicits any amount from any other person for placement in a credit 
union.
    (d) Effect on state laws. State law requirements that are 
inconsistent with the requirements of the TISA and this part are 
preempted to the extent of the inconsistency.

[58 FR 50445, Sept. 27, 1993, as amended at 61 FR 68129, Dec. 27, 1996; 
74 FR 36103, July 22, 2009]



Sec. 707.2  Definitions.

    For purposes of this part, the following definitions apply:
    (a) Account means a share or deposit account at a credit union held 
by or offered to a member or potential member. It includes, but is not 
limited to, accounts such as share, share draft, checking and term share 
accounts. For purposes of the advertising regulations in Sec. 707.8, the 
term also includes an account at a credit union that is held by or 
offered by a share or deposit broker.
    (b) Advertisement means a commercial message, appearing in any 
medium, that promotes directly or indirectly:

[[Page 867]]

    (1) The availability or terms of, or a deposit in, a new account; 
and
    (2) For purposes of Sec. 707.8(a) and Sec. 707.11 of this part, the 
terms of, or a deposit in, a new or existing account.
    (c) Annual percentage yield means a percentage rate reflecting the 
total amount of dividends paid on an account, based on the dividend rate 
and the frequency of compounding for a 365-day period and calculated 
according to the rules in appendix A of this part.
    (d) Average daily balance method means the application of a periodic 
rate to the average daily balance in the account for the period. The 
average daily balance is determined by adding the full amount of 
principal in the account for each day of the period and dividing that 
figure by the number of days in the period.
    (e) Bonus means a premium, gift, award, or other consideration worth 
more than $10 (whether in the form of cash, credit, merchandise, or any 
equivalent) given or offered to a member during a year in exchange for 
opening, maintaining, or renewing an account, or increasing an account 
balance. The term does not include dividends, other consideration worth 
$10 or less given during a year, the waiver or reduction of a fee, the 
absorption of expenses, non-dividend membership benefits, or 
extraordinary dividends.
    (f) Credit union means a federal or state-chartered credit union 
that is either insured by, or is eligible to apply for insurance from, 
the National Credit Union Share Insurance Fund.
    (g) Daily balance method means the application of a daily periodic 
rate to the full amount of principal in the account each day.
    (h) Dividend and dividends mean any declared or prospective earnings 
on a member's shares in a credit union to be paid to a member or to the 
member's account. For purposes of this part, the term does not include 
the payment of a bonus or other consideration worth $10 or less given 
during a year, the waiver or reduction of a fee, the absorption of 
expenses, non-dividend membership benefits, or extraordinary dividends.
    (i) Dividend declaration date means the date that the board of 
directors of a credit union declares a dividend for the preceding 
dividend period.
    (j) Dividend period means the span of time established by the board 
of directors of a credit union by the end of which shares in a member 
account earn dividend credit. The dividend period may be different for 
each type of account.
    (k) Dividend rate means the declared or prospective annual dividend 
rate paid on an account, which does not reflect compounding. For 
purposes of the account disclosures in Sec. 707.4(b)(1)(i), the rate 
may, but need not, be referred to as the ``annual percentage rate'' in 
addition to being referred to as the ``dividend rate.''
    (l) Extraordinary dividends means a nonrepetitive dividend paid at 
an irregular time from funds legally available for such distribution.
    (m) Fixed-rate account means an account that is not a variable rate 
account as defined in paragraph (z) of this section.
    (n) Grace period means a period following the maturity of an 
automatically renewing term share account during which the member may 
withdraw funds without being assessed a penalty.
    (o) Interest means any payment to a member or to a member's account 
for the use of funds in a nondividend-bearing account at a state-
chartered credit union offered pursuant to state law, calculated by 
application of a periodic rate to the balance. For purposes of this 
regulation, the term does not include the payment of a bonus or other 
consideration worth $10 or less given during a year, the waiver or 
reduction of a fee, the absorption of expenses, non-dividend membership 
benefits, or extraordinary dividends. Except as is specifically 
otherwise provided in this part, in the case of an interest-bearing 
account held in or offered by a state-chartered credit union pursuant to 
state law, the word ``interest'' shall be substituted for all references 
to ``dividend'' or ``dividends'' in this part.
    (p) Member means:
    (1) A natural person member of the credit union who holds an account 
primarily for personal, family, or household purposes;
    (2) A natural person nonmember who holds an account primarily for 
personal, family, or household purposes, either jointly with a natural 
person

[[Page 868]]

member or in a credit union designated as a low-income credit union, or 
to whom such an account is offered; and
    (3) A natural person nonmember who holds a deposit account in a 
state-chartered credit union pursuant to state law, or to whom such 
deposit account is offered.


The term does not include a natural person who holds an account for 
another in a professional capacity or an unincorporated nonbusiness 
association of natural person members.
    (q) Non-dividend membership benefits means any property or service 
provided by a credit union to its members, the nature of which makes its 
valuation unreasonable and administratively impracticable.
    (r) Passbook account means an account in which the member retains a 
book or other document in which the credit union records transactions on 
the account.
    (s) Periodic statement means a statement setting forth information 
about an account (other than a term share account or passbook account) 
that is provided to a member on a regular basis four or more times a 
year.
    (t) Potential member means a natural person within the credit 
union's field of membership (or an unincorporated nonbusiness 
association of such persons) or otherwise eligible to become a member as 
defined in paragraph (q) of this section.
    (u) Stepped-rate account means an account that has two or more 
dividend rates that take effect in succeeding periods and are known when 
the account is opened.
    (v) Term share account means any share certificate, interest-bearing 
certificate of deposit account, or other account with a maturity of at 
least seven days in which the member generally does not have a right to 
make withdrawals for six days after the account is opened, unless the 
account is subject to an early withdrawal penalty of at least seven 
days' dividends on amounts withdrawn, offered by a credit union to a 
member or potential member.
    (w) Tiered-rate account means an account that has two or more 
dividend rates that are applicable to specified balance levels.
    (x) Variable-rate account means a share, share draft, checking, or 
term share account in which the simple dividend rate may change after 
the account is opened, unless the credit union contracts to give at 
least thirty days advance written notice of rate decreases.

[58 FR 50445, Sept. 27, 1993, as amended at 59 FR 13436, Mar. 22, 1994; 
59 FR 59899, Nov. 21, 1994; 70 FR 72898, Dec. 8, 2005; 78 FR 32544, May 
31, 2013]



Sec. 707.3  General disclosure requirements.

    (a) Form. Credit unions must make the disclosures required by 
Secs. 707.4 through 707.6 of this part, as applicable, clearly and 
conspicuously, in writing, and in a form the member or potential member 
may keep. Credit unions may provide the disclosures required by this 
part to a member or potential member in electronic form, subject to 
compliance with the consent and other applicable provisions of the 
Electronic Signatures in Global and National Commerce Act (E-Sign Act), 
15 U.S.C. 7001 et seq. Credit unions may provide the disclosures 
required by Secs. 707.4(a)(2) and 707.8 to a member or potential member 
in electronic form without regard to the consent or other provisions of 
the E-Sign Act in the circumstances set forth in those sections. 
Disclosures for each account offered by a credit union may be presented 
separately or combined with disclosures for the credit union's other 
accounts, as long as it is clear which disclosures are applicable to the 
member or potential member's account.
    (b) General. The disclosures shall reflect the terms of the legal 
obligation between the member and the credit union. Disclosures may be 
made in languages other than English, provided the disclosures are 
available in English upon request.
    (c) Relation to Regulation E (12 CFR part 1005). Disclosures 
required by and provided in accordance with the Electronic Fund Transfer 
Act (15 U.S.C. 1601) and its implementing Regulation E (12 CFR part 
1005) that are also required by this part may be substituted for the 
disclosures required by this part.

[[Page 869]]

    (d) Multiple members. If an account is held by more than one member, 
disclosures may be made to any one of the members.
    (e) Oral responses to inquiries. In an oral response to a member or 
potential member's inquiry about dividend rates payable on its accounts, 
the credit union shall state the annual percentage yield. The dividend 
rate may be stated in addition to the annual percentage yield. No other 
rate may be stated. In stating a dividend rate and annual percentage 
yield, a credit union shall:
    (1) For dividend-bearing accounts other than term share accounts, 
specify a dividend rate and annual percentage yield as of the last 
dividend declaration date. In the event that disclosures of a dividend 
rate and annual percentage yield as of the last dividend declaration 
date might be inaccurate because of known or contemplated dividend rate 
changes, the credit union may disclose the prospective dividend rate and 
prospective annual percentage yield. Such prospective dividend rate and 
prospective annual percentage yield may be disclosed either in lieu of, 
or in addition to, the dividend rate and annual percentage yield as of 
the last dividend declaration date.
    (2) For interest-bearing accounts and for dividend-bearing term 
share accounts, specify an interest (dividend) rate and annual 
percentage yield that were offered within the most recent seven calendar 
days; state that the rate and yield are accurate as of an identified 
date; and provide a telephone number members may call to obtain current 
rate information.
    (f) Rounding and accuracy rules for rates and yields--(1) Rounding. 
The annual percentage yield, the annual percentage yield earned, and the 
dividend rate shall be rounded to the nearest one-hundredth of one 
percentage point (.01%) and expressed to two decimal places. For account 
disclosures, the dividend rate may be expressed to more than two decimal 
places.
    (2) Accuracy. The annual percentage yield (and the annual percentage 
yield earned) will be considered accurate if not more than one-twentieth 
of one percentage point (.05%) above or below the annual percentage 
yield (and the annual percentage yield earned) determined in accordance 
with the rules in appendix A of this part.

(Approved by the Office of Management and Budget under control number 
3133-0134)

[58 FR 50445, Sept. 27, 1993, as amended at 61 FR 114, Jan. 3, 1996; 66 
FR 33162, June 21, 2001; 74 FR 36104, July 22, 2009; 77 FR 71084, Nov. 
29, 2012]



Sec. 707.4  Account disclosures.

    (a) Delivery of account disclosures--(1) Account opening--(i) 
General. A credit union must provide account disclosures to a member or 
potential member before an account is opened or a service is provided, 
whichever is earlier. A credit union is deemed to have provided a 
service when a fee required to be disclosed is assessed. Except as 
provided in paragraph (a)(1)(ii) of this section, if a member or 
potential member is not present at the credit union when the account is 
opened or the service is provided and has not already received the 
disclosures, the credit union must mail or deliver the disclosures no 
later than 10 business days after the account is opened or the service 
is provided, whichever is earlier.
    (ii) Timing of electronic disclosures. If a member or potential 
member who is not present at the credit union uses electronic means, for 
example, an internet Web site, to open an account or request a service, 
the disclosures required under paragraph (a)(1) of this section must be 
provided before the account is opened or the service is provided.
    (2) Requests. (i) A credit union must provide account disclosures to 
a member or potential member upon request. If a member or potential 
member who is not present at the credit union makes a request, the 
credit union must mail or deliver the disclosures within a reasonable 
time after it receives the request and may provide the disclosures in 
paper form or electronically if the member or potential member agrees.
    (ii) In providing disclosures upon request, the credit union may:
    (A) Specify rates as follows:

[[Page 870]]

    (1) For dividend-bearing accounts other than term share accounts, 
specify a dividend rate and annual percentage yield as of the last 
dividend declaration date. In the event that disclosures of a dividend 
rate and annual percentage yield as of the last dividend declaration 
date might be inaccurate because of known or contemplated dividend rate 
changes, the credit union may disclose the prospective dividend rate and 
prospective annual percentage yield. Such prospective dividend rate and 
prospective annual percentage yield may be disclosed either in lieu of, 
or in addition to, the dividend rate and annual percentage yield as of 
the last dividend declaration date.
    (2) For interest bearing accounts and for dividend-bearing term 
share accounts, specify an interest rate and annual percentage yield 
that were offered within the most recent seven calendar days; state that 
the rate and yield are accurate as of an identified date; and provide a 
telephone number members may call to obtain current rate information; 
and
    (B) State the maturity of a term share account as either a term or a 
date.
    (b) Content of account disclosures. Account disclosures shall 
include the following, as applicable:
    (1) Rate information--(i) Annual percentage yield and dividend rate. 
(A) For interest-bearing accounts and for dividend-bearing term share 
accounts, the ``annual percentage yield'' and the ``interest rate'' 
(``dividend rate''), using those terms, and for fixed-rate accounts the 
period of time the interest (dividend) rate will be in effect.
    (B) For dividend-bearing accounts other than term share accounts, a 
credit union shall specify a dividend rate and annual percentage yield 
(using those terms) as of the last dividend declaration date. In the 
event that disclosures of a dividend rate and annual percentage yield as 
of the last dividend declaration date might be inaccurate because of 
known or contemplated dividend rate changes, the credit union may 
disclose the prospective dividend rate and prospective annual percentage 
yield. Such prospective dividend rate and prospective annual percentage 
yield may be disclosed either in lieu of, or in addition to, the 
dividend rate and annual percentage yield as of the last dividend 
declaration date.
    (ii) Variable rates. For variable-rate accounts:
    (A) The fact that the dividend rate and annual percentage yield may 
change;
    (B) How the dividend rate is determined;
    (C) The frequency with which the dividend rate may change; and
    (D) Any limitation on the amount the dividend rate may change.
    (2) Compounding and crediting--(i) Frequency. The frequency with 
which dividends are compounded and credited, and the dividend period for 
dividend-bearing accounts.
    (ii) Effect of closing an account. If members will forfeit dividends 
if they close an account before accrued dividends are credited, a 
statement that the dividends will not be paid in such cases.
    (3) Balance information--(i) Minimum balance requirements. Any 
minimum balance required to:
    (A) Open the account;
    (B) Avoid the imposition of a fee; or
    (C) Obtain the annual percentage yield disclosed.


Except for the balance to open the account, the disclosure shall state 
how the balance is determined for these purposes.
    (ii) Balance computation method. An explanation of the balance 
computation method specified in Sec. 707.7, used to calculate dividends 
on the account.
    (iii) When dividends begin to accrue. A statement of when dividends 
begin to accrue on noncash deposits.
    (4) Fees. The amount of any fee that may be imposed in connection 
with the account (or an explanation of how the fee will be determined) 
and the conditions under which the fee may be imposed.
    (5) Transaction limitations. Any limitations on the number or dollar 
amount of withdrawals or deposits.
    (6) Features of term share accounts. For term share accounts:
    (i) Time requirements. The maturity date.
    (ii) Early withdrawal penalties. A statement that a penalty will be 
imposed for early withdrawal, how it is

[[Page 871]]

calculated, and the conditions for its assessment.
    (iii) Withdrawal of dividends prior to maturity. If compounding 
occurs and dividends may be withdrawn prior to maturity, a statement 
that the annual percentage yield assumes dividends remain in the account 
until maturity and that a withdrawal will reduce earnings. For accounts 
with a stated maturity greater than 1 year that do not compound 
dividends on an annual or more frequent basis, that require dividend 
payouts at least annually, and that disclose an APY determined in 
accordance with section E of appendix A of this part, a statement that 
dividends cannot remain on account and that payout of dividends is 
mandatory.
    (iv) Renewal policies. A statement of whether or not the account 
will renew automatically at maturity. If it will, a statement of whether 
or not a grace period will be provided and, if so, the length of that 
period must be stated. If the account will not renew automatically, a 
statement of whether dividends will be paid after maturity if the member 
does not renew the account must be stated.
    (7) Bonuses. The amount or type of any bonus, when the bonus will be 
provided, and any minimum balance and time requirements to obtain the 
bonus.
    (8) Nature of dividends. For accounts earning dividends, other than 
term share accounts, a statement that dividends are paid from current 
income and available earnings, after required transfers to reserves at 
the end of a dividend period.
    (c) Notice to existing account holders--(1) Notice of availability 
of disclosures. Credit unions shall provide a notice to members who 
receive periodic statements and who hold existing accounts of the type 
offered by the credit union on January 1, 1995. The notice shall be 
included on or with the first periodic statement sent after January 1, 
1995 (or on or with the first periodic statement for a statement cycle 
beginning on or after that date). The notice shall state that the 
members may request account disclosures containing terms, fees, and rate 
information for the account. In responding to such a request, credit 
unions shall provide disclosures in accordance with paragraph (a)(2) of 
this section.
    (2) Alternative to notice. As an alternative to the notice described 
in paragraph (c)(1) of this section, credit unions may provide account 
disclosures to members. The disclosures may be provided either with a 
periodic statement or separately, but must be sent no later than when 
the periodic statement described in paragraph (c)(1) of this section is 
sent.

(Approved by the Office of Management and Budget under control number 
3133-0134)

[58 FR 50445, Sept. 27, 1993, as amended at 61 FR 114, Jan. 3, 1996; 63 
FR 71574, Dec. 29, 1998; 66 FR 33163, June 21, 2001; 74 FR 36104, July 
22, 2009]



Sec. 707.5  Subsequent disclosures.

    (a) Change in terms--(1) Advance notice required. A credit union 
shall give advance notice to affected members of any change in a term 
required to be disclosed under Sec. 707.4(b), if the change may reduce 
the annual percentage yield or adversely affect the member. The notice 
shall include the effective date of the change. The notice shall be 
mailed or delivered at least 30 calendar days before the effective date 
of the change.
    (2) No notice required. No notice under this section is required 
for:
    (i) Variable-rate changes. Changes in the dividend rate and 
corresponding changes in the annual percentage yield in variable-rate 
accounts.
    (ii) Share draft and check printing fees. Changes in fees for check 
printing.
    (iii) Short-term term share accounts. Changes in any term for term 
share accounts with maturities of one month or less.
    (b) Notice before maturity for term share accounts longer than one 
month that renew automatically. For term share accounts with a maturity 
longer than one month that renew automatically at maturity, credit 
unions shall provide the disclosures described below before maturity. 
The disclosures shall be mailed or delivered at least 30 calendar days 
before maturity of the existing account. Alternatively, the disclosures 
may be mailed or delivered at least 20 calendar days before the end of 
the grace period on the existing account,

[[Page 872]]

provided a grace period of at least five calendar days is allowed.
    (1) Maturities of longer than one year. If the maturity is longer 
than one year, the credit union shall provide account disclosures set 
forth in Sec. 707.4(b) for the new account, along with the date the 
existing account matures. If the dividend rate and annual percentage 
yield that will be paid for the new account are unknown when disclosures 
are provided, the credit union shall state that those rates have not yet 
been determined, the date when they will be determined, and a telephone 
number members may call to obtain the dividend rate and the annual 
percentage yield that will be paid for the new account.
    (2) Maturities of one year or less but longer than one month. If the 
maturity is one year or less but longer than one month, the credit union 
shall either:
    (i) Provide disclosures as set forth in paragraph (b)(1) of this 
section; or
    (ii) Disclose to the member:
    (A) The date the existing account matures and the new maturity date 
if the account is renewed;
    (B) The dividend rate and the annual percentage yield for the new 
account if they are known (or that those rates have not yet been 
determined, the date when they will be determined, and a telephone 
number the member may call to obtain the dividend rate and the annual 
percentage yield that will be paid for the new account); and
    (C) Any difference in the terms of the new account as compared to 
the terms required to be disclosed under Sec. 707.4(b) for the existing 
account.
    (c) Notice before maturity for term share accounts longer than one 
year that do not renew automatically. For term share accounts with a 
maturity longer than one year that do not renew automatically at 
maturity, credit unions shall disclose to members the maturity date and 
whether dividends will be paid after maturity. The disclosures shall be 
mailed or delivered at least 10 calendar days before maturity of the 
existing account.

(Approved by the Office of Management and Budget under control number 
3133-0134)

[58 FR 50445, Sept. 27, 1993, as amended at 61 FR 114, Jan. 3, 1996; 63 
FR 71574, Dec. 29, 1998]



Sec. 707.6  Periodic statement disclosures.

    (a) Rule when statement and crediting periods vary. In making the 
disclosures described in paragraph (b) of this section, credit unions 
that calculate and credit dividends for a period other than the 
statement period, such as the dividend period, may calculate and 
disclose the annual percentage yield earned and amount of dividends 
earned based on that period rather than the statement period. The 
information in paragraph (b)(4) shall be stated for that period as well 
as for the statement period.
    (b) Statement disclosures. If a credit union mails or delivers a 
periodic statement, the statement shall include the following 
disclosures:
    (1) Annual percentage yield earned. The ``annual percentage yield 
earned,'' using that term as calculated according to the rules in 
appendix A of this part.
    (2) Amount of dividends. The dollar amount of dividends earned 
(accrued or paid and credited) on the account. The dollar amount of any 
extraordinary dividends earned during the statement period shall be 
shown as a separate figure.
    (3) Fees imposed. Fees required to be disclosed under 
Sec. 707.4(b)(4) of this part that were debited from the account during 
the statement period. The fees must be itemized by type and dollar 
amounts. Except as provided in Sec. 707.11(a)(1) of this part, when fees 
of the same type are imposed more than once in a statement period, a 
credit union may itemize each fee separately or group the fees together 
and disclose a total dollar amount for all fees of that type.
    (4) Length of period. The total number of days in the statement 
period, or the beginning and ending dates of the period.
    (5) Aggregate fee disclosure. If applicable, the total overdraft and 
returned item fees required to be disclosed by Sec. 707.11(a).

(Approved by the Office of Management and Budget under control number 
3133-0134)

[58 FR 50445, Sept. 27, 1993, as amended at 59 FR 59899, Nov. 21, 1994; 
61 FR 114, Jan. 3, 1996; 64 FR 66356, Nov. 26, 1999; 66 FR 33163, June 
21, 2001; 70 FR 72898, Dec. 8, 2005; 75 FR 47175, Aug. 5, 2010]

[[Page 873]]



Sec. 707.7  Payment of dividends.

    (a) Permissible methods--(1) Balance on which dividends are 
calculated. Credit unions shall calculate dividends on the full amount 
of principal in an account for each day by use of either the daily 
balance method or the average daily balance method. Credit unions shall 
calculate dividends by use of a daily rate of at least \1/365\ of the 
dividend rate. In a leap year a daily rate of \1/366\ of the dividend 
rate may be used.
    (2) Determination of minimum balance to earn dividends. A credit 
union shall use the same method to determine any minimum balance 
required to earn dividends as it uses to determine the balance on which 
dividends are calculated. A credit union may use an additional method 
that is unequivocally beneficial to the member.
    (b) Compounding and crediting policies. This section does not 
require credit unions to compound or credit dividends at any particular 
frequency.
    (c) Date dividends begin to accrue. Dividends shall begin to accrue 
not later than the day specified in section 606 of the Expedited Funds 
Availability Act (12 U.S.C. 4005) and implementing Regulation CC (12 CFR 
part 229). Dividends shall accrue on funds until the day funds are 
withdrawn.

(Approved by the Office of Management and Budget under control number 
3133-0134)

[58 FR 50445, Sept. 27, 1993, as amended at 61 FR 114, Jan. 3, 1996]



Sec. 707.8  Advertising.

    (a) Misleading or inaccurate advertisements. An advertisement must 
not:
    (1) Be misleading or inaccurate or misrepresent a credit union's 
account agreement; or
    (2) Refer to or describe an account as ``free'' or ``no cost'' or 
contain a similar term if any maintenance or activity fee may be imposed 
on the account. The word ``profit'' must not be used in referring to 
dividends or interest paid on an account.
    (b) Permissible rates. If an advertisement states a rate of return, 
it shall state the rate as an ``annual percentage yield,'' using that 
term. (The abbreviation ``APY'' may be used provided the term ``annual 
percentage yield'' is stated at least once in the advertisement.) The 
advertisement shall not state any other rate, except that the ``dividend 
rate,'' using that term, may be stated in conjunction with, but not more 
conspicuously than, the annual percentage yield to which it relates.
    (c) When additional disclosures are required. Except as provided in 
paragraph (e) of this section, if the annual percentage yield is stated 
in an advertisement, the advertisement shall state the following 
information, to the extent applicable, clearly and conspicuously:
    (1) Variable rates. For variable-rate accounts, a statement that the 
rate may change after the account is opened.
    (2) Time annual percentage yield is offered. For interest-bearing 
accounts and dividend-bearing term share accounts, the period of time 
the annual percentage yield will be offered, or a statement that the 
annual percentage yield is accurate as of a specified date. For 
dividend-bearing accounts other than term share accounts, a statement 
that the annual percentage yield is accurate as of the last dividend 
declaration date. In the event that disclosure of an annual percentage 
yield as of the last dividend declaration date might be inaccurate 
because of known or contemplated dividend rate changes, the credit union 
may disclose the prospective annual percentage yield. Such prospective 
annual percentage yield may be disclosed either in lieu of, or in 
addition to, the dividend rate and annual percentage yield as of the 
last dividend declaration date.
    (3) Minimum balance. The minimum balance required to earn the 
advertised annual percentage yield. For tiered-rate accounts, the 
minimum balance required for each tier shall be stated in close 
proximity and with equal prominence to the applicable annual percentage 
yield.
    (4) Minimum opening deposit. The minimum deposit required to open 
the account, if it is greater than the minimum balance necessary to earn 
the advertised annual percentage yield.
    (5) Effect of fees. A statement that fees could reduce the earnings 
on the account.

[[Page 874]]

    (6) Features of term share accounts. For term share accounts:
    (i) Time requirements. The term of the account.
    (ii) Early withdrawal penalties. A statement that a penalty will or 
may be imposed for early withdrawal.
    (iii) Required dividend payouts. For noncompounding term share 
accounts with a stated maturity greater than one year that do not 
compound dividends on an annual or more frequent basis, that require 
dividend payouts at least annually, and that disclose an APY determined 
in accordance with section E of appendix A of this part, a statement 
that dividends cannot remain on account and that payout of dividends is 
mandatory.
    (d) Bonuses. Except as provided in paragraph (e) of this section, if 
a bonus is stated in an advertisement, the advertisement shall state the 
following information, to the extent applicable, clearly and 
conspicuously:
    (1) The ``annual percentage yield,'' using that term;
    (2) The time requirements to obtain the bonus;
    (3) The minimum balance required to obtain the bonus;
    (4) The minimum balance required to open the account, if it is 
greater than the minimum balance necessary to obtain the bonus; and
    (5) When the bonus will be provided.
    (e) Exemption for certain advertisements--(1) Certain media. If an 
advertisement is made through one of the following media, it need not 
contain the information in paragraphs (c)(1), (c)(2), (c)(4), (c)(5), 
(c)(6)(ii), (d)(4) and (d)(5) of this section:
    (i) Broadcast or electronic media, such as television or radio;
    (ii) Outdoor media, such as billboards; or
    (iii) Telephone response machines.
    (2) Indoors signs. (i) Signs inside the premises of a credit union 
(or the premises of a share or deposit broker) are not subject to 
paragraphs (b), (c), (d) or (e)(1) of this section.
    (ii) If a sign exempted by paragraph (e)(2) of this section states a 
rate of return, it shall:
    (A) State the rate as an ``annual percentage yield,'' using that 
term or the term ``APY.'' The sign shall not state any other rate, 
except that the dividend rate may be stated in conjunction with the 
annual percentage yield to which it relates.
    (B) Contain a statement advising members to contact an employee for 
further information about applicable fees and terms.
    (3) Newsletters. (i) Newsletters sent by a credit union to existing 
members only are not subject to paragraphs (b), (c), (d) or (e)(1) of 
this section.
    (ii) If a newsletter exempted by paragraph (e)(3) of this section 
states a rate of return, it shall:
    (A) State the rate as an ``annual percentage yield,'' using that 
term or the term ``APY.'' The newsletter shall not state any other rate, 
except that the dividend rate may be stated in conjunction with the 
annual percentage yield to which it relates.
    (B) Contain a statement advising members to contact an employee for 
further information about applicable fees and terms.
    (f) Additional disclosures in connection with the payment of 
overdrafts. Credit unions that promote the payment of overdrafts in an 
advertisement must include in the advertisement the disclosures required 
by Sec. 707.11(b) of this part.

(Approved by the Office of Management and Budget under control number 
3133-0134)

[58 FR 50445, Sept. 27, 1993, as amended at 59 FR 13436, Mar. 22, 1994; 
61 FR 114, Jan. 3, 1996; 63 FR 71575, Dec. 29, 1998; 70 FR 72898, Dec. 
8, 2005; 73 FR 30477, May 28, 2008]



Sec. 707.9  Enforcement and record retention.

    (a) Administrative enforcement. Section 270 of TISA (12 U.S.C. 4309) 
contains the provisions relating to administrative sanctions for failure 
to comply with the requirements of TISA and this part.
    (b) Civil liability. Section 271 of TISA (12 U.S.C. 4310) contains 
the provisions relating to civil liability for failure to comply with 
the requirements of TISA and this part; Section 271 is repealed 
effective September 30, 2001.
    (c) Record retention. A credit union shall retain evidence of 
compliance with this regulation for a minimum of two years after the 
date disclosures are

[[Page 875]]

required to be made or action is required to be taken.

(Approved by the Office of Management and Budget under control number 
3133-0134)

[58 FR 50445, Sept. 27, 1993, as amended at 59 FR 13436, Mar. 22, 1994; 
61 FR 114, Jan. 3, 1996; 63 FR 71575, Dec. 29, 1998]



Sec. 707.10  [Reserved]



Sec. 707.11  Additional disclosure requirements for overdraft services.

    (a) Disclosure of total fees on periodic statements--(1) General. A 
credit union must separately disclose on each periodic statement, as 
applicable:
    (i) The total dollar amount for all fees or charges imposed on the 
account for paying checks or other items when there are insufficient or 
unavailable funds and the account becomes overdrawn, using the term 
``Total Overdraft Fees;'' and
    (ii) The total dollar amount for all fees or charges imposed on the 
account for returning items unpaid.
    (2) Totals required. The disclosures required by paragraph (a)(1) of 
this section must be provided for the statement period and for the 
calendar year-to-date.
    (3) Format requirements. The aggregate fee disclosures required by 
paragraph (a) of this section must be disclosed in close proximity to 
fees identified under Sec. 707.6(a)(3), using a format substantially 
similar to Sample Form B-10 in appendix B.
    (b) Advertising disclosures for overdraft services--(1) Disclosures. 
Except as provided in paragraphs (b)(2),(b)(3), and (b)(4) of this 
section, any advertisement promoting the payment of overdrafts must 
disclose in a clear and conspicuous manner:
    (i) The fee or fees for the payment of each overdraft;
    (ii) The categories of transactions for which a fee for paying an 
overdraft may be imposed;
    (iii) The time period by which the member must repay or cover any 
overdraft; and
    (iv) The circumstances under which the credit union will not pay an 
overdraft.
    (2) Communications about the payment of overdrafts not subject to 
additional advertising disclosures. Paragraph (b)(1) of this section 
does not apply to:
    (i) An advertisement promoting a service where the credit union's 
payment of overdrafts will be agreed upon in writing and subject to part 
1026 of this title (Regulation Z);
    (ii) A communication by a credit union about the payment of 
overdrafts in response to a member-initiated inquiry about share 
accounts or overdrafts. Providing information about the payment of 
overdrafts in response to a balance inquiry made through an automated 
system, such as a telephone response machine, ATM, or a credit union's 
Internet site, is not a response to a member-initiated inquiry for 
purposes of this paragraph;
    (iii) An advertisement made through broadcast or electronic media, 
such as television or radio;
    (iv) An advertisement made on outdoor media, such as billboards;
    (v) An ATM receipt;
    (vi) An in-person discussion with a member;
    (vii) Disclosures required by Federal or other applicable law;
    (viii) Information included on a periodic statement or a notice 
informing a member about a specific overdrawn item or the amount the 
account is overdrawn;
    (ix) A term in a share account agreement discussing the credit 
union's right to pay overdrafts;
    (x) A notice provided to a member, such as at an ATM, that 
completing a requested transaction may trigger a fee for overdrawing an 
account, or a general notice that items overdrawing an account may 
trigger a fee;
    (xi) Informational or educational materials concerning the payment 
of overdrafts if the materials do not specifically describe the credit 
union's overdraft service; or
    (xii) An opt-out or opt-in notice regarding the credit union's 
payment of overdrafts or provision of discretionary overdraft services.
    (3) Exception for ATM screens and telephone response machines. The 
disclosures described in paragraphs (b)(1)(ii) and (b)(1)(iv) of this 
section are not required in connection with any advertisement made on an 
ATM screen or using a telephone response machine.

[[Page 876]]

    (4) Exception for indoor signs. Paragraph (b)(1) of this section 
does not apply to advertisements for the payment of overdrafts on indoor 
signs as described by Sec. 707.8(e)(2) of this part, provided that the 
sign contains a clear and conspicuous statement that fees may apply and 
that members should contact an employee for further information about 
applicable fees and terms. For purposes of this paragraph (b)(4), an 
indoor sign does not include an ATM screen.
    (c) Disclosure of account balances. If a credit union discloses 
balance information to a member through an automated system, the balance 
may not include additional amounts that the credit union may provide to 
cover an item when there are insufficient or unavailable funds in the 
member's account, whether under a service provided in its discretion, a 
service subject to part 1026 of this title (Regulation Z), or a service 
to transfer funds from another member account. The credit union may, at 
its option, disclose additional account balances that include such 
additional amounts, if the credit union prominently states that any such 
balance includes such additional amounts and, if applicable, that 
additional amounts are not available for all transactions.

[70 FR 72898, Dec. 8, 2005, as amended at 74 FR 36104, July 22, 2009; 75 
FR 47175, Aug. 5, 2010; 77 FR 71084, Nov. 29, 2012]



    Sec. Appendix A to Part 707--Annual Percentage Yield Calculation

    The annual percentage yield (APY) measures the total amount of 
dividends a credit union pays on an account based on the dividend rate 
and the frequency of compounding. The annual percentage yield is 
expressed as an annualized rate, based on a 365-day year. (Credit unions 
may calculate the annual percentage yield based on a 365-day or a 366-
day year in a leap year.) Part I of this appendix discusses the annual 
percentage yield calculations for account disclosures and 
advertisements, while Part II discusses annual percentage yield earned 
calculations for statements. The annual percentage yield reflects only 
dividends and does not include the value of any bonus, as that term is 
defined in part 707, that may be provided to the member to open, 
maintain, increase or renew an account. Dividends, interest or other 
earnings are not to be included in the annual percentage yield if such 
amounts are determined by circumstances that may or may not occur in the 
future. These formulas apply to both dividend-bearing and interest-
bearing accounts held by credit unions.

Part I. Annual Percentage Yield for Account Disclosures and Advertising 
                                Purposes

    In general, the annual percentage yield for account disclosures 
under Secs. 707.4 and 707.5 and for advertising under Sec. 707.8 is an 
annualized rate that reflects the relationship between the amount of 
dividends that would be earned by the member for the term of the account 
and the amount of principal used to calculate those dividends. The 
amount of dividends that would be earned may be projected based on the 
most recent past declared rate or an anticipated future rate, whichever 
the credit union judges to most reasonably approximate the dividends to 
be earned. Special rules apply to accounts with tiered and stepped 
dividend rates, and to certain term share accounts with a stated 
maturity greater than 1 year.

                            A. General Rules

    Except as provided in Part I. E. of this appendix, the annual 
percentage yield shall be calculated by the formula shown below. Credit 
unions may calculate the annual percentage yield using projected 
dividends based on either the rate at the last dividend declaration date 
or the rate anticipated at a future date. The credit union must disclose 
whichever option it uses to members. Credit unions shall calculate the 
annual percentage yield based on the actual number of days for the term 
of the account. For accounts without a stated maturity date (such as a 
typical share or share draft account), the calculation shall be based on 
an assumed term of 365 days. In determining the total dividends figure 
to be used in the formula, credit unions shall assume that all principal 
and dividends remain on deposit for the entire term, and that no other 
transactions (deposits or withdrawals) occur during the term. (This 
assumption shall not be used if a credit union requires, as a condition 
of the account, that members withdraw dividends during the term. In such 
a case, the dividends (and annual percentage yield calculation) shall 
reflect that requirement.) For term share accounts that are offered in 
multiples of months, credit unions may base the number of days on either 
the actual number of days during the applicable period, or the number of 
days that would occur for any actual sequence of that many calendar 
months. If credit unions choose to use this permissive rule, they must 
use the same number of days to calculate the dollar amount of dividends 
that will be earned on the account in the annual percentage yield 
formula (where ``Dividends'' are divided by ``Principal''.)

[[Page 877]]

    The annual percentage yield is to be calculated by use of the 
following general formula ((``APY'') is used for convenience in the 
formulas):

APY = 100 [(1 + Dividends/Principal) (365/Days in term) -1].
    ``Principal'' is the amount of funds assumed to have been deposited 
at the beginning of the account.
    ``Dividends'' is the total dollar amount of dividends earned on the 
Principal for the term of the account.
    ``Days in term'' is the actual number of days in the term of the 
account.
    When the ``days in term'' is 365 (that is, where the stated maturity 
is 365 days or where the account does not have a stated maturity), the 
APY can be calculated by use of the following simple formula:

APY = 100 (Dividends/Principal).

Examples:
    (1) If a credit union would pay $61.68 in dividends for a 365-day 
year on $1,000 deposited into a share draft account, the APY is 6.17%:

APY = 100 [(1 + 61.68/1,000) (365/365) -1]
APY = 6.17%.
    Or, using the simple formula above (since the term is deemed to be 
365 days):

APY = 100(61.68/1,000)
APY = 6.17%.
    (2) If a credit union pays $30.37 in dividends on a $1,000 six-month 
term share certificate account (where the six-month period used by the 
credit union contains 182 days), using the general formula above, the 
APY is 6.18%:

APY = 100 [(1 + 30.37/1,000)(365/182) -1]
APY = 6.18%.
    The APY is affected by the frequency of compounding, i.e., the 
amount of dividends will be greater the more frequently dividends are 
compounded for a given nominal rate. When two credit unions are offering 
the same dividend rate on, for example, a share account, the APY 
disclosed may be different if the credit unions use a different 
frequency of compounding.
Examples:
    (1) If a credit union pays $1,268.25 in dividends for a 365-day year 
on $10,000 deposited into a regular share account earning 12%, and the 
dividends are compounded monthly, the APY will be 12.68%.

APY = 100($1,268.25/10,000)
APY = 12.68%
    (2) However, if a credit union is compounding dividends on a 
quarterly basis on an account which otherwise has the same terms, the 
dividends will be $1,255.09 and the APY will be 12.55%.

APY = 100 ($1,255.09/10,000)
APY = 12.55%

 B. Stepped-Rate Accounts (Different Rates Apply in Succeeding Periods)

    For accounts with two or more dividend rates applied in succeeding 
periods (where the rates are known at the time the account is opened), a 
credit union shall assume each dividend rate is in effect for the length 
of time provided for in any share agreement.
Examples:
    (1) If a credit union offers a $1,000 6-month term share 
(certificate) account on which it pays a 5% dividend rate, compounded 
daily, for the first three months (which contain 91 days), and a 5.5% 
dividend rate, compounded daily, for the next three months (which 
contain 92 days), the total dividends for six months is $26.68, and, 
using the general formula above, the APY is 5.39%:

APY = 100 [(1 + 26.68/1,000)(365/183)-1]
APY = 5.39%.
    (2) If a credit union offers a $1,000 2-year share certificate on 
which it pays a 6% dividend rate, compounded daily, for the first year, 
and a 6.5% dividend rate, compounded daily, for the next year, the total 
dividends for two years is $133.13, and, using the general formula 
above, the APY is 6.45%:

APY = 100 [(1 + 133.13/1,000)(365/730)-1]
APY = 6.45%.

                        C. Variable-Rate Accounts

    For variable-rate accounts without an introductory premium or 
discounted rate, a credit union must base the calculation only on the 
initial dividend rate in effect when the account is opened (or 
advertised), and assume that this rate will not change during the year.
    Variable-rate accounts with an introductory premium or discount rate 
must be treated like stepped-rate accounts. Thus, a credit union shall 
assume that: (1) The introductory simple dividend rate is in effect for 
the length of time provided for in the account contract; and (2) the 
variable dividend rate that would have been in effect when the account 
is opened or advertised (but for the introductory rate) is in effect for 
the remainder of the year. If the variable rate is tied to an index, the 
index-based rate in effect at the time of disclosure must be used for 
the remainder of the year. If the rate is not tied to an index, the rate 
in effect for existing members holding the same account (who are not 
receiving the introductory dividend rate) must be used for the remainder 
of the year.
    For example, if a credit union offers an account on which it pays a 
7% dividend rate, compounded daily, for the first three months (which, 
for example, contains 91 days), while the variable dividend rate that 
would have been in effect when the account was opened was 5%, the total 
dividends for a 365-day year for a $1,000 account balance is $56.52, 
(based on 91 days at 7% followed by 274 days at 5%). Using the simple 
formula, the APY is 5.65%:


[[Page 878]]


APY = 100 (56.52/1,000)
APY = 5.65%.

   D. Accounts With Tiered Rates (Different Rates Apply to Specified 
                             Balance Level)

    For accounts in which two or more dividend rates paid on the account 
are applicable to specified balance levels, the credit union must 
calculate the annual percentage yield in accordance with the method 
described below that it uses to calculate dividends. In all cases, an 
annual percentage yield (or a range of annual percentage yields, if 
appropriate) must be disclosed for each balance tier.
    For purposes of the examples discussed below, assume the following:

------------------------------------------------------------------------
  Simple dividend rate (Percent)     Share balance required to earn rate
------------------------------------------------------------------------
5.25..............................  Up to but not exceeding $2,500.
5.50..............................  Above $2,500, but not exceeding
                                     $15,000.
5.75..............................  Above $15,000.
------------------------------------------------------------------------

                            Tiering Method A

    Under this method, a credit union pays on the full balance in the 
account the stated dividend rate that corresponds to the applicable 
share balance tier. For example, if a member deposits $8,000, the credit 
union pays the 5.50% dividend rate on the entire $8,000. This is also 
known as a ``hybrid'' or ``plateau'' tiered rate account.
    When this method is used to determine dividends, only one annual 
percentage yield will apply to each tier. Within each tier, the annual 
percentage yield will not vary with the amount of principal assumed to 
have been deposited.
    For the dividend rates and account balances assumed above, the 
credit union will state three annual percentage yields--one 
corresponding to each balance tier. Calculation of each annual 
percentage yield is similar for this type of account as for accounts 
with a single fixed dividend rate. Thus, the calculation is based on the 
total amount of dividends that would be received by the member for each 
tier of the account for a year and the principal assumed to have been 
deposited to earn that amount of dividends.
    First tier. Assuming daily compounding, the credit union will pay 
$53.90 in dividends on a $1,000 account balance. Using the general 
formula for the first tier, the APY is 5.39%:

APY = 100 [(1 + 53.90/1,000)(365/365)-1]
APY = 5.39%.
    Using the simple formula:

APY = 100 (53.90/1,000)
APY = 5.39%.
    Second tier. The credit union will pay $452.29 in dividends on an 
$8,000 deposit. Thus, using the simple formula, the annual percentage 
yield for the second tier is 5.65%:

APY = 100(452.29/8,000)
APY = 5.65%.
    Third tier. The credit union will pay $1,183.61 in dividends on a 
$20,000 account balance. Thus, using the simple formula, the annual 
percentage yield for the third tier is 5.92%:

APY = 100(1,183.61/20,000)
APY = 5.92%.

                            Tiering Method B

    Under this method, a credit union pays the stated dividend rate only 
on that portion of the balance within the specified tier. For example, 
if a member deposits $8,000, the credit union pays 5.25% on only $2,500 
and 5.50% on $5,500 (the difference between $8,000 and the first tier 
cutoff of $2,500). This is also known as a ``pure'' tiered rate account.
    The credit union that computes dividends in this manner must provide 
a range that shows the lowest and the highest annual percentage yields 
for each tier (other than for the first tier, which, like the tiers in 
Method A, has the same annual percentage yield throughout). The low 
figure for an annual percentage yield is calculated based on the total 
amount of dividends earned for a year assuming the minimum principal 
required to earn the dividend rate for that tier. The high figure for an 
annual percentage yield is based on the amount of dividends the credit 
union would pay on the highest principal that could be deposited to earn 
that same dividend rate. If the account does not have a limit on the 
amount that can be deposited, the credit union may assume any amount.
    For the tiering structure assumed above, the credit union would 
state a total of five annual percentage yields--one figure for the first 
tier and two figures stated as a range for the other two tiers.
    First tier. Assuming daily compounding, the credit union could pay 
$53.90 in dividends on a $1,000 account balance. For this first tier, 
using the simple formula, the annual percentage yield is 5.39%:

APY = 100 (53.90/1,000)
APY = 5.39%.
    Second tier. For the second tier the credit union would pay between 
$134.75 and $841.45 in dividends, based on assumed balances of $2,500.01 
and $15,000, respectively. For $2,500.01, dividends would be figured on 
$2,500 at 5.25% dividend rate plus dividends on $.01 at 5.50%. For the 
low end of the second tier, therefore, the annual percentage yield is 
5.39%. Using the simple formula:

APY = 100 (134.75/2,500)
APY = 5.39%.
    For $15,000, dividends are figured on $2,500 at 5.25% dividend rate 
plus dividends on $12,500 at 5.50% dividend rate. For the high end of 
the second tier, the annual percentage yield, using the simple formula, 
is 5.61%:

APY = 100 (841.45/15,000)

[[Page 879]]

APY = 5.61%.
    Thus, the annual percentage yield range that would be stated for the 
second tier is 5.39% to 5.61%.
    Third tier. For the third tier, the credit union would pay $841.45 
and $5,871.78 in dividends on the low end of the third tier (a balance 
of $15,000.01). For $15,000.01, dividends would be figured on $2,500 at 
5.25% dividend rate, plus dividends on $12,500 at 5.50% dividend rate, 
plus dividends on $.01 at 5.75% dividend rate. For the low end of the 
third tier, therefore, the annual percentage yield, using the simple 
formula, is 5.61%:

APY = 100 (841.45/15,000)
APY = 5.61%.
    Assuming the credit union does not limit the account balance, it may 
assume any maximum amount for the purposes of computing the annual 
percentage yield for the high end of the third tier. For an assumed 
maximum balance amount of $100,000, dividends would be figured on $2,500 
at 5.25% dividend rate, plus dividends on $12,500 at 5.50% dividend 
rate, plus dividends on $85,000 at 5.75% dividend rate. For the high end 
of the third tier, therefore, the annual percentage yield, using the 
simple formula, is 5.87%:

APY = 100 (5,871.78/100,000)
APY = 5.87%.
    Thus, the annual percentage yield that would be stated for the third 
tier is 5.61% to 5.87%. If the assumed maximum balance amount is 
$1,000,000, credit unions would use $985,000 rather than $85,000 in the 
last calculation. In that case for the high end of the third tier, the 
annual percentage yield, using the simple formula, is 5.91%:

APY = 100 (59,134.22/1,000,000)
APY = 5.91%
    Thus, the annual percentage yield range that would be stated for the 
third tier is 5.61% to 5.91%.

E. Term Share Accounts with a Stated Maturity Greater than One Year that 
                     Pay Dividends At Least Annually

    1. For term share accounts with a stated maturity greater than one 
year, that do not compound dividends on an annual or more frequent 
basis, and that require the member to withdraw dividends at least 
annually, the annual percentage yield may be disclosed as equal to the 
dividend rate.

Example:
    If a credit union offers a $1,000 two-year term share account that 
does not compound and that pays out dividends semi-annually by check or 
transfer at a 6.00% dividend rate, the annual percentage yield may be 
disclosed as 6.00%.
    2. For term share accounts covered by this paragraph that are also 
stepped-rate accounts, the annual percentage yield may be disclosed as 
equal to the composite dividend rate.

Example:
    (1) If a credit union offers a $1,000 three-year term share account 
that does not compound and that pays out dividends annually by check or 
transfer at a 5.00% dividend rate for the first year, 6.00% dividend 
rate for the second year, and 7.00% dividend rate for the third year, 
the credit union may compute the composite dividend rate and APY as 
follows:
    (a) Multiply each dividend rate by the number of days it will be in 
effect;
    (b) Add these figures together; and
    (c) Divide by the total number of days in the term.
    (2) Applied to the example, the products of the dividend rates and 
days the rates are in effect are (5.00%  x  365 days) 1825, (6.00%  x  
365 days) 2190, and (7.00%  x  365) 2555, respectively. The sum of these 
products, 6570, is divided by 1095, the total number of days in the 
term. The composite dividend rate and APY are both 6.00%.

         Part II. Annual Percentage Yield Earned for Statements

    The annual percentage yield earned for statements under Sec. 707.6 
is an annualized rate that reflects the relationship between the amount 
of dividends actually earned (accrued or paid and credited) to the 
member's account during the period and the average daily balance in the 
account for the period over which the dividends were earned.
    Pursuant to Sec. 707.6(a), when dividends are paid less frequently 
than statements are sent, the APY Earned may reflect the number of days 
over which dividends were earned rather than the number of days in the 
statement period, e.g., if a credit union uses the average daily balance 
method and calculates dividends for a period other than the statement 
period, the annual percentage yield earned shall reflect the 
relationship between the amount of dividends earned and the average 
daily balance in the account for the other period, such as a crediting 
or dividend period.
    The annual percentage yield shall be calculated by using the 
following formulas (``APY Earned'' is used for convenience in the 
formulas):

                           A. General Formula

APY Earned = 100 [(1 + Dividends earned/
          Balance)(365/Daysinperiod)-1].

    ``Balance'' is the average daily balance in the account for the 
period.
    ``Dividends earned'' is the actual amount of dividends accrued or 
paid and credited to the account for the period.
    ``Days in period'' is the actual number of days over which the 
dividends disclosed on the statement were earned.

Examples:

[[Page 880]]

    (1) If a credit union calculates dividends for the statement period 
(and uses either the daily balance or the average daily balance method), 
and the account had a balance of $1,500 for 15 days and a balance of 
$500 for the remaining 15 days of a 30-day statement period, the average 
daily balance for the period is $1,000. Assume that $5.25 in dividends 
was earned during the period. The annual percentage yield earned (using 
the formula above) is 6.58%:

APY Earned = 100 [(1 + 5.25/1,000)(365/30)-1]
APY Earned = 6.58%.
    (2) Assume a credit union calculates dividends on the average daily 
balance for the calendar month and provides periodic statements that 
cover the period from the 16th of one month to the 15th of the next 
month. The account has a balance of $2,000 September 1 through September 
15 and a balance of $1,000 for the remaining 15 days of September. The 
average daily balance for the month of September is $1,500, which 
results in $6.50 in dividends earned for the month. The annual 
percentage yield earned for the month of September would be shown on the 
periodic statement covering September 16 through October 15. The annual 
percentage yield earned (using the formula above) is 5.40%:

APY Earned = 100 [(1 + 6.50/1,500)(365/30)-1]
APY Earned = 5.40%.
    (3) Assume a credit union calculates dividends on the average daily 
balance for a quarter (for example, the calendar months of September 
through November), and provides monthly periodic statements covering 
calendar months. The account has a balance of $1,000 throughout the 30 
days of September, a balance of $2,000 throughout the 31 days of 
October, and a balance of $3,000 throughout the 30 days of November. The 
average daily balance for the quarter is $2,000, which results in $21 in 
dividends earned for the quarter. The annual percentage yield earned 
would be shown on the periodic statement for November. The annual 
percentage yield earned (using the formula above) is 4.28%:

APY Earned = 100 [(1 + 21/2,000)(365/91)-1]
APY Earned = 4.28%.

 B. Special formula for use where periodic statement is sent more often 
           than the period for which dividends are compounded.

    Credit unions that use the daily balance method to accrue dividends 
and that issue periodic statements more often than the period for which 
dividends are compounded shall use the following special formula:
[GRAPHIC] [TIFF OMITTED] TR27SE93.000

    The following definition applies for use in this formula (all other 
terms are defined under Part II):
    ``Compounding'' is the number of days in each compounding period.
    Assume a credit union calculates dividends for the statement period 
using the daily balance method, pays a 5.00% dividend rate, compounded 
annually, and provides periodic statements for each monthly cycle. The 
account has a daily balance of $1000.00 for a 30-day statement period. 
The dividend earned of $4.11 for the period, and the annual percentage 
yield earned (using the special formula above) is 5.00%:
[GRAPHIC] [TIFF OMITTED] TR27SE93.001

APY Earned = 5.00%.

[58 FR 50445, Sept. 27, 1993, as amended at 63 FR 71575, Dec. 29, 1998]

[[Page 881]]



       Sec. Appendix B to Part 707--Model Clauses and Sample Forms

                            Table of Contents

B-1--Model Clauses for Account Disclosures (Sec. 707.4(b))
B-2--Model Clauses for Changes in Terms (Sec. 707.5(a))
B-3--Model Clauses for Pre-Maturity Notices for Term Share Accounts 
          (Sec. 707.5(b-d))
B-4--Sample Form (Signature Card/ Application for Membership)
B-5--Sample Form (Term Share (Certificate) Account)
B-6--Sample Form (Regular Share Account Disclosures)
B-7--Sample Form (Share Draft Account Disclosures)

        B-8--Sample Form (Money Market Share Account Disclosures)

     B-9--Sample Form (Term Share (Certificate) Account Disclosures)

                 B-10--Sample Form (Periodic Statement)

                B-11--Sample Form (Rate and Fee Schedule)

       B-12 Aggregate Overdraft and Returned Item Fees Sample Form

    General Note: Appendix B contains model clauses and sample forms 
intended for optional use by credit unions to aid in compliance with the 
disclosure requirements of Secs. 707.4 (account disclosures), 707.5 
(subsequent disclosures), 707.6 (statement disclosures), and 707.8 
(advertisements). Section 269(b) of TISA provides that credit unions 
that use these clauses and forms will be in compliance with TISA's 
disclosure provisions.

    As discussed in the supplementary information to Sec. 707.3(a), this 
final rule provides for flexibility in designing the format of the 
disclosures. Credit unions can choose to prepare a single document or 
brochure that incorporates disclosures for all accounts offered, or to 
prepare different documents for each type of account. Credit unions may 
also use inserts to a document, or fill in blanks to show current rates, 
fees and other terms.
    In the model clauses, words in parentheses indicate the type of 
disclosure a credit union should insert in the space provided (for 
example, a credit union might insert ``July 23, 1995'' in the blank for 
a ``(date)'' disclosure). Brackets and ``/'' indicate that a credit 
union must choose the alternative that best describes its practice (for 
example, ``[daily balance/ average daily balance]''). It should be noted 
that only in sections B-6 through B-10 of this appendix have specific 
examples of disclosures been given, with dates and figures. Sections B-1 
through B-5, and section B-11 provide only unspecific model clauses or 
blank forms. The Board felt, as articulated in the appendix A to 
Regulation DD, that a mix of blank clauses and forms and application of 
the model clauses to real specific situations would benefit those who 
must comply with TISA.
    Any references to NCUA Rules and Regulations, the NCUA Standard FCU 
Bylaws, or the NCUA Accounting Manual for FCUs, are provided for 
guidance and as a point of reference for credit unions. Citations to 
these sources does not indicate that their application is required for 
those credit unions who need not follow them.

        B-1 Model Clauses for Account Disclosures (Sec. 707.4(b))

                 (a) Rate Information (Sec. 707.4(b)(1))

           (i) Fixed-Rate Accounts (Sec. 707.4(b)(1)(i)(A-B))

                      1. Interest-bearing Accounts

    The interest rate on your deposit account is ___% with an annual 
percentage yield (APY) of ___%. [For purposes of this disclosure, this 
is a rate and APY that were offered within the most recent seven 
calendar days and were accurate as of (date). Please call (credit union 
telephone number) to obtain current rate information.] You will be paid 
this rate [for (time period)/until (date)/for at least 30 calendar 
days].

    Note: This provision reflects an accurate statement for an interest-
bearing account authorized by state law for state-chartered credit 
unions. While the definition of the term ``interest'' permits its 
substitution for the term ``dividends,'' separate disclosures should be 
made for interest-bearing accounts. Since account opening disclosures 
may be provided to potential members requesting account information 
before opening an account, and members opening new accounts, information 
is provided indicating that the rate may not be current, but that the 
potential member or member may call the credit union to obtain up-to-
date information. When opening a new account, of course, a credit union 
could provide the contractual rate alone, and delete the sentences in 
brackets. Given the definition of fixed-rate account in Sec. 707.2(n), 
credit unions offering fixed-rate accounts must contract to hold rates 
steady for at least a 30-day period. Thus, if the 30-day option of the 
last sentence is not chosen, the period chosen must be longer than 30 
days.

                 2. Dividend-bearing Term Share Accounts

    The dividend rate on your term share account is ___% with an annual 
percentage yield (APY) of ___%. [For purposes of this disclosure, this 
is a rate and APY that were offered within the most recent seven 
calendar days and were accurate as of (date). Please call (credit union 
telephone number)

[[Page 882]]

to obtain current rate information.] You will be paid this rate [for 
(time period)/until (date)/for at least 30 calendar days].

    Note: This provision reflects an accurate statement for a fixed-
rate, dividend-bearing term share account. Interest-bearing term share 
accounts would use the disclosure in Sec. 1, above. Since account 
opening disclosures may be provided to potential members requesting 
account information before opening an account, and members opening new 
accounts, information is provided indicating that the rate may not be 
current, but that the potential member or member may call the credit 
union to obtain up-to-date information. When opening a new account, of 
course, a credit union could provide the contractual rate alone, and 
delete the sentences in brackets. Given the definition of fixed-rate 
account in Sec. 707.2(n), credit unions offering fixed-rate accounts 
must contract to hold rates steady for at least a 30-day period. Thus, 
if the 30-day option of the last sentence is not chosen, the period 
chosen must be longer than 30 days.

                   3. Other Dividend-bearing Accounts

[As of [the last dividend declaration date/ (date)], the dividend rate 
was ___% with an annual percentage yield (APY) of ___% on your account. 
/or The prospective dividend rate on your account is ___% with a 
prospective APY of ___% for the current dividend period.] You will be 
paid this rate for [(time period)/at least 30 calendar days].

    or

[As of [the last dividend declaration date/ (date)], the dividend rate 
was ___% with an annual percentage yield (APY) of ___% on your account. 
/or The prospective dividend rate on your account is ___% with an annual 
percentage yield (APY) of ___% for this dividend period.] This rate will 
not change unless the credit union notifies you at least 30 calendar 
days prior to any change.

    Note: Credit unions may disclose the dividend rate and annual 
percentage yield on accounts as of the last dividend declaration date. 
This necessitates inclusion of a disclosure of the actual calendar date 
of the last dividend declaration date. Additionally or alternatively (if 
the last dividend rate could be inaccurate), credit unions may disclose 
a prospective dividend rate and a prospective annual percentage yield. 
Such prospective rates and yields must be estimated in good faith, and 
must be declared at the proper time if it is at all possible to do so. 
As for the last sentence in these disclosures, this provision reflects a 
credit union policy to set prospective dividend rates for the next month 
(or at least 30 days), quarter or other period. Many credit unions, at 
their mid-monthly board meeting, set prospective dividend rates for the 
next month beginning on the 1st day of the month and continuing to the 
last day of the month. These rates must be formalized or ratified at the 
end of a dividend period. Given the timing of the board meetings, the 
time to prepare and mail notices and the 30 day period, it will often 
take credit unions 45 to 60 days to effectively change rates. For these 
reasons, the Board strongly suggests that credit unions do not offer 
fixed-rate, dividend-bearing accounts.

           (ii) Variable-Rate Accounts (Sec. 707.4(b)(1)(ii))

                      1. Interest-bearing Accounts

    The interest rate on your deposit account is ___%, with an annual 
percentage yield (APY) of ___%. [For purposes of this disclosure, this 
is a rate and APY that were offered within the most recent seven 
calendar days and were accurate as of (date). Please call (credit union 
telephone number) to obtain current rate information.] The interest rate 
and annual percentage yield may change every (time period) based on 
[(name of index)/the determination of the credit union board of 
directors]. The interest rate for your account will [never change by 
more than ___% each (time period)/never be less/more than ___%/never 
exceed ___% above or fall more than ___% below the initial interest 
rate].

    Note: This disclosure combines the requirements of 
Sec. 707.4(b)(1)(i) with Sec. 707.4(b)(1)(ii) for interest-bearing 
accounts. The variable nature of a deposit account usually is based on 
an external index or is set at the discretion of the board. If another 
means of rate setting is used, that, instead of the proposed language, 
must be disclosed. Since account opening disclosures may be provided to 
potential members requesting account information before opening an 
account, and members opening new accounts, information is provided 
indicating that the rate may not be current, but that the potential 
member or member may call the credit union to obtain up-to-date 
information. When opening a new account, of course, a credit union could 
provide the contractual rate alone, and delete the sentences in 
brackets. Rarely would there be limitations on rate changes, but 
language is provided for this situation in the last sentence. Of course, 
it is only to be used if it applies to an account.

                 2. Dividend-bearing Term Share Accounts

    The dividend rate on your term share account is ___%, with an annual 
percentage yield (APY) of ___%. [For purposes of this disclosure, this 
is a rate and APY that were offered within the most recent seven 
calendar days and were accurate as of (date). Please call (credit union 
telephone number) to obtain current rate information.] The dividend rate 
and annual percentage yield may change every (time period) based on 
[(name

[[Page 883]]

of index)/the determination of the credit union board of directors]. The 
dividend rate for your account will [never change by more than ___% each 
(time period)/never be less/more than ___% /never exceed ___% above or 
fall more than ___% below the initial dividend rate].

    Note: This disclosure combines the requirements of 
Sec. 707.4(b)(1)(i) with Sec. 707.4(b)(1)(ii) for dividend-bearing, 
variable-rate term share accounts. The variable nature of a deposit 
account usually is based on an external index or is set at the 
discretion of the board. If another means of rate setting is used, that, 
instead of the model language, must be disclosed. Since account opening 
disclosures may be provided to potential members requesting account 
information before opening an account, and members opening new accounts, 
information is provided indicating that the rate may not be current, but 
that the potential member or member may call the credit union to obtain 
up-to-date information. When opening a new account, of course, a credit 
union could provide the contractual rate alone, and delete the sentences 
in brackets. Rarely would there be limitations on rate changes, but 
language is provided for this situation in the last sentence. Of course, 
it is only to be used if it applies to an account.

                   3. Other Dividend-bearing Accounts

[As of [the last dividend declaration date/ (date)], the dividend rate 
was ___% with an annual percentage yield (APY) of ___% on your account. 
/or The prospective dividend rate on your account is ___% with an 
anticipated annual percentage yield (APY) of ___% for the current 
dividend period.] The dividend rate and annual percentage yield may 
change every (dividend period) as determined by the credit union board 
of directors.

    Note: This language combines the requirements of Sec. 707.4(b)(1)(i) 
with Sec. 707.4(b)(1)(ii). Credit unions may disclose the dividend rate 
and annual percentage yield on accounts as of the last dividend 
declaration date. This necessitates inclusion of a disclosure of the 
actual calendar date of the last dividend declaration date or use of the 
phrase ``last dividend declaration date''. Additionally or 
alternatively, credit unions may disclose a prospective dividend rate 
and a prospective annual percentage yield. Such prospective rates and 
yields must be estimated in good faith, and must be declared at the 
proper time if it is at all possible to do so. As for the last sentence 
in these disclosures, this provision reflects the variable nature of the 
account. Generally, there is only one variable-rate feature for share 
accounts: the frequency of dividend period rate changes (e.g., daily, 
weekly, monthly, quarterly, semi-annually, annually). Normally, there 
are no contractual limitations on share account earnings (unless imposed 
by a regulator), nor are earnings based on any internal or external 
index. If contractual limitations or an index are involved, however, 
those factors would need to be disclosed (unless a regulator orders 
otherwise).

            (iii) Stepped-Rate Accounts (Sec. 707.4(b)(1)(i))

                      1. Interest-bearing Accounts

    The initial interest rate on your deposit account is ___%. You will 
be paid that rate [for (time period)/ until (date)]. After that time, 
the interest rate for your deposit account will be ___% and you will be 
paid that rate [for (time period)/ until (date)]. The annual percentage 
yield (APY) for your account is ___%. [For purposes of this disclosure, 
this is a rate and APY that were offered within the most recent seven 
calendar days and were accurate as of (date). Please call (credit union 
telephone number) to obtain current rate information.] You will be paid 
this rate [for (time period)/until (date)/for at least 30 calendar 
days].

                 2. Dividend-bearing Term Share Accounts

    The initial dividend rate on your term share account is ___%. You 
will be paid that rate [for (time period)/ until (date)]. After that 
time, the dividend rate for your term share account will be ___% and you 
will be paid that rate [for (time period)/ until (date)]. The annual 
percentage yield (APY) for your account is ___%. [For purposes of this 
disclosure, this is a rate and APY that were offered within the most 
recent seven calendar days and were accurate as of (date). Please call 
(credit union telephone number) to obtain current rate information.] You 
will be paid this rate [for (time period)/until (date)/for at least 30 
calendar days].

                   3. Other Dividend-bearing Accounts

[As of [the last dividend declaration date/ (date)], the initial 
dividend rate on your account was ___%. /or The prospective dividend 
rate on your account is ___%.] You will be paid that rate [for (time 
period)/ until (date)]. After that time, the prospective dividend rate 
for your share account will be ___% and you will be paid such rate [for 
(time period)/ until (date)]. The annual percentage yield (APY) for your 
account is ___%. You will be paid this rate for [(time period)/at least 
30 calendar days].

    Note: Stepped-rate accounts are accounts with two or more rates that 
take effect in succeeding periods. The applicable rates and time periods 
are known when the account is opened. By nature these are fixed-rate 
accounts and are usually associated with term share (certificate) 
accounts. Accordingly, a contract provision (for share accounts) to 
change rates should be included.

[[Page 884]]

             (iv) Tiered-Rate Accounts (Sec. 707.4(b)(1)(i))

                      1. Interest-bearing Accounts

                            Tiering Method A

    1* If your [daily balance/average daily balance] is $___ or more, 
the interest rate paid on the entire balance in your account will be 
___%, with an annual percentage yield (APY) of ___%.
    2* If your [daily balance/average daily balance] is more than $___, 
but less than $___, the interest rate paid on the entire balance in your 
account will be ___%, with an APY of ___%.
    3* If your [daily balance/average daily balance] is $___ or less, 
the interest rate paid on the entire balance will be ___% with an APY of 
___%.
    [For purposes of this disclosure, this is a rate and APY that were 
offered within the most recent seven calendar days and were accurate as 
of (date). Please call (credit union telephone number) to obtain current 
rate information.]
    [Fixed-rate--You will be paid this rate [for (time period)/until 
(date)/for at least 30 calendar days]./ Variable-rate--The interest rate 
and APY may change every (time period) based on [(name of index)/ the 
determination of the credit union board of directors.]

    Note: Tiering Method A pays the stated interest rate that 
corresponds to the applicable deposit tier on the full balance in the 
account. This example contemplates a two-tier system. The option (1, 2 
or 3) most closely matching the terms of the account should be chosen as 
the appropriate disclosure. For tiered-rate accounts, a disclosure may 
be added about the currency of the rate, as is provided in the first set 
of brackets. A disclosure regarding the fixed-rate or variable-rate 
nature of the account must be added, as is provided in the last set of 
brackets.

                            Tiering Method B

    1* An interest rate of ____% will be paid only on the portion of 
your [daily balance/average daily balance] that is greater than $____. 
The annual percentage yield (APY) for this tier will range from ____% to 
____%, depending on the balance in the account.
    2* An interest rate of ____% will be paid only on the portion of 
your [daily balance/average daily balance] that is greater than $____, 
but less than $____. The annual percentage yield (APY) for this tier 
will range from ____% to ____%, depending on the balance in the account.
    3* If your [daily balance/average daily balance] is $____ or less, 
the interest rate paid on the entire balance will be ____%, with an 
annual percentage yield (APY) of ____%.
    [For purposes of this disclosure, this is a rate and APY that were 
offered within the most recent seven calendar days and were accurate as 
of (date). Please call (credit union telephone number) to obtain current 
rate information.]
    [Fixed-rate--You will be paid this rate [for (time period)/until 
(date)/for at least 30 calendar days]./ Variable-rate--The interest rate 
and APY may change every (time period) based on [(name of index)/ the 
determination of the credit union board of directors.]

    Note: Tiering Method B pays different stated interest rates 
corresponding to applicable deposit tiers, on the applicable balance in 
each tier of the account. For example, a credit union might pay 3% 
interest on account funds of $500 or below, and pay 4% interest on the 
portion of the same account that exceeds $500. The example contemplates 
an account with two tiers, but additional tiers are possible. The option 
(1, 2 or 3) most closely matching the terms of the account should be 
chosen as the appropriate disclosure. For tiered-rate accounts, a 
disclosure may be added about the currency of the rate, as is provided 
in the first set of brackets.
    Tiered-rate accounts can be either fixed-rate or variable-rate 
accounts. The last sentence offers an option of either fixed-rate or 
variable-rate disclosure. Thus, the disclosures outlined above will be 
made in addition to either: (i) Disclosure of the period the fixed-rates 
are in effect or (ii) the variable-rate disclosures. Tiered-rate 
accounts are also subject to the requirement for disclosure of the 
balance computation method, see paragraph (e) to this appendix.

                 2. Dividend-bearing Term Share Accounts

                            Tiering Method A

    1* If your [daily balance/average daily balance] is $____ or more, 
the dividend rate paid on the entire balance in your account will be 
____%, with an annual percentage yield (APY) of ____%.
    2* If your [daily balance/average daily balance] is more than $____, 
but less than $____, the dividend rate paid on the entire balance in 
your account will be ____%, with an APY of ____%.
    3* If your [daily balance/average daily balance] is $____ or less, 
the dividend rate paid on the entire balance will be ____% with an APY 
of ____%.
    [For purposes of this disclosure, this is a rate and APY that were 
offered within the most recent seven calendar days and were accurate as 
of (date). Please call (credit union telephone number) to obtain current 
rate information.]
    [Fixed-rate--You will be paid this rate [for (time period)/until 
(date)/for at least 30 calendar days]./ Variable-rate--The interest rate 
and APY may change every (time period)

[[Page 885]]

based on [(name of index)/ the determination of the credit union board 
of directors.]

    Note: Tiering Method A pays the stated dividend rate that 
corresponds to the applicable account balance tier on the full balance 
in the account. This example contemplates a two-tier system. The option 
(1, 2 or 3) most closely matching the terms of the account should be 
chosen as the appropriate disclosure. For tiered-rate accounts, a 
disclosure may be added about the currency of the rate, as is provided 
in the first set of brackets. A disclosure regarding the fixed-rate or 
variable-rate nature of the account must be added, as is provided in the 
last set of brackets.

                            Tiering Method B

    1* A dividend rate of ____% will be paid only on the portion of your 
[daily balance/average daily balance] that is greater than $____. The 
annual percentage yield (APY) for this tier will range from ____% to 
____%, depending on the balance in the account.
    2* A dividend rate of ____% will be paid only on the portion of your 
[daily balance/average daily balance] that is greater than $____, but 
less than $____. The annual percentage yield (APY) for this tier will 
range from ____% to ____%, depending on the balance in the account.
    3* If your [daily balance/average daily balance] is $____ or less, 
the dividend rate paid on the entire balance will be ____%, with an 
annual percentage yield (APY) of ____%.
    [For purposes of this disclosure, this is a rate and APY that were 
offered within the most recent seven calendar days and were accurate as 
of (date). Please call (credit union telephone number) to obtain current 
rate information.]
    [Fixed-rate--You will be paid this rate [for (time period)/until 
(date)/for at least 30 calendar days]./ Variable-rate--The interest rate 
and APY may change every (time period) based on [(name of index)/ the 
determination of the credit union board of directors.]

    Note: Tiering Method B pays different stated dividend rates 
corresponding to applicable account balance tiers, on the applicable 
balance in each tier of the account. For example, a credit union might 
pay 3% dividend on account funds of $500 or below, and pay 4% dividend 
on the portion of the same account that exceeds $500. The example 
contemplates an account with two tiers, but additional tiers are 
possible. The option (1, 2 or 3) most closely matching the terms of the 
account should be chosen as the appropriate disclosure. For tiered-rate 
accounts, a disclosure may be added about the currentness of the rate, 
as is provided in the first set of brackets.
    Tiered-rate accounts can be either fixed-rate or variable-rate 
accounts. The last sentence offers an option of either fixed-rate or 
variable-rate disclosure. Thus, the disclosures outlined above will be 
made in addition to either: (i) Disclosure of the period the fixed-rates 
are in effect or (ii) the variable-rate disclosures. Tiered-rate 
accounts are also subject to the requirement for disclosure of the 
balance computation method, see paragraph (e) to this appendix.

                   3. Other Dividend-bearing Accounts

                            Tiering Method A

    1* [As of [the last dividend declaration date/ (date)], if your 
[daily balance/average daily balance] was $____ or more, the dividend 
rate paid on the entire balance in your account was ____%, with an 
annual percentage yield (APY) of ____%. /or If your [daily balance/
average daily balance] is $____ or more, a prospective dividend rate of 
____% will be paid on the entire balance in your account with a 
prospective annual percentage yield (APY) of ____% for this dividend 
period.]
    2* [As of [the last dividend declaration date/ (date)], if your 
[daily balance/average daily balance] was more than $____, but was less 
than $____, the dividend rate paid on the entire balance in your account 
was ____%, with an annual percentage yield (APY) of ____%. /or If your 
[daily balance/average daily balance] is more than $____, but is less 
than $____, a prospective dividend rate of ____% will be paid on the 
entire balance in your account with a prospective annual percentage 
yield (APY) of ____% for this dividend period.]
    3* [As of the last dividend declaration date/ (date)], if your 
[daily balance/average daily balance] was $____ or less, the dividend 
rate paid on the entire balance in your account will be ____% with an 
annual percentage yield (APY) of ____%. /or If your [daily balance/
average daily balance] is $____ or less, the prospective dividend rate 
of ____% will be paid on the entire balance in your account with a 
prospective annual percentage yield (APY) of ____% for this dividend 
period.
    [Fixed-rate--You will be paid this rate for [(time period)/at least 
30 calendar days]./ Variable-rate--The dividend rate and APY may change 
every (dividend period) as determined by the credit union board of 
directors.]

    Note: Tiering Method A pays the stated dividend rate that 
corresponds to the applicable deposit tier on the full balance in the 
account. This example contemplates a two-tier system. The option (1, 2 
or 3) most closely matching the terms of the account should be chosen as 
the appropriate disclosure. For tiered-rate accounts, a disclosure may 
be

[[Page 886]]

added about the prospective rate. Note that the prospective rate 
disclosure options match the required tiered-rate disclosures based on 
the previous dividend declaration date. A disclosure regarding the 
fixed-rate or variable-rate nature of the account must be added, as is 
provided in the last set of brackets.

                            Tiering Method B

    1* [As of [the last dividend declaration date/ (date)], a dividend 
rate of ____% was paid only on the portion of your [daily balance/
average daily balance] that was greater than $____. The annual 
percentage yield (APY) for this tier ranged from ____% to ____%, 
depending on the balance in the account. /or A prospective dividend rate 
of ____% will be paid only on the portion of your [daily balance/average 
daily balance] that is greater than $____ with a prospective annual 
percentage yield (APY) ranging from ____% to ____%, depending on the 
balance in the account, for this dividend period.]
    2* [As of [the last dividend declaration date/ (date)], a dividend 
rate of ____% was paid only on the portion of your [daily balance/
average daily balance] that was greater than $____ but less than $____. 
The annual percentage yield (APY) for this tier ranged from ____% to 
____%, depending on the balance in the account. /or A prospective 
dividend rate of ____% will be paid only on the portion of your [daily 
balance/average daily balance] that is greater than $____, but less than 
$____] with a prospective annual percentage yield (APY) ranging from 
____% to ____%, depending on the balance in the account, for this 
dividend period.]
    3* [As of [the last dividend declaration date/ (date)], if your 
[daily balance/average daily balance] was $____ or less, the dividend 
rate paid on the entire balance was ____%, with an annual percentage 
yield (APY) of ____%. /or If your [daily balance/average daily balance] 
was $___ or less, the prospective dividend rate paid on the entire 
balance in your account will be ___% with a prospective annual 
percentage yield (APY) of ___% for this dividend period.

    Note: Tiering Method B pays different stated dividend rates 
corresponding to applicable account tiers, on the applicable balance in 
each tier of the account. For example, a credit union might pay a 3% 
dividend on account funds of $500 or below, and pay a 4% dividend on the 
portion of the same account that exceeds $500. The example contemplates 
an account with two tiers, but additional tiers are possible. The option 
(1, 2 or 3) most closely matching the terms of the account should be 
chosen as the appropriate disclosure. Note that the prospective rate 
disclosure options match the required tiered-rate disclosures based on 
the previous dividend declaration date.
    Tiered-rate accounts can be either fixed-rate or variable-rate 
accounts. The last sentence offers an option of either fixed-rate or 
variable-rate disclosures. Thus, the disclosures outlined above must be 
made in addition to either: (i) Disclosure of the period the fixed-rates 
are in effect or (ii) the variable-rate disclosures. Tiered-rate 
accounts are also subject to the requirement for disclosure of the 
balance computation method, see paragraph (e) to this appendix.

               (b) Nature of Dividends (Sec. 707.4(b)(8))

    Dividends are paid from current income and available earnings, after 
required transfers to reserves at the end of a dividend period.

    Note: The Board of Directors declares dividends based on current 
income and available earnings of the credit union after providing for 
the required reserves at the end of the month. The dividend rate and 
annual percentage yield shown may reflect either the last dividend 
declaration date on the account or the earnings the credit union 
anticipates having available for distribution. This disclosure only 
applies to share and share draft (as opposed to deposit) accounts and 
should be grouped with the Rate Information to make the disclosures more 
meaningful. This disclosure also does not apply to term share accounts 
for reasons discussed in the supplementary information regarding 
Secs. 707.3(e) and 707.4(b)(8).

            (c) Compounding and Crediting (Sec. 707.4(b)(2))

    [Dividends/Interest] will be compounded (frequency) and will be 
credited (frequency).

and, if applicable:

    If you close your [share/deposit] account before [dividends/
interest] [are/is] paid, you will not receive the accrued [dividends/
interest].

and, if applicable (for dividend-bearing accounts):

    For this account type, the dividend period is (frequency), for 
example, the beginning date of the first dividend period of the calendar 
year is (date) and the ending date of such dividend period is (date). 
All other dividend periods follow this same pattern of dates. The 
dividend declaration date follows the ending date of a dividend period, 
and for the example is (date).

    Note: Where the word ``(frequency)'' appears, time periods must be 
inserted to coincide with those specified in board resolutions of each 
credit union's board of directors. A disclosure of dividend period was 
added to Sec. 707.4(b)(2)(i) in the final rule to assist members in 
knowing when dividend rate and APY disclosures would be given by a 
credit union

[[Page 887]]

using the optional statement rule of Sec. 707.6(a). The dividend 
declaration date is important for purposes of Sec. 707.4(a)(2)(ii), 
request disclosures, Sec. 707.4(b)(2), account opening disclosures, and 
Sec. 707.8(c)(2), advertising disclosures. The Board believes that this 
is critical information for dividend-bearing accounts, but that 
provision by an example (whether of the first dividend period of the 
year, or of any randomly chosen dividend period) is favorable to 
providing a list of such dates for the entire year or for a period of 
years (although these methods would also be permissible). As noted in 
the supplementary information to Sec. 707.2(j), dividend declaration 
date, the dividend period and actual dividend distribution date may 
vary. Thus, it is possible for crediting periods and dividend periods 
not to coincide, though the Board believes that credit unions should 
make every effort to attempt to coordinate the two periods.

         (d) Minimum Balance Requirements (Sec. 707.4(b)(3)(i))

    (i) To open the account
    The minimum balance required to open this account is $____.

or, for first share account at a credit union

    The minimum required to open this account is the purchase of a (par 
value of a share) share in the credit union.
    (ii) To avoid imposition of fees
    You must maintain a minimum daily balance of $____ in your account 
to avoid a service fee. If, during any (time period), your account 
balance falls below the required minimum daily balance, your account 
will be subject to a service fee of $____ for that (time period).

or

    You must maintain a minimum average daily balance of $____ in your 
account to avoid a service fee. If, during any (time period), your 
average daily balance is below the required minimum, your account will 
be subject to a service fee of $____ for that (time period).
    (iii) To obtain the annual percentage yield disclosed
    You must maintain a minimum daily balance of $____ in your account 
each day to obtain the disclosed annual percentage yield.

    or

    You must maintain a minimum average daily balance of $____ in your 
account to obtain the disclosed annual percentage yield.
    (iv) Absence of minimum balance requirements
    No minimum balance requirements apply to this account.
    (v) Par value
    The par value of a share in this credit union is $____.

    Note: Where the words ``(time period)'' appear, time periods should 
be inserted to coincide with those specified in board resolutions of 
each credit union's board of directors. As the supplementary information 
to Sec. 707.4(b)(3)(i) explains, the par value of a share to establish 
membership is a critical disclosure to be made to potential members of 
credit unions. The par value disclosure is required by 
Sec. 707.4(b)(3)(i) as being analogous to a minimum balance account 
opening requirement.

          (e) Balance Computation Method (Sec. 707.4(b)(3)(ii))

    (i) Daily Balance Method
    [Dividends/Interest] [are/is] calculated by the daily balance method 
which applies a daily periodic rate to the balance in the account each 
day.
    (ii) Average Daily Balance Method
    [Dividends/Interest] [are/is] calculated by the average daily 
balance method which applies a periodic rate to the average daily 
balance in the account for the period. The average daily balance is 
calculated by adding the balance in the account for each day of the 
period and dividing that figure by the number of days in the period.

    Note: Any explanation of balance computation method must contain 
enough information for members to grasp the means by which dividends or 
interest will be calculated on their accounts. Using a shorthand form, 
such as ``day in/day out'' for the daily balance method or ``average 
balance'' for the average daily balance method, without more 
information, is insufficient. In addition, any disclosure based on the 
equivalency of the two allowable methods, such as stating that the 
average daily balance method was the same as the daily balance method, 
is impermissible and misleading.

         (f) Accrual of Dividends/Interest on Noncash Deposits 
                         (Sec. 704.4(b)(3)(iii))

    [Dividends/Interest] will begin to accrue on the business day you 
[place/deposit] noncash items (e.g. checks) to your account.

or
    [Dividends/Interest] will begin to accrue no later than the business 
day we receive provisional credit for the [placement/deposit] of noncash 
items (e.g. checks) to your account.

    Note: Accrual information is not included in the explanation of 
balance computation method required by Sec. 707.4(b)(4)(ii). In 
addition, the disclosures required by TISA do not affect the substantive 
requirements of the EFAA and Regulation CC.

    The EFAA and Regulation CC control, and any modifications to them 
should occasion credit unions to revisit this disclosure with a view to 
revising it to reflect current law.

[[Page 888]]

                 (g) Fees and Charges (Sec. 707.4(b)(4))

    The following fees and charges may be assessed against your account:

(Service/explanation)--$___.
(Service/explanation)--$___.

    Note: Fees and charges may be disclosed in an account disclosure, or 
separately in a Rate and Fee Schedule (see section B-11 of this 
appendix). In either event, the disclosure should also specify when the 
fee will be assessed by using phrases such as ``per item,'' ``per 
month,'' or ``per inquiry.''

             (h) Transaction Limitations (Sec. 707.4(b)(5))

    The minimum amount you may [withdraw/write a draft for] is $____
    During any statement period, you may not make more than six 
withdrawals or transfers to another credit union account of yours or to 
a third party by means of a preauthorized or automatic transfer or 
telephonic order or instruction. No more than three of the six transfers 
may be made by check, draft, debit card, if applicable, or similar order 
to a third party. If you exceed the transfer limitations set forth above 
in any statement period, your account will be subject to [closure by the 
credit union/a fee of $____.

    Note: This paragraph satisfies the requirements of Sec. 707.4(b)(6) 
with respect to the Federal Reserve Board's Regulation D limitations on 
share accounts and money market accounts. These are some of the more 
common limitations applicable.

    The credit union reserves the right to require a member intending to 
make a withdrawal from any account (except a share draft account) to 
give written notice of such intent not less than seven days and up to 60 
days before such withdrawal.

    Note: This disclosure is limited to federal credit unions with 
Bylaws containing this limitation. See Standard Federal Credit Union 
Bylaws, Art. III, section 5(a). Similar disclosures are required of any 
state-chartered credit unions having similar limitations in their 
bylaws, or under state law. This limitation does not directly relate to 
the ``number'' or ``amount'' of transactions, and accordingly, may not 
be necessary under Sec. 707.4(b)(5), but would, if applicable, be 
required by Sec. 707.3(b).

    (i) Disclosures Related to Term Share Accounts (Sec. 707.4(b)(6))

    (i) Time requirements
    Your account will mature on (date).

or

    Your account will mature after (time period).
    (ii) Early withdrawal penalties
    We [will/may] impose a penalty if you withdraw [any/all] of the 
[funds/principal] in your account before the maturity date. The penalty 
will equal [____ [days'/weeks'/months'] [dividends/interest] on your 
account.

or
    We [will/may] impose a penalty of $_____ if you withdraw [any/all] 
of the [funds/principal] before the maturity date.
    If you withdraw some of your funds before maturity, the [dividend/
interest] rate for the remaining funds in your account will be ___%, 
with an annual percentage yield of ___%.

    Note: In most cases, the dividend rate and annual percentage yield 
on the funds remaining in the account after early withdrawal are the 
same as before the withdrawal. Accordingly, the disclosure of dividend 
rate and annual percentage yield after withdrawal is required only if 
the dividend rate and APY will change.

    (iii) Withdrawal of Dividends/Interest Prior to Maturity
    The annual percentage yield is based on an assumption that 
[dividends/interest] will remain in the account until maturity. A 
withdrawal will reduce earnings.

    Note: This disclosure may be used if the credit union compounds 
dividends/interest and allows withdrawal of accrued dividends/interest 
before maturity. This disclosure alerts members that the annual 
percentage yield is based on an assumption that the dividends/interest 
remain on deposit until maturity.

    (iv) Renewal Policies

             1. Automatically Renewable Term Share Accounts

    Your term share account will automatically renew at maturity. You 
will have a grace period of ____ [calendar/business] days after the 
maturity date to withdraw the funds in the account without being charged 
an early withdrawal penalty.

    or

    Your term share account will automatically renew at maturity. There 
is no grace period following the maturity of this account.

           2. Non-Automatically Renewable Term Share Accounts

    This account will not renew automatically at maturity. If you do not 
renew the account, your account will [continue to earn/no longer earn] 
[dividends/interest] after the maturity date.

    Note: These disclosures should agree with the necessary pre-maturity 
notices for term share accounts in B-3 of this appendix.

    (v) Required dividend distribution.

[[Page 889]]

    This account requires the distribution of dividends and does not 
allow dividends to remain in the account.

                     (j) Bonuses (Sec. 704.4(b)(7))

    You will [be paid/receive] [$_____/(description of item)] as a bonus 
[when you open the account/on (date)].
    You must maintain a minimum [daily balance/average daily balance] of 
$_____ to obtain the bonus.
    To earn the bonus, [$_____/your entire principal] must remain on 
deposit [for (time period)/until (date)].

    Note: These disclosures follow the requirements of Sec. 707.4(b)(7) 
and should be used as applicable. Further information may also be added, 
especially if it clarifies the conditions and timing of receiving the 
bonus, or better informs the member about the bonus.

         B-2 Model Clauses for Changes in Terms (Sec. 707.5(a))

    On (date), the (type of fee) will increase to $_____.
    On (date), the [dividend/interest] rate on your account will 
decrease to ___%, with an annual percentage yield (APY) of ___%.
    On (date), the [minimum daily balance/average daily balance] 
required to avoid imposition of a fee will increase to $_____.

    Note: These examples apply to the more common changes necessitating 
a change in terms notice. However, any change, amendment or modification 
reducing the APY or adversely affecting the members holding such 
accounts must be disclosed. For such changes not contemplated by the 
model clauses, the Board recommends the use of as simple language as 
possible to convey the change, along with cross-referencing to the 
particular sections or paragraph numbers of the account opening 
disclosures, when to do so
will assist members in reviewing and understanding the change.

   B-3 Model Clauses for Pre-Maturity Notices for Term Share Accounts 
                            (Sec. 707.5(b-c))

                            (a) Maturity Date

    Your term share account will mature on _____.

                             (b) Nonrenewal

    Unless your term share account is renewed, it will not accrue 
further [dividends/interest] after the maturity date.

                          (c) Rate Information

    The [dividend/interest] rate and annual percentage yield that will 
apply to your term share account if it is renewed have not yet been 
determined. That information will be available on ____. After that date, 
you may call the credit union during regular business hours at 
(telephone number) to find out the [dividend/interest] rate and annual 
percentage yield (APY) that will apply to your term share account if it 
is renewed.

    Note: Pre-maturity notices should follow the requirements of 
Sec. 707.5(b-d) as closely as possible. Care should be taken to explain 
any grace periods used. See discussion of use of alternative timing in 
supplementary information to Sec. 707.2(o) and Sec. 707.5(b-d).

       B-4 Sample Form (Signature Card/Application for Membership)

            Application for Membership/Account Signature Card

          ACCOUNT NUMBER________________________________________________

_____  _____  _____
(last name) (first name) (middle name)

________________________________________________________________________

(street address) (apartment number)

_____  ___  ____
(city) (state) (zip code)

______  ______
(home telephone number) (business telephone number)

__-__-____    _____
(Social Security  or TIN) (date of birth)

_______  ________
  (mother's maiden name) (employer, occupation)

    I hereby make application for membership in and agree to conform to 
the Bylaws, as amended, of _____ Credit Union (the ``Credit Union''). I 
certify that: I am within the field of membership of this Credit Union; 
the information provided on this application is true and correct; and my 
signature on this card applies to all accounts under my name at this 
Credit Union. I also agree to be bound to the terms and conditions of 
any account that I have in the Credit Union now or in the future.

________________________________________________________________________
    (signature of applicant)

    This application approved____(date) by the (Check one)

(  ) Board    (  ) Exec. Committee
(  ) Membership Officer

Signed:_________________________________________________________________
    (Secretary; Exec. Cmte. Member, or Membership Officer)

    Note: This form is modeled on NCUA Form FCU 150, Application for 
Membership, as discussed in the Accounting Manual for FCUs, 
Secs. 5030.1, 5150.3. It is noted that other information can also be 
requested on the signature card, as long as it is in accordance with 
federal and state laws. For example, information identifying the member, 
such as a state driver's license number, could be

[[Page 890]]

added. The types of accounts that the signature applies to could be 
specified. Furthermore, the Board notes that this card contains much 
identification information that may not be necessary for all credit 
unions; common sense should guide credit union boards of directors in 
designing their applications for membership/signature cards. However, 
the Board believes that the information solicited on this form is 
reasonable and prudent for many credit unions. Payable on death 
designations, joint account language required under state law, life 
savings beneficiary designations, and other like variations and 
designations may be added to the card if so desired. The proposed 
signature card/ application for membership form contained taxpayer 
certification language. One commenter noted that the IRS may always 
change its requirements in this area, which are beyond the authority of 
the Board. Therefore, the Board has deleted reference to the IRS 
taxpayer certification required by 26 U.S.C. 3406, but notes that such 
certification must be made in accordance with applicable law and IRS 
rules. The information may be included on the front and back of a 
standard size signature card, or on the front of a large size signature 
card. However, no account terms may be included on a signature card 
unless a copy of the signature card is provided to the member at the 
time of account opening. The Board recommends that credit unions refrain 
from this practice, and instead use standard account disclosures. One 
reason for this is that if laws, regulations or credit union policies 
change, discrepancies may result between them and the earlier signature 
card terms. Given the longevity of credit union membership, signature 
cards may well be in use for up to or over a century. In addition, as 
signature cards are relatively small, they probably will not contain 
enough space to make all desired and required disclosures. Fragmentation 
of terms, some on signature cards, some on separate disclosures, could 
easily lead to member confusion. As terms are usually construed against 
the drafter, credit unions should be very careful in their use of 
account terms and conditions varying from those provided as model 
clauses and sample forms in this appendix.

           B-5 Sample Form (Term Share (Certificate) Account)

                         Term Share Certificate

________________________________________________________________________
Date Issued

________________________________________________________________________
Account Number

________________________________________________________________________
Certificate Number

________________________________________________________________________
Social Security Number

    This is to certify that (name(s)) _________ [is/ are] the owner(s) 
of a term share certificate account in the _____ Credit Union (the 
``Credit Union'') in the amount of _____ Dollars ($_____). This term 
share certificate account may be redeemed on (maturity date) _____ only 
upon presentation of the certificate to the Credit Union. The dividend 
rate of this certificate account is __% with an annual percentage yield 
of __%. The annual percentage yield and dividend rate assume that 
dividends are to be [check one] (  ) added to principal/(  ) paid to 
regular share account number _____/ (  ) mailed to owner(s). This 
account is subject to all terms and conditions stated in the Term Share 
Certificate Account Disclosures, as they may be amended from time to 
time, and incorporates the same by reference into this agreement.

________________________________________________________________________
Authorized signature

________________________________________________________________________
Authorized signature

    Note: This form is modeled on NCUA Form FCU 107SCP, Credit Union 
Share Certificate, as discussed in the Accounting Manual for FCUs, 
Secs. 5030.1, 5150.6. It is simplified to reflect the term share 
(certificate) account agreement, the parties involved, the maturity term 
and the annual percentage yield and dividend rate. All other terms are 
incorporated by reference. This should allow the credit union maximum 
flexibility in fashioning certificate, and other term share account, 
products. If a credit union so desired, other terms and conditions could 
be incorporated into the term share certificate itself, as long as a 
copy is presented to the member at the account opening. Care should also 
be taken to ensure that the term share certificate format addresses any 
necessary state law concerns. As the FRB's Regulation D on reserve 
requirements permits all term share accounts to be represented by a 
transferable or nontransferable, or a negotiable or nonnegotiable, 
certificate, instrument, passbook, statement or otherwise, and still be 
considered a ``time deposit'', the Board has made no entry on this 
sample form regarding such terms, leaving the decision instead to each 
credit union's board of directors. 12 CFR 204.2(c)(2).

           B-6 Sample Form (Regular Share Account Disclosures)

                    Regular Share Account Disclosures

    1. Rate information. As of April 1, 1995, the dividend rate was 
5.00% and the annual percentage yield (APY) was 5.13% on your regular 
share account. In addition, the credit union estimates a prospective 
dividend rate of 5.25% and a prospective APY of 5.39% on your share 
account for this dividend period.

[[Page 891]]

The dividend rate and annual percentage yield may change every quarter 
as determined by the credit union board of directors.
    2. Compounding and crediting. Dividends will be compounded daily and 
will be credited quarterly. For this account type, the dividend period 
is quarterly, for example, the beginning date of the first dividend 
period of the calendar year is January 1 and the ending date of such 
dividend period is March 31. All other dividend periods follow this same 
pattern of dates. The dividend declaration date follows the ending date 
of a dividend period, and for the example is April 1. If you close your 
regular share account before dividends are credited, you will not 
receive accrued dividends.
    3. Minimum balance requirements. The minimum balance to open this 
account is the purchase of a $5 share in the Credit Union. You must 
maintain a minimum daily balance of $500 in your account to avoid a 
service fee. If, during any day during a quarter, your account balance 
falls below the required minimum daily balance, your account will be 
subject to a service fee of $5 for that quarter.
    4. Balance computation method. Dividends are calculated by the daily 
balance method which applies a daily periodic rate to the principal in 
your account each day.
    5. Accrual of dividends. Dividends will begin to accrue on the 
business day you deposit noncash items (e.g., checks) to your account.
    6. Fees and charges. The following fees and charges may be assessed 
against your account.
    a. Statement copies--$5.00 per statement.
    b. Account inquiries--$3.00 per inquiry.
    c. Dormant account fee--$10.00 per month.
    d. Wire transfers--$8.00 per transfer.
    e. Minimum balance service fee--$5.00 per quarter.
    f. Share transfer--$1.00 per transfer.
    g. Excessive share withdrawals $1.00 per item.
    7. Transaction limitations. During any statement period, you may not 
make more than six withdrawals or transfers to another credit union 
account of yours or to a third party by means of a preauthorized or 
automatic transfer or telephonic order or instruction. No more than 
three of the six transfers may be made by check, draft, debit card, if 
applicable, or similar order to a third party. If you exceed the 
transfer limitations set forth above in any statement period, your 
account will be subject to closure by the credit union or to a fee of 
$1.00 per item.
    8. Nature of dividends. Dividends are paid from current income and 
available earnings, after required transfers to reserves at the end of a 
dividend period.
    9. Bylaw Requirements. A member who fails to complete payment of one 
share within _____ of his admission to membership, or within _____ from 
the increase in the par value in shares, or a member who reduces his 
share balance below the par value of one share and does not increase the 
balance to at least the par value of one share within _____ of the 
reduction may be terminated from membership at the end of a dividend 
period. [All blanks should be filled with time chosen by credit union 
board of directors.] Shares may be transferred only from one member to 
another, by written instrument in such form as the Credit Union may 
prescribe. The Credit Union reserves the right, at any time, to require 
members to give, in writing, not more than 60 days notice of intention 
to withdraw the whole or any part of the amounts so paid in by them. No 
member may withdraw shareholdings that are pledged as required on 
security on loans without the written approval of the credit committee 
or a loan officer, except to the extent that such shares exceed the 
member's total primary and contingent liability to the Credit Union. No 
member may withdraw any shareholdings below the amount of his/her 
primary or contingent liability to the Credit Union if he/she is 
delinquent as a borrower, or if borrowers for whom he/she is comaker, 
endorser, or guarantor are delinquent, without the written approval of 
the credit committee or loan officer.
    10. Par value of shares; Dividend period. The par value of a regular 
share in this Credit Union is $5. The dividend period of the Credit 
Union is quarterly.
    11. National Credit Union Share Insurance Fund. Member accounts in 
this Credit Union are federally insured by the National Credit Union 
Share Insurance Fund.
    12. Other Terms and Conditions. [In this item, which may be titled 
or subdivided in any manner by each credit union, NCUA suggests that the 
following issues be covered or handled: Statutory lien or setoff; 
expenses (garnishments and bankruptcy orders and holds on account); 
joint ownership accounts; trust accounts; payable-on-death accounts; 
retirement accounts; Uniform Transfer to Minor Act accounts; sole 
proprietorship accounts; escrow and custodial accounts; corporation 
accounts; not-for-profit corporation accounts; voluntary association 
accounts; partnership accounts; public unit accounts; powers of attorney 
(guardianship orders); tax disclosures and certifications; Uniform 
Commercial Code variances; amendments; reliance on signature card; 
change of address; incorporations of other documents by reference, such 
as expedited funds availability policies, service charges schedules or 
electronic banking disclosures; ability to suspend services; and 
operational matters (stop payment orders--verbal and written, 
satisfactory identification, refusal of deposits not in proper form, 
wire transfers, stale check deposits, availability of periodic 
statements or passbook feature.)]


[[Page 892]]


    Note: This form is modeled on the share account disclosures in the 
Accounting Manual for FCUs, Sec. 5150.7. The disclosures are for a 
variable-rate, daily balance method dividend calculation regular share 
account in an FCU with a $500 minimum balance to avoid service fees. For 
the example, the account was opened on May 1, 1995. Other terms are 
self-explanatory. The dividend rate paid and annual percentage yield 
disclosures will reflect the prospective dividend rate for a given 
dividend period. Item nos. 1-8 reflect standard TISA and part 707 
disclosures discussed in sections B-1 through B-3 of this appendix. Note 
that if the credit union limits the maximum amount of shares which may 
be held by one member under NCUA Standard FCU Bylaws, Art. III, section 
2, that this should be stated in item no. 7, transaction limitations. 
Item no. 9 reflects various terms provided in Art. III, sections 3-6 of 
the NCUA Standard FCU Bylaws. Item no. 10 reflects the par value amount 
of regular shares in a federal credit union, pursuant to section 117 of 
the FCU Act, 12 U.S.C. 117. It also states the dividend period of the 
credit union, which is set by the board of directors. Item no. 11 
addresses the requirements of 12 CFR part 740. Nonfederally insured 
credit unions (NICUs) would be expected to disclose information required 
by section 151 of the Federal Deposit Insurance Corporation Improvement 
Act of 1991. 12 U.S.C. 1831t. By December 19, 1992, all NICUs were 
required to include conspicuously on all periodic statements of account, 
signature cards, passbooks, share certificates and other similar 
instruments of deposit and in all advertising a notice that the credit 
union is not federally insured. Additional disclosures will be required 
of NICUs by June 19, 1994. Item no. 12 is inserted to ensure that credit 
unions add other account terms and conditions not covered by the 
proposed regulation. These sorts of terms are contemplated by proposed 
Sec. 707.3(b), requiring that the disclosures reflect the terms of the 
legal obligation between the member and the credit union. This list is 
not meant to be exhaustive, but to give a general idea of other topics 
often covered in share account contracts. Item no. 12 is not expressly 
required by either TISA or part 707, but any of these terms that are 
disclosed must be accurate and not misleading. Also the Board strongly 
recommends that such terms are included in account opening disclosures 
to inform the membership and to clearly set forth the legal relationship 
between the members and their credit union.

            B-7 Sample Form (Share Draft Account Disclosures)

                     Share Draft Account Disclosures

    1. Rate information. As of January 1, 1995, the dividend rate was 
3.00% and the annual percentage yield (APY) was 3.04% on your share 
account. In addition, the prospective dividend rate on your account is 
3.15% with a prospective annual percentage yield (APY) of 3.20% for the 
current dividend period. The dividend rate and APY may change every 
dividend period as determined by the credit union board of directors.
    2. Compounding and crediting. Dividends will be compounded monthly 
and will be credited monthly. For this account type, the dividend period 
is monthly, for example, the beginning date of the first dividend period 
of the calendar year is January 1 and the ending date of such dividend 
period is January 31. All other dividend periods follow this same 
pattern of dates. The dividend declaration date follows the ending date 
of a dividend period, and for the example above is February 1. If you 
close your share draft account before dividends are credited, you will 
not receive accrued dividends.
    3. No Minimum balance requirements apply to this account.
    4. Balance computation method. Dividends are calculated by the 
average daily balance method which applies a periodic rate to the 
average daily balance in the account for the period. The average daily 
balance is calculated by adding the balance in the account for each day 
of the period and dividing that figure by the number of days in the 
period.
    5. Accrual of dividends. Dividends will begin to accrue no later 
than the business day we receive provisional credit for the placement of 
noncash items (e.g. checks) to your account.
    6. Fees and charges. The following fees and charges may be assessed 
against your account.
    a. Statement copies--$5.00 per statement.
    b. Account inquiries--$3.00 per inquiry.
    c. Dormant account fee--$10.00 per month.
    d. Wire transfers--$8.00 per transfer.
    e. Overdrafts/Returned Items--$5.00 per draft.
    f. Share transfer--$1.00 per transfer.
    g. Excessive share withdrawals--$1.00 per item.
    h. Certified checks--$5.00 per check.
    i. Stop Payment Order--$5.00 per order.
    j. Check Printing Fee--$12.00 per 200 checks (varies depending on 
style of check ordered).
    7. No transaction limitations apply to this account.
    8. Nature of dividends. Dividends are paid from current income and 
available earnings, after required transfers to reserves at the end of a 
dividend period.
    9. Bylaw Requirements. A member who fails to complete payment of one 
share within _____ of his admission to membership, or within _____ from 
the increase in the par value in shares, or a member who reduces his 
share balance below the par value of one share and does not increase the 
balance to at least the par value of one share within

[[Page 893]]

_____ of the reduction may be terminated from membership at the end of a 
dividend period. [All blanks should be filled with time chosen by credit 
union board of directors.] Shares may be transferred only from one 
member to another, by written instrument in such form as the Credit 
Union may prescribe. The Credit Union reserves the right, at any time, 
to require members to give, in writing, not more than 60 days notice of 
intention to withdraw the whole or any part of the amounts so paid in by 
them. Shares paid in under an accumulated payroll deduction plan may not 
be withdrawn until credited to a member's account. No member may 
withdraw shareholdings that are pledged as required on security on loans 
without the written approval of the credit committee or a loan officer, 
except to the extent that such shares exceed the member's total primary 
and contingent liability to the Credit Union. No member may withdraw any 
shareholdings below the amount of his/her primary or contingent 
liability to the Credit Union if he/she is delinquent as a borrower, or 
if borrowers for whom he/she is comaker, endorser, or guarantor are 
delinquent, without the written approval of the credit committee or loan 
officer.
    10. Par value of shares; Dividend period. The par value of a regular 
share in this Credit Union is $5. The dividend period of the Credit 
Union is monthly, beginning on the first of a month and ending on the 
last day of the month.
    11. National Credit Union Share Insurance Fund. Member accounts in 
this Credit Union are federally insured by the National Credit Union 
Share Insurance Fund.
    12. Other Terms and Conditions. [See section B-6, item 12, of this 
appendix].

    Note: This form is modeled on the share account disclosures in the 
Accounting Manual for FCUs, Sec. 5150.7. The disclosures are for a 
variable-rate, average daily balance method dividend calculation share 
draft account in an FCU with no minimum balance requirement. For 
purposes of this example, the account was opened on January 15, 1995. 
The Credit Union has monthly dividend periods. Other terms are self-
explanatory. The dividend rate paid and annual percentage yield 
disclosures will reflect the prospective dividend rate for a given 
dividend period. The disclosures are very similar to the ones in section 
B-6 of appendix B, except for the rollback and par value disclosures, 
which have been removed from the final rule and appendices.

        B-8 Sample Form (Money Market Share Account Disclosures)

                 Money Market Share Account Disclosures

    1. Rate information. As of January 1, 1995, if your average daily 
balance was $500 or more, the dividend rate paid on the entire balance 
in your account was 4.75%, with an annual percentage yield (APY) of 
4.85%. If your average daily balance is $500 or more, a prospective 
dividend rate of 4.95% will be paid on the entire balance in your 
account with a prospective APY of 5.00% for this dividend period on your 
account. The dividend rate and APY may change every dividend period as 
determined by the credit union board of directors.
    2. Compounding and crediting. Dividends will be compounded monthly 
and will be credited quarterly. If you close your share money market 
account before dividends are credited, you will not receive accrued 
dividends.
    3. Minimum balance requirements. The minimum balance required to 
open this account is $500. You must maintain a minimum daily balance of 
$500 in your account to avoid a service fee. If, during any (time 
period), your account falls below the required minimum daily balance, 
your account will be subject to a service fee of $5 for that (time 
period).
    4. Balance computation method. Dividends are calculated by the 
average daily balance method which applies a periodic rate to the 
average daily balance in your account for the period. The average daily 
balance is calculated by adding the principal in the account for each 
day of the period and dividing that figure by the number of days in the 
period.
    5. Accrual of dividends. Dividends will begin to accrue on the 
business day you deposit noncash items (e.g., checks) to your account.
    6. Fees and charges. The following fees and charges may be assessed 
against your account.
    a. Statement copies--$5.00 per statement.
    b. Account inquiries--$3.00 per inquiry.
    c. Dormant account fee--$10.00 per month.
    d. Wire transfers--$8.00 per transfer.
    e. Minimum balance service fee--$5.00 per (time period).
    f. Share transfer--$1.00 per transfer.
    g. Excessive share withdrawals--$1.00 per item.
    h. Certified checks--$5.00 per check.
    i. Stop Payment Order--$5.00 per order.
    j. Check Printing Fee--$12.00 per 200 checks (varies depending on 
style of check ordered).
    7. Transaction limitations. During any statement period, you may not 
make more than six withdrawals or transfers to another credit union 
account of yours or to a third party by means of a preauthorized or 
automatic transfer or telephonic order or instruction. No more than 
three of the six transfers may be made by check, draft, debit card, if 
applicable, or similar order to a third party. If you exceed the 
transfer limitations set forth above in any statement period, your 
account will be subject to closure by the credit union or to a fee of 
$1.00 per item.

[[Page 894]]

    8. Nature of dividends. Dividends are paid from current income and 
available earnings, after required transfers to reserves at the end of a 
dividend period.
    9. Bylaw Requirements. [This section should reflect any requirements 
concerning share accounts in the FISCU's bylaws or charter.]
    10. Par value of shares; Dividend period. The par value of a regular 
share in this Credit Union is $50. The dividend period of the Credit 
Union is monthly, beginning on the first of a month and ending on the 
last day of the month.
    11. National Credit Union Share Insurance Fund. Member accounts in 
this Credit Union are federally insured by the National Credit Union 
Share Insurance Fund.
    12. Other Terms and Conditions. [See section B-6, item 12, of this 
appendix.]

    Note: This form is modeled on the share account disclosures in the 
Accounting Manual for FCUs, Sec. 5150.7 and on the share draft account 
disclosures in section B-7 of this appendix. The disclosures are for a 
variable-rate, tiered-rate (method A, option 1), average daily balance 
method dividend calculation, money market share account in a FISCU with 
a $500 minimum balance to open the account and to avoid service fees. 
For purposes of this example, the account was opened on January 29, 
1995. Other terms are self-explanatory. The dividend rate paid and 
annual percentage yield disclosures will reflect the prospective 
dividend rate for a given dividend period. Note that the contents of 
Item 9, Bylaw requirements, must be tailored to the specific bylaws of a 
FISCU or NICU. Also note the high par value amount in Item 10.

     B-9 Sample Form (Term Share (Certificate) Account Disclosures)

              Term Share (Certificate) Account Disclosures

    1. Rate information. [Repeat rates disclosed on face of term share 
certificate, see Sec. B-5, Sample Form (Term Share (Certificate) 
Account)].
    2. Compounding and crediting. Dividends will be compounded monthly 
and will be credited annually. If you close your certificate account 
before dividends are credited, you will not receive accrued dividends.
    3. Minimum balance requirements. The minium balance required to open 
this account is $500.
    4. Balance computation method. Dividends are calculated by the daily 
balance method, which applies a daily periodic rate to the principal in 
your account each day.
    5. Accrual of dividends. Dividends will begin to accrue on the 
business day you deposit noncash items (e.g., checks) to your account.
    6. Fees and charges. The following fees and charges may be assessed 
against your account.
    a. Statement copies--$5.00 per statement.
    b. Account inquiries--$3.00 per inquiry.
    c. Share transfer--$1.00 per transfer.
    7. Transaction limitations. After the account is opened, you may not 
make deposits into the account until the maturity date stated on the 
certificate.
    8. Maturity date. Your account will mature on January 1, 1996.
    9. Early withdrawal penalties. We may impose a penalty if you 
withdraw any of the funds before the maturity date. The penalty will 
equal three months' dividends on your deposit.
    10. Renewal policies. Your certificate account will automatically 
renew at maturity. You will have a grace period of 10 business days 
after the maturity date to withdraw the funds in the account without 
being charged an early withdrawal penalty.
    11. Bonus. You will receive a new (insert brand name) toaster-oven 
as a bonus when you open the account after December 31, 1994, and before 
June 30, 1995. You must maintain your entire principal on deposit until 
the maturity date of your certificate account to obtain the bonus.
    12. [Reserved]
    13. Bylaw Requirements. [This section should reflect any 
requirements concerning share accounts in the FISCU's bylaws or 
charter.]
    14. Par value of shares; Dividend period. The par value of a regular 
share in this Credit Union is $25. The dividend period of the Credit 
Union on this type of account is annual, beginning on the date the 
account is opened, and ending on the stated maturity date, unless 
renewed.
    15. National Credit Union Share Insurance Fund. Member accounts in 
this Credit Union are federally insured by the National Credit Union 
Share Insurance Fund.
    16. Other Terms and Conditions. [See section B-6, item 12, of this 
appendix.]

    Note: Even though this disclosure if for an account at a FISCU, this 
form is modeled on the share account disclosures in the Accounting 
Manual for FCUs, Sec. 5150.7 and upon the regular share account 
disclosures in section B-6 of this appendix. The disclosures are for a 
fixed-rate, daily balance method dividend calculation, automatically 
renewing term share certificate account in a FISCU with a $500 minimum 
balance to open the account and a ten day grace period. For the example, 
the account is opened on January 1, 1995 and matures on January 1, 1996. 
Other terms are self-explanatory. The dividend rate paid and annual 
percentage yield disclosures reflect the contracted, prospective 
dividend rate for a given dividend period. Note the special disclosures 
for term share certificate accounts, items nos. 8-10. Note also the 
bonus disclosure, item no. 11.

[[Page 895]]

                  B-10 Sample Form (Periodic Statement)

                           Periodic Statement

________________________________________________________________________
Member Name

________________________________________________________________________
Account Number

[Transaction account activity by date.]
[Average daily balance of $1,500 for the month, daily compounding.]
    Your account earned $6.72, with an annual percentage yield earned of 
5.40%, for the statement period from May 1 through and including May 31. 
In addition, your account earned $15 in extraordinary dividends for this 
period. Any fees assessed against your account are shown in the body of 
the periodic statement and are identified by the code at the bottom 
margin of this statement.

                          Service Charge Codes

SC-1 Stop Payment Order Fee
SC-2 Statement Copy Fee
SC-3 Draft Return Fee
SC-4 Transfer from Shares
SC-5 Microfilm Copy
SC-6 Share Draft Printing Fee
SC-7 Dormant Account Fee
SC-8 Wire Transfer Fee
SC-9 Excessive Share Withdrawal Fee
SC-10 ___________

                           Other Transactions

D Dividends
EC Error Correction
OR Overdraft Returned
OL Overdraft Loan
OS Overdraft Share Transfer

    Note: This form is modeled on the share draft statement of account, 
Form FCU 107G-SD, in the Accounting Manual for FCUs, Sec. 5150.4. All 
information is self-explanatory. Codes of transactions are not required, 
but are a common credit union practice. The information regarding fees 
could also be included on the line of the periodic statement showing 
when the fees were debited from the account. Alternatively, a credit 
union could show all fees debited against the account for the statement 
period in a special area of the periodic statement. Clarity to the 
member of the required information--annual percentage yield earned; 
amount of dividends; fees imposed and length of period--is the important 
goal. An additional disclosure regarding the dollar value of any 
extraordinary dividends earned must be added to those statements showing 
the payment of such extraordinary dividends to the member.

                B-11 Sample Form (Rate and Fee Schedule)

                          Rate and Fee Schedule

    This Rate and Fee Schedule for all Accounts sets forth certain 
conditions, rates, fees and charges applicable to your regular share, 
share draft, and money market accounts at the _____ Federal Credit Union 
as of _____ [insert date of delivery to member]. This schedule is 
incorporated as part of your account agreement with the _____ Federal 
Credit Union.

                              Regular Share

    Dividend Rate as of Last Dividend Declaration Date ___%.
    Annual Percentage Yield as of Last Dividend Declaration Date ___%.
    Prospective Dividend Rate ___%.
    Prospective Annual Percentage Yield ___%.
    Dividends Compounded [Annually, Semiannually, Quarterly, Monthly, 
Weekly, Daily].
    Dividends Credited--At close of a dividend period.
    Dividend Period [Annually, Semiannually, Quarterly, Monthly, Weekly, 
Daily].
    Minimum Opening Deposit $5.00 par value share.
    Minimum Monthly Balance [None, $ amount].

                               Share Draft

    Dividend Rate as of Last Dividend Declaration Date ___%.
    Annual Percentage Yield as of Last Dividend Declaration Date ___%.
    Prospective Dividend Rate ___%.
    Prospective Annual Percentage Yield ___%.
    Dividends Compounded [Annually, Semiannually, Quarterly, Monthly, 
Weekly, Daily].
    Dividends Credited--At close of a dividend period.
    Dividend Period [Annually, Semiannually, Quarterly, Monthly, Weekly, 
Daily].
    Minimum Opening Deposit [None, $ amount].
    Minimum Monthly Balance [None, $ amount].

                              Money Market

    Dividend Rate as of Last Dividend Declaration Date ___%.
    Annual Percentage Yield as of Last Dividend Declaration Date ___%.
    Prospective Dividend Rate ___%.
    Prospective Annual Percentage Yield ___%.
    Dividends Compounded [Annually, Semiannually, Quarterly, Monthly, 
Weekly, Daily].
    Dividends Credited--At close of a dividend period.
    Dividend Period [Annually, Semiannually, Quarterly, Monthly, Weekly, 
Daily].
    Minimum Opening Deposit [None, $ amount].

[[Page 896]]

    Minimum Monthly Balance [None, $ amount].
    The following fees may be assessed in connection with your accounts:

                     Fees Applicable to All Accounts

    Returned item fee--$__.00 per item.
    Account reconciliation fee--$__.00 per hour.
    Statement copies fee--$__.00 per statement.
    Certified draft fee--$__.00 per draft.
    Wire transfer fee--$__.00 per transfer.
    Account inquiry fee--$__.00 per inquiry.
    Dormant account fee--$__.00 per month.
    Minimum balance service fee--$__.00 per day.
    Share transfer fee--$__.00 per transfer.
    Excessive share withdrawals fee--$__.00 per item.

                        Share Draft Account Fees

    Monthly service fee--$__.00 per month.
    Overdraft transfers fee--$__.00 per overdraft.
    Drafts returned insufficient funds fee--$__.00 per draft.
    Stop payment order fee--$__.00 per order.
    Draft copy fee--$__.00 per copy.
    Check printing fee--$__.00 per 200 drafts.

                     Money Market Share Account Fees

    Monthly service fee--$__.00 per month.
    Check printing fee--$__.00 per 200 drafts.

    Note: This illustration is for use of an FCU. The information 
provided on a Rate and Fee Schedule can be presented in any format. To 
ensure that it is a part of the account agreement, if used, it should be 
incorporated by reference into the appropriate share account 
disclosures. The figures used are illustrative only.

       B-12 Aggregate Overdraft and Returned Item Fees Sample Form
------------------------------------------------------------------------
                                         Total for this   Total year-to-
                                             period            date
------------------------------------------------------------------------
Total overdraft fees..................           $60.00          $150.00
Total returned item fees..............            $0.00           $30.00
------------------------------------------------------------------------


[58 FR 50445, Sept. 27, 1993, as amended at 59 FR 13436, 13437, Mar. 22, 
1994; 63 FR 71575, Dec. 29, 1998; 72 FR 30246, May 31, 2007; 74 FR 
36104, July 22, 2009; 75 FR 47175, Aug. 5, 2010; 77 FR 71084, Nov. 29, 
2012]



       Sec. Appendix C to Part 707--Official Staff Interpretations

                              Introduction

    1. Official status. This commentary is the means by which the staff 
of the Office of General Counsel of the National Credit Union 
Administration issues official staff interpretations of Part 707 of the 
NCUA Rules and Regulations. Good faith compliance with this commentary 
affords protection from liability under section 271(f) of the Truth in 
Savings Act (TISA), 12 U.S.C. 4311.

  Section 707.1--Authority, Purpose, Coverage, and Effect on State Laws

                              (c) Coverage

    1. Foreign applicability. Part 707 applies to all credit unions that 
offer share and deposit accounts to residents (including resident 
aliens) of any state as defined in Sec. 707.2(v) and that offer accounts 
insurable by the National Credit Union Share Insurance Fund (NCUSIF) 
whether or not such accounts are insured by the NCUSIF. Corporate credit 
unions designated as such by NCUA under 12 CFR 704.2 (definition of 
``corporate credit union'') are exempt from part 707.
    2. Persons who advertise accounts. Persons who advertise accounts 
are subject to the advertising rules. This includes agent and agented 
accounts, such as a member who subdivides interests in a jumbo term 
share certificate account for sale to other parties or among members who 
form a certificate account investment club. For example, if an agent 
places an advertisement that offers members an interest in an account at 
a credit union, the advertising rules apply to the advertisement, 
whether the account is held by the agent or directly by the member.
    3. Nonautomated credit unions. Nonautomated credit unions with an 
asset size of $2 million or less, after subtracting any nonmember 
deposits, are exempt from TISA and part 707. NCUA defines a 
``nonautomated credit union'' as a credit union without sufficient data 
processing capability and capacity to establish, operate and maintain a 
share and loan software system to timely and accurately process all 
account transactions of all members. The nonautomated credit union 
exemption is available to all credit unions meeting the asset size and 
automation standards of this comment, including newly chartered credit 
unions. If any of the credit unions eligible for this exemption grow to 
have more than $2 million in assets as of December 31 of any year, the 
NCUA Board will require such credit unions to comply with TISA and part 
707 on January 1 of one year after such credit union loses its exemption 
eligibility. Similarly, if a credit union becomes sufficiently automated 
to operate a complete share and loan system, such credit union will be 
entitled to the same compliance phase-in period.

                        (d) Effect on State Laws

    1. Preemption of state laws/Inconsistent requirements. State law 
requirements that are inconsistent with the requirements of TISA and 
part 707 are preempted to the extent of

[[Page 897]]

the inconsistency. A state law is inconsistent if it requires a credit 
union to make disclosures or take actions that contradict the 
requirements of the federal law. A state law is also contradictory if it 
requires the use of the same term to represent a different amount or a 
different meaning than the federal law, requires the use of a term 
different from that required in the federal law to describe the same 
item, or permits a method of calculating dividends or interest on an 
account different from that required in the federal law.
    2. Preemption determinations. A credit union, state, or other 
interested party may request the Board to determine whether a state law 
requirement is inconsistent with the federal requirements. A request for 
a determination should be addressed to NCUA's Office of General Counsel, 
1775 Duke Street, Alexandria, VA 22314. Written preemption requests 
should cite (or include a copy of) the allegedly inconsistent state law, 
demonstrate the inconsistency with TISA and part 707 and the burden on 
credit unions, and formally request a preemption determination. The 
Office of General Counsel may provide other interested parties, 
particularly affected states, an informal opportunity to comment on any 
request for a preemption determination, unless it finds that such notice 
and opportunity for comment would be impracticable, unnecessary, or 
contrary to the public interest. NCUA will publicize any preemption 
determinations using any means readily at its disposal.
    3. Effect of preemption determinations. After the Board, through its 
Office of General Counsel, determines that a state law is inconsistent, 
a credit union may not make disclosures using the inconsistent term or 
take actions relying on the inconsistent law.
    4. Reversal of determination. The Board reserves the right to 
reverse a determination for any reason bearing on the coverage or effect 
of state or federal law.

                       Section 707.2--Definitions

                               (a) Account

    1. Covered accounts. Examples of accounts subject to the regulation 
are:
    i. Dividend-bearing and interest-bearing accounts.
    ii. Non-dividend-bearing and non-interest-bearing accounts.
    iii. Accounts opened as a condition of obtaining a credit card.
    iv. Escrow accounts with a consumer purpose, such as an account 
established by a member to escrow rental payments, pending resolution of 
a dispute with the member's landlord.
    v. Accounts held by a parent or custodian for a minor under a 
state's Uniform Gift to Minors Act (or Uniform Transfers to Minors Act).
    vi. Individual retirement accounts (IRAs) and simplified employee 
pension (SEP) accounts.
    vii. Payable-on-Death (POD) or ``Totten trust'' accounts.
    2. Other accounts. Examples of accounts not subject to the 
regulation are:
    i. Mortgage escrow accounts for collecting taxes and property 
insurance premiums.
    ii. Accounts established to make periodic disbursements on 
construction loans.
    iii. Trust accounts opened by a trustee pursuant to a formal written 
trust agreement (not merely declarations of trust on a signature card 
such as a ``Totten trust,'' or an IRA or SEP account).
    iv. Accounts opened by an executor in the name of decedent's estate.
    v. Accounts of individuals operating businesses as sole proprietors.
    vi. Certificates of indebtedness. Some credit unions borrow funds 
from their members through a certificate of indebtedness that sets forth 
the terms and conditions of the repayment of the borrowing, such as 
federal credit unions do through 12 CFR 701.38. Such an account does not 
represent an account in a credit union and is not covered by part 707.
    vii. Unincorporated nonbusiness association accounts.
    3. Other investments. The term ``account'' does not apply to these 
products. Examples of products not covered are:
    i. Government securities.
    ii. Mutual funds.
    iii. Annuities.
    iv. Securities or obligations of a credit union.
    v. Contractual arrangements such as repurchase agreements, interest 
rate swaps, and bankers acceptances.
    vi. Purchases of U.S. Savings Bonds through a credit union.
    vii. Services offered through a group purchasing plan or a credit 
union service organization (CUSO).
    4. Options. All dividend-bearing and interest-bearing accounts are 
either fixed-rate or variable-rate accounts.
    5. Use of synonyms. Generally, it is not the purpose of part 707 to 
prohibit specific descriptive terms for accounts. For example, credit 
unions can use adjectives and trade names to describe accounts such as 
``Best Share Draft Account,'' or ``Ultra Money Market Share Account.'' 
Synonyms for share, share draft, money market share, and term share 
accounts may be used to describe various types of credit union share and 
deposit accounts as long as the synonym is accurate and not misleading 
and, for account disclosures, is used in conjunction with the correct 
legal term. For example, the following synonyms may be used:
    i. The term ``checking account'' may be used to describe share draft 
accounts.

[[Page 898]]

    ii. The term ``money market account'' may be used to describe money 
market share accounts.
    iii. The term ``savings account'' may be used to describe regular 
share and share accounts.
    iv. The terms ``share certificate,'' ``certificate account,'' or 
``certificate'' may be used to describe share certificates and other 
dividend-bearing term share accounts.
    v. However, under no circumstances may a credit union describe a 
share account as a deposit account, or vice versa. For example, the term 
``certificate of deposit'' or ``CD'' may not be used to describe share 
certificates and other dividend-bearing term share accounts. Similarly, 
the terms ``time account'' (used in Regulation DD, 12 CFR 1030.2(u)) and 
``time deposit'' (used in Federal Reserve Board's Regulation D, 12 CFR 
204.2(c)) may not be used to describe term share accounts.

                            (b) Advertisement

    1. Covered messages. Advertisements include commercial messages in 
visual, oral, or print media that invite, offer, or otherwise announce 
generally to members and potential members the availability of member 
accounts such as:
    i. Telephone solicitations.
    ii. Messages on automated teller machine (ATM) screens (including 
any printout).
    iii. Messages on a computer screen in a credit union's lobby 
(including any printout) other than a screen viewed solely by the credit 
union's employee.
    iv. Messages in a newspaper, magazine, or promotional flyer or on 
radio or television.
    v. Messages promoting an account that are provided along with 
information about the member's existing account at a credit union and 
that promote another account at the credit union (such as account 
promotional messages on the periodic statement).
    2. Other messages. Examples of messages that are not advertisements 
are:
    i. Rate sheets published in newspapers, periodicals, or trade 
journals (unless the credit union or share and deposit broker that 
offers accounts at the credit union pays a fee to have the information 
included or otherwise controls publication).
    ii. Telephone conversations initiated by a member or potential 
member about an account.
    iii. An in-person discussion with a member about the terms for a 
specific account.
    iv. For purposes of Sec. 707.8(b) of this part through Sec. 707.8(e) 
of this part, information given to members about existing accounts, such 
as current rates recorded on a voice-response machine or notices for 
automatically renewable time account sent before renewal.
    v. Information about a particular transaction in an existing 
account.
    vi. Disclosures required by Federal or other applicable law.
    vii. A share account agreement.

                      (c) Annual Percentage Yield.

    1. General. The annual percentage yield (APY) is required for 
disclosures for new accounts, oral responses to inquiries about rates; 
disclosures provided upon request; initial disclosures (if the credit 
union chooses to provide full disclosures instead of the abbreviated 
notice); notices prior to the renewal of a term share account, if known 
at the time the notice is sent, and in advertising. The annual 
percentage yield shows the total amount of dividends for a 365 day 
period (or a 366 day period for a leap year) on an assumed principal 
amount based on the dividend rate and frequency of compounding as a 
percentage of the assumed principal (for accounts such as share or share 
draft accounts) or for the total amount of dividends over the term of 
the account for term share accounts. The annual percentage yield assumes 
the principal amount remains in the account for 365 days (366 days for 
leap year) or for the term of the account.
    2. How Annual Percentage Yield Differs from Annual Percentage Yield 
Earned. The annual percentage yield (APY) differs from the annual 
percentage yield earned (APYE). The annual percentage yield earned is 
required for periodic statements only. The annual percentage yield 
earned shows the total amount of dividends earned for the dividend or 
statement period as a percent of the actual average daily balance in the 
member's account. Unlike the annual percentage yield, the annual 
percentage yield earned is affected by additions and withdrawals during 
the period. The annual percentage yield and the annual percentage yield 
earned must be calculated according to the formulas provided in appendix 
A to this rule.

                    (d) Average Daily Balance Method

    1. General. One of the two required methods (the daily balance is 
the other) of determining the balance upon which dividends must be 
accrued and paid. The average daily balance method requires the 
application of a periodic rate to the average daily balance in the 
account for the average daily balance calculation period. The average 
daily balance is determined by adding the full amount of principal in 
the account for each day of the period and dividing that figure by the 
number of days in the period.

                               (e) Board.

    1. General. The NCUA Board.

                                (f) Bonus

    1. General. Bonuses include items of value offered as incentives to 
members, such as an offer to pay the final installment deposit for

[[Page 899]]

a holiday club account if the final installment is over $10. Bonuses do 
not include the payment of dividends (including extraordinary 
dividends), the waiver or reduction of a fee, the absorption of 
expenses, non-dividend membership benefits, or other consideration 
aggregating $10 or less per year.
    2. Examples. The following are examples of bonuses.
    i. A credit union offers $25 to potential members for becoming a 
member and opening an account. The $25 could be provided by check, cash, 
or direct deposit.
    ii. A credit union offers $25 to a member with only a regular share 
account to open a share draft account. The $25 could be provided by 
check, cash, or direct deposit.
    iii. A credit union offers a portable radio with a value of $20 to 
members and potential members for opening a share draft account.
    iv. A credit union pays the final installment deposit for a holiday 
club account if over $10.
    3. Examples not comprising bonuses. The following are examples of 
items that are not bonuses:
    i. Discount coupons distributed by credit unions for use at 
restaurants or stores.
    ii. A credit union offers $20 to any member if the member is 
responsible for encouraging a potential member to open an account. The 
$20 is not a bonus because the $20 is not paid to the individual opening 
the account. Any item, including cash, given or offered to a third party 
(that is not a joint member or joint owner in an account being opened) 
in exchange for a member or potential member opening (or a member 
renewing or adding to) an account is not a bonus.
    iii. A credit union offers $25 to a member if the member can locate 
his name in the body of a newsletter.
    iv. Life savings benefits. Many credit unions offer life savings 
benefits to beneficiaries of deceased members. Because the benefit 
accrues to a third party, such life savings plans offered are not 
bonuses.
    v. A credit union offers to pay annual membership dues in a 
benevolent organization for a class of members.
    4. De minimis rule. Items with a de minimis value of $10 or less are 
not bonuses. Credit unions may rely on the valuation standard used by 
the Internal Revenue Service (IRS) to determine if the value of the item 
is de minimis. Items required to be reported by the credit union under 
IRS rules are bonuses under this regulation. Examples of items of de 
minimis values are:
    i. Disability insurance premiums on a share account valued at an 
amount of $10 or less per year.
    ii. Coffee mugs, T-shirts or other merchandise with a market value 
of $10 or less per year.
    5. Aggregation. In determining if an item valued at $10 or less is a 
bonus, credit unions must aggregate per account per calendar year items 
that may be given to members. In making this determination, credit 
unions aggregate per account only the market value of items that may be 
given for a specific promotion. To illustrate, assume a credit union 
offers in January to give members an item valued at $7 for each calendar 
quarter during the year that the average account balance in a share 
draft account exceeds $10,000. The bonus rules are triggered, since 
members are eligible under the promotion to receive up to $28 during the 
year. However, the bonus rules are not triggered if an item valued at $7 
is offered to members opening a share draft account during the month of 
January, even though in November the credit union introduces a new 
promotion that includes, for example, an offer to existing share draft 
accountholders for an item valued at $8 for maintaining an average 
balance of $5,000 for the month.
    6. Waiver or reduction of a fee or absorption of expenses. Bonuses 
do not include value received by members through the waiver or reduction 
of fees for credit union-related services (even if the fees waived 
exceed $10), such as the following:
    i. Waiving a safe deposit box rental fee for one year for members 
who open a new account.
    ii. Waiving fees for travelers checks for members, and waiving check 
and share draft printing fees.
    iii. Nondiscriminatorily waiving all fees for a particular class of 
members, such as seniors or minors.
    iv. Discounts on interest rates charged for loans at the credit 
union.
    v. Rebates of loan interest already paid by a member.
    vi. Discounts on application fees charged for loans at the credit 
union.
    vii. Packaged, linked, or tied-account services.
    7. Non-dividend membership benefits. Such benefits are not bonuses 
because they are sporadic in nature, often difficult to value, and 
providing non-dividend membership benefits is a long-standing unique 
credit union practice. (See commentary to Sec. 707.2(r) for examples of 
such benefits.)

                            (g) Credit Union

    1. General. Includes credit unions in the United States, Puerto 
Rico, Guam, U.S. Virgin Islands, and U.S. territories. Applies to credit 
unions whether or not the accounts in the credit union are federally, 
state, privately insured, or uninsured.

                        (h) Daily Balance Method

    1. General. One of the two required methods (the average daily 
balance is the other) of determining the balance upon which dividends 
must be accrued and paid. The daily

[[Page 900]]

balance method requires the application of a daily periodic rate to the 
full amount of principal in the account each day.

                       (i) Dividend and Dividends

    1. General. Member savings placed in share accounts are equity 
investments, and the returns earned on these accounts are dividends. 
Federal credit unions may only offer dividend-bearing and non-dividend-
bearing share accounts. State-chartered credit unions may offer both 
share and deposit accounts if permitted by state law. State law, 
including without limitation regulations and official interpretations, 
will determine if returns earned in accounts in state-chartered credit 
unions are dividends. Dividends exclude the payment of a bonus or other 
consideration worth $10 or less given during a year, the waiver or 
reduction of a fee, the absorption of expenses, non-dividend membership 
benefits and extraordinary dividends. Dividend-bearing accounts must be 
either fixed-rate or variable-rate accounts.
    2. Procedure. Credit unions must follow appropriate law (state law 
for state-chartered credit unions and federal law for federal credit 
unions) in determining dividend policies and declaring dividends. 
Generally, dividends may be viewed as a portion of the available account 
and undivided earnings of the credit union which is set apart, after 
required transfer to reserves, by valid act of the board of directors, 
for distribution among the members. As a matter of legal procedure, 
members are usually not entitled to dividends until the following steps 
are completed: (1) The board of the credit union develops a 
nondiscriminatory dividend policy, by establishing dividend periods, 
dividend credit determination dates dividend distribution dates, any 
associated penalties (if applicable), and the method of dividend 
computation for each type of share account; (2) the provisions for 
required transfers to reserves are made; (3) sufficient and available 
prior and/or current earnings are available at the end of the dividend 
period; (4) the board formally makes a dividend declaration in 
accordance with the credit union's dividend policy; and (5) dividends 
must be paid to members by a credit to the appropriate share account, 
payment by check or share draft, or by a combination of the two methods.
    3. When available. Credit unions must follow the law of their 
primary chartering authority to determine when dividends are available. 
Generally, it is the declaration of the dividend itself which creates 
the dividend and the member has no right to receive a dividend until it 
is so declared. The decision of when to declare dividends lies within 
the official discretion of each credit union's board of directors and 
cannot be abrogated by contract. An agreement to pay dividends on a 
share account is generally interpreted not as an obligation to pay the 
stipulated dividends absolutely and unconditionally, but as an 
undertaking to pay them out of the earnings when sufficiently 
accumulated from which dividends in general are properly payable. 
Generally, ``prospective rates'' are rates set in good faith in advance 
of the close of a dividend period, that may be altered if sufficient 
funds are not available, or in the event of a superseding event, such as 
a strike, plant closure, significant fluctuation in market rates and/or 
a significant change in financial structure, natural disaster or 
emergency that alters the assumptions under which the ``prospective 
rates'' were made. It is the intent of TISA that all disclosure be 
accurate when made, and credit unions are urged to make every effort to 
ratify disclosed ``prospective rates.'' ``Prospective rates'' may also 
be referred to as ``projected rates'' or similar wording, but not as 
``estimated rates.'' (See comment 3(b)-2, prohibiting use of estimates).
    4. Sample dividend resolutions. (i) The following resolution may be 
used where the dividend rates are set after the close of a dividend 
period.

    Resolution of Board of Directors for the Declaration of Dividends

    A. I, ________, certify that I am Secretary of ________ Credit Union 
Board of Directors, and that the following is a correct copy of the 
resolution for declaring dividend adopted by the ________ Credit Union 
at a meeting of the Board of Directors duly and properly held on 
_________, 19__. This resolution appears in the minutes of this meeting 
and has not been rescinded or modified.
    B. Resolved, that
    (1) The Board of Directors has developed a nondiscriminatory 
dividend policy, by establishing dividend periods, dividend credit 
determination dates, dividend distribution dates, any associated 
penalties (if applicable), and the method of dividend computation for 
each type of share account;
    (2) The required transfers to reserves have been made; and
    (3) Sufficient and available prior and/or current earnings are 
available at the end of this dividend period.
    C. Resolved, further, that the Board of Directors now formally makes 
a dividend declaration in accordance with the Credit Union's dividend 
policy and authorizes that on ________, 19__, dividends must be paid to 
members by a credit to the appropriate share account, payment by share 
draft or by a combination of the two methods.
    D. I further certify that the Board of Directors of this Credit 
Union has, and the time of adoption of this resolution had, full power 
and lawful authority to adopt the foregoing resolutions and that this 
resolution revokes any prior resolution.

[[Page 901]]

    In witness whereof, this is my signature and the date on which I 
signed this Resolution.

________________________________________________________________________
Signature

________________________________________________________________________
Date

[Attach list of accounts with dividend rates for each type of account.]

    (ii) The following resolution may be used where the dividend rates 
are set before the close of a dividend period.

    Resolution of Board of Directors for the Declaration of Dividends

    A. I, ________, certify that I am the Secretary of ________ Credit 
Union, and that the following is a correct copy of the resolution for 
declaring dividends adopted by the ________ Credit Union at a meeting of 
the Board of Directors duly and properly held on __________, 19__. This 
resolution appears in the minutes of that meeting and has not been 
rescinded or modified.
    B. Resolved, that the Board of Directors has adopted a 
nondiscriminatory dividend policy, by establishing dividend periods, 
dividend credit determination dates, dividend distribution dates, any 
associated penalties (if applicable) and the method of dividend 
computation for each type of share account.
    C. Resolved, that it is the policy and practice of the Board of 
Directors to meet periodically to establish prospective dividend rates 
for each type of dividend-bearing share account.
    D. Resolved, that if the required transfers to reserves have been 
made and there are sufficient and available prior and/or current 
earnings available at the end of a dividend period, the officers of the 
Credit Union are authorized to pay dividends at the rate prospectively 
established by the Board of Directors for each account for the dividend 
period. The officers may pay the dividends without any further action of 
the Board of Directors. The act of paying the dividends shall constitute 
the declaration of the dividends and shall be a ratification of the 
prospective dividend rate.
    In witness whereof, this is my signature and the date on which I 
signed this Resolution.

________________________________________________________________________
Signature

________________________________________________________________________
Date

[Attach list of accounts with prospective dividend rates for each type 
of account.]

    5. Referencing. Except where specifically stated otherwise, use of 
the term ``share'' in part 707, as in ``share account,'' also refers to 
``deposit,'' as in ``deposit account,'' where appropriate (for interest-
bearing or non-interest-bearing deposit accounts at some state-chartered 
credit unions).

                      (j) Dividend Declaration Date

    1. General. The importance of the dividend declaration date is to 
tie the last paid dividend to a certain period of time to place members 
and potential members on notice that the last paid dividend is different 
from the next dividend to be paid. In order to achieve this purpose, a 
credit union may use any of the following methods:
    i. ``As of 3/15/95'' (the date the board of directors last met and 
declared the last paid dividend).
    ii. ``As of 3/31/95'' (the last day of the last dividend period upon 
which a dividend has been paid).
    iii. ``For the period 1/1/95 to 3/31/95'' (the last dividend period 
upon which a dividend has been paid).
    iv. ``For the first quarter of 1995'' (the last dividend period upon 
which a dividend has been paid).
    v. ``For April 1995'' (the last dividend period upon which a 
dividend has been paid).
    vi. ``As of the last dividend declaration date'' (the last dividend 
period upon which a dividend has been paid).

                           (k) Dividend Period

    1. General. The dividend period is to be set by a credit union's 
board of directors for each account type, e.g., regular share, share 
draft, money market share, and term share. The most common dividend 
periods are weekly, monthly, quarterly, semi-annually, and annually. 
Dividend periods need not agree with calendar months, e.g., a monthly 
dividend period could begin March 15 and end April 14.

                            (l) Dividend Rate

    1. General. The dividend rate does not reflect compounding. 
Compounding is reflected in the ``annual percentage yield'' definition.
    2. Referencing. Except where specifically stated otherwise, use of 
the term ``dividend rate'' in part 707 also refers to ``interest rate,'' 
where appropriate (for interest-bearing and non-interest-bearing deposit 
accounts at some state-chartered credit unions).

                       (m) Extraordinary Dividends

    1. General. The definition encompasses all irregularly scheduled and 
declared dividends, and as dividends, extraordinary dividends are exempt 
from the ``bonus'' disclosure requirements. Extraordinary dividends do 
not have to be disclosed on account disclosures, but the dollar amount 
of an extraordinary dividend credited to the account during the 
statement period does have to be separately disclosed on the periodic 
statement for the

[[Page 902]]

dividend period during which the extraordinary dividends are earned. 
Extraordinary dividends, like ordinary dividends, do not include the 
payment of a bonus or other consideration worth $10 or less given during 
a year, the waiver or reduction of a fee, the absorption of expenses or 
non-dividend membership benefits. See comments 2(f) 1 through 7 and 2(i) 
1 through 4. Extraordinary dividends may be calculated by any means 
determined by the board of directors of a credit union and may not be 
used in the annual percentage yield earned calculation.
    2. Use of synonym. Extraordinary dividends may be described as 
``bonus dividends.''

                         (n) Fixed-Rate Account

    1. General. Includes all accounts in which the credit union, by 
contract, agrees to give at least 30 days advance written notice of 
decreases in the dividend rate. Thus, credit unions can decrease rates 
only after providing advance written notice of rate decreases, e.g., a 
``change-in-terms notice.''

                            (o) Grace Period

    1. General. A period after maturity of an automatically renewing 
term share account during which the member may withdraw funds without 
being assessed a penalty. Use of a ``grace period'' is discretionary, 
not mandatory. This definition does not refer to the ``grace period'' 
account, which is a synonym for ``federal rollback method'' or ``in by 
the 10th'' accounts, which are prohibited by TISA and part 707.

                              (p) Interest

    1. General. Member savings placed in deposit accounts are debt 
investments, and the return earned on these accounts is interest. 
Federal credit unions are not authorized to offer any interest-bearing 
deposit accounts. State-chartered credit unions may offer both share and 
deposit accounts if permitted by state law. State law, including without 
limitation regulations and official interpretations, will determine if 
returns earned in accounts in state-chartered credit unions are 
interest. Interest excludes the payment of a bonus or other 
consideration worth $10 or less given during a year, the waiver of 
reduction of a fee, the absorption of expenses, non-dividend membership 
benefits, and extraordinary dividends.
    2. Differences between dividends and interest. Generally, dividends 
are returns on an equity investment (shares); interest is return on a 
debt investment (deposits). Dividends, in general, are not properly 
payable until declared at the close of a dividend period; interest, in 
general, is properly payable daily according to the deposit contract. 
Dividend rates are prospective until actually declared; interest rates 
are set according to contract in advance and are earned on that basis. 
Share accounts establish a member (owner)/credit union (cooperative) 
relationship; deposit accounts establish a depositor (creditor)/
depository (debtor) relationship.
    3. Referencing. Except where specifically stated otherwise, use of 
the terms ``dividend'' or ``dividends'' in part 707 also refers to 
``interest'' where appropriate (for interest-bearing and non-interest-
bearing deposit accounts at some state-chartered credit unions).

                               (q) Member

    1. Professional capacity. Examples of accounts held by a natural 
person in a professional capacity for another are:
    i. Attorney-client trust accounts.
    ii. Trust, estate and court-ordered accounts.
    iii. Landlord-tenant security accounts.
    2. Other accounts. Examples of accounts not held in a professional 
capacity include accounts held by parents for a child under the Uniform 
Gifts to Minors Act (or Uniform Transfers to Minors Act.
    3. Retirement plans. IRAs and SEP accounts are member accounts to 
the extent that funds are invested in accounts subject to the 
regulation. Keogh accounts, like sole proprietor accounts, are not 
subject to the regulation.

                  (r) Non-Dividend Membership Benefits

    1. General. Term reflects unique credit union practices that are 
difficult to value, encourage community spirit, and are not granted in 
such quantity as to be includable as calculable dividends.
    2. Examples. Examples include:
    i. Food, refreshments, and drawings and raffles at annual meetings, 
member functions, and branch openings.
    ii. Travel club benefits.
    iii. Prizes offered at annual meetings, such as U.S. Savings Bonds, 
a deposit of funds into the winner's account, trips, and other gifts. 
Such prizes are not bonuses because they are offered as an incentive to 
increase attendance at the annual meeting, and not to entice members to 
open, maintain, or renew accounts or increase an account balance.
    iv. Life savings benefits.

                          (s) Passbook Account

    1. Relation to Regulation E. Passbook accounts include accounts 
accessed by preauthorized electronic fund transfers to the account (as 
defined in 12 CFR 1005.2(k)), such as an account credited by direct 
share and deposit of social security payments. Accounts that permit 
access by other electronic means are not ``passbook accounts,'' and any 
statements that are sent four or more times a year must comply with the 
requirements of Sec. 707.6.

[[Page 903]]

                         (t) Periodic Statement

    1. General. Periodic statements are not required by part 707. 
Passbook and term share accounts are exempt from periodic statement 
requirements.
    2. Examples. Periodic statements do not include:
    i. Additional statements provided solely upon request.
    ii. General service information such as a quarterly newsletter or 
other correspondence that describes available services and products.

                          (u) Potential Member

    1. General. A potential member is a natural person eligible for 
membership in a credit union, who has not yet taken the steps necessary 
to become a member. The term also includes natural person nonmembers 
eligible to hold accounts in a credit union pursuant to relevant federal 
or state law.
    2. Verification of eligibility. It is recommended that credit unions 
have sound written procedures in place to identify those eligible for 
membership. If these procedures include verification measures, such as 
an application process, verification telephone call or letter to an 
employer or association within the field of membership, witnessing by an 
existing member, or similar procedure, then the credit union may first 
verify the membership eligibility of a potential member before providing 
account disclosures or other information to the potential member. This 
process of verifying a member's eligibility status, making a 
recommendation for membership, and providing account disclosures should 
be completed within 20 calendar days. This period also applies when 
potential members not on credit union premises request disclosures.
    3. Nonmembers. Within its sole discretion, the board of directors of 
a credit union may provide TISA disclosures to nonmembers who are 
ineligible for membership or to hold an account at the credit union. If 
disclosures are made to such nonmembers, it is the position of the Board 
that no civil liability can accrue to the credit union for any errors in 
such disclosures. (See commentary to Sec. 707.3(d)).

                                (v) State

    1. General. Territories and possessions include American Samoa, 
Guam, the Mariana Islands, and the Marshall Islands.

                        (w) Stepped-Rate Account

    1. General. Stepped-rate accounts are those accounts in which two or 
more dividend rates (known at the time the account is opened) will take 
effect in succeeding periods.
    2. Example. An example of a stepped-rate account is a one-year term 
share certificate account in which a 5.00% dividend rate is paid for the 
first six months, and 5.50% for the second six months.

                         (x) Term Share Account

    1. Relation to the Federal Reserve Board's Regulation D. Federal 
Reserve Board's Regulation D permits, in limited circumstances, the 
withdrawal of funds without penalty during the first six days after a 
``time deposit'' is opened. (See 12 CFR 204.2(c)(1)(i).) But the fact 
that a member makes a withdrawal as permitted by Regulation D does not 
disqualify the account from being a term share account for purposes of 
this regulation (such as withdrawals upon the death of the member, or 
within a ``grace period'' for automatically renewable term share 
accounts).
    2. Club accounts. Club accounts, including Christmas club, holiday 
club, and vacation club accounts may be either term share or regular 
share accounts, depending on the terms of the account. Although club 
accounts typically have a maturity date, they are not term share 
accounts unless they also require a penalty of at least seven days' 
dividends for withdrawals during the first six days after the account is 
opened.

                         (y) Tiered-Rate Account

    1. General. Tiered-rate accounts are those accounts in which two or 
more dividend rates are paid on the account and are determined by 
reference to a specified balance level. Tiered-rate accounts are of two 
types: Tiering Method A and Tiering Method B. In Tiering Method A 
accounts, the credit union pays the applicable tiered dividends rate on 
the entire amount in the account. This method is also known as the 
``hybrid'' or ``plateau'' tiered-rate account. In Tiering Method B 
accounts, the credit union does not pay the applicable tiered dividends 
rate on the entire amount in the account, but only on the portion of the 
share account balance that falls within each specified tier. This method 
is also known as the ``pure'' or ``split-rate'' tiered-rate account. 
(See appendix A, part I, D.)
    2. Example. An example of a tiered-rate account is one in which a 
credit union pays a 5.00% dividend rate on balances below $1,000, and 
5.50% on balances $1,000 and above.
    3. Term share accounts. Term share accounts that pay different rates 
based solely on the amount of the initial share and deposit are not 
tiered-rate accounts.
    4. Minimum balance accounts. A requirement to maintain a minimum 
balance to earn dividends does not make an account a tiered-rate 
account. If dividends are not paid on amounts below a specified balance 
level, then the account has a minimum balance requirement (required to 
be disclosed under Sec. 707.4(b)(3)(i)), but the account does not 
constitute a tiered-rate account. A zero rate

[[Page 904]]

(0%) cannot constitute a tier. Minimum balance accounts are single rate 
accounts with a minimum balance requirement.

                        (z) Variable-Rate Account

    1. General. Includes accounts in which the credit union does not 
contract to give at least 30 days advance written notice of decreases in 
the dividend rate. An account meets this definition whether the rate 
change is determined by reference to an index, by use of a formula, or 
merely at the discretion of the credit union's board of directors. An 
account that permits one or more rate adjustments prior to maturity at 
the member's option, such as a rate relock option, is a variable-rate 
account.
    2. Differences between fixed-rate and variable-rate accounts. All 
ccounts must either be fixed-rate or variable-rate accounts. Classifying 
an account as variable-rate affects credit unions three ways:
    i. Additional account disclosures are required 
(Sec. 707.4(b)(1)(ii));
    ii. Rate decreases are exempted from change-in-terms requirements 
(Sec. 707.5(a)(2)(i)); and
    iii. Advertising notice required (Sec. 707.8(c)(1)).
    Fixed-rate accounts require a contract term obligating the credit 
union to a 30-day advance, written notice to members before decreasing 
the dividend rate on the account. Term changes adversely affecting the 
member and rate decreases cannot take effect until 30 days after such 
fixed-rate change-in-terms notices are mailed or delivered to members 
(Sec. 707.5(a)).

             Section 707.3--General Disclosure Requirements

                                (a) Form

    1. General. All required disclosures (e.g., account disclosures, 
change-in-terms notices, term share renewal/maturity notices, statement 
disclosures and advertising disclosures) must be made clearly and 
conspicuously, in a form the member may retain. Disclosures need be made 
only as applicable (e.g., disclosures for a non-dividend-bearing account 
would not include disclosure of annual percentage yield, dividend rate, 
or other disclosures pertaining to dividend calculations).
    2. Design requirements. Disclosures must be presented in a format 
that allows members and potential members to readily understand the 
terms of their account. Credit unions are not required to use a 
particular type size or typeface, nor are credit unions required to 
state any term more conspicuously than any other term. Disclosures may 
be made:
    i. In any order.
    ii. In combination with other disclosures or account terms.
    iii. In combination with disclosures for other types of accounts, as 
long as it is clear to members and potential members which disclosures 
apply to their account.
    iv. On more than one page and on the front and reverse sides.
    v. By using inserts to a document or filling in blanks.
    vi. On more than one document, as long as the documents are provided 
at the same time.
    3. Consistent terminology. A credit union must use the same 
terminology to describe terms or features that are required to be 
disclosed. For example, if a credit union describes a monthly fee 
(regardless of account activity), as a ``monthly service fee'' in 
account opening disclosures, the periodic statements and change-in-terms 
notices must use the same terminology so that members and potential 
members can readily identify the fee.

                               (b) General

    1. Terms and conditions. Credit unions are required to have 
disclosures reflect the terms of the legal obligation between the credit 
union and a member at the time the member opens the account. This 
provision does not impose any contract terms or supersede state or other 
laws that define how the legal obligations between a credit union and 
its membership are determined.
    2. Specificity of legal obligation. Credit unions may refer to the 
calendar month or to roughly equivalent intervals during a calendar year 
as a ``month.'' Use of estimates is prohibited in TISA disclosures.
    3. Foreign language. Disclosures may be made in any foreign 
language, if desired by the board of directors of a credit union. 
However, disclosures must also be provided in English, upon request.

                      (c) Relation to Regulation E

    1. General rule. Compliance with Regulation E (12 CFR part 1005) is 
deemed to satisfy the disclosure requirements of this regulation, such 
as when:
    i. A credit union changes a term that triggers a notice under 
Regulation E, and the timing and disclosure rules of Regulation E for 
sending change-in-terms notices.
    ii. A member adds an ATM access feature to an account, and the 
credit union provides disclosures pursuant to Regulation E, including 
disclosure of fees before the member receives ATM access. (See 12 CFR 
1005.7.)
    iii. A credit union complying with the timing rules of Regulation E 
discloses at the same time fees for electronic services (such as balance 
inquiry fees imposed if the inquiry is made at an ATM) that are required 
to be disclosed by this regulation, but not by Regulation E.
    iv. A credit union relies on Regulation E's rules regarding 
disclosures of limitations on the frequency and amount of electronic 
fund

[[Page 905]]

transfers, including security-related exceptions. But any limitation on 
the number of ``intra-institutional transfers'' to or from the member's 
other accounts at the credit union during a given time period must be 
disclosed, even though intra-institutional transfers are exempt from 
Regulation E.

                          (d) Multiple Members

    1. General. When an account has multiple natural person member 
accountholders, delivery of disclosures to any member accountholder or 
agent authorized by the accountholder satisfies the disclosure 
requirements of part 707.

                     (e) Oral Response to Inquiries

    1. Application of rule. Credit unions need not provide rate 
information orally. Disclosures need be made only as appropriate. For 
example, the requirement to give a telephone number for a member to call 
about rates for interest-bearing accounts and dividend-bearing term 
share accounts, would not be necessary for members calling the credit 
union for information. Also, the disclosure requirements are applicable 
only to credit union employees and volunteers acting in the ordinary 
course of credit union business.
    2. Relation to advertising. The advertising rules do not cover an 
oral response to a question about rates.
    3. Existing accounts. This paragraph does not apply to oral 
responses about rate information for existing term share accounts or 
accounts not currently offered. For example, if a member holding a one-
year term share account requests dividend rate information about the 
account during the term, the credit union need not disclose the annual 
percentage yield, unless the member is calling for rate information 
under a maturity notice.

          (f) Rounding and Accuracy Rules for Rates and Yields

                             (f)(1) Rounding

    1. Permissible rounding. The annual percentage yield, annual 
percentage yield earned and dividend rate must be rounded to the nearest 
one-hundredth of one percentage point (.01%) when disclosed. Examples of 
permissible rounding are an annual percentage yield calculated to be 
5.644%, rounded down and shown as 5.64%; 5.645% would be rounded up and 
disclosed as 5.65%. For account disclosures, the dividend rate may be 
expressed to more than two decimal places.

                             (f)(2) Accuracy

    1. Annual percentage yield and annual percentage yield earned. The 
tolerance for annual percentage yield and annual percentage yield earned 
calculations is designed to accommodate inadvertent errors. Credit 
unions may not purposely incorporate the one-twentieth of one percentage 
point (.05%) tolerance into their calculation of yields.
    2. Dividend rate. There is no tolerance for an inaccuracy in the 
dividend rate.

                   Section 707.4--Account Disclosures

                   (a) Delivery of Account Disclosures

                         (a)(1) Account Opening

    1. New accounts. New account disclosures must be provided when:
    i. A term share account that does not automatically rollover is 
renewed by a member.
    ii. A member changes the term for a renewable term share account 
(from a one-year term share account to a six-month term share account, 
for instance) (see comment 5(b)-5 regarding disclosure alternatives).
    iii. A credit union transfers funds from an account to open a new 
account not at the member's request, unless the credit union previously 
gave account disclosures and any change-in-terms notices for the new 
account (e.g., funds in a money market share account are transferred by 
a credit union to open a new account for the member, such as a share 
draft account, because the member exceeded transaction limitations on 
the money market share account).
    iv. A credit union accepts a deposit from a member to an account 
that the credit union had previously deemed to be ``closed,'' under 
applicable federal or state law, for the purpose of treating accrued, 
but uncredited, dividends as forfeited dividends. New account numbers 
are not required by this requirement.
    2. Acquired accounts. New account disclosures need not be given when 
a credit union acquires an account through an acquisition of, or merger 
with, another credit union (but see Sec. 707.5(a) regarding advance 
notice requirements if terms are changed).
    3. Combination disclosures. New account disclosures need not be 
given when a member has already received disclosures covering several 
accounts, and opens a new account properly disclosed by the already 
received combination disclosures, if the new account is opened within a 
reasonable amount of time after receipt of the combination disclosures 
and if the received disclosures and terms are accurate at the time the 
new account is opened.

                             (a)(2) Requests

                                (a)(2)(i)

    1. Inquiries versus requests. A response to an oral inquiry (by 
telephone or in person) about rates and yields or fees does not trigger 
the duty to provide account disclosures. But, when a member asks for 
written information about an account (whether by telephone, in person, 
or by other means), the

[[Page 906]]

credit union must provide disclosures unless the account is no longer 
offered to the public.
    2. General requests. When member's or potential member's request 
disclosures about a type of account (a share draft account, for 
example), a credit union that offers several variations may provide 
disclosures for any one of them. No disclosures need be made to 
nonmembers, though a credit union may provide disclosures to nonmembers 
within its sole discretion.
    3. Timing for response. Ten business days is a reasonable time for 
responding to requests for account information that members or potential 
members do not make in person, including requests made by electronic 
means, such as by electronic mail.
    4. Use of electronic means. If a member or potential member who is 
not present at the credit union makes a request for account disclosures, 
including a request made by telephone, e-mail, or via the credit union's 
Web site, the credit union may send the disclosures in paper form or, if 
the member or potential member agrees, may provide the disclosures 
electronically, such as to an e-mail address that the member or 
potential member provides for that purpose, or on the credit union's Web 
site, without regard to the consent or other provisions of the E-Sign 
Act. The regulation does not require a credit union to provide, nor a 
member or potential member to agree to receive, the disclosures required 
by Sec. 707.4(a)(2) in electronic form.

                            (a)(2)(ii)(A)(2)

    1. Recent rates. Credit unions comply with this paragraph if they 
disclose an interest rate (or dividend rate on a dividend-bearing term 
share account) and annual percentage yield accurate within the seven 
calendar days preceding the date they send the disclosures.

                              (a)(2)(ii)(B)

    1. Term. Describing the maturity of a term share account as ``1 
year'' or ``6 months,'' for example, illustrates a response stating the 
maturity of a term share account as a term rather than a date (e.g., 
``June 1, 1995'').

                   (b) Content of Account Disclosures

                         (b)(1) Rate Information

           (b)(1)(i) Annual Percentage Yield and Dividend Rate

    1. Rate disclosures. In addition to the dividend rate and annual 
percentage yield, credit unions may disclose a periodic rate 
corresponding to the dividend rate. No other rate or yield (such as 
``tax effective yield'') is permitted. If the annual percentage yield is 
the same as the dividend rate, credit unions may disclose a single 
figure but must use both terms.
    2. Fixed-rate accounts. For fixed-rate term share accounts paying 
the opening rate until maturity, credit unions may disclose the period 
of time the dividend rate will be in effect by stating, or cross-
referencing, the maturity date. For other fixed-rate accounts, credit 
unions may use a date (such as ``This rate will be in effect through 
June 30, 1995'') or a period (such as ``This rate will be in effect for 
at least 30 days'').
    3. Tiered-rate accounts. Each dividend rate, along with the 
corresponding annual percentage yield for each specified balance level 
(or range of annual percentage yields, if appropriate), must be 
disclosed for tiered-rate accounts. (See appendix A, Part I, Paragraph 
D.)
    4. Stepped-rate accounts. A single composite annual percentage yield 
must be disclosed for stepped-rate accounts. (See appendix A, Part I, 
Paragraph B.) The dividend rates and the period of time each will be in 
effect also must be provided. When the initial rate offered for a 
specified time on a variable-rate account is higher or lower than the 
rate that would otherwise be paid on the account, the calculation of the 
annual percentage yield must be made as if for a stepped-rate account. 
(See appendix A, Part I, Paragraph C.)
    5. Minimum balance accounts. If a credit union sets a minimum 
balance to earn dividends, the credit union may, but need not, state 
that the annual percentage yield is 0% for those days the balance in the 
account drops below the minimum balance level when using the daily 
balance method. Nor is a disclosure of 0% required for credit unions 
using the average daily balance method, if the member fails to meet the 
minimum balance required for the average daily balance period.

                        (b)(1)(ii) Variable Rates

                              (b)(1)(ii)(B)

    1. Determining dividend rates. To disclose how the dividend rate is 
determined, credit unions must:
    i. Identify the index and specific margin, if the dividend rate is 
tied to an index.
    ii. State that rate changes are within the credit union's 
discretion, if the credit union does not tie changes to an index.

                              (b)(1)(ii)(C)

    1. Frequency of rate changes. A credit union reserving the right to 
change rates at its discretion must state the fact that rates may change 
at any time.

                              (b)(1)(ii)(D)

    1. Limitations. A floor or ceiling on rates or on the amount the 
rate may decrease or increase during any time period must be disclosed. 
Credit unions need not disclose the absence of limitations on rate 
changes.

[[Page 907]]

                    (b)(2) Compounding and Crediting

                           (b)(2)(i) Frequency

    1. General. Descriptions such as ``quarterly'' or ``monthly'' are 
sufficient. Irregular crediting and compounding periods, such as if a 
cycle is out short at year end for tax reporting purposes, need not be 
disclosed.
    2. Dividend period. For dividend-bearing accounts, the dividend 
period must be disclosed. (A specific example must also be given, see 
appendix B, Sec. B-1(c).) The dividend period for term share accounts 
generally may be disclosed as the account's term (e.g., two years).

                 (b)(2)(ii) Effect of Closing an Account

    1. Deeming an account closed. A credit union may, subject to state 
or other law, provide in account contracts the actions by members that 
will be treated as closing the account and that will result in the 
forfeiture of accrued but uncredited dividends. An example is the 
withdrawal of all funds from the account prior to the date dividends are 
credited. Credit unions are cautioned that bylaw requirements may 
prevent a credit union from deeming a member's account closed until 
certain time periods are extinguished if funds remain in a member's 
account. NCUA Standard FCU Bylaws, Art. III, Sec. 3. Such bylaw 
requirements may not be overridden without proper agency approval.

                       (b)(3) Balance Information

                 (b)(3)(i) Minimum Balance Requirements

    1. Par value. Credit unions must disclose any minimum balance 
required to open the account, to avoid the imposition of a fee, or to 
obtain the annual percentage yield. Since members cannot generally 
maintain any accounts until the par value of the membership share is 
paid in full, this section requires that credit unions disclose the par 
value of a share necessary to become a member and maintain accounts at 
the credit union. The par value of a share and the minimum balance 
requirement do not have to be the same amount (e.g., a credit union may 
have a $5 par value for a membership share, in order for accounts to be 
opened and maintained, and a $100 minimum balance requirement, in order 
for the account to earn dividends).
    2. Disclosures. The explanation of minimum balance computation 
methods may be combined with the balance computation method disclosures 
(Sec. 707.4(b)(3)(ii)) if they are the same. If a credit union uses 
different cycles for determining minimum balance requirements for 
purposes of assessing fees and for paying dividends, the credit union 
must disclose the specific cycle or time period used for each purpose 
(e.g., use of a midmonth statement cycle for determining dividends, and 
use of a calendar month cycle for determining fees). Credit unions may 
assess fees by using any method. If fees on one account are tied to the 
balance in another account, such provision must be explained (e.g., if 
share draft fees are tied to a minimum balance in the regular share 
account (or a combination of the share draft and regular share 
accounts), the share draft account must explain that fact and how the 
balance in the regular share account (or both accounts) is determined). 
The fee need not be disclosed in the account disclosures if the fee is 
not imposed on that account.

                  (b)(3)(ii) Balance Computation Method

    1. Methods and periods. Credit unions may use different methods or 
periods to calculate minimum balances for purposes of imposing a fee 
(the daily balance for a calendar month, for example) and accruing 
dividends (the average daily balance for a statement period, for 
example). Each method and corresponding period must be disclosed.

               (b)(3)(iii) When dividends begin to accrue

    1. Additional information. Credit unions must include a statement as 
to when dividends begin to accrue for noncash deposits. Credit unions 
may disclose additional information such as the time of day after which 
deposits are treated as having been received the following business day, 
and may use additional descriptive terms such as ``ledger'' or 
``collected'' balances to disclose when dividends begin to accrue. Under 
the ledger balance method, dividends begin to accrue on the day of 
deposit. Under the collected balance methods, dividends begin to accrue 
when provisional credit is received for the item deposited.

                               (b)(4) Fees

    1. Types of fees. Fees related to the routine use of an account must 
be disclosed. The following are types of fees that must be disclosed in 
connection with an account:
    i. Maintenance fees, such as monthly service fees.
    ii. Fees related to share deposits or withdrawals.
    iii. Fees for special services, such as stop payment fees, fees for 
balance inquiries or verification of share and deposits, fees associated 
with checks returned unpaid, fees for regularly sending to members share 
drafts that otherwise would be held by the credit union, and overdraft 
line of credit access fees (if charged against the share account).
    iv. Fees to open or to close an account.
    v. Fees imposed upon dormant or inactive accounts.
    2. Other fees. Credit unions need not disclose fees such as the 
following:
    i. Fees for services offered to members and nonmembers alike, such 
as fees for certain

[[Page 908]]

travelers checks, for wire transfers and automated clearinghouse (ACH) 
transfers, to process credit card cash advances, or to handle U.S. 
Savings Bond Redemption (even if different amounts are charged to 
members and nonmembers).
    ii. Incidental fees, such as fees associated with state escheat 
laws, garnishment or attorneys fees, to change names on an account, to 
generate a midcycle periodic statement, to wrap loose coins, for 
photocopying, for statements returned to the credit union because of a 
wrong address, and locator fees.
    3. Amount of fees. Credit unions are cautioned that merely providing 
fee information in an account disclosure may not be sufficient to gain 
the legal right to impose the fee involved under applicable law. Credit 
unions must state the amount and conditions under which a fee may be 
imposed. Naming and describing the fee typically satisfies this 
requirement. Some examples are:
    i. ``$4.00 monthly service fee''.
    ii. $7.00 and up'' or ``fee depends on style of checks ordered'' for 
check printing fees.
    4. Tied-accounts. Credit unions must state if fees that may be 
assessed against an account are tied to other accounts at the credit 
union. For example, if a credit union ties the fees payable on a share 
draft account to balances held in the share draft account and in a 
regular share account, the share draft account disclosures must state 
that fact and explain how the fee is determined.
    5. Regulation E statements. Some fees are required to be disclosed 
under both Regulation E (12 CFR 1005.7) and part 707. If such fees, such 
as ATM transaction fees, are disclosed on a Regulation E statement, they 
need not be disclosed again on a periodic statement required under part 
707.
    6. Fees for overdrawing an account. Under Sec. 707.4(b)(4) of this 
part, credit unions must disclose the conditions under which a fee may 
be imposed. In satisfying this requirement credit unions must specify 
the categories of transactions for which an overdraft fee may be 
imposed. An exhaustive list of transactions is not required. It is 
sufficient for a credit union to state that the fee applies to 
overdrafts ``created by check, in-person withdrawal, ATM withdrawal, or 
other electronic means.'' Disclosing a fee ``for overdraft items'' would 
not be sufficient.

                     (b)(5) Transaction Limitations

    1. General rule. Examples of limitations on the number of dollar 
amount of share deposits or withdrawals that credit unions must disclose 
are:
    i. Limits on the number of share drafts or checks that may be 
written on an account for a given time period.
    ii. Limits on withdrawals or share deposits during the term of a 
term share account.
    iii. Limitations required by Regulation D, such as the number of 
withdrawals permitted from money market share accounts by check to third 
parties each month (credit unions need not disclose reservation of right 
to require a notice for withdrawals from accounts required by federal or 
state law).

                 (b)(6) Features of Term Share Accounts

                       (b)(6)(i) Time Requirements

    1. ``Callable'' term share accounts. In addition to the maturity 
date, credit unions must state the date or the circumstances under which 
the credit union may redeem a term share account at the credit union's 
option (a ``callable'' term share account).

                  (b)(6)(ii) Early Withdrawal Penalties

    1. General. The term ``penalty'' may, but need not, be used to 
describe the loss that may be incurred by members for early withdrawal 
of funds from term share accounts.
    2. Examples. Examples of early withdrawal penalties are:
    i. Monetary penalties, such a specific dollar amount (e.g., 
``$10.00'') or a specific days' worth of dividends (e.g., ``seven days' 
dividends plus accrued but uncredited dividends, but only if the account 
is closed'').
    ii. Adverse changes to terms such as the lowering of the dividend 
rate, annual percentage yield, or reducing the compounding or crediting 
frequency for funds remaining in shares or on deposit.
    iii. Reclamation of bonuses.
    3. Relation to rules for IRAs or similar plans. Penalties imposed by 
the Internal Revenue Code for certain withdrawals from IRAs or similar 
pension or savings plans are not early withdrawal penalties for purposes 
of this regulation.
    4. Disclosing penalties. Penalties may be stated in months, whether 
credit unions assess the penalty using the actual number of days during 
the period or using another method such as a number of days that occurs 
in any actual sequence of the total calendar months involved. For 
example, stating ``one month's dividends'' is permissible, whether the 
credit union assesses 30 days' dividends during the month of April, or 
selects a time period between 28 and 31 days for calculating the 
dividends for all early withdrawals regardless of when the penalty is 
assessed.

                       (b)(6)(iv) Renewal Policies

    1. Rollover term share accounts. Credit unions are not required to 
provide a grace period, to pay dividends during the grace period, or to 
disclose whether or not dividends will be paid during the grace period. 
Credit unions offering a grace period on term share accounts must give 
the length of the grace period. Commentary, appendix B, Model Clauses, 
Sec. B-1(i)(iv).

[[Page 909]]

    2. Nonrollover term share accounts. Credit unions that pay dividends 
on funds following the maturity of term share accounts that do not renew 
automatically need not state the rate (or annual percentage yield) that 
may be paid.

                             (b)(7) Bonuses

    1. General. Credit unions are required to state the amount and type 
of bonus, and disclose any minimum balance or time requirement to obtain 
the bonus and when the bonus will be provided. If the minimum balance or 
time requirement is otherwise required to be disclosed, credit unions 
need not duplicate the disclosure for purposes of this paragraph.

                       (b)(8) Nature of Dividends

    1. General. Dividends are not payable until declared and unless 
sufficient current and undivided earnings are available after required 
transfers to reserves at the close of a dividend period. A disclosure 
explaining dividends educates members and protects credit unions in the 
event that a prospective dividend cannot be paid, or is not properly 
payable. This disclosure is required for all dividend-bearing share 
accounts. Term share accounts need not include a statement regarding the 
nature of dividends.
    2. State-chartered credit unions with interest-bearing deposit 
accounts. State law controls the nature of accounts (i.e., whether an 
account is a share account or a deposit account). If a member of a 
state-chartered credit union is opening only an interest-bearing deposit 
account, or is requesting account disclosures only for an interest-
bearing deposit account (if state law requires the depositor to hold a 
share account), the disclosures must generally include the following 
information on any dividend-bearing share portion of the account (e.g., 
membership share): the par value of a share; a statement that the 
portion of the deposit that represents the par value of the membership 
share will earn dividends, and that dividends are paid from current 
income and available earnings after required transfers to reserves. 
Further additional disclosures, such as a separate dividend rate and 
annual percentage yield for the membership share, are not required (if 
the additional disclosures would agree with the remainder of the account 
which is invested in an interest-bearing deposit).

                  (c) Notice to Existing Accountholders

    1. General. Only members who receive periodic statements (provided 
regularly at least four times per year) and who hold accounts of the 
type offered by the credit union as of the compliance date of part 707 
(generally January 1, 1995) must receive the notice. If following 
receipt of the notice members request disclosures, credit unions have 
twenty calendar days from receipt of the request to provide the 
disclosures. Rate and annual percentage yield information in such 
disclosures must conform to that required for disclosures upon request. 
As an alternative to including the notice in or on the periodic 
statement, the final rule permits credit unions to send the account 
disclosures themselves, as long as they are sent at the same time as the 
periodic statement (the disclosures may be mailed either with the 
periodic statement or separately).
    2. Form of the notice. The notice may be included on the periodic 
statement, in a member newsletter, or on a statement stuffer or other 
insert, if it is clear and conspicuous. The notice cannot be sent in a 
separate mailing from the periodic statement.
    3. Timing. The notice may accompany the first periodic statement 
after the compliance date for part 707, or the periodic statement for 
the first cycle beginning after that date. For example, a credit union's 
statement cycle is December 15, 1994-January 14, 1995. The statement is 
mailed on January 15, The next cycle is January 15, 1995 through 
February 14, 1995, and the statement for that cycle is mailed on 
February 15. The credit union may provide the notice either on or with 
the January 15 statement or on or with the February 15 statement, as it 
covers the first cycle after January 1, 1995.
    4. Early compliance. Credit unions that provide the notice to 
existing members prior to the compliance date of part 707, must be 
prepared to provide accurate and timely disclosures when, following 
receipt of the notice, members ask for account disclosures. Such 
disclosures must be provided even if they are requested before the 
compliance date of part 707. Credit unions who provide early notice to 
existing members need to comply with other aspects of part 707, but need 
not provide disclosures already provided in compliance with part 707.

                  Section 707.5--Subsequent Disclosures

                           (a) Change in Terms

                     (a)(1) Advance Notice required

    1. Form of notice. Credit unions may provide a change-in-term notice 
on or with a regular periodic statement or in another mailing (such as a 
highlighted portion of a newsletter or statement stuffer insert). If a 
credit union provides notice through revised account disclosures, the 
changed term must be highlighted in some manner. For example, credit 
unions may state that a particular fee has been changed (also specifying 
the new amount) or use an accompanying letter that refers to the changed 
term. Credit unions are cautioned that unless credit unions have 
reserved the right to change terms in the account agreement or 
disclosures, a change-in-

[[Page 910]]

terms notice may not be sufficient to amend the terms under applicable 
law.
    2. Effective date. An example of a language for disclosing the 
effective date of a change is: ``As of May 11, 1995''.
    3. Terms that change upon the occurrence of an event. A credit union 
offering terms that will automatically change upon the occurrence of a 
stated event need not send an advance notice of the change provided the 
credit union fully describes the conditions of the change in the account 
opening disclosures (and sends any change-in-term notices regardless of 
whether the changed term affects that member's account at that time).
    4. Examples. Examples of changes not requiring an advance change-in-
terms notice are:
    i. The termination of employment for employee-members for whom 
account maintenance or activity fees were waived during their employment 
by the credit union.
    ii. The expiration of one year in a promotion described in the 
account opening disclosures to ``waive $4.00 monthly service charges for 
one year''.

                        (a)(2) No Notice Required

                     (a)(2)(ii) Check Printing Fees

    1. Increase in fees. A notice is not required for an increase in 
fees for printing share drafts (or deposit and withdrawal slips) even if 
the credit union adds some amount to the price charged by the vendor.

(b) Notice Before Maturity for Term Share Accounts Longer Than One Month 
                        That Renew Automatically.

    1. Maturity dates on nonbusiness days. In determining the term of a 
term share account, credit unions may disregard the fact that the term 
will be extended beyond the disclosed number of days if the maturity 
date falls on a nonbusiness day. For example, a holiday or weekend may 
cause a ``one-year'' term share account to extend beyond 365 days (or 
366, in a leap year), or a ``one-month'' term share account to extend 
beyond 31 days.
    2. Disclosing when rates will be determined. Ways to disclose when 
the annual percentage yield will be available include the use of:
    i. A specific date, such as ``October 28''.
    ii. A date that is easily discernible, such as ``the Tuesday prior 
to the maturity date stated on the notice'' or ``as of the maturity date 
stated on this notice''.
    3. Alternative timing rule. Under the alternative timing rule, a 
credit union that offers a 10-day grace period would have to provide the 
disclosures at least 10 calendar days prior to the scheduled maturity 
date.
    4. Club accounts. If members have agreed to the transfer of payments 
from another account to a club term share account for the next club 
period, the credit union must comply with the requirements for 
automatically renewable term share accounts--even though members may 
withdraw funds from the club account at the end of the current club 
period.
    5. Renewal of a term share account. In the case of a change-in-terms 
that becomes effective if a rollover term share account is subsequently 
renewed:
    i. If the change is initiated by the credit union, the disclosure 
requirements of this paragraph apply. (Section 707.5(a) applies if the 
change becomes effective prior to the maturity of the existing term 
share account.)
    ii. If the change is initiated by the member, the account opening 
disclosure requirements of Sec. 707.4(b) apply. (If the notice required 
by this paragraph has been provided, credit unions may give new account 
disclosures or disclosures that reflect the new term.)
    6. Example. If a member receives a notice prior to maturity on a 
one-year term share account and requests a rollover to a six-month 
account, the credit union must provide either account opening 
disclosures including the new maturity date or, if all other terms 
previously disclosed in the prematurity notice remain the same, only the 
new maturity date.

                (b)(1) Maturities of Longer Than One Year

    1. Highlighting changed terms. Credit unions need not highlight 
terms that have changed since the last account disclosures were 
provided.

(c) Notice Before Maturity for Term Share Accounts Longer Than One Year 
                     That Do not Renew Automatically

    1. Subsequent account. When funds are transferred following maturity 
of a nonrollover term share account, credit unions need not provide 
account disclosures unless a new account is established.

              Section 707.6--Periodic Statement Disclosures

           (a) Rule When Statement and Crediting Periods Vary

    1. General. Credit unions are not required to provide periodic 
statements. If they provide periodic statements, disclosures need only 
be furnished to the extent applicable. For example, if no dividends are 
earned for a statement period, credit unions need not state that fact. 
Or, credit unions may disclose ``$0'' dividends earned and ``0%'' annual 
percentage yield earned.
    2. Regulation E interim statements. When a credit union provides 
regular quarterly statements, and in addition provides a monthly interim 
statement to comply with Regulation E, the interim statement need not 
comply with this section unless it states

[[Page 911]]

dividend or rate information. (See 12 CFR 1005.9). For credit unions 
that choose not to treat Regulation E activity statements as part 707 
periodic statements, the quarterly periodic statement must reflect the 
annual percentage yield earned and dividends earned for the full 
quarter. However, credit unions choosing this option need not redisclose 
fees already disclosed on an interim Regulation E activity statement on 
the quarterly periodic statement. For credit unions that choose to treat 
Regulation E activity statements as part 707 periodic statements, the 
Regulation E statement must meet all part 707 requirements.
    3. Combined statements. Credit unions may provide certain 
information about an account (such as a money market share account or 
regular share account) on the periodic statement for another account 
(such as a share draft account) without triggering the disclosures 
required by this section, as long as:
    i. The information is limited to information such as the account 
number, the type of account, balance information, accountholders' names, 
and social security or tax identification number; and
    ii. The credit union also provides members a periodic statement 
complying with this section for the account (the money market share 
account or regular share account, in the example).
    4. Other information. Additional information that may be given on or 
with a periodic statement, includes:
    i. Dividend rates and corresponding periodic rates to the dividend 
rate applied to balances during the statement period.
    ii. The dollar amount of dividends earned year-to-date.
    iii. Bonuses paid (or any de minimis consideration of $10 or less).
    iv. Fees for other products, such as safe deposit boxes.
    v. Accounts not covered by the periodic statement disclosure 
requirements (passbook and term share accounts) may disclose any 
information on the statement related to such accounts, so long as such 
information is accurate and not misleading.
    5. When statement and crediting periods vary. This rule permits 
credit unions, on dividend-bearing share accounts, to report the annual 
percentage yield earned and the amount of dividends earned on a 
statement other than on each periodic statement when the dividend period 
does not agree with, varies from, or is different than, the statement 
period. For dividend-bearing share accounts, credit unions may disclose 
the required information either upon each periodic statement, or on the 
statement on which dividends are actually earned (credited or posted) to 
the member's account. In addition, for accounts using the average daily 
balance method of calculating dividends, when the average daily balance 
period and the statement periods do not agree, vary or are different, 
credit unions may also report annual percentage yield earned and the 
dollar amount of dividends earned on the periodic statement on which the 
dividends or interest is earned. For example, if a credit union has 
quarterly dividend periods, or uses a quarterly average daily balance on 
an account, the first two monthly statements may not state annual 
percentage yield earned and dividends earned figures; the third 
``monthly'' statement will reflect the dividends earned and the annual 
percentage yield earned for the entire quarter. The fees imposed 
disclosure must be given on the periodic statement on which they are 
imposed.
    6. Length of the period. Credit unions must disclose the length of 
both the dividend period (or average daily balance calculation period) 
and the statement period. For example, a statement could disclose a 
statement period of April 16 through May 15 and further state that ``the 
dividends earned and the annual percentage yield earned are based on 
your dividend period (or average daily balance) for the period April 1 
through April 30.''
    7. Dividend period more frequent than statement period. Credit 
unions that calculate dividends on a monthly basis, but send statements 
on a quarterly basis, may disclose a single dividend (and annual 
percentage yield earned) figure. Alternatively, a credit union may 
disclose three dividends earned and three annual percentage yield earned 
figures, one of each month in the quarter, as long as the credit union 
states the number of days (or beginning and ending date) in each 
dividend period if it varies from the statement period.
    8. Additional voluntary disclosures. For credit unions not 
disclosing the annual percentage yield earned and dividends earned on 
all periodic statements, credit unions may place a notice on statements 
without dividends and annual percentage yield earned figures, that the 
annual percentage yield earned and dollar amount of dividends earned 
will appear on the first statement at the close of the dividend (or 
average daily balance) period, or similar wording. Credit unions may 
also choose to include a telephone number to call for interim 
information, if desired by a member.

                        (b) Statement Disclosures

                  (b)(1) Annual Percentage Yield Earned

    1. Ledger and collected balances. Credit unions that accrue interest 
using the collected balance method may use either the ledger or 
collected balance methods to determine the balance used to determine the 
annual percentage yield earned. Ledger balance means the record of the 
balance in a member's account, as per the credit union's

[[Page 912]]

records. (The ledger balance may reflect additions and deposits for 
which the credit union has not yet received final payment). Collected 
balance means the record of balance in a member's account reflecting 
collected funds, that is, cash or checks deposited in the credit union 
which have been presented for payment and for which payment has actually 
been received. (See Regulation CC, 12 CFR 229.14).

                 (b)(2) Amount of Dividends or Interest

    1. Definition of earned. The term ``earned'' is defined to include 
dividends and interest either ``accrued'' or ``paid and credited.'' 
Credit unions may use either the ``ledger'' or the ``collected'' balance 
for either option. (See 707.6(b)(1)1. and 707.7(c)2. of this appendix.)
    2. Accrued interest. Credit unions must state the amount of interest 
that accrued during the statement period, even if it was not credited.
    3. Terminology. In disclosing dividends earned for the period, 
credit unions must use the term ``dividends'' or terminology such as: 
``Dividends paid,'' to describe dividends that have been credited; 
``Dividends accrued,'' to indicate that dividends are not yet credited.
    4. Closed accounts. If a member closes an account between crediting 
periods and forfeits accrued dividends, the credit union may not show 
any figures for ``dividends earned'' or annual percentage yield earned 
for the period (other than zero, at the credit union's option).
    5. Extraordinary dividends. Extraordinary dividends are not a 
component of the annual percentage yield earned or the dividend rate, 
but are an addition to the member's account. The dollar amount of the 
extraordinary dividends paid, denoted as a separate, identified figure, 
must be disclosed on the periodic statement on which the extraordinary 
dividends are earned. A credit union may also disclose information 
regarding the calculation of the extraordinary dividends, and additional 
annual percentage yield earned and dividend rate figures taking into 
account the extraordinary dividend, so long as such information is 
accurate and not misleading.

                           (b)(3) Fees Imposed

    1. General. Periodic statements must state fees disclosed under 
Sec. 707.4(b) that were debited to the account during the statement 
period, even if assessed for an earlier period.
    2. Itemizing fees by type. In itemizing fees imposed more than once 
in the period, credit unions may group fees if they are the same type. 
(See Sec. 707.11(a)(1) of this part regarding certain fees that are 
required to be grouped.) When fees of the same type are grouped 
together, the description must make clear that the dollar figure 
represents more than a single fee, for example, ``total fees for checks 
written this period.'' Examples of fees that may not be grouped together 
are--
    i. Monthly maintenance and excess-activity fees.
    ii. ``Transfer'' fees, if different dollar amounts are imposed, such 
as $.50 for deposits and $1.00 for withdrawals.
    iii. Fees for electronic fund transfers and fees for other services, 
such as balance-inquiry or maintenance fees.
    iv. Fees for paying overdrafts and fees for returning checks or 
other items unpaid.
    3. Identifying fees. Statement details must enable the member to 
identify the specific fee. For example:
    i. Credit unions may use a code to identify a particular fee if the 
code is explained on the periodic statement or in documents accompanying 
the statement.
    ii. Credit unions using debit slips may disclose the date the fee 
was debited on the periodic statement and show the amount and type of 
fee on the dated debit slip.
    4. Relation to Regulation E. Disclosure of fees in compliance with 
Regulation E complies with this section for fees related to electronic 
fund transfers (for example, totaling all electronic funds transfer fees 
in a single figure).

                         (b)(4) Length of Period

    1. General. Credit unions providing the beginning and ending dates 
of the period must make clear whether both dates are included in the 
period. For example, stating ``April 1 through April 30'' would clearly 
indicate that both April 1 and April 30 are included in the period.
    2. Opening or closing an account mid-cycle. If an account is opened 
or closed during the period for which a statement is sent, credit unions 
must calculate the annual percentage yield earned based on account 
balances for each day the account was open.

                   Section 707.7--Payment of Dividends

                         (a) Permissible Methods

    1. Prohibited calculation methods. Calculation methods that do not 
comply with the requirement to pay dividends on the full amount of 
principal in the account each day include:
    i. The ``rollback'' method, also known as the ``grace period'' or 
``in by the 10th'' method, where credit unions pay dividends on the 
lowest balance in the account for the period.
    ii. The ``increments of par value'' method, where credit unions only 
pay dividends on full shares in an account, e.g., a credit union with $5 
par value shares pays dividends on $20 of a $24 account balance.
    iii. The ``ending balance'' method, where credit unions pay 
dividends on the balance in the account at the end of the period.

[[Page 913]]

    iv. The ``investable balance'' method, where credit unions pay 
dividends on a percentage of the balance, excluding an amount credit 
unions set aside for reserve requirements.
    v. The ``low balance'' method, where credit unions pay dividends on 
the lowest balance in the account for any day in that period.
    2. Use of 365-day basis. Credit unions may apply a daily periodic 
rate that is greater than \1/365\ of the dividend rate--such as \1/360\ 
of the dividend rate--as long as it is applied 365 days a year.
    3. Periodic dividend payments. A credit union can pay dividends each 
day on the account and still make uniform dividend payments. For 
example, for a one-year term share account, a credit union could make 
monthly dividend payments that are equal to \1/12\ of the amount of 
dividends that will be earned for a 365-day period (or 11 uniform 
monthly payments--each equal to roughly \1/12\ of the total amount of 
dividends--and one payment that accounts to the remainder of the total 
amount of dividends earned for the period).
    4. Leap year. Credit unions may apply a daily rate of \1/366\ or \1/
365\ of the dividend rate for 366 days in a leap year, if the account 
will earn dividends for February 29.
    5. Maturity of term share accounts. Credit unions are not required 
to pay dividends after term share accounts mature. Examples include:
    i. During any grace period offered by a credit union for an 
automatically renewable term share account, if the member decides during 
that period not to renew the account.
    ii. Following the maturity of nonrollover term share accounts.
    iii. When the maturity date falls on a holiday, and the member must 
wait until the next business day to obtain the funds.
    6. Dormant accounts. Credit unions must pay dividends on funds in an 
account, even if inactivity or the infrequency of transactions would 
permit the credit union to consider the account to be ``inactive'' or 
``dormant'' (or similar status) as defined by state or other law or the 
account contract.
    7. Insufficient funds. Credit unions are not required to pay 
dividends on checks or share drafts deposited to a member's account that 
are returned for insufficient funds. If a credit union accrues dividends 
on a check that it later determines is not good, it may deduct from the 
accrued dividends any dividends attributed to the proceeds of the 
returned check. If dividends have already been credited before the 
credit union determines the item has insufficient funds, the credit 
union may deduct the amount of the check and associated dividends from 
the account balance. The amount deducted will not be reflected in the 
dividend amount and annual percentage yield earned reported for the next 
period.
    8. Account drawn below par value of a share. If a member draws his 
or her account below the par value of a share, dividends would continue 
to accrue on the account so long as any minimum balance requirement is 
met. However, under the NCUA Standard FCU Bylaws, if a member who 
reduces his or her share balance below the value of a par value share 
and does not increase the balance within at least six months, the credit 
union may terminate the member's membership. State-chartered credit 
unions may have similar termination provisions.

        (a)(2) Determination of Minimum Balance To Earn Dividends

    1. General. Credit unions may set minimum balance requirements that 
must be met in order to earn dividends. However, credit unions must use 
the same method to determine a minimum balance required to earn 
dividends as they use to determine the balance upon which dividends will 
accrue and pay. For example, a credit union that calculates dividends on 
the daily balance method must use the daily balance method to determine 
if the minimum balance to earn dividends has been met. Similarly, a 
credit union that calculates dividends on the average daily balance 
method must use the average daily balance method to determine if the 
minimum to earn dividends has been met. Credit unions may have a par 
value of a share that is different from the minimum balance requirement 
to earn dividends. (See commentary to Sec. 707.4(b)(3)(i)).
    2. Daily balance accounts. Credit unions that require a minimum 
balance to earn dividends may choose not to pay dividends for days when 
the balance drops below the required minimum balance if they use the 
daily balance method to calculate dividends. For example, a credit union 
could set a minimum daily balance level of $200 and pay dividends only 
those days the $200 daily balance is maintained.
    3. Average daily balance accounts. Credit unions that require a 
minimum balance to earn dividends may choose not to pay dividends for 
the average daily balance calculation period in which the average daily 
balance drops below the required minimum, if they use the average daily 
balance method to calculate dividends. For example, a credit union could 
set a minimum average daily balance level of $200 and pay dividends only 
if the $200 average daily balance is met for the calculation period.
    4. Beneficial method. Credit unions may not require members to 
maintain both a minimum daily balance and a minimum average daily 
balance to earn dividends, such as by requiring the member to maintain a 
$500 daily balance and a prescribed average daily balance (whether 
higher or lower). But a credit union could offer a minimum balance to 
earn dividends that includes an additional

[[Page 914]]

method that is ``unequivocally beneficial'' to the member such as the 
following:
    i. A credit union using the daily balance method to calculate 
dividends and requiring a $500 minimum daily balance could choose to pay 
dividends on the account (for those days the minimum balance is not met) 
as long as the member maintained an average daily balance throughout the 
month of $400.
    ii. A credit union using the average daily balance method to 
calculate dividends and requiring a $400 minimum average daily balance 
could choose to pay dividends on the account as long as the member 
maintained a daily balance of $500 for at least half of the days in the 
period.
    iii. A credit union using either the daily balance method or average 
daily balance method to calculate dividends that requires: (A) a $500 
daily balance; or (B) a $400 average daily balance to pay dividends on 
the account.
    5. Paying on full balance. Credit unions must pay dividends on the 
full balance in the account that meets the required minimum balance. For 
example, if $300 is the minimum daily balance required to earn 
dividends, and a member deposits $500, the credit union must pay the 
stated dividend rate on the full $500 and not just on the $200.
    6. Negative balances prohibited. Credit unions must treat a negative 
account balance as zero to determine:
    i. The daily or average daily balance on which dividends will be 
paid.
    ii. Whether any minimum balance to earn dividends is met. (See 
commentary to appendix A, Part II, which prohibits credit unions from 
using negative balances in calculating the dividends figure for the 
annual percentage yield earned.)
    7. Club accounts. Credit unions offering club accounts (such as a 
``holiday'' or ``vacation'' club accounts) cannot impose a minimum 
balance requirement for dividends based on the total number or dollar 
amount of payments required under the club plan. For example, if a plan 
calls for $10 weekly payments for 50 weeks, the credit union cannot set 
a $500 minimum balance and then pay only if the member makes all 50 
payments.
    8. Minimum balances not affecting dividends. Credit unions may use 
the daily balance, average daily balance, or other computation method to 
calculate minimum balance requirements not involving the payment of 
dividends--such as to compute minimum balances for assessing fees.

                 (b) Compounding and Crediting Policies

    1. General. Credit unions choosing to compound dividends may 
compound or credit dividends annually, semi-annually, quarterly, 
monthly, daily, continuously, or on any other basis.
    2. Withdrawals prior to crediting date. If members withdraw funds 
(without closing the account), prior to a scheduled crediting date, 
credit unions may delay paying the accrued dividends on the withdrawn 
amount until the scheduled crediting date, but may not avoid paying 
dividends.
    3. Closed accounts. Subject to state or other law, a credit union 
may choose not to pay accrued dividends if members close an account 
prior to the date accrued dividends are credited, as long as the credit 
union has disclosed that fact. If accrued dividends are paid, accrued 
dividends must be paid on funds up until the account is closed or the 
account is deemed closed. For example, if an account is closed on a 
Tuesday, accrued dividends on the funds through Monday would be paid. 
Whether (and the conditions under which) credit unions are permitted to 
deem an account closed by a member is determined by state or other law, 
if any. Credit unions are cautioned that bylaw requirements may prevent 
a credit union from deeming a member's account closed until certain time 
periods are extinguished. (See NCUA Standard FCU Bylaws, Art. III, 
Sec. 3. Such bylaw requirements may not be overridden without proper 
agency approval.)

                   (c) Date Dividends Begin To Accrue

    1. Relation to Regulation CC. Credit unions may rely on the 
Expedited Funds Availability Act (EFAA) and Regulation CC (12 CFR part 
229) to determine, for example, when a deposit is considered made for 
purposes of dividend accrual, or when dividends need not be paid on 
funds because a deposited check is later returned unpaid.
    2. Ledger and collected balances. Credit unions may calculate 
dividends by using a ``ledger'' balance or ``collected'' balance method, 
as long as the crediting requirements of the EFAA are met (12 CFR 
229.14).
    3. Withdrawal of principal. Credit unions must accrue dividends on 
funds until the funds are withdrawn from the account. For example, if a 
check is debited to an account on a Tuesday, the credit union must 
accrue dividends on those funds through Monday.

                       Section 707.8--Advertising

               (a) Misleading or Inaccurate Advertisements

    1. General. All advertisements are subject to the rule against 
misleading or inaccurate advertisements, even though the disclosure 
applicable to various media differ. The word ``profit'' may be used when 
referring to dividend-bearing share accounts, as it reflects the nature 
of dividends. The word ``profit'' may not be used when referring to 
interest-bearing deposit accounts.
    2. Indoor signs. An indoor sign advertising an annual percentage 
yield is not misleading or inaccurate if:
    i. For a tiered-rate account, it also provides the upper and lower 
dollar amounts of

[[Page 915]]

the tier corresponding to the advertised annual percentage yield.
    ii. For a term share account, it also provides the term required to 
obtain the advertised annual percentage yield.
    3. ``Free'' or ``no cost'' accounts. For purposes of determining 
whether an account can be advertised as ``free'' or ``no cost,'' 
maintenance and activity fees include:
    i. Any fee imposed if a minimum balance requirement is not met, or 
if the member exceeds a specified number of transactions.
    ii. Transaction and service fees that members reasonably expect to 
be imposed on an account on a regular basis (see comments 4(b)(4)-1 and 
2).
    iii. A flat fee, such as a monthly service fee.
    iv. Fees imposed to deposit, withdraw or transfer funds, including 
per-check or per-transaction charges (for example, $.25 for each 
withdrawal, whether by check, in person).
    4. Other fees. Examples of fees that are not maintenance or activity 
fees include:
    i. Fees that are not required to be disclosed under 
Sec. 707.4(b)(4).
    ii. Check printing fees of any type.
    iii. Fees for obtaining copies of checks, whether or not the 
original checks have been truncated or returned to the member 
periodically.
    iv. Balance inquiry fees.
    v. Fees assessed against a dormant account.
    vi. Fees for using an ATM.
    vii. Fees for electronic transfer services that are not required to 
obtain an account, such as preauthorized transfers or home electronic 
credit union services.
    viii. Stop payment fees and fees for share drafts or checks returned 
unpaid.
    5. Similar terms. An advertisement may not use a term such as ``fees 
waived'' if a maintenance or activity fee may be imposed because it is 
similar to the terms ``free'' or ``no cost.''
    6. Specific account services. Credit unions may advertise a specific 
account service or feature as free as long as no fee is imposed for that 
service or feature. For example, credit unions offering an account that 
is free of deposit or withdrawal fees could advertise that fact, as long 
as the advertisement does not mislead members by implying that the 
account is free and that no other fee (a monthly service fee, for 
example) may be charged.
    7. Free for limited time. If an account (or a specific account 
service) is free only for a limited period of time--for example, for one 
year following the account opening--the account (or service) may be 
advertised as free as long as the time period is stated.
    8. Conditions not related to share accounts. Credit unions may 
advertise accounts as ``free'' for members that meet conditions not 
related to share accounts, such as the member's age. For example, credit 
unions may advertise a share draft account as ``free for persons over 65 
years old,'' even though a maintenance or activity fee may be assessed 
on accounts held by members that are 65 or younger.
    9. Electronic advertising. If an electronic advertisement, such as 
an advertisement appearing on an internet Web site, displays a 
triggering term, such as a bonus or annual percentage yield, the 
advertisement must clearly refer the member to the location where the 
additional required information begins. For example, an advertisement 
that includes a bonus or annual percentage yield may be accompanied by a 
link that directly takes the member to the additional information.
    10. Examples. Examples of advertisements that would ordinarily be 
misleading, inaccurate, or misrepresent the deposit contract are:
    i. Representing an overdraft service as a ``line of credit,'' unless 
the service is subject to 12 CFR part 1026 (Regulation Z).
    ii. Representing that the credit union will honor all checks or 
authorize payment of all transactions that overdraw an account, with or 
without a specified dollar limit, when the credit union retains 
discretion at any time not to honor checks or authorize transactions.
    iii. Representing that members with an overdrawn account can 
maintain a negative balance when the terms of the account's overdraft 
service require members promptly to return the share account to a 
positive balance.
    iv. Describing a credit union's overdraft service solely as 
protection against bounced checks when the credit union also permits 
overdrafts for a fee for overdrawing their accounts by other means, such 
as ATM withdrawals, debit card transactions, or other electronic fund 
transfers.
    v. Advertising an account-related service for which the credit union 
charges a fee in an advertisement that also uses the word ``free'' or 
``no cost'' or a similar term to describe the account, unless the 
advertisement clearly and conspicuously indicates that there is a cost 
associated with the service. If the fee is a maintenance or activity fee 
under Sec. 707.8(a)(2) of this part, however, an advertisement may not 
describe the account as ``free'' or ``no cost'' or contain a similar 
term even if the fee is disclosed in the advertisement.
    11. Additional disclosures in connection with the payment of 
overdrafts. The rule in Sec. 707.3(a), providing that disclosures 
required by Sec. 707.8 may be provided to the member in electronic form 
without regard to E-Sign Act requirements, applies to the disclosures 
described in Sec. 707.11(b), which are incorporated by reference in 
Sec. 707.8(f).

[[Page 916]]

                          (b) Permissible Rates

    1. Tiered-rate accounts. An advertisement for a tiered-rate account 
that states an annual percentage yield must also state the annual 
percentage yield for each tier, along with corresponding minimum balance 
requirements. Any dividend rates stated must appear in conjunction with 
the annual percentage yields for each tier.
    2. Stepped-rate accounts. An advertisement that states a dividend 
rate for a stepped-rate account must state all the dividend rates and 
the time period that each rate is in effect.
    3. Representative examples. An advertisement that states an annual 
percentage yield for a type of account (such as a term share account for 
a specified term) need not state the annual percentage yield applicable 
to every variation offered by the credit union or indicate that other 
maturity terms are available. In an advertisement stating that rates for 
an account may vary depending on the amount of the initial deposit or 
the term of a term share account, credit unions need not list each 
balance level and term offered. Instead, the advertisement may:
    i. Provide a representative example of the annual percentage yields 
offered, clearly described as such. For example, if a credit union 
offers a $25 bonus on all term share accounts and the annual percentage 
yield will vary depending on the term selected, the credit union may 
provide a disclosure of the annual percentage yield as follows: ``For 
example, our 6-month share certificate currently pays a 3.15% annual 
percentage yield.''
    ii. Indicate that various rates are available, such as by stating 
short-term and longer-term maturities along with the applicable annual 
percentage yields: ``We offer share certificates with annual percentage 
yields that depend on the maturity you choose. For example, our one-
month share certificate earns a 2.75% APY. Or, earn a 5.25% APY for a 
three-year share certificate.''

              (c) When Additional Disclosures are Required

    1. Trigger terms. The following are examples of information stated 
in advertisements that are not ``trigger'' terms:
    i. ``One, three, and five year share certificates available''.
    ii. ``Bonus rates available''.
    iii. ``1% over our current rate,'' so long as the rates are not 
determinable from the advertisement.

             (c)(2) Time Annual Percentage Yield is Offered

    1. Specified recent date. If an advertisement discloses an annual 
percentage yield as of a specified date, that date must be recent in 
relation to the publication or broadcast frequency of the media used. 
For example, the printing date of a brochure printed once for an account 
promotion that will be in effect for six months would be considered 
``recent,'' even though rates change during the six-month period. 
Dividend rates published in a daily newspaper or on television must be a 
rate offered shortly before (or on) the date the rates are published or 
broadcast. Similarly, dividend rates published in a daily newspaper or 
on television must be a rate reflecting either the preceding dividend 
period, or a prospective rate, and the option chosen should be noted.
    2. Reference to date of publication. An advertisement may refer to 
the annual percentage yield as being accurate as of the date of 
publication, if the date is on the publication itself. For instance, an 
advertisement in a periodical may state that a rate is ``current through 
the date of this issue,'' if the periodical shows the date.

                          (c)(5) Effect of Fees

    1. Scope. This requirement applies only to maintenance or activity 
fees as described in paragraph 8(a).

                 (c)(6) Features of Term Share Accounts

                       (c)(6)(i) Time Requirements

    1. Club accounts. If a club account has a maturity date, but the 
term may vary depending on when the account is opened, credit unions may 
use a phrase such as: ``The maturity date of this club account is 
November 15; its term varies depending on when the account is opened.''

                  (c)(6)(ii) Early Withdrawal Penalties

    1. Discretionary penalties. Credit unions imposing early withdrawal 
penalties on a case-by-case basis may disclose that they ``may'' (rather 
than ``will'') impose a penalty if that accurately describes the account 
terms.

                               (d) Bonuses

    1. General reference to ``bonus.'' General statements such as 
``bonus checking'' or ``get a bonus when you open a checking account'' 
do not trigger the bonus disclosures.

                (e) Exemption for Certain Advertisements

                          (e)(1) Certain Media

                                (e)(1)(i)

    1. Internet advertisements. The exemption for advertisements made 
through broadcast or electronic media does not extend to advertisements 
posted on the internet or sent by e-mail.
    2. Internet advertisements. The exemption for advertisements made 
through broadcast

[[Page 917]]

or electronic media does not extend to advertisements made by electronic 
communication, such as advertisements posted on the Internet or sent by 
e-mail.

                               (e)(1)(iii)

    1. Tiered-rate accounts. Solicitations for tiered-rate accounts made 
through telephone response machines must provide all annual percentage 
yields and the balance requirements applicable to each tier.

                           (e)(2) Indoor Signs

                                (e)(2)(i)

    1. General. Indoor signs include advertisements displayed on 
computer screens, banners, preprinted posters, and chalk or peg boards. 
Any advertisement inside the premises that can be retained by a member 
(such as a brochure or a printout from a computer) is not an indoor 
sign.

                           (e)(3) Newsletters

    1. General. The partial exemption applies to all credit union 
newsletters, whether instituted before or after the compliance date of 
part 707. Nor must a newsletter be of any particular circulation 
frequency (e.g., weekly, monthly, quarterly, biannually, annually, or 
irregularly) or of any certain format (e.g. magazine, bulletin, 
broadside, circular, mimeograph, letter, or pamphlet) in order to be 
eligible for the partial advertising exemption.
    2. Permissible Distribution. In order for newsletters to retain the 
partial advertising exemption, newsletters can be sent to existing 
credit union members only. Any distribution reasonably calculated to 
reach only members is also acceptable, such as:
    i. Mailing newsletters to existing members.
    ii. Distributing newsletters at a function reasonably limited to 
members, such as an annual meeting or member picnic.
    iii. Displaying or offering newsletters at a credit union lobby, 
branch, or office.
    3. Impermissible Distribution. Distributing a newsletter in a place 
open to nonmembers, such as a sponsor's lunch room, is not reasonably 
calculated to reach only members, and such newsletter would be subject 
to all applicable advertising rules.

             Section 707.9--Enforcement and Record Retention

                          (c) Record Retention

    1. Evidence of required actions. Credit unions comply with the 
regulation by demonstrating they have done the following:
    i. Established and maintained procedures for paying dividends and 
providing timely disclosures as required by the regulation, and
    ii. Retained sample disclosures for each type account offered to 
members, such as account-opening disclosures, copies of advertisements, 
and change-in-term notices; and information regarding the dividend rates 
and annual percentage yields offered.
    2. Methods of retaining evidence. Credit unions must be able to 
reconstruct the required disclosures or other actions. They need not 
keep disclosures or other business records in hard copy. Records 
evidencing compliance may be retained on microfilm, microfiche, or by 
other methods that reproduce records accurately (including computer 
files). Credit unions must retain copies of all printed advertisements 
and the text of all advertisements conveyed by electronic or broadcast 
media, and newsletters.
    3. Payment of dividends. Credit unions must retain sufficient rate 
and balance information to permit the verification of dividends paid on 
an account, including the payment of dividends on the full principal 
balance.

                        Section 707.10 [Reserved]

    Section 707.11--Additional Disclosures Regarding the Payment of 
                               Overdrafts

           (a) Disclosure of total fees on periodic statements

                             (a)(1) General.

    1. Transfer services. The overdraft services covered by 
Sec. 707.11(a)(1) of this part do not include a service providing for 
the transfer of funds from another share account of the member to permit 
the payment of items without creating an overdraft, even if a fee is 
charged for the transfer.
    1. Examples of credit unions advertising the payment of overdrafts. 
A credit union would trigger the periodic statement disclosures if it:
    i. Promotes the credit union's policy or practice of paying some 
overdrafts, unless the service would be subject to 12 CFR part 1026 
(Regulation Z), in advertisements using broadcast media, brochures, 
telephone solicitations ,or electronic mail, or on Internet sites, ATM 
screens or receipts, billboards, or indoor signs. But see, Sec. 
707.11(a)(2) of this part regarding communications about the payment of 
overdrafts that would not trigger periodic statement disclosures;
    ii. Includes a message on a periodic statement informing the member 
of an overdraft limit or the amount of funds available for overdrafts. 
For example, a credit union that includes a message on a periodic 
statement informing the member of a $500 overdraft limit or that the 
member has $300 remaining on the overdraft limit, is promoting an 
overdraft service;
    iii. Discloses an overdraft limit or includes the dollar amount of 
an overdraft limit in a balance disclosed by any means, including on

[[Page 918]]

an ATM receipt or on an automated system, such as a telephone response 
machine, ATM screen, or the credit union's Internet site.
    2. Fees for paying overdrafts. Credit unions must disclose on 
periodic statements a total dollar amount for all fees or charges 
imposed on the account for paying overdrafts. The credit union must 
disclose separate totals for the statement period and for the calendar 
year-to-date. The total dollar amount for each of these periods includes 
per-item fees as well as interest charges, daily or other periodic fees, 
or fees charged for maintaining an account in overdraft status, whether 
the overdraft is by check, debit card transaction, or by any other 
transaction type. It also includes fees charged when there are 
insufficient funds because previously deposited funds are subject to a 
hold or are uncollected. It does not include fees for transferring funds 
from another account of the member to avoid an overdraft, or fees 
charged under a service subject to Regulation Z (12 CFR part 1026). See 
also comment 11(c)-2. Under Sec. 707.11(a)(1)(i), the disclosure must 
describe the total dollar amount for all fees or charges imposed on the 
account for the statement period and calendar year-to-date for paying 
overdrafts using the term ``Total Overdraft Fees.'' This requirement 
applies notwithstanding comment 3(a)-2.
    3. Fees for returning items unpaid. The total dollar amount for all 
fees for returning items unpaid must include all fees charged to the 
account for dishonoring or returning checks or other items drawn on the 
account. The credit union must disclose separate totals for the 
statement period and for the calendar year-to-date. Fees imposed when 
deposited items are returned are not included. Credit unions may use 
terminology such as ``returned item fee'' or ``NSF fee'' to describe 
fees for returning items unpaid.
    4. Waived fees. In some cases, a credit union may provide a 
statement for the current period reflecting that fees imposed during a 
previous period were waived and credited to the account. Credit unions 
may, but are not required to, reflect the adjustment in the total for 
the calendar year-to-date and in the applicable statement period. For 
example, if a credit union assesses a fee in January and refunds the fee 
in February, the credit union could disclose a year-to-date total 
reflecting the amount credited, but it should not affect the total 
disclosed for the February statement period, because the fee was not 
assessed in the February statement period. If a credit union assesses 
and then waives and credits a fee within the same cycle, the credit 
union may, at its option, reflect the adjustment in the total disclosed 
for fees imposed during the current statement period and for the total 
for the calendar year-to-date. Thus, if the credit union assesses and 
waives the fee in the February statement period, the February fee total 
could reflect a total net of the waived fee.
    5. Totals for the calendar year to date. Some credit unions' 
statement periods do not coincide with the calendar month. In such 
cases, the credit union may disclose a calendar year-to-date total by 
aggregating fees for 12 monthly cycles, starting with the period that 
begins during January and finishing with the period that begins during 
December. For example, if statement periods begin on the 10th day of 
each month, the statement covering December 10, 2006 through January 9, 
2007 may disclose the year-to-date total for fees imposed from January 
10, 2006 through January 9, 2007. Alternatively, the credit union could 
provide a statement for the cycle ending January 9, 2007, showing the 
year-to-date total for fees imposed January 1, 2006 through December 31, 
2006.
    6. Itemization of fees. A credit union may itemize each fee in 
addition to providing the disclosures required by Sec. 707.11(a)(1) of 
this part.

                (a)(3) Time period covered by disclosures

    1. Periodic statement disclosures. The disclosures under 
Sec. 707.11(a) must be included on periodic statements provided by a 
credit union starting with the first statement period that begins after 
January 1, 2010. For example, if a member's statement period typically 
closes on the 15th of each month, a credit union must provide the 
disclosures required by Sec. 707.11(a)(1) on subsequent periodic 
statements for that member beginning with the statement reflecting the 
period from January 16, 2010 to February 15, 2010.

                        (a)(5) Acquired accounts

    (b) Advertising disclosures in connection with overdraft services

    1. Examples of credit unions promoting the payment of overdrafts. A 
credit union must include the advertising disclosures in 
Sec. 707.11(b)(1) of this part if the credit union:
    i. Promotes the credit union's policy or practice of paying 
overdrafts, unless the service would be subject to 12 CFR part 1026 
(Regulation Z). This includes advertisements using print media such as 
newspapers or brochures, telephone solicitations, electronic mail, or 
messages posted on an Internet site. But see, Sec. 707.11(b)(2) of this 
part for communications that are not subject to the additional 
advertising disclosures;
    ii. Includes a message on a periodic statement informing the member 
of an overdraft limit or the amount of funds available for overdrafts. 
For example, a credit union that includes a message on a periodic 
statement informing the member of a $500 overdraft limit or that the 
member has $300 remaining on the overdraft limit, is promoting an 
overdraft service.

[[Page 919]]

    iii. Discloses an overdraft limit or includes the dollar amount of 
an overdraft limit in a balance disclosed on an automated system, such 
as a telephone response machine, ATM screen, or the credit union's 
Internet site. See, however, Sec. 707.11(b)(3) of this part.
    2. Transfer services. The overdraft services covered by 
Sec. 707.11(b)(1) of this part do not include a service providing for 
the transfer of funds from another share account of the member to permit 
the payment of items without creating an overdraft, even if a fee is 
charged for the transfer.
    3. Electronic media. The exception for advertisements made through 
broadcast or electronic media, such as television or radio, does not 
apply to advertisements posted on a credit union's Internet site, on an 
ATM screen, provided on telephone response machines, or sent by 
electronic mail.
    4. Fees. The fees that must be disclosed under Sec. 707.11(b)(1) of 
this part include per-item fees as well as interest charges, daily or 
other periodic fees, and fees charged for maintaining an account in 
overdraft status, whether the overdraft is by check or by other means. 
The fees also include fees charged when there are insufficient funds 
because previously deposited funds are subject to a hold or are 
uncollected. The fees do not include fees for transferring funds from 
another account to avoid an overdraft or fees charged when the credit 
union has previously agreed in writing to pay items that overdraw the 
account and the service is subject to 12 CFR part 1026 (Regulation Z).
    5. Categories of transactions. An exhaustive list of transactions is 
not required. Disclosing that a fee may be imposed for covering 
overdrafts created by check, in-person withdrawal, ATM withdrawal, or 
other electronic means would satisfy the requirements of 
Sec. 707.11(b)(1)(ii) of this part where the fee may be imposed in these 
circumstances. See comment 4(b)(4)-5 of this part.
    6. Time period to repay. If a credit union reserves the right to 
require a member to pay an overdraft immediately or on demand instead of 
affording members a specific time period to establish a positive balance 
in the account, a credit union may comply with Sec. 707.11(b)(1)(iii) of 
this part by disclosing this fact.
    7. Circumstances for nonpayment. A credit union must describe the 
circumstances under which it will not pay an overdraft. It is sufficient 
to state, as applicable: ``Whether your overdrafts will be paid is 
discretionary and we reserve the right not to pay. For example, we 
typically do not pay overdrafts if your account is not in good standing, 
or you are not making regular deposits, or you have too many 
overdrafts.''
    8. Advertising an account as ``free.'' If the advertised account-
related service is an overdraft service subject to the requirements of 
Sec. 707.11(b)(1) of this part, credit unions must disclose the fee or 
fees for the payment of each overdraft, not merely that a cost is 
associated with the overdraft service, as well as other required 
information. Compliance with comment 8(a)--10.v is not sufficient.

                   (c) Disclosure of account balances

    1. Balance that does not include additional amounts. For purposes of 
the balance disclosure requirement in Sec. 707.11(c), if a credit union 
discloses balance information to a member through an automated system, 
it must disclose a balance that excludes any funds the credit union may 
provide to cover an overdraft pursuant to a discretionary overdraft 
service that will be paid by the credit union under a service subject to 
part 1026 of this title (Regulation Z) or that will be transferred from 
another account held individually or jointly by a member. The balance 
may, but need not, include funds that are deposited in the member's 
account, such as from a check, that are not yet made available for 
withdrawal in accordance with the funds availability rules under part 
229 of the title (Regulation CC). In addition, the balance may, but need 
not, include funds that are held by the credit union to satisfy a prior 
obligation of the member, for example, to cover a hold for an ATM or 
debit card transaction that has been authorized but for which the credit 
union has not settled.
    2. Retail sweep programs. In a retail sweep program, a credit union 
establishes two legally distinct subaccounts, a share draft subaccount 
and a share savings subaccount, which together make up the member's 
account. The credit union allocates and transfers funds between the two 
subaccounts in order to maximize the balance in the share savings 
account while complying with the monthly limitations on transfers out of 
savings accounts under the Federal Reserve Board's Regulation D, 12 CFR 
204.2(d)(2). Retail sweep programs are generally not established for the 
purpose of covering overdrafts. Rather, credit unions typically 
establish retail sweep programs by agreement with the member in order 
for the credit union to minimize its transaction account reserve 
requirements and, in some cases, to provide a higher interest rate than 
the member would earn on a share draft account alone. Section 707.11(c) 
does not require a credit union to exclude funds from the member's 
balance that may be transferred from another account pursuant to a 
retail sweep program that is established for such purposes and that has 
the following characteristics:
    i. The account involved complies with the Federal Reserve Board's 
Regulation D, 12 CFR 204.2(d)(2),
    ii. The member does not have direct access to the share savings 
subaccount that is part of the retail sweep program, and

[[Page 920]]

    iii. The member's periodic statements show the account balance as 
the combined balance in the subaccounts.
    3. Additional balance. The credit union may disclose additional 
balances supplemented by funds that may be provided by the credit union 
to cover an overdraft, whether pursuant to a discretionary overdraft 
service, a service subject to Regulation Z (12 CFR part 1026), or a 
service that transfers funds from another account held individually or 
jointly by the member, so long as the credit union prominently states 
that any additional balance includes these additional overdraft amounts. 
The credit union may not simply state, for instance, that the second 
balance is the members ``available balance,'' or contains ``available 
funds.'' Rather, the credit union should provide enough information to 
convey that the second balance includes these amounts. For example, the 
credit union may state that the balance includes ``overdraft funds.'' 
Where a member has not opted into, or as applicable, has opted out of 
the credit union's discretionary overdraft service, any additional 
balance disclosed should not include funds that otherwise might be 
available under that service. Where a member has not opted into, or as 
applicable, has opted out of, the credit union's discretionary overdraft 
service for some, but not all transactions (e.g., the member has not 
opted into overdraft services for ATM and one-time debit card 
transactions), a credit union that includes these additional overdraft 
funds in the second balance should convey that the overdraft funds are 
not available for all transactions. For example, the credit union could 
state that overdraft funds are not available for ATM and one-time (or 
everyday) debit card transactions. Similarly, if funds are not available 
for all transactions pursuant to a service subject to Regulation Z (12 
CFR part 1026) or a service that transfers funds from another account, a 
second balance that includes such funds should also indicate this fact.
    4. Automated systems. The balance disclosure requirement in 
Sec. 707.11(c) applies to any automated system through which the member 
requests a balance, including, but not limited to, a telephone response 
system, the credit union's Internet site, or an ATM. The requirement 
applies whether the credit union discloses a balance through an ATM 
owned or operated by the credit union or through an ATM not owned or 
operated by the credit union, including an ATM operated by an entity 
that is not a financial institution. If the balance is obtained at an 
ATM, the requirement also applies whether the balance is disclosed on 
the ATM screen or on a paper receipt.

       Appendix A to Part 707--Annual Percentage Yield Calculation

Part I. Annual Percentage Yield for Account Disclosures and Advertising 
                                Purposes

    1. Rounding for calculations. The following are examples of 
permissible rounding rules for calculating dividends and the annual 
percentage yield:
    i. The daily rate applied to a balance carried to five or more 
decimals. For example; .008219178%, 3.00% for a 365 day year, would be 
rounded to no less than .00822%.
    ii. The daily dividends or interest earned carried to five or more 
decimals. For example; $.08219178082, daily dividends on $1,000 at 3% 
for a 365 day year, would be rounded to no less than $.08219.
    2. Exponents in a leap year. The annual percentage yield formula's 
exponent numerator will remain 365 in leap years. The ``days in term'' 
figure used in the denominator should be consistent with the length of 
term used in the dividends calculation.
    3. First tier of a tiered-rate account. When credit unions use a 
rate table, the first tier of a tiered rate account is to be disclosed 
and advertised; ``Up to but not exceeding * * * '', ``$.01 to * * * '', 
or similar language.
    4. Term Share Accounts Opened in Midterm. For club accounts that 
meet the definition of a term share account, the annual percentage yield 
is based on the maximum number of days in the term not to exceed 365 
days (or 366 days in a leap year).

     Part II. Annual Percentage Yield Earned for Periodic Statements

    1. Balance method. The dividend or interest figure used in the 
calculation of the annual percentage yield earned may be derived from 
the daily balance method or the average daily balance method. Regardless 
of the dividend calculation method, the balance used in the annual 
percentage yield earned formula is the average daily balance. The 
average daily balance calculation is the sum of the balances for each 
day in the period divided by the number of days in the period. The 
balance for each day is based on a point in time; i.e. beginning of day 
balance, end of day balance, closing of day balance, etc. Each day's 
balance, for dividend accrual and payment purposes, must be based on the 
same point in time and cannot be based on the day's low balance.
    2. Negative balances prohibited. Credit unions must treat a negative 
account balance as zero to determine the balance on which the annual 
percentage yield earned is calculated. (See commentary to 
Sec. 707.7(a)(2).)

                           A. General Formula

    1. Accrued but uncredited dividends. To calculate the annual 
percentage yield earned, accrued but uncredited dividends:

[[Page 921]]

    i. May not be included in the balance for statements that are issued 
at the same time or less frequently than the account's compounding and 
crediting frequency. For example, if monthly statements are sent for an 
account that compounds dividends daily and credits dividends monthly, 
the balance may not be increased each day to reflect the effect of daily 
compounding. Assume a credit union will pay $13.70 in dividends on 
$100,000 for the first day, $6.85 in dividends on $50,013.70 for the 
second day, and $3.43 in dividends on $25,020.55 for the third day. The 
sum of each days balance is $175,000 (does not include accrued, but 
uncredited, dividends amounts $13.70, $6.85, and $3.43), thereby 
resulting in an average daily balance for the three days of $58,333.33.
    ii. Must be included in the balance for succeeding statements if a 
statement is issued more frequently than compounded dividends is 
credited on an account. For example, if monthly statements are sent for 
an account that compounds dividends daily and credits dividends 
quarterly, the balance for the second monthly statement would include 
dividends that had accrued for the prior month. Assume a credit union 
will pay $411.78 in dividends on 30 days of $100,000, $427.28 in 
dividends on 31 days of $100,411.78, and $415.23 in dividends on 30 days 
of $100,839.06. The balance (average daily balance in the account for 
the period) for the second 31 days is $100,411.78.
    2. Rounding. The dividends earned figure used to calculate the 
annual percentage yield earned must be rounded to two decimals to 
reflect the amount actually paid. For example, if the dividends earned 
for a statement period is $20.074 and the credit union pays the member 
$20.07, the credit union must use $20.07 (not $20.074) to calculate the 
annual percentage yield earned. For accounts that pay dividends based on 
the daily balance method, compound and credit dividends or interest 
quarterly, and send monthly statements, the credit union may, but need 
not, round accrued dividends to two decimals for calculating the 
``projected'' or ``anticipated'' annual percentage yield earned on the 
first two monthly statements issued during the quarter. However, on the 
quarterly statement the dividends earned figure must reflect the amount 
actually paid.
    3. Compounding frequency using the average daily balance method. Any 
compounding frequency, including daily compounding, can be used when 
calculating dividends using the average daily balance method. (See 
comment 707.7(b), which does not require credit unions to compound or 
credit dividends at any particular frequency).

 B. Special Formula for Use Where Periodic Statement is Sent More Often 
           Than the Period for Which Dividends are Compounded

    1. Statements triggered by Regulation E. Credit unions may, but need 
not, use this formula to calculate the annual percentage yield earned 
for accounts that receive quarterly statements and that are subject to 
Regulation E's rule calling for monthly statements when an electronic 
fund transfer has occurred. They may do so even though no monthly 
statement was issued during a specific quarter. This formula must be 
used for accounts that compound and credit dividends quarterly and that 
receive monthly statements, triggered by Regulation E, which comply with 
the provisions of Sec. 707.6.
    2. Days in compounding period. Credit unions using the special 
annual percentage yield earned formula must use the actual number of 
days in the compounding period.

         Appendix B to Part 707--Model Clauses and Sample Forms

    1. Modifications. Credit unions that modify the model clauses will 
be deemed in compliance as long as they do not delete information 
required by TISA or regulation or rearrange the format so as to affect 
the substance or clarity of the disclosures.
    2. Format. Credit unions may use inserts to a document (see Sample 
Form B-11) or fill-in blanks (see Sample Forms B-4 and B-5, which use 
double underlining to indicate terms that have been filled in) to show 
current rates, fees or other terms.
    3. Disclosures for opening accounts. The sample forms illustrate the 
information that must be provided to a member when an account is opened, 
as required by Sec. 707.4(a)(1). (See Sec. 707.4(a)(2), which states the 
requirements for disclosing the annual percentage yield, the dividend 
rate, and the maturity of a term share account in responding to a 
member's request.)
    4. Compliance with Regulation E. Credit unions may satisfy certain 
requirements under Part 707 with disclosures that meet the requirements 
of Regulation E. (See Sec. 707.3(c).) The model clauses and sample forms 
do not give examples of disclosures that would be covered by both this 
regulation and Regulation E (such as disclosing the amount of a fee for 
ATM usage). Credit unions should consult appendix A to Regulation E for 
appropriate model clauses.
    5. Duplicate disclosures. If a requirement such as a minimum balance 
applies to more than one account term (to obtain a bonus and determine 
the annual percentage yield, for example), credit unions need not repeat 
the requirement for each term, as long as it is clear which terms the 
requirement applies to.
    6. Guide to model clauses. In the model clauses, italicized words 
indicate the type of

[[Page 922]]

disclosure a credit union should insert in the space provided (for 
example, a credit union might insert ``March 25, 1995'' in the blank for 
``(date)'' disclosure). Brackets and diagonals (``/'') indicate a credit 
union must choose the alternative that describes its practice (for 
example, [daily balance/average daily balance]).
    7. Sample forms. The sample forms (B-4 through B-11) serve a purpose 
different from the model clauses. They illustrate various ways of 
adapting the model clauses to specific accounts. The clauses shown 
relate only to the specific transactions described.

[59 FR 59899, Nov. 21, 1994, as amended at 60 FR 21699, May 3, 1995; 61 
FR 68129, Dec. 27, 1996; 63 FR 71575, Dec. 29, 1998; 66 FR 33163, June 
21, 2001; 70 FR 72899, Dec. 8, 2005; 72 FR 30246, May 31, 2007; 74 FR 
36105, July 22, 2009; 75 FR 47175, Aug. 5, 2010; 77 FR 71085, Nov. 29, 
2012]

    Editorial Note: At 74 FR 36105, July 22, 2009, part 707, appendix C 
was amended in Sec. 707.11 by redesignating (a)(1)-3 through (a)(1)-8 as 
(a)(1)-1 through (a)(1)-6; however (a)(1)-1 already existed.



PART 708a_BANK CONVERSIONS AND MERGERS--Table of Contents



  Subpart A_Conversion of Insured Credit Unions to Mutual Savings Banks

Sec.
708a.101  Definitions.
708a.102  Authority to convert.
708a.103  Board of directors' approval and members' opportunity to 
          comment.
708a.104  Disclosures and communications to members.
708a.105  Notice to NCUA.
708a.106  Membership approval of a proposal to convert.
708a.107  Certification of vote on conversion proposal.
708a.108  NCUA oversight of methods and procedures of membership vote.
708a.109  Other regulatory oversight of methods and procedures of 
          membership vote.
708a.110  Completion of conversion.
708a.111  Limit on compensation of officials.
708a.112  Voting incentives.
708a.113  Voting guidelines.

Subpart B [Reserved]

          Subpart C_Merger of Insured Credit Unions Into Banks

708a.301  Definitions.
708a.302  Authority to merge.
708a.303  Board of directors' approval and members' opportunity to 
          comment.
708a.304  Notice to NCUA and request to proceed with member vote.
708a.305  Disclosures and communications to members.
708a.306  Membership approval of a proposal to merge.
708a.307  Certification of vote on merger proposal.
708a.308  NCUA approval of the merger.
708a.309  Completion of merger.
708a.310  Limits on compensation of officials.
708a.311  Voting incentives.
708a.312  Voting guidelines.

    Authority: 12 U.S.C. 1766, 1785(b), and 1785(c).

    Source: 71 FR 77167, Dec 22, 2006, unless otherwise noted.



  Subpart A_Conversion of Insured Credit Unions to Mutual Savings Banks



Sec. 708a.101  Definitions.

    As used in this part:
    Clear and conspicuous means text in bold type in a font size at 
least one size larger than any other text used in the document 
(exclusive of headings), but in no event smaller than 12 point.
    Conducted by an independent entity means:
    (1) The independent entity will receive the ballots directly from 
voting members.
    (2) After the conclusion of the special meeting that ends the ballot 
period, the independent entity will open all the ballots in its 
possession and tabulate the results. The entity must not open or 
tabulate any ballots before the conclusion of the special meeting.
    (3) The independent entity will certify the final vote tally in 
writing to the credit union and provide a copy to the NCUA Regional 
Director. The certification will include, at a minimum, the number of 
members who voted, the number of affirmative votes, and the number of 
negative votes. During the course of the voting period the independent 
entity may provide the credit union with the names of members who have 
not yet voted, but may not provide any voting results to the credit 
union prior to certifying the final vote tally.
    Credit union has the same meaning as insured credit union in section 
101 of the Federal Credit Union Act.

[[Page 923]]

    Federal banking agencies have the same meaning as in section 3 of 
the Federal Deposit Insurance Act.
    Independent entity means a company with experience in conducting 
corporate elections. No official or senior management official of the 
credit union, or the immediate family member of any official or senior 
management official, may have any ownership interest in, or be employed 
by, the entity.
    Mutual savings bank and savings association have the same meaning as 
in section 3 of the Federal Deposit Insurance Act.
    Regional Director means either the director for the NCUA Regional 
Office for the region where a natural person credit union's main office 
is located or the director of the NCUA's Office of Consumer Financial 
Protection and Access. For corporate credit unions and natural person 
credit unions with $10 billion or more in assets, Regional Director 
means the director of NCUA's Office of National Examinations and 
Supervision.
    Secret ballot means no credit union employee or official can 
determine how a particular member voted. Credit union employees and 
officials are prohibited from assisting members in completing ballots or 
handling completed ballots.
    Senior management official means a chief executive officer, an 
assistant chief executive officer, a chief financial officer, and any 
other senior executive officer as defined by the appropriate federal 
banking agencies pursuant to section 32(f) of the Federal Deposit 
Insurance Act.

[71 FR 77167, Dec. 22, 2006. Redesignated and amended at 75 FR 81386, 
Dec. 28, 2010; 76 FR 13505, Mar. 14, 2011; 78 FR 32544, May 31, 2013; 81 
FR 76496, Nov. 3, 2016]



Sec. 708a.102  Authority to convert.

    A credit union, with the approval of its members, may convert to a 
mutual savings bank or a savings association that is in mutual form 
without the prior approval of the NCUA, subject to applicable law 
governing mutual savings banks and savings associations and the other 
requirements of this part.

[71 FR 77167, Dec. 22, 2006. Redesignated at 75 FR 81386, Dec. 28, 2010]



Sec. 708a.103  Board of directors' approval and members' opportunity
to comment.

    (a) A credit union's board of directors must comply with the 
following notice requirements before voting on a proposal to convert.
    (1) No later than 30 days before a board of directors votes on a 
proposal to convert, it must publish a notice in a general circulation 
newspaper, or in multiple newspapers if necessary, serving all areas 
where the credit union has an office, branch, or service center. It must 
also post the notice in a clear and conspicuous fashion in the lobby of 
the credit union's home office and branch offices and on the credit 
union's Web site, if it has one. If the notice is not on the home page 
of the Web site, the home page must have a clear and conspicuous link, 
visible on a standard monitor without scrolling, to the notice.
    (2) The public notice must include the following:
    (i) The name and address of the credit union;
    (ii) The type of institution to which the credit union's board is 
considering a proposal to convert;
    (iii) A brief statement of why the board is considering the 
conversion and the major positive and negative effects of the proposed 
conversion;
    (iv) A statement that directs members to submit any comments on the 
proposal to the credit union's board of directors by regular mail, 
electronic mail, or facsimile;
    (v) The date on which the board plans to vote on the proposal and 
the date by which members must submit their comments for consideration, 
which may not be more than 5 days before the board vote;
    (vi) The street address, electronic mail address, and facsimile 
number of the credit union where members may submit comments; and
    (vii) A statement that, in the event the board approves the proposal 
to convert, the proposal will be submitted to the membership of the 
credit union for

[[Page 924]]

a vote following a notice period that is no shorter than 90 days.
    (3) The board of directors must approve publication of the notice.
    (b) The credit union must collect member comments and retain copies 
at the credit union's main office until the conversion process is 
completed.
    (c) The board of directors may vote on the conversion proposal only 
after reviewing and considering all member comments. The conversion 
proposal may only be approved by an affirmative vote of a majority of 
board members who have determined the conversion is in the best 
interests of the members. If approved, the board of directors must set a 
date for a vote on the proposal by the members of the credit union.

[71 FR 77167, Dec. 22, 2006. Redesignated at 75 FR 81386, Dec. 28, 2010]



Sec. 708a.104  Disclosures and communications to members.

    (a) After the board of directors has complied with Sec. 708a.3 and 
approves a conversion proposal, the credit union must provide written 
notice of its intent to convert to each member who is eligible to vote 
on the conversion. The notice to members must be submitted 90 calendar 
days, 60 calendar days, and 30 calendar days before the date of the 
membership vote on the conversion. A ballot must be included in the same 
envelope as the 30-day notice and only in the 30-day notice. A 
converting credit union may not distribute ballots with either the 90-
day or 60-day notice, in any other written communications, or in person 
before the 30-day notice is sent.
    (b)(1) The notice to members must adequately describe the purpose 
and subject matter of the vote to be taken at the special meeting or by 
submission of the written ballot. The notice must clearly inform members 
that they may vote at the special meeting or by submitting the written 
ballot. The notice must state the date, time, and place of the meeting.
    (2) The notices that are submitted 90 and 60 days before the 
membership vote on the conversion must state in a clear and conspicuous 
fashion that a written ballot will be mailed together with another 
notice 30 days before the date of the membership vote on conversion. The 
notice submitted 30 days before the membership vote on the conversion 
must state in a clear and conspicuous fashion that a written ballot is 
included in the same envelope as the 30-day notice materials.
    (3) For purposes of facilitating the member-to-member contact 
described in paragraph (f) of this section, the 90-day notice must 
indicate the number of credit union members eligible to vote on the 
conversion proposal and state how many members have agreed to accept 
communications from the credit union in electronic form. The 90-day 
notice must also include the information listed in paragraph (f)(9) of 
this section.
    (4) The member ballot must include:
    (i) A brief description of the proposal (e.g., ``Proposal: Approval 
of the Plan of Charter Conversion by which (insert name of credit union) 
will convert its charter to that of a federal mutual savings bank.'');
    (ii) Two blocks marked respectively as ``FOR'' and ``AGAINST;'' and
    (iii) The following language: ``A vote FOR the proposal means that 
you want your credit union to become a mutual savings bank. A vote 
AGAINST the proposal means that you want your credit union to remain a 
credit union.'' This language must be displayed in a clear and 
conspicuous fashion immediately beneath the FOR and AGAINST blocks.
    (5) The ballot may also include voting instructions and the 
recommendation of the board of directors (i.e., ``Your Board of 
Directors recommends a vote FOR the Plan of Conversion'') but may not 
include any further information without the prior written approval of 
the Regional Director.
    (c) An adequate description of the purpose and subject matter of the 
member vote on conversion, as required by paragraph (b) of this section, 
must include:
    (1) A clear and conspicuous disclosure that the conversion from a 
credit union to a mutual savings bank could lead to members losing their 
ownership interests in the credit union if the mutual savings bank 
subsequently converts to a stock institution and the members do not 
become stockholders;

[[Page 925]]

    (2) A clear and conspicuous disclosure of how a conversion from a 
credit union to a mutual savings bank will affect members' voting rights 
and if the mutual savings bank intends to base voting rights on account 
balances;
    (3) A clear and conspicuous disclosure of any conversion-related 
economic benefit a director or senior management official will or may 
receive including receipt of or an increase in compensation and an 
explanation of any foreseeable stock-related benefits associated with a 
subsequent conversion to a stock institution or mutual holding company 
structure. The explanation of stock-related benefits must include a 
comparison of the opportunities to acquire stock available to officials 
and employees with those opportunities available to the general 
membership;
    (4) An affirmative statement that, at the time of conversion to a 
mutual savings bank, the credit union does or does not intend to convert 
to a stock institution or a mutual holding company structure;
    (5) A clear and conspicuous disclosure of the estimated, itemized 
cost of the proposed conversion, including printing fees, postage fees, 
advertising, consulting and professional fees, legal fees, staff time, 
the cost of holding a special meeting, other costs of conducting the 
vote, and any other conversion-related expenses;
    (6) A clear and conspicuous disclosure of how the conversion from a 
credit union to a mutual savings bank will affect the institution's 
ability to make non-housing-related consumer loans because of a mutual 
savings bank's obligations to satisfy certain lending requirements as a 
mutual savings bank. This disclosure should specify possible reductions 
in some kinds of loans to members;
    (7) A clear and conspicuous disclosure that the National Credit 
Union Administration does not approve or disapprove of the conversion 
proposal or the reasons advanced in support of and the reasons against 
the proposal; and
    (8) A clear and conspicuous disclosure of how the conversion from a 
credit union to a mutual savings bank is likely to affect the 
availability of facilities and services. At a minimum, this disclosure 
should include the name and location of any branches, including shared 
branches, and automatic teller networks, to which members may lose 
access as a result of the conversion. This disclosure must be based on 
research and analysis completed before the date the board of directors 
votes to adopt the conversion proposal.
    (d)(1) A converting credit union must provide the following 
disclosures in a clear and conspicuous fashion with the 90-, 60-, and 
30-day notices it sends to its members regarding the conversion:

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
             IMPORTANT REGULATORY DISCLOSURE ABOUT YOUR VOTE
The National Credit Union Administration, the federal government agency
 that supervises credit unions, requires [insert name of credit union]
 to provide the following disclosures:
1. LOSS OF CREDIT UNION MEMBERSHIP. A vote ``FOR'' the proposed
 conversion means you want your credit union to become a mutual savings
 bank. A vote ``AGAINST'' the proposed conversion means you want your
 credit union to remain a credit union.
2. RATES ON LOANS AND SAVINGS. If your credit union converts to a bank,
 you may experience changes in your loan and savings rates. Available
 historic data indicates that, for most loan products, credit unions on
 average charge lower rates than banks. For most savings products,
 credit unions on average pay higher rates than banks.
3. POTENTIAL PROFITS BY OFFICERS AND DIRECTORS. Conversion to a mutual
 savings bank is often the first step in a two-step process to convert
 to a stock-issuing bank or holding company structure. In such a
 scenario, the officers and directors of the institution often profit by
 obtaining stock in excess of that available to other members.
------------------------------------------------------------------------

    (2) This text must be placed in a box, must be the only text on the 
front side of a single piece of paper, and must be placed so that the 
member will see the text after reading the credit union's cover letter 
but before reading any other part of the member notice. The back side of 
the paper must be blank. A

[[Page 926]]

converting credit union may modify this text only with the prior written 
consent of the Regional Director and, in the case of a state-chartered 
credit union, the appropriate state regulatory agency.
    (e) All written communications from a converting credit union to its 
members regarding the conversion must be written in a manner that is 
simple and easy to understand. Simple and easy to understand means the 
communications are written in plain language designed to be understood 
by ordinary consumers and use clear and concise sentences, paragraphs, 
and sections. For purposes of this part, examples of factors to be 
considered in determining whether a communication is in plain language 
and uses clear and concise sentences, paragraphs and sections include 
the use of short explanatory sentences; use of definite, concrete, 
everyday words; use of active voice; avoidance of multiple negatives; 
avoidance of legal and technical business terminology; avoidance of 
explanations that are imprecise and reasonably subject to different 
interpretations; and use of language that is not misleading.
    (f)(1) A converting credit union must mail or e-mail a requesting 
member's proper conversion-related materials to other members eligible 
to vote if:
    (i) A credit union's board of directors has adopted a proposal to 
convert;
    (ii) A member makes a written request that the credit union mail or 
e-mail materials for the member;
    (iii) The request is received by the credit union no later than 35 
days after it sends out the 90-day member notice; and
    (iv) The requesting member agrees to reimburse the credit union for 
the reasonable expenses, excluding overhead, of mailing or e-mailing the 
materials and also provides the credit union with an appropriate advance 
payment.
    (2) A member's request must indicate if the member wants the 
materials mailed or e-mailed. If a member requests that the materials be 
mailed, the credit union will mail the materials to all eligible voters. 
If a member requests the materials be e-mailed, the credit union will e-
mail the materials to all members who have agreed to accept 
communications electronically from the credit union. The subject line of 
the credit union's e-mail will be ``Proposed Credit Union Conversion to 
a Bank--Views of Member (insert member name).''
    (3) (i) A converting credit union may, at its option, include the 
following statement with a member's material:

    On (date), the board of directors of (name of converting credit 
union) adopted a proposal to convert from a credit union to a mutual 
savings bank. Credit union members who wish to express their opinions 
about the proposed conversion to other members may provide those 
opinions to (name of credit union). By law, the credit union, at the 
requesting members' expense, must then send those opinions to the other 
members. The attached document represents the opinion of a member of 
this credit union. This opinion is a personal opinion and does not 
necessarily reflect the views of the management or directors of the 
credit union.

    (ii) A converting credit union may not add anything other than this 
statement to a member's material without the prior approval of the 
Regional Director.
    (4) The term ``proper conversion-related materials'' does not 
include materials that:
    (i) Due to size or similar reasons are impracticable to mail or e-
mail;
    (ii) Are false or misleading with respect to any material fact;
    (iii) Omit a material fact necessary to make the statements in the 
material not false or misleading;
    (iv) Relate to a personal claim or a personal grievance, or solicit 
personal gain or business advantage by or on behalf of any party;
    (v) Relate to any matter, including a general economic, political, 
racial, religious, social, or similar cause, that is not significantly 
related to the proposed conversion;
    (vi) Directly or indirectly and without expressed factual foundation 
impugn a person's character, integrity, or reputation;
    (vii) Directly or indirectly and without expressed factual 
foundation make charges concerning improper, illegal, or immoral 
conduct; or
    (viii) Directly or indirectly and without expressed factual 
foundation make statements impugning the stability and soundness of the 
credit union.

[[Page 927]]

    (5) If a converting credit union believes some or all of a member's 
request is not proper it must submit the member materials to the 
Regional Director within seven days of receipt. The credit union must 
include with its transmittal letter a specific statement of why the 
materials are not proper and a specific recommendation for how the 
materials should be modified, if possible, to make them proper. The 
Regional Director will review the communication, communicate with the 
requesting member, and respond to the credit union within seven days 
with a determination on the propriety of the materials. The credit union 
must then immediately mail or e-mail the material to the members if so 
directed by NCUA.
    (6) A credit union must ensure that its members receive all 
materials that meet the requirements of Sec. 708a.4(f) on or before the 
date the members receive the 30-day notice and associated ballot. If a 
credit union cannot meet this delivery requirement, it must postpone 
mailing the 30-day notice until it can deliver the member materials. If 
a credit union postpones the mailing of the 30-day notice, it must also 
postpone the special meeting by the same number of days. When the credit 
union has completed the delivery, it must inform the requesting member 
that the delivery was completed and provide the number of recipients.
    (7) The term ``appropriate advance payment'' means:
    (i) For requests to mail materials to all eligible voters, a payment 
in the amount of 150% of the first class postage rate times the number 
of mailings, and
    (ii) For requests to e-mail materials only to members that have 
agreed to accept electronic communications, a payment in the amount of 
200 dollars.
    (8) If a credit union posts conversion-related information or 
material on its Web site, then it must simultaneously make a portion of 
its Web site available free of charge to its members to post and share 
their opinions on the conversion. A link to the portion of the Web site 
available to members to post their views on the conversion must be 
marked ``Members: Share your views on the proposed conversion and see 
other members views'' and the link must also be visible on all pages on 
which the credit union posts its own conversion-related information or 
material, as well as on the credit union's homepage. If a credit union 
believes a particular member submission is not proper for posting, it 
will provide that submission to the Regional Director for review as 
described in paragraph (f)(5) of this section. The credit union may also 
post a content-neutral disclaimer using language similar to the language 
in paragraph (f)(3)(i) of this section.
    (9) A converting credit union must inform members with the 90-day 
notice that if they wish to provide their opinions about the proposed 
conversion to other members they can submit their opinions in writing to 
the credit union no later than 35 days from the date of the notice and 
the credit union will forward those opinions to other members. The 90-
day notice will provide a contact at the credit union for delivery of 
communications, will explain that members must agree to reimburse the 
credit union's costs of transmitting the communication including 
providing an advance payment, and will refer members to this section of 
NCUA's rules for further information about the communication process. 
The credit union, at its option, may include additional factual 
information about the communication process with its 90-day notice.
    (10) A group of members may make a joint request that the credit 
union send its materials to other members. For purposes of paragraphs 
(f)(2) and (f)(3) of this section, the credit union will use the group 
name provided by the group.

[71 FR 77167, Dec. 22, 2006, as amended at 75 FR 34621, June 18, 2010. 
Redesignated and amended at 75 FR 81386, Dec. 28, 2010]



Sec. 708a.105  Notice to NCUA.

    (a) If a converting credit union's board of directors approves a 
proposal to convert, it must provide the Regional Director with notice 
of its intent to convert during the 90 calendar day period preceding the 
date of the membership vote on the conversion.
    (1) A credit union must give notice to the Regional Director of its 
intent to

[[Page 928]]

convert by providing a letter describing the material features of the 
conversion or a copy of the filing the credit union has made or intends 
to make with another federal or state regulatory agency in which the 
credit union seeks that agency's approval of the conversion. A credit 
union must include with the notice to the Regional Director copies of 
the notices the credit union has provided or intends to provide to 
members under Secs. 708a.3 and 708a.4. The credit union must also 
include a copy of the ballot form and all written materials the credit 
union has distributed or intends to distribute to members. The term 
``written materials'' includes written documentation or information of 
any sort, including electronic communications posted on a Web site or 
transmitted by electronic mail.
    (2) As part of its notice to NCUA of intent to convert, the credit 
union's board of directors must provide the Regional Director with a 
certification of its support for the conversion proposal and plan. Each 
director who voted in favor of the conversion proposal must sign the 
certification. The certification must contain the following:
    (i) A statement that each director signing the certification 
supports the proposed conversion and believes the proposed conversion is 
in the best interests of the members of the credit union;
    (ii) A description of all materials submitted to the Regional 
Director with the notice and certification;
    (iii) A statement that each board member signing the certification 
has examined all these materials carefully and these materials are true, 
correct, current, and complete as of the date of submission; and
    (iv) An acknowledgement that federal law (18 U.S.C. 1001) prohibits 
any misrepresentations or omissions of material facts, or false, 
fictitious or fraudulent statements or representations made with respect 
to the certification or the materials provided to the Regional Director 
or any other documents or information provided to the members of the 
credit union or NCUA in connection with the conversion.
    (3) A state-chartered credit union must state as part of the notice 
required by Sec. 708a.5(a) if its state chartering law permits it to 
convert to a mutual savings bank and provide the specific legal 
citation. A state-chartered credit union will remain subject to any 
state law requirements for conversion that are more stringent than those 
this part imposes, including any internal governance requirements, such 
as the requisite membership vote for conversion and the determination of 
a member's eligibility to vote. If a state-chartered credit union relies 
for its authority to convert to a mutual savings bank on a state law 
parity provision, meaning a provision in state law permitting a state-
chartered credit union to operate with the same or similar authority as 
a federal credit union, it must:
    (i) Include in its notice a statement that its state regulatory 
authority agrees that it may rely on the state law parity provision as 
authority to convert; and
    (ii) Indicate its state regulatory authority's position as to 
whether federal law and regulations or state law will control internal 
governance issues in the conversion such as the requisite membership 
vote for conversion and the determination of a member's eligibility to 
vote.
    (b) If it chooses, a credit union may seek a preliminary 
determination from the Regional Director regarding any of the notices 
required under this part and its proposed methods and procedures 
applicable to the membership conversion vote. The Regional Director will 
make a preliminary determination regarding the notices and methods and 
procedures applicable to the membership vote within 30 calendar days of 
receipt of a credit union's request for review unless the Regional 
Director extends the period as necessary to request additional 
information or review a credit union's submission. A credit union's 
prior submission of any notice or proposed voting procedures does not 
relieve the credit union of its obligation to certify the results of the 
membership vote required by Sec. 708a.6 or eliminate the right of the 
Regional Director to disapprove the actual methods and procedures 
applicable to the membership vote if the credit union fails to conduct 
the membership vote

[[Page 929]]

in a fair and legal manner consistent with the Federal Credit Union Act 
and these rules.
    (c) After receiving the notice described in paragraph (a)(3) of this 
section, the Regional Director will contact and consult with the 
appropriate State Supervisory Authority.

[71 FR 77167, Dec. 22, 2006. Redesignated at 75 FR 81386, Dec. 28, 2010]



Sec. 708a.106  Membership approval of a proposal to convert.

    (a) A proposal for conversion approved by a board of directors 
requires approval by a majority of the members who vote on the proposal.
    (b) The board of directors must set a voting record date to 
determine member voting eligibility that is at least one day before the 
publication of notice required in Sec. 708a.3.
    (c) A member may vote on a proposal to convert in person at a 
special meeting held on the date set for the vote or by written ballot 
filed by the member. The vote on the conversion proposal must be by 
secret ballot and conducted by an independent entity. The independent 
entity must be a company with experience in conducting corporate 
elections. No official or senior management official of the credit union 
or the immediate family members of any official or senior management 
official may have any ownership interest in or be employed by the 
independent entity.

[71 FR 77167, Dec. 22, 2006. Redesignated at 75 FR 81386, Dec. 28, 2010]



Sec. 708a.107  Certification of vote on conversion proposal.

    (a) The board of directors of the converting credit union must 
certify the results of the membership vote to the Regional Director 
within 14 calendar days after the vote is taken.
    (b) The certification must also include a statement that the notice, 
ballot and other written materials provided to members were identical to 
those submitted to NCUA pursuant to Sec. 708a.5. If the board cannot 
certify this, the board must provide copies of any new or revised 
materials and an explanation of the reasons for any changes.
    (c) The certification must be accompanied by copies of all 
correspondence between the credit union and any Federal banking agency 
whose approval is required for the conversion.

[71 FR 77167, Dec. 22, 2006. Redesignated at 75 FR 81386, Dec. 28, 2010. 
Amended at 75 FR 81387, Dec. 28, 2010]



Sec. 708a.108  NCUA oversight of methods and procedures of membership
vote.

    (a) The Regional Director will review the methods by which the 
membership vote was taken and the procedures applicable to the 
membership vote. The Regional Director will determine: if the notices 
and other communications to members were accurate, not misleading, and 
timely; the membership vote was conducted in a fair and legal manner; 
and the credit union has otherwise complied with part 708a.
    (b) After completion of this review, the Regional Director will 
issue a determination that the methods and procedures applicable to the 
membership vote are approved or disapproved. The Regional Director will 
issue this determination within 30 calendar days of receipt from the 
credit union of the certification of the result of the membership vote 
required under Sec. 708a.7 unless the Regional Director extends the 
period as necessary to request additional information or review the 
credit union's submission. Approval of the methods and procedures under 
this paragraph remains subject to a credit union fulfilling the 
requirements in Sec. 708a.10 for timely completion of the conversion.
    (c) If the Regional Director disapproves the methods by which the 
membership vote was taken or the procedures applicable to the membership 
vote, the Regional Director may direct that a new vote be taken.
    (d) A converting credit union may appeal the Regional Director's 
determination to the NCUA Board. The credit union must file the appeal 
within 30 days after receipt of the Regional Director's determination. 
The NCUA Board will act on the appeal within 90 days of receipt.

[71 FR 77167, Dec. 22, 2006. Redesignated at 75 FR 81386, Dec. 28, 2010]

[[Page 930]]



Sec. 708a.109  Other regulatory oversight of methods and procedures
of membership vote.

    The federal or state regulatory agency that will have jurisdiction 
over the financial institution after conversion must verify the 
membership vote and may direct that a new vote be taken, if it 
disapproves of the methods by which the membership vote was taken or the 
procedures applicable to the membership vote.

[71 FR 77167, Dec. 22, 2006. Redesignated at 75 FR 81386, Dec. 28, 2010]



Sec. 708a.110  Completion of conversion.

    (a) After receipt of the approvals under Sec. 708a.8 and Sec. 708a.9 
the credit union may complete the conversion.
    (b) The credit union must complete the conversion within one year of 
the date of receipt of NCUA approval under Sec. 708a.8. If a credit 
union fails to complete the conversion within one year the Regional 
Director will disapprove of the methods and procedures. The credit 
union's board of directors must then adopt a new conversion proposal and 
solicit another member vote if it still desires to convert.
    (c) The Regional Director may, upon timely request and for good 
cause, extend the one year completion period for an additional six 
months.
    (d) After notification by the board of directors of the mutual 
savings bank or mutual savings association that the conversion has been 
completed, the NCUA will cancel the insurance certificate of the credit 
union and, if applicable, the charter of a federal credit union.

[71 FR 77167, Dec. 22, 2006. Redesignated at 75 FR 81386, Dec. 28, 2010]



Sec. 708a.111  Limit on compensation of officials.

    No director or senior management official of an insured credit union 
may receive any economic benefit in connection with the conversion of a 
credit union other than compensation and other benefits paid to 
directors or senior management officials of the converted institution in 
the ordinary course of business.

[71 FR 77167, Dec. 22, 2006. Redesignated at 75 FR 81386, Dec. 28, 2010]



Sec. 708a.112  Voting incentives.

    If a converting credit union offers an incentive to encourage 
members to participate in the vote, including a prize raffle, every 
reference to such incentive made by the credit union in a written 
communication to its members must also state that members are eligible 
for the incentive regardless of whether they vote for or against the 
proposed conversion.

[71 FR 77167, Dec. 22, 2006. Redesignated at 75 FR 81386, Dec. 28, 2010]



Sec. 708a.113  Voting guidelines.

    A converting credit union must conduct its member vote on conversion 
in a fair and legal manner. NCUA provides the following guidelines as 
suggestions to help a credit union obtain a fair and legal vote and 
otherwise fulfill its regulatory obligations. These guidelines are not 
an exhaustive checklist and do not by themselves guarantee a fair and 
legal vote.
    (a) Applicability of state law. While NCUA's conversion rule applies 
to all conversions of federally insured credit unions, federally insured 
state-chartered credit unions (FISCUs) are also subject to state law on 
conversions. NCUA's position is that a state legislature or state 
supervisory authority may impose conversion requirements more stringent 
or restrictive than NCUA's. States that permit this kind of conversion 
may have substantive and procedural requirements that vary from federal 
law. For example, there may be different voting standards for approving 
a vote. While the Federal Credit Union Act requires a simple majority of 
those who vote to approve a conversion, some states have higher voting 
standards requiring two-thirds or more of those who vote. A FISCU should 
be careful to understand both federal and state law to navigate the 
conversion process and conduct a proper vote.
    (b) Eligibility to vote. (1) Determining who is eligible to cast a 
ballot is fundamental to any vote. No conversion vote can be fair and 
legal if some members are improperly excluded. A converting credit union 
should be cautious to identify all eligible members and make certain 
they are included on its voting

[[Page 931]]

list. NCUA recommends that a converting credit union establish internal 
procedures to manage this task.
    (2) A converting credit union should be careful to make certain its 
member list is accurate and complete. For example, when a credit union 
converts from paper recordkeeping to computer recordkeeping, some member 
names may not transfer unless the credit union is careful in this 
regard. This same problem can arise when a credit union converts from 
one computer system to another where the software is not completely 
compatible.
    (3) Problems with keeping track of who is eligible to vote can also 
arise when a credit union converts from a federal charter to a state 
charter or vice versa. NCUA is aware of an instance where a federal 
credit union used membership materials allowing two or more individuals 
to open a joint account and also allowed each to become a member. The 
federal credit union later converted to a state-chartered credit union 
that, like most other state-chartered credit unions in its state, used 
membership materials allowing two or more individuals to open a joint 
account but only allowed the first person listed on the account to 
become a member. The other individuals did not become members as a 
result of their joint account, but were required to open another account 
where they were the first or only person listed on the account. Over 
time, some individuals who became members of the federal credit union as 
the second person listed on a joint account were treated like those 
individuals who were listed as the second person on a joint account 
opened directly with the state-chartered credit union. Specifically, 
both of those groups were treated as non-members not entitled to vote. 
This example makes the point that a credit union must be diligent in 
maintaining a reliable membership list.
    (c) Scheduling the special meeting. NCUA's conversion rule requires 
a converting credit union to permit members to vote by written mail 
ballot or in person at a special meeting held for the purpose of voting 
on the conversion. Although most members may choose to vote by mail, a 
significant number may choose to vote in person. As a result, a 
converting credit union should be careful to conduct its special meeting 
in a manner conducive to accommodating all members wishing to attend, 
including selecting a meeting location that can accommodate the 
anticipated number of attendees and is conveniently located. The meeting 
should also be held on a day and time suitable to most members' 
schedules. A credit union should conduct its meeting in accordance with 
applicable federal and state law, its bylaws, Robert's Rules of Order or 
other appropriate parliamentary procedures, and determine before the 
meeting the nature and scope of any discussion to be permitted.
    (d) Voting incentives. Some credit unions may wish to offer 
incentives to members, such as entry to a prize raffle, to encourage 
participation in the conversion vote. The credit union must exercise 
care in the design and execution of such incentives.
    (1) The credit union should ensure that the incentive complies with 
all applicable state, federal, and local laws.
    (2) The incentive should not be unreasonable in size. The cost of 
the incentive should have a negligible impact on the credit union's net 
worth ratio and the incentive should not be so large that it distracts 
the member from the purpose of the vote. If the board desires to use 
such incentives, the cost of the incentive should be included in the 
directors' deliberation and determination that the conversion is in the 
best interests of the credit union's members.
    (3) The credit union should ensure that the incentive is available 
to every member that votes regardless of how or when he or she votes. 
All of the credit union's written materials promoting the incentive to 
the membership must disclose to the members, as required by Sec. 708a.12 
of this part, that they have an equal opportunity to participate in the 
incentive program regardless of whether they vote for or against the 
conversion. The credit union should also design its incentives so that 
they are available equally to all members who vote, regardless of 
whether they vote

[[Page 932]]

by mail or in person at the special meeting.
    (e) Solicitation of votes. Some credit unions may wish to contact 
members who have not voted and encourage them to vote on the conversion 
proposal. NCUA believes, however, that using credit union employees to 
solicit votes is problematic. Employees directed to solicit votes could 
easily neglect everyday duties critical to the credit union's safe and 
sound operation. Also, employees may very well feel pressured to solicit 
votes for the conversion, regardless of whether or not they support the 
conversion. Accordingly, NCUA strongly encourages converting credit 
unions to use an independent third party to solicit votes rather than 
diverting credit union employees from their usual duties.

[71 FR 77167, Dec. 22, 2006. Redesignated at 75 FR 81386, Dec. 28, 2010. 
Amended at 75 FR 81387, Dec. 28, 2010]

Subpart B [Reserved]



          Subpart C_Merger of Insured Credit Unions Into Banks

    Source: 75 FR 81387, Dec. 28, 2010, unless otherwise noted.



Sec. 708a.301  Definitions.

    As used in this part:
    Bank has the same meaning as in section 3(a) of the Federal Deposit 
Insurance Act, 12 U.S.C. 1813(a).
    Clear and conspicuous means text in bold type in a font size at 
least one size larger than any other text used in the document 
(exclusive of headings), but in no event smaller than 12 point.
    Conducted by an independent entity means:
    (1) The independent entity will receive the ballots directly from 
voting members.
    (2) After the conclusion of the special meeting that ends the ballot 
period, the independent entity will open all the ballots in its 
possession and tabulate the results. The entity must not open or 
tabulate any ballots before the conclusion of the special meeting.
    (3) The independent entity will certify the final vote tally in 
writing to the credit union and provide a copy to the NCUA Regional 
Director. The certification will include, at a minimum, the number of 
members who voted, the number of affirmative votes, and the number of 
negative votes. During the course of the voting period the independent 
entity may provide the credit union with the names of members who have 
not yet voted, but may not provide any voting results to the credit 
union prior to certifying the final vote tally.
    Credit union has the same meaning as insured credit union in section 
101 of the Federal Credit Union Act.
    Distribution formula is the formula the bank will use to determine 
each member's portion of that payment to be received upon completion of 
the merger.
    Federal banking agencies have the same meaning as in section 3 of 
the Federal Deposit Insurance Act.
    Merger means any transaction in which a credit union transfers all, 
or substantially all, of its assets to a bank. The term merger includes 
any purported conversion of a credit union to a bank if the purported 
conversion is conducted pursuant to an agreement between a preexisting 
bank and the credit union that provides--
    (1) The credit union will not conduct business as a stand-alone 
bank, and
    (2) The purported conversion will be followed by the transfer of 
all, or substantially all, of the credit union's assets to the 
preexisting bank.
    Merger value or merger valuation is the amount that a stock bank 
would pay in an arm's-length transaction to purchase the credit union's 
assets and assume its liabilities and shares (deposits).
    Qualified appraisal entity means entity that has significant 
experience in the valuation of depository institutions and that has no 
past financial relationship with the merging credit union; the 
continuing bank, the continuing bank's owners, affiliates, or holding 
companies; or any law firm representing the credit union or the bank in 
connection with the merger.
    Regional Director means the director of the NCUA Regional Office for 
the region where a natural person credit

[[Page 933]]

union's main office is located. For corporate credit unions and natural 
person credit unions with $10 billion or more in assets, Regional 
Director means the Director of NCUA's Office of National Examinations 
and Supervision.
    Secret ballot means no credit union employee or official can 
determine how a particular member voted. Credit union employees and 
officials are prohibited from assisting members in completing ballots or 
handling completed ballots.
    Senior management official means a chief executive officer, an 
assistant chief executive officer, a chief financial officer, and any 
other senior executive officer as defined by the appropriate Federal 
banking agencies pursuant to section 32(f) of the Federal Deposit 
Insurance Act.

[75 FR 81387, Dec. 28, 2010, as amended at 78 FR 32544, May 31, 2013]



Sec. 708a.302  Authority to merge.

    A credit union, with the approval of its members, may merge into a 
bank only with the prior approval of NCUA, the Federal Deposit Insurance 
Corporation, and the regulator of the bank. If the credit union is State 
chartered, it also needs the prior approval of its State regulator.



Sec. 708a.303  Board of directors' approval and members' opportunity
to comment.

    (a) Merger valuation. Before selecting a bank merger partner and 
voting on a proposal to merge, a credit union's board of directors must 
determine, as part of its due diligence, the merger value of the credit 
union. In making its determination of the merger value of the credit 
union, the credit union must either:
    (1) Conduct a well-publicized merger auction and obtain purchase 
quotations from at least three banks, two or more of which must be stock 
banks; or
    (2) Retain a qualified appraisal entity to analyze and estimate the 
merger value of the credit union.
    (b) Advance notice. A credit union that does not conduct a public 
auction as described in paragraph (a)(1) of this section must comply 
with the following notice requirements before voting on a proposal to 
merge.
    (1) No later than 30 days before a board of directors votes on a 
proposal to merge, it must publish a notice in a general circulation 
newspaper, or in multiple newspapers if necessary, serving all areas 
where the credit union has an office, branch, or service center. It must 
also post the notice in a clear and conspicuous fashion in the lobby of 
the credit union's home office and branch offices and on the credit 
union's Web site, if it has one. If the notice is not on the home page 
of the Web site, the home page must have a clear and conspicuous link, 
visible on a standard monitor without scrolling, to the notice.
    (2) The public notice must include the following:
    (i) The name and address of the credit union;
    (ii) The name and type of institution into which the credit union's 
board is considering a proposal to merge;
    (iii) A brief statement of why the board is considering the merger 
and the major positive and negative effects of the proposed merger;
    (iv) A statement that directs members to submit any comments on the 
proposal to the credit union's board of directors by regular mail, 
electronic mail, or facsimile;
    (v) The date on which the board plans to vote on the proposal and 
the date by which members must submit their comments for consideration; 
which submission date may not be more than 5 days before the board vote;
    (vi) The street address, electronic mail address, and facsimile 
number of the credit union where members may submit comments; and
    (vii) A statement that, in the event the board approves the proposal 
to merge, the proposal will be submitted to the membership of the credit 
union for a vote following a notice period that is no shorter than 90 
days.
    (3) The board of directors must approve publication of the notice.
    (c) Member comments. A credit union must collect and review any 
member comments about the merger received during the merger process. The 
credit union must retain the comments until the merger is consummated.

[[Page 934]]

    (d) Approval of proposal to merge. The merger proposal may only be 
approved by an affirmative vote of a majority of board members who have 
determined:
    (1) A merger with a bank is in the best interests of the members, 
and
    (2) The merger partner selected by the directors is the best choice 
for the members, taking into account the merger value of the credit 
union and the amount that the selected merger partner is willing to pay 
the credit union's members to effect the merger.



Sec. 708a.304  Notice to NCUA and request to proceed with member vote.

    (a) NIMRA. If a credit union's board of directors adopts a proposal 
to merge, it must, within 30 days of the adoption, provide the Regional 
Director with a Notice of its Intent to Merge and Request for NCUA 
Authorization (NIMRA) to conduct a member vote. The NIMRA must include 
the following:
    (1) The merger plan (as described below in paragraph (b) of this 
section);
    (2) Resolutions of the boards of directors of both institutions;
    (3) Certification of the board of directors (as described below);
    (4) Proposed Merger Agreement;
    (5) Proposed Notice of Special Meeting of the Members and any other 
communications about the merger that the credit union intends to send to 
its members, including electronic communications posted on a Web site or 
transmitted by electronic mail;
    (6) Proposed ballot to be sent to the members;
    (7) For State chartered credit unions, evidence that the proposed 
merger is authorized under State law (as described below);
    (8) A copy of the bank's last two examination reports;
    (9) A statement of the merger valuation of the credit union;
    (10) A statement of whether any merger payment will be made to the 
members and how such a payment will be distributed among the members;
    (11) Information about the due diligence of the directors in 
locating a merger partner and determining that the merger is in best 
interests of the members of the credit union (as described below);
    (12) Copies of all contracts reflecting any merger-related 
compensation or other benefit to be received by any director or senior 
management official of the credit union;
    (13) If the merging credit union's assets on its latest call report 
are equal to or greater than the threshold amount established annually 
by the Federal Trade Commission under 15 U.S.C. 18a(a)(2)(B)(i), 
currently $63.4 million, a statement about whether the two institutions 
intend to make a Hart-Scott-Rodino Act premerger notification filing 
with the Federal Trade Commission and, if not, an explanation why not;
    (14) Copies of any filings the credit union or bank intends to make 
with another Federal or State regulatory agency in which the credit 
union or bank seeks that agency's approval of the merger; and
    (15) Proof that the accounts of the credit union will be accepted 
for coverage by the Federal Deposit Insurance Corporation.
    (b) Merger plan. The merger plan must include:
    (1) Current financial statements for both institutions;
    (2) Current delinquent loan summaries and analyses of the adequacy 
of the Allowance for Loan and Lease Losses account for both 
institutions;
    (3) Consolidated financial statements of the continuing institution 
after the merger;
    (4) Explanation of any provisions for reserves, undivided earnings 
or dividends;
    (5) Provisions with respect to notification and payment of 
creditors; and
    (6) Explanation of any changes relative to insurance such as life 
savings and loan protection insurance and insurance of member accounts.
    (c) Director certification. The NIMRA must include a certification 
by the credit union's board of directors of their support for the merger 
proposal and plan. Each director who voted in favor of the merger 
proposal must sign the certification. The certification must contain the 
following:
    (1) A statement that each director signing the certification 
supports the proposed merger and believes the proposed merger, and the 
selected bank

[[Page 935]]

merger partner, are both in the best interests of the members of the 
credit union;
    (2) A description of all materials submitted to the Regional 
Director with the notice and certification;
    (3) A statement that each board member signing the certification has 
examined all these materials carefully and these materials are true, 
correct, current, and complete as of the date of submission; and
    (4) An acknowledgement that Federal law (18 U.S.C. 1001) prohibits 
any misrepresentations or omissions of material facts, or false, 
fictitious or fraudulent statements or representations made with respect 
to the certification or the materials provided to the Regional Director 
or any other documents or information provided to the members of the 
credit union or NCUA in connection with the merger.
    (d) Due diligence. The NIMRA must include a description of all the 
credit union's due diligence in determining that the merger satisfies 
the factors contained in section 205(c) of the Act. In particular, the 
NIMRA must describe how the board located the merger partner, how the 
board negotiated the merger agreement, and how the board determined that 
this merger was in the best interests of the credit union's members. The 
description must include all information relied upon by the credit union 
in determining the merger value of the credit union, the amount of any 
payment to be made by the bank to the credit union's members (the 
``merger payment''), and, if that merger payment is less than the merger 
value of the credit union, an explanation why the merger and the merger 
partner selected is in the best interests of the members. The 
description must include an explanation of the distribution formula by 
which the merger payment will be distributed among the credit union's 
members.
    (e) State chartered credit unions. A State chartered credit union 
must state as part of its NIMRA if its State chartering law permits it 
to merge into a bank and provide the specific legal citation. A State 
chartered credit union will remain subject to any State law requirements 
for merger that are more stringent than those this part imposes, 
including any internal governance requirements, such as the requisite 
membership vote for merger and the determination of a member's 
eligibility to vote. If a State chartered credit union relies for its 
authority to merge into a bank on a State law parity provision, meaning 
a provision in State law permitting a State chartered credit union to 
operate with the same or similar authority as a Federal credit union, it 
must:
    (1) Include in its notice a statement that its State regulatory 
authority agrees that it may rely on the State law parity provision as 
authority to merge; and
    (2) Indicate its State regulatory authority's position as to whether 
Federal law and regulations or State law will control internal 
governance issues in the merger such as the requisite membership vote 
for merger and the determination of a member's eligibility to vote.
    (f) Consultation with State authorities. After receiving a NIMRA 
from a State chartered credit union, the Regional Director will consult 
with the appropriate State supervisory authority.
    (g) Regional Director approval. After receiving a NIMRA, the 
Regional Director will either disapprove the proposed merger or 
authorize the credit union to proceed with its membership vote.
    (1) The Regional Director will disapprove the proposed merger if the 
NIMRA either lacks the documentation required by this section or lacks 
substantial evidence to support each of the factors in section 205(c) of 
the Act. As part of this determination, the Regional Director must 
disapprove the proposed merger if:
    (i) The merger payment offered by the bank to the members is less 
than the merger valuation, absent some additional, quantifiable benefit 
to the members from the selected merger partner; or
    (ii) The NIMRA fails to adequately explain the nature and amount of 
any compensation to be received by the credit union's directors or 
senior management officials in connection with the merger or to justify 
that compensation.

[[Page 936]]

    (2) NCUA's authorization to proceed with the member vote does not 
mean NCUA has approved of the merger proposal.
    (h) Appeal of adverse decision. If the Regional Director disapproves 
a merger proposal, the credit union may appeal the Regional Director's 
determination to the Board. The credit union must file the appeal within 
30 days after receipt of the Regional Director's determination. The 
Board will act on the appeal within 120 days of receipt.



Sec. 708a.305  Disclosures and communications to members.

    (a) After the board of directors approves a merger proposal and 
receives NCUA's authorization as described in Secs. 708a.303 and 
708a.304, the credit union must provide written notice of its intent to 
merge to each member who is eligible to vote on the merger. The notice 
to members must be mailed 90 calendar days and 30 calendar days before 
the date of the membership vote on the merger. A ballot must be included 
in the same envelope as the 30-day notice and only with the 30-day 
notice. A merging credit union may not distribute ballots with the 90-
day notice, in any other written communications, or in person before the 
30-day notice is sent.
    (b)(1) The notice to members must adequately describe the purpose 
and subject matter of the vote and clearly inform members that they may 
vote at the special meeting or by submitting the written ballot. The 
notice must state the date, time, and place of the meeting.
    (2) The 90-day notice must state in a clear and conspicuous fashion 
that a written ballot will be mailed together with another notice 30 
days before the date of the membership vote on merger. The 30-day notice 
must state in a clear and conspicuous fashion that a written ballot is 
included in the same envelope as the 30-day notice materials.
    (3) For purposes of facilitating the member-to-member contact 
described in paragraph (f) of this section, the 90-day notice must 
indicate the number of credit union members eligible to vote on the 
merger proposal and state how many members have agreed to accept 
communications from the credit union in electronic form. The 90-day 
notice must also include the information listed in paragraph (g)(9) of 
this section.
    (4) The member ballot must include:
    (i) A brief description of the proposal (e.g., ``Proposal: Approval 
of the Plan of Merger by which [insert name of credit union] will merge 
with a bank'');
    (ii) Two blocks marked respectively as ``FOR'' and ``AGAINST;'' and
    (iii) The following language: ``A vote FOR the proposal means that 
you want your credit union to merge with and become a bank. A vote 
AGAINST the proposal means that you want your credit union to remain a 
credit union.'' This language must be displayed in a clear and 
conspicuous fashion immediately beneath the FOR and AGAINST blocks.
    (5) The ballot may also include voting instructions and the 
recommendation of the board of directors (i.e., ``Your Board of 
Directors recommends a vote FOR the Plan of Merger'') but may not 
include any further information without the prior written approval of 
the Regional Director.
    (c) For mergers into stock banks, an adequate description of the 
purpose and subject matter of the member vote on merger, as required by 
paragraph (b) of this section, must include:
    (1) A clear and conspicuous disclosure that if the merger is 
approved the members will lose all of their ownership interests in the 
institution, including the right to vote, the right to share in the 
value of the institution should it be liquidated, the right to share in 
any extraordinary dividends, and the right to have the net worth of the 
institution managed in their best interests;
    (2) A clear and conspicuous disclosure of any post-merger employment 
or consulting relationships offered by the bank to any of the credit 
union's directors and senior management officials and the amount of the 
associated compensation;
    (3) A clear and conspicuous disclosure of how the merger of the 
credit union will affect the members' ability to obtain non-housing-
related consumer loans from the bank because of because of the bank's 
obligations to satisfy

[[Page 937]]

statutory or regulatory lending requirements (if any). This disclosure 
should specify possible reductions in some kinds of loans to members;
    (4) A clear and conspicuous statement of the merger value of the 
credit union, the total dollar amount the selected bank merger partner 
has agreed to pay to effect the merger, and the distribution formula the 
bank will use to determine each member's portion of that payment to be 
received upon completion of the merger; and
    (d) For mergers into mutual banks, an adequate description of the 
purpose and subject matter of the member vote on merger, as required by 
paragraph (b) of this section, must include:
    (1) A clear and conspicuous disclosure of how the merger will affect 
members' voting rights including whether the bank bases voting rights on 
account balances;
    (2) A clear and conspicuous disclosure that the merger could lead to 
members losing all of their ownership interests in the credit union if 
the bank subsequently converts to a stock institution and the members do 
not purchase stock;
    (3) A clear and conspicuous disclosure of any post-merger employment 
or consulting relationships offered by the bank to the credit union's 
directors and senior management officials and the associated 
compensation for each;
    (4) A clear and conspicuous disclosure of how the merger of the 
credit union will affect the members' ability to obtain non-housing-
related consumer loans from the bank because of the bank's obligations 
to satisfy statutory or regulatory lending requirements (if any). This 
disclosure should specify possible reductions in some kinds of loans to 
members;
    (5) A clear and conspicuous statement that, at the time of merger, 
the bank does or does not intend to convert to a stock institution or a 
mutual holding company structure;
    (6) A clear and conspicuous statement of the merger value of the 
credit union, the total dollar amount the selected bank merger partner 
has agreed to pay to effect the merger, and the distribution formula the 
bank will use to determine each member's portion of that payment to be 
received upon completion of the merger; and
    (7) If the bank plans to add one or more of the credit union's 
directors to its board or employ one or more senior officials of the 
credit union, a clear and conspicuous statement that bank could convert 
to a stock bank in the future and a comparison of the opportunities 
available to those officials and employees to obtain stock with the 
opportunities available to the depositors of the bank.
    (e)(1) A merging credit union must provide the following disclosures 
in a clear and conspicuous fashion with the 90-day and 30-day notices it 
sends to its members regarding the merger:

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
             IMPORTANT REGULATORY DISCLOSURE ABOUT YOUR VOTE
The National Credit Union Administration, the Federal government agency
 that supervises credit unions, requires [insert name of credit union]
 to provide the following disclosures:
1. LOSS OF CREDIT UNION MEMBERSHIP. A vote ``FOR'' the proposed merger
 means you want your credit union to merge with and become a bank. A
 vote ``AGAINST'' the proposed merger means you want your credit union
 to remain a credit union.
2. [For Mergers into Stock Banks Only]. LOSS OF OWNERSHIP INTERESTS. If
 your credit union merges into the bank, you will lose all the ownership
 interests you currently have in the credit union and you will become a
 customer of the bank. The bank's stockholders own the bank, and the
 directors of the bank have a fiduciary responsibility to run the bank
 in the best interests of the stockholders, not the customers.
2. [For Mergers into Mutual Banks Only]. POTENTIAL PROFITS BY OFFICERS
 AND DIRECTORS. Merger into a mutual savings bank is often the first
 step in a two-step process to convert to a stock-issuing bank or
 holding company structure. In such a scenario, the officers and
 directors of the bank often profit by obtaining stock in excess of that
 available to other members.

[[Page 938]]

 
3. RATES ON LOANS AND SAVINGS. If your credit union merges into the
 bank, you may experience changes in your loan and savings rates.
 Available historic data indicates that, for most loan products, credit
 unions on average charge lower rates than banks. For most savings
 products, credit unions on average pay higher rates than banks.
------------------------------------------------------------------------

    (2) This text must be placed in a box, must be the only text on the 
front side of a single piece of paper, and must be placed so that the 
member will see the text after reading the credit union's cover letter 
but before reading any other part of the member notice. The back side of 
the paper must be blank. A merging credit union may modify this text 
only with the prior written consent of the Regional Director and, in the 
case of a State chartered credit union, the appropriate State regulatory 
agency.
    (f) All written communications from a merging credit union to its 
members regarding the merger must be written in a manner that is simple 
and easy to understand. Simple and easy to understand means the 
communications are written in plain language designed to be understood 
by ordinary consumers and use clear and concise sentences, paragraphs, 
and sections. For purposes of this part, examples of factors to be 
considered in determining whether a communication is in plain language 
and uses clear and concise sentences, paragraphs and sections include 
the use of short explanatory sentences; use of definite, concrete, 
everyday words; use of active voice; avoidance of multiple negatives; 
avoidance of legal and technical business terminology; avoidance of 
explanations that are imprecise and reasonably subject to different 
interpretations; and use of language that is not misleading.
    (g)(1) A merging credit union must mail or e-mail a requesting 
member's proper merger-related materials to other members eligible to 
vote if:
    (i) A credit union's board of directors has adopted a proposal to 
merge;
    (ii) A member makes a written request that the credit union mail or 
e-mail materials for the member;
    (iii) The request is received by the credit union no later than 35 
days after it sends out the 90-day member notice; and
    (iv) The requesting member agrees to reimburse the credit union for 
the reasonable expenses, excluding overhead, of mailing or e-mailing the 
materials and also provides the credit union with an appropriate advance 
payment.
    (2) A member's request must indicate if the member wants the 
materials mailed or e-mailed. If a member requests that the materials be 
mailed, the credit union will mail the materials to all eligible voters. 
If a member requests the materials be e-mailed, the credit union will e-
mail the materials to all members who have agreed to accept 
communications electronically from the credit union. The subject line of 
the credit union's e-mail will be ``Proposed Credit Union Merger--Views 
of Member (insert member name).''
    (3)(i) A merging credit union may, at its option, include the 
following statement with a member's material:

    On (date), the board of directors of (name of merging credit union) 
adopted a proposal to merge the credit union into a bank. Credit union 
members who wish to express their opinions about the proposed merger to 
other members may provide those opinions to (name of credit union). By 
law, the credit union, at the requesting members' expense, must then 
send those opinions to the other members. The attached document 
represents the opinion of a member (or group of members) of this credit 
union. This opinion is a personal opinion and does not necessarily 
reflect the views of the management or directors of the credit union.

    (ii) A merging credit union may not add anything other than this 
statement to a member's material without the prior approval of the 
Regional Director.
    (4) The term ``proper merger-related materials'' does not include 
materials that:
    (i) Due to size or similar reasons are impracticable to mail or e-
mail;
    (ii) Are false or misleading with respect to any material fact;
    (iii) Omit a material fact necessary to make the statements in the 
material not false or misleading;
    (iv) Relate to a personal claim or a personal grievance, or solicit 
personal gain or business advantage by or on behalf of any party;

[[Page 939]]

    (v) Relate to any matter, including a general economic, political, 
racial, religious, social, or similar cause, that is not significantly 
related to the proposed merger;
    (vi) Directly or indirectly and without expressed factual foundation 
impugn a person's character, integrity, or reputation;
    (vii) Directly or indirectly and without expressed factual 
foundation make charges concerning improper, illegal, or immoral 
conduct; or
    (viii) Directly or indirectly and without expressed factual 
foundation make statements impugning the stability and soundness of the 
credit union.
    (5) If a merging credit union believes some or all of a member's 
request is not proper it must submit the member materials to the 
Regional Director within seven days of receipt. The credit union must 
include with its transmittal letter a specific statement of why the 
materials are not proper and a specific recommendation for how the 
materials should be modified, if possible, to make them proper. The 
Regional Director will review the communication, communicate with the 
requesting member, and respond to the credit union within seven days 
with a determination on the propriety of the materials. The credit union 
must then mail or e-mail the material to the members if so directed by 
NCUA.
    (6) A credit union must ensure that its members receive all 
materials that meet the requirements of Sec. 708a.305(g) on or before 
the date the members receive the 30-day notice and associated ballot. If 
a credit union cannot meet this delivery requirement, it must postpone 
mailing the 30-day notice until it can deliver the member materials. If 
a credit union postpones the mailing of the 30-day notice, it must also 
postpone the special meeting by the same number of days. When the credit 
union has completed the delivery, it must inform the requesting member 
that the delivery was completed and provide the number of recipients.
    (7) The term ``appropriate advance payment'' means:
    (i) For requests to mail materials to all eligible voters, a payment 
in the amount of 150 percent of the first class postage rate times the 
number of mailings, and
    (ii) For requests to e-mail materials only to members that have 
agreed to accept electronic communications, a payment in the amount of 
200 dollars.
    (8) If a credit union posts merger-related information or material 
on its Web site, then it must simultaneously make a portion of its Web 
site available free of charge to its members to post and share their 
opinions on the merger. A link to the portion of the Web site available 
to members to post their views on the merger must be marked ``Members: 
Share your views on the proposed merger and see other members' views'' 
and the link must also be visible on all pages on which the credit union 
posts its own merger-related information or material, as well as on the 
credit union's homepage. If a credit union believes a particular member 
submission is not proper for posting, it will provide that submission to 
the Regional Director for review as described in paragraph (g)(5) of 
this section. The credit union may also post a content-neutral 
disclaimer using language similar to the language in paragraph (g)(3)(i) 
of this section.
    (9) A merging credit union must inform members with the 90-day 
notice that if they wish to provide their opinions about the proposed 
merger to other members they can submit their opinions in writing to the 
credit union no later than 35 days from the date of the notice and the 
credit union will forward those opinions to other members. The 90-day 
notice will provide a contact at the credit union for delivery of 
communications, will explain that members must agree to reimburse the 
credit union's costs of transmitting the communication including 
providing an advance payment, and will refer members to this section of 
NCUA's rules for further information about the communication process. 
The credit union, at its option, may include additional factual 
information about the communication process with its 90-day notice.
    (10) A group of members may make a joint request that the credit 
union send its materials to other members. For purposes of paragraphs 
(g)(2) and (g)(3) of this section, the credit union will

[[Page 940]]

use the group name provided by the group.
    (h) If it chooses, a credit union may seek a preliminary 
determination from the Regional Director regarding any of the notices 
required under this subchapter and its proposed methods and procedures 
applicable to the membership merger vote. The Regional Director will 
make a preliminary determination regarding the notices and methods and 
procedures applicable to the membership vote within 30 calendar days of 
receipt of a credit union's request for review unless the Regional 
Director extends the period as necessary to request additional 
information or review a credit union's submission. A credit union's 
prior submission of any notice or proposed voting procedures does not 
relieve the credit union of its obligation to certify the results of the 
membership vote required by Sec. 708a.307 or eliminate the right of the 
Regional Director to disapprove the merger if the credit union fails to 
conduct the membership vote in a fair and legal manner consistent with 
the Federal Credit Union Act and these rules.



Sec. 708a.306  Membership approval of a proposal to merge.

    (a) A proposal for merger approved by a board of directors also 
requires approval by a majority of the members who vote on the proposal. 
At least 20 percent of the members eligible to vote must participate in 
the vote. The credit union must also have NCUA's written authorization 
to proceed with the member vote.
    (b) The board of directors must set a voting record date to 
determine member voting eligibility. The record date must be at least 
one day before the publication of notice required in Sec. 708a.303.
    (c) A member may vote on a proposal to merge in person at a special 
meeting held on the date set for the vote or by written ballot delivered 
by mail or otherwise. The vote on the merger proposal must be by secret 
ballot and conducted by an independent entity. The independent entity 
must be a company with experience in conducting corporate elections. No 
official or senior management official of the credit union or the 
immediate family members of any official or senior management official 
may have any ownership interest in or be employed by the independent 
entity.



Sec. 708a.307  Certification of vote on merger proposal.

    (a) The board of directors of the merging credit union must certify 
the results of the membership vote to the Regional Director within 14 
calendar days after the vote is taken.
    (b) The certification must also include a statement that the notice, 
ballot, and other written materials provided to members were identical 
to those submitted to NCUA pursuant to Sec. 708a.305. If the board 
cannot certify this, the board must provide copies of any new or revised 
materials and an explanation of the reasons for any changes.
    (c) The certification must include copies of any correspondence 
between the credit union and other regulators related to the pending 
merger.



Sec. 708a.308  NCUA approval of the merger.

    (a) The Regional Director will review the methods by which the 
membership vote was taken and the procedures applicable to the 
membership vote. The Regional Director will determine if the notices and 
other communications to members were accurate, not misleading, and 
timely; if the membership vote was conducted in a fair and legal manner; 
and if the credit union has otherwise met the requirements of this 
subpart, including whether there is substantial evidence that the 
factors in section 205(c) of the Act are satisfied.
    (b) After completion of this review, the Regional Director will 
approve or disapprove the proposed merger. The Regional Director will 
issue the approval or disapproval within 30 calendar days of receipt 
from the credit union of the certification of the result of the 
membership vote required under Sec. 708a.307, unless the Regional 
Director extends the period as necessary to request additional 
information or review the credit union's submission. The Regional 
Director's approval is conditional on the credit union completing the 
merger in the timeframes required by Sec. 708a.309.

[[Page 941]]

    (c) If the Regional Director disapproves the methods by which the 
membership vote was taken or the procedures applicable to the membership 
vote, the Regional Director may direct that a new vote be taken.
    (d) A merging credit union may appeal a Regional Director's 
disapproval to the NCUA Board. The credit union must file the appeal 
within 30 days after receipt of the Regional Director's determination. 
The NCUA Board will act on the appeal within 120 days of receipt.



Sec. 708a.309  Completion of merger.

    (a) After receipt of the approvals under Secs. 708a.302 and 708a.308 
a credit union may complete the merger.
    (b) The credit union must complete the merger within one year of the 
date of NCUA approval under Sec. 708a.308. If a credit union fails to 
complete the merger within one year the Regional Director will 
disapprove the merger. The credit union's board of directors must then 
adopt a new merger proposal and solicit another member vote if it still 
desires to merge.
    (c) The Regional Director may, upon timely request and for good 
cause, extend the one year completion period for an additional six 
months.
    (d) After notification by the board of directors of the bank that 
the merger has been completed, the NCUA will cancel the insurance 
certificate of the credit union and, if applicable, the charter of a 
Federal credit union.



Sec. 708a.310  Limits on compensation of officials.

    No director or senior management official of an insured credit union 
may receive any economic benefit in connection with the merger of a 
credit union other than reasonable compensation and other benefits paid 
in the ordinary course of business.



Sec. 708a.311  Voting incentives.

    If a merging credit union offers an incentive to encourage members 
to participate in the vote, including a prize raffle, every reference to 
such incentive made by the credit union in a written communication to 
its members must also state that members are eligible for the incentive 
regardless of whether they vote for or against the proposed merger.



Sec. 708a.312  Voting guidelines.

    A merging credit union must conduct its member vote on merger in a 
fair and legal manner. NCUA provides the following guidelines as 
suggestions to help a credit union obtain a fair and legal vote and 
otherwise fulfill its regulatory obligations. These guidelines are not 
an exhaustive checklist and do not by themselves guarantee a fair and 
legal vote.
    (a) Applicability of State law. While NCUA's merger rules apply to 
all mergers of Federally insured credit unions, Federally insured State 
chartered credit unions (FISCUs) are also subject to State law on 
mergers. NCUA's position is that no merger of a State chartered credit 
union is authorized unless permitted by State law, and also that a State 
legislature or State supervisory authority may impose merger 
requirements more stringent or restrictive than NCUA's. States that 
permit mergers may have substantive and procedural requirements that 
vary from Federal law. For example, there may be different voting 
standards for approving a vote. While the Federal Credit Union Act 
requires a simple majority of those who vote to approve a merger, some 
States have higher voting standards requiring two-thirds or more of 
those who vote. A FISCU should be careful to understand both Federal and 
State law to navigate the merger process and conduct a proper vote.
    (b) Eligibility to vote. (1) Determining who is eligible to cast a 
ballot is fundamental to any vote. No merger vote can be fair and legal 
if some members are improperly excluded. A merging credit union should 
be cautious to identify all eligible members and make certain they are 
included on its voting list. NCUA recommends that a merging credit union 
establish internal procedures to manage this task.
    (2) A merging credit union should be careful to make certain its 
member list is accurate and complete. For example, when a credit union 
converts from paper record keeping to computer record keeping, some 
member names may not transfer unless the credit

[[Page 942]]

union is careful in this regard. This same problem can arise when a 
credit union merges from one computer system to another where the 
software is not completely compatible.
    (3) Problems with keeping track of who is eligible to vote can also 
arise when a credit union merges from a Federal charter to a State 
charter or vice versa. NCUA is aware of an instance where a Federal 
credit union used membership materials allowing two or more individuals 
to open a joint account and also allowed each to become a member. The 
Federal credit union later converted to a State chartered credit union 
that, like most other State chartered credit unions in its State, used 
membership materials allowing two or more individuals to open a joint 
account but only allowed the first person listed on the account to 
become a member. The other individuals did not become members as a 
result of their joint account, but were required to open another account 
where they were the first or only person listed on the account. Over 
time, some individuals who became members of the Federal credit union as 
the second person listed on a joint account were treated like those 
individuals who were listed as the second person on a joint account 
opened directly with the State chartered credit union. Specifically, 
both of those groups were treated as non-members not entitled to vote. 
This example makes the point that a credit union must be diligent in 
maintaining a reliable membership list.
    (c) Scheduling the special meeting. NCUA's merger rule requires a 
merging credit union to permit members to vote by written mail ballot or 
in person at a special meeting held for the purpose of voting on the 
merger. Although most members may choose to vote by mail, a significant 
number may choose to vote in person. As a result, a merging credit union 
should be careful to conduct its special meeting in a manner conducive 
to accommodating all members wishing to attend, including selecting a 
meeting location that can accommodate the anticipated number of 
attendees and is conveniently located. The meeting should also be held 
on a day and time suitable to most members' schedules. A credit union 
should conduct its meeting in accordance with applicable Federal and 
State law, its bylaws, Robert's Rules of Order or other appropriate 
parliamentary procedures, and determine before the meeting the nature 
and scope of any discussion to be permitted.
    (d) Voting incentives. Some credit unions may wish to offer 
incentives to members, such as entry to a prize raffle, to encourage 
participation in the merger vote. The credit union must exercise care in 
the design and execution of such incentives.
    (1) The credit union should ensure that the incentive complies with 
all applicable State, Federal, and local laws.
    (2) The incentive should not be unreasonable in size. The cost of 
the incentive should have a negligible impact on the credit union's net 
worth ratio and the incentive should not be so large that it distracts 
the member from the purpose of the vote. If the board desires to use 
such incentives, the cost of the incentive should be included in the 
directors' deliberation and determination that the merger is in the best 
interests of the credit union's members.
    (3) The credit union should ensure that the incentive is available 
to every member that votes regardless of how or when he or she votes. 
All of the credit union's written materials promoting the incentive to 
the membership must disclose to the members, as required by 
Sec. 708a.311 of this part, that they have an equal opportunity to 
participate in the incentive program regardless of whether they vote for 
or against the merger. The credit union should also design its 
incentives so that they are available equally to all members who vote, 
regardless of whether they vote by mail or in person at the special 
meeting.
    (e) Solicitation of votes. Some credit unions may wish to contact 
members who have not voted and encourage them to vote on the merger 
proposal. NCUA believes, however, that using credit union employees to 
solicit votes is problematic. Employees directed to solicit votes could 
easily neglect everyday duties critical to the credit union's safe and 
sound operation. Also, employees may very well feel pressured to

[[Page 943]]

solicit votes for the merger, regardless of whether or not they support 
the merger. Accordingly, NCUA strongly encourages credit unions to use 
an independent third party to solicit votes rather than diverting credit 
union employees from their usual duties.



PART 708b_MERGERS OF FEDERALLY-INSURED CREDIT UNIONS; VOLUNTARY 
TERMINATION OR CONVERSION OF INSURED STATUS--Table of Contents



Sec.
708b.1  Scope.
708b.2  Definitions.

                            Subpart A_Mergers

708b.101  Mergers generally.
708b.102  Special provisions for federal insurance.
708b.103  Preparation of merger plan.
708b.104  Submission of merger proposal to the NCUA.
708b.105  Approval of merger proposal by the NCUA.
708b.106  Approval of the merger proposal by members.
708b.107  Certification of vote on merger proposal.
708b.108  Completion of merger.

     Subpart B_Voluntary Termination or Conversion of Insured Status

708b.201  Termination of insurance.
708b.202  Notice to members of proposal to terminate insurance.
708b.203  Conversion of insurance.
708b.204  Notice to members of proposal to convert insurance.
708b.205  Modifications to notice and ballot.
708b.206  Share insurance communications to members.

                             Subpart C_Forms

708b.301  Conversion of insurance (State Chartered Credit Union)
708b.302  Conversion of insurance (Federal Credit Union).
708b.303  Conversion of insurance through merger.

    Authority: 12 U.S.C. 1752(7), 1766, 1785, 1786, 1789.

    Source: 70 FR 3288, Jan. 24, 2005, unless otherwise noted.



Sec. 708b.1  Scope.

    (a) Subpart A of this partprescribes the procedures for merging one 
or more credit unions with a continuing credit union where at least one 
of the credit unions is federally-insured.
    (b) Subpart B of this partprescribes the procedures and notice 
requirements for termination of federal insurance or conversion of 
federal insurance to nonfederal insurance, including termination or 
conversion resulting from a merger.
    (c) Subpart C prescribes required forms for use in conversion of 
federal insurance to nonfederal insurance.
    (d) Nothing in this partrestricts or otherwise impairs the authority 
of the NCUA to approve a merger pursuant to section 205(h) of the Act.
    (e) This part does not address procedures or requirements that may 
be applicable under state law for a state credit union.



Sec. 708b.2  Definitions.

    Conducted by an independent entity means:
    (1) The independent entity will receive the ballots directly from 
voting members.
    (2) After the conclusion of the special meeting that ends the ballot 
period, the independent entity will open all the ballots in its 
possession and tabulate the results. The entity must not open or 
tabulate any ballots before the conclusion of the special meeting.
    (3) The independent entity will certify the final vote tally in 
writing to the credit union and provide a copy to the NCUA Regional 
Director. The certification will include, at a minimum, the number of 
members who voted, the number of affirmative votes, and the number of 
negative votes. During the course of the voting period the independent 
entity may provide the credit union with the names of members who have 
not yet voted, but may not provide any voting results to the credit 
union prior to certifying the final vote tally.
    Continuing credit union means the credit union that will continue in 
operation after the merger.

[[Page 944]]

    Convert, conversion, and converting, when used in connection with 
insurance, refer to the act of canceling federal insurance and 
simultaneously obtaining insurance from another insurance carrier. They 
mean that after cancellation of federal insurance the credit union will 
be nonfederally-insured.
    Federally-insured means insured by the National Credit Union 
Administration (NCUA) through the National Credit Union Share Insurance 
Fund (NCUSIF).
    Independent entity means a company with experience in conducting 
corporate elections. No official or senior manager of the credit union, 
or the immediate family members of any official or senior manager, may 
have any ownership interest in, or be employed by, the entity.
    Insurance and insured refer to primary share or deposit insurance. 
These terms do not include excess share or deposit insurance as referred 
to in part 740 of this chapter.
    Merger-related financial arrangement means a material increase in 
compensation (including indirect compensation, for example, bonuses, 
deferred compensation, or other financial rewards) or benefits that any 
board member or senior management official of a merging credit union may 
receive in connection with a merger transaction. For purposes of this 
definition, a material increase is an increase that exceeds the greater 
of 15 percent or $10,000.
    Merging credit union means the credit union that will cease to exist 
as an operating credit union at the time of the merger.
    Nonfederally-insured means insured by a private or cooperative 
insurance fund or guaranty corporation organized or chartered under 
state or territorial law.
    Regional Director means either the director for the NCUA Regional 
Office for the region where a natural person credit union's main office 
is located or the director of the NCUA's Office of Consumer Financial 
Protection and Access. For corporate credit unions, regional director 
means the director of NCUA's Office of National Examinations and 
Supervision.
    Secret ballot means no credit union employee or official can 
determine how a particular member voted. Credit union employees and 
officials are prohibited from assisting members in completing ballots or 
handling completed ballots.
    Senior management official means the chief executive officer (who 
may hold the title of president or treasurer/manager), any assistant 
chief executive officer, and the chief financial officer.
    Share insurance communication means any written communication, 
excluding the forms in subpart C of this part, that is made by or on 
behalf of a federally-insured credit union that is intended to be read 
by two or more credit union members and that mentions share insurance 
conversion or termination. The term:
    (1) Includes communications delivered or made available before, 
during, and after the credit union's board of directors decides to seek 
conversion or termination.
    (2) Includes, but is not limited to, communications delivered or 
made available by mail, e-mail, and internet website posting.
    (3) Does not include communications intended to be read only by the 
credit union's own employees or officials.
    State credit union means any credit union organized and operated 
according to the laws of any state, the several territories and 
possessions of the United States, or the Commonwealth of Puerto Rico. 
Accordingly, state authority means the appropriate state or territorial 
regulatory or supervisory authority for any such credit union.
    Terminate, termination, and terminating, when used in reference to 
insurance, refer to the act of canceling federal insurance and mean that 
the credit union will become uninsured.
    Uninsured means there is no share or deposit insurance available on 
the credit union accounts.

[70 FR 3288, Jan. 24, 2005, as amended at 75 FR 80680, Dec. 23, 2010; 75 
FR 81393, Dec. 28, 2010; 78 FR 32544, May 31, 2013; 81 FR 76496, Nov. 3, 
2016]

[[Page 945]]



                            Subpart A_Mergers



Sec. 708b.101  Mergers generally.

    (a) In any case where a merger will result in the termination of 
federal insurance or conversion to nonfederal insurance, the merging 
credit union must comply with the provisions of subparts B and C of this 
part in addition to this subpart A.
    (b) A federally-insured credit union must have the prior written 
approval of the NCUA before merging with any other credit union.
    (c) Where the continuing credit union is a federal credit union, it 
must be in compliance with the chartering policies of the NCUA.
    (d) Where the continuing or merging credit union is a state credit 
union, the merger must be permitted by state law or authorized by the 
state authority.
    (e) Where both the merging and continuing credit unions are 
federally-insured and the two credit unions have overlapping fields of 
membership, the continuing credit union must, within three months after 
completion of the merger, either:
    (1) Notify all members of the continuing credit union of the 
potential loss of insurance coverage if they had overlapping membership,
    (2) Notify all individuals and entities that were actually members 
of both credit unions of the potential loss of insurance coverage, or
    (3) Determine which members of both credit unions may actually have 
uninsured funds six months after the merger and notify those members of 
the potential loss of insurance coverage.



Sec. 708b.102  Special provisions for federal insurance.

    (a) Where the continuing credit union is federally-insured, the 
NCUSIF will assess a deposit and a prorated insurance premium (unless 
waived in whole or in part for all insured credit unions during that 
year) on the additional share accounts insured as a result of the merger 
of a nonfederally-insured or uninsured credit union with a federally-
insured credit union.
    (b) Where the continuing credit union is nonfederally-insured or 
uninsured but desires to be federally-insured as of the date of the 
merger, it must submit an application to the appropriate Regional 
Director when the merging credit union requests approval of the merger 
proposal. If the Regional Director approves the merger, the NCUSIF will 
assess a deposit and a prorated insurance premium (unless waived in 
whole or in part for all insured credit unions during that year) on any 
additional share accounts insured as a result of the merger.
    (c) Where the continuing credit union is nonfederally-insured or 
uninsured and does not make application for insurance, but the merging 
credit union is federally-insured, the continuing credit union is 
entitled to a refund of the merging credit union's NCUSIF deposit and to 
a refund of the unused portion of the NCUSIF share insurance premium (if 
any). If the continuing credit union is uninsured, the NCUSIF will make 
the refund only after expiration of the one-year period of continued 
insurance coverage noted in paragraph (e) of this section.
    (d) Where the continuing credit union is nonfederally-insured, 
NCUSIF insurance of the member accounts of a merging federally-insured 
credit union ceases as of the effective date of the merger.
    (e) Where the continuing credit union is uninsured, NCUSIF insurance 
of the member accounts of the merging federally-insured credit union 
will continue for a period of one year, subject to the restrictions in 
section 206(d)(1) of the Act.



Sec. 708b.103  Preparation of merger plan.

    (a) Upon the approval of a proposition for merger by the boards of 
directors of the credit unions, the two credit unions must prepare a 
plan for the proposed merger that includes:
    (1) Current financial statements for both credit unions;
    (2) Current delinquent loan summaries and analyses of the adequacy 
of the Allowance for Loan and Lease Losses account;
    (3) Consolidated financial statements, including an assessment of 
the generally accepted accounting principles (GAAP) net worth of each 
credit union before the merger and the GAAP net worth of the continuing 
credit union after the merger;

[[Page 946]]

    (4) Analyses of share values;
    (5) Explanation of any proposed share adjustments, and where the net 
worth ratio of the merging credit union is more than 500 basis points 
higher than the net worth ratio of the continuing credit union, an 
explanation of the factors considered in establishing the amount of any 
proposed adjustment or in determining no adjustment is necessary;
    (6) Explanation of any provisions for reserves, undivided earnings 
or dividends;
    (7) Description of any merger-related financial arrangement, as 
defined in Sec. 708b.2;
    (8) Provisions with respect to notification and payment of 
creditors;
    (9) Explanation of any changes relative to insurance such as life 
savings and loan protection insurance and insurance of member accounts;
    (10) Provisions for determining that all assets and liabilities of 
the continuing credit union will conform with the requirements of the 
Act (where the continuing credit union is a federal credit union); and
    (11) Proposed charter amendments (where the continuing credit union 
is a federal credit union). These amendments, if any, will usually 
pertain to the name of the credit union and the definition of its field 
of membership.
    (b) [Reserved]

[70 FR 3288, Jan. 24, 2005, as amended at 75 FR 81394, Dec. 28, 2010]



Sec. 708b.104  Submission of merger proposal to the NCUA.

    (a) Upon approval of the merger plan by the boards of directors of 
the credit unions, the credit unions must submit the following 
information to the Regional Director:
    (1) The merger plan, as described in this part;
    (2) Resolutions of the boards of directors;
    (3) Proposed Merger Agreement;
    (4) Proposed Notice of Special Meeting of the Members (for merging 
federal credit unions);
    (5) Copy of the form of Ballot to be sent to the members (for 
merging federal credit unions);
    (6) Evidence that the state's supervisory authority approves the 
merger proposal (for states that require such agreement before NCUA 
approval);
    (7) Application and Agreement for Insurance of Member Accounts (for 
continuing state credit unions desiring to become federally-insured);
    (8) If the merging credit union's assets on its latest call report 
are equal to or greater than the threshold amount established annually 
by the Federal Trade Commission under 15 U.S.C. 18a(a)(2)(B)(i), 
currently $63.4 million, a statement about whether the two credit unions 
intend to make a Hart-Scott-Rodino Act premerger notification filing 
with the Federal Trade Commission and, if not, an explanation why not; 
and
    (9) For mergers where the continuing credit union is not federally-
insured and will not apply for federal insurance:
    (i) A written statement from the continuing credit union that it 
``is aware of the requirements of 12 U.S.C. 1831t(b), including all 
notification and acknowledgment requirements''; and
    (ii) Proof that the accounts of the credit union will be accepted 
for coverage by the nonfederal insurer (if the credit union will have 
nonfederal insurance).
    (b) [Reserved]

[70 FR 3288, Jan. 24, 2005, as amended at 75 FR 81394, Dec. 28, 2010]



Sec. 708b.105  Approval of merger proposal by the NCUA.

    (a) In any case where the continuing credit union is federally-
insured and the merging credit union is nonfederally-insured or 
uninsured, the NCUA will determine the potential risk to the NCUSIF.
    (b) If the NCUA finds that the merger proposal complies with the 
provisions of this part and does not present an undue risk to the 
NCUSIF, it may approve the proposal subject to any other specific 
requirements as it may prescribe to fulfill the intended purposes of the 
proposed merger. For mergers of federal credit unions into federally-
insured credit unions, if the NCUA determines that the merging credit 
union is in danger of insolvency and that the proposed merger would 
reduce the risk or avoid a threatened loss to the NCUSIF, the NCUA may 
permit the

[[Page 947]]

merger to become effective without an affirmative vote of the membership 
of the merging credit union otherwise required by Sec. 708b.106 of this 
part.
    (c) NCUA may approve any proposed charter amendments for a 
continuing federal credit union contingent upon the completion of the 
merger. All charter amendments must be consistent with NCUA chartering 
policy.

[70 FR 3288, Jan. 24, 2005, as amended at 73 FR 30477, May 28, 2008]



Sec. 708b.106  Approval of the merger proposal by members.

    (a) When the merging credit union is a federal credit union, the 
members must:
    (1) Have the right to vote on the merger proposal in person at the 
annual meeting, if within 60 days after NCUA approval, or at a special 
meeting to be called within 60 days of NCUA approval, or by mail ballot, 
received no later than the date and time announced for the annual 
meeting or the special meeting called for that purpose.
    (2) Be given advance notice of the meeting in accordance with the 
provisions of Article IV, Meetings of Members, Federal Credit Union 
Bylaws. The notice must:
    (i) Specify the purpose of the meeting and the time and place;
    (ii) Contain a summary of the merger plan, including, but not 
necessarily limited to, current financial statements for each credit 
union, a consolidated financial statement for the continuing credit 
union, analyses of share values, explanation of any proposed share 
adjustments, explanation of any changes relative to insurance such as 
life savings and loan protection insurance and insurance of member 
accounts, and a detailed description of any merger related financial 
arrangement, as defined in Sec. 708b.2. The description must include the 
name and title of each individual recipient and an explanation of the 
financial impact of each element of the arrangement, including direct 
salary increases and any indirect compensation, such as any bonus, 
deferred compensation or other financial reward;
    (iii) State reasons for the proposed merger;
    (iv) Provide name and location, including branches, of the 
continuing credit union;
    (v) Inform the members that they have the right to vote on the 
merger proposal in person at the meeting or by written ballot to be 
received no later than the date and time announced for the annual 
meeting or the special meeting called for that purpose; and
    (vi) Be accompanied by a Ballot for Merger Proposal.
    (b) Approval of a proposal to merge a federal credit union into a 
federally-insured credit union requires the affirmative vote of a 
majority of the members of the merging credit union who vote on the 
proposal. If the continuing credit union is uninsured or nonfederally-
insured, the voting requirements of subpart B apply. If the continuing 
credit union is nonfederally-insured, the merging credit union must use 
the form notice and ballot in subpart C of this part unless the Regional 
Director approves the use of different forms.

[70 FR 3288, Jan. 24, 2005, as amended at 75 FR 81394, Dec. 28, 2010]



Sec. 708b.107  Certification of vote on merger proposal.

    The board of directors of the merging federal credit union must 
certify the results of the membership vote to the Regional Director 
within 10 days after the vote is taken. The certification must include 
the total number of members of record of the credit union, the number 
who voted on the merger, the number who voted in favor, and the number 
who voted against. If the continuing credit union is nonfederally-
insured, the merging credit union must use the certification form in 
subpart C of this part unless the Regional Director approves the use of 
a different form.

[70 FR 3288, Jan. 24, 2005, as amended at 75 FR 81394, Dec. 28, 2010]



Sec. 708b.108  Completion of merger.

    (a) Upon approval of the merger proposal by the NCUA and by the 
state supervisory authority (where the continuing or merging credit 
union is a state credit union) and by the members of each credit union 
where required,

[[Page 948]]

the credit unions may complete the merger.
    (b) Upon completion of the merger, the board of directors of the 
continuing credit union must certify the completion of the merger to the 
Regional Director within 30 days after the effective date of the merger.
    (c) Upon the NCUA's receipt of certification that the merger has 
been completed, the NCUA will cancel the charter of the merging federal 
credit union (if applicable) and the insurance certificate of any 
merging federally-insured credit union.



     Subpart B_Voluntary Termination or Conversion of Insured Status



Sec. 708b.201  Termination of insurance.

    (a) A state credit union may terminate federal insurance, if 
permitted by state law, either on its own or by merging into an 
uninsured credit union.
    (b) A federal credit union may terminate federal insurance only by 
merging into, or converting its charter to, an uninsured state credit 
union.
    (c) A majority of the credit union's members must approve a 
termination of insurance by affirmative vote. The vote must be taken by 
secret ballot and conducted by an independent entity.
    (d) Termination of federal insurance requires the NCUA's prior 
written approval. A credit union must notify the NCUA and request 
approval of the termination through the Regional Director in writing at 
least 90 days before the proposed termination date and within one year 
after obtaining the membership vote. The notice to the NCUA must 
include:
    (1) A written statement from the credit union that it ``is aware of 
the requirements of 12 U.S.C. 1831t(b), including all notification and 
acknowledgment requirements;'' and
    (2) A certification of the member vote that must include the total 
number of members of record of the credit union, the number who voted in 
favor of the termination, and the number who voted against.
    (e) The NCUA will approve or disapprove the termination in writing 
within 90 days after being notified by the credit union.

[70 FR 3288, Jan. 24, 2005, as amended at 75 FR 81394, Dec. 28, 2010]



Sec. 708b.202  Notice to members of proposal to terminate insurance.

    (a) When the board of directors of a federally-insured credit union 
adopts a resolution proposing to terminate federal insurance, including 
termination due to a merger or conversion of charter, it must provide 
its members with written notice of the proposal to terminate and of the 
date set for the membership vote. The first written communication 
following the resolution that is made by or on behalf of the credit 
union and that informs the members that the credit union will seek 
termination is the notice of the proposal to terminate. This notice 
must:
    (1) Inform the members of the requirement for a membership vote and 
the date for the vote;
    (2) Explain that the insurance provided by the NCUA is federal 
insurance and is backed by the full faith and credit of the United 
States government; and
    (3) Include a conspicuous statement that if the termination or 
merger is approved, and the credit union, or the continuing credit union 
in the case of a merger, subsequently fails, the federal government does 
not guarantee the member will get his or her money back.
    (b) The credit union must deliver the notice in person to each 
member, or mail it to each member at the address for the member as it 
appears on the records of the credit union, not more than 30 nor less 
than 7 days before the date of the vote. The membership must be given 
the opportunity to vote by mail ballot. The credit union may provide the 
notice of the proposal and the ballot to members at the same time.
    (c) If the membership and the NCUA approve the proposition for 
termination of insurance, the credit union must give the members prompt 
and reasonable notice of termination.



Sec. 708b.203  Conversion of insurance.

    (a) A federally-insured state credit union may convert to nonfederal 
insurance, if permitted by state law, either

[[Page 949]]

on its own or by merging into a nonfederally-insured credit union.
    (b) A federal credit union may convert to nonfederal insurance only 
by merging into, or converting its charter to, a nonfederally-insured 
state credit union.
    (c) Conversion to nonfederal insurance requires the prior written 
approval of the NCUA. After the credit union board of directors resolves 
to seek a conversion, the credit union must notify the Regional Director 
promptly, in writing, of the desired conversion and request NCUA 
approval of the conversion. The notification must be in the form 
specified in subpart C of this part, unless the Regional Director 
approves a different form. The credit union must provide this 
notification and request for approval to the Regional Director at least 
14 days before the credit union notifies its members and seeks their 
vote and at least 90 days before the proposed conversion date. NCUA will 
approve or disapprove the conversion as described in paragraph (g) of 
this section.
    (d) Approval of a conversion of Federal to nonfederal insurance 
requires the affirmative vote of a majority of the credit union's 
members who vote on the proposition, provided at least 20 percent of the 
total membership participates in the voting. The vote must be taken by 
secret ballot and conducted by an independent entity.
    (e) For all conversions, the notice to the NCUA must include:
    (1) A written statement from the credit union that ``it is aware of 
the requirements of 12 U.S.C. 1831t(b), including all notification and 
acknowledgment requirements;'' and
    (2) Proof that the nonfederal insurer is authorized to issue share 
insurance in the state where the credit union is located and that the 
insurer will insure the credit union.
    (f) The board of directors of the credit union and the independent 
entity that conducts the membership vote must certify the results of the 
membership vote to the NCUA within 14 calendar days after the deadline 
for receipt of votes. The certification must include the total number of 
members of record of the credit union, the number who voted on the 
conversion, the number who voted in favor of the conversion, and the 
number who voted against. The certification must be in the form 
specified in subpart C of this part.
    (g) Generally, the NCUA will conditionally approve or disapprove the 
conversion in writing within 14 days after receiving the certification 
of the vote. The credit union must complete the conversion within six 
months of the date of conditional approval. If a credit union fails to 
complete the conversion within six months the Regional Director will 
disapprove the conversion. The credit union's board of directors, if it 
still wishes to convert, must then adopt a new conversion proposal and 
solicit another member vote.
    (h) For conversions by merger, the merging credit unions must follow 
the procedures specified in subparts A and B of this part and use the 
forms specified in subpart C of this part. In the event the procedures 
of subpart A and B conflict, the credit union must follow subpart B.

[70 FR 3288, Jan. 24, 2005, as amended at 73 FR 30477, May 28, 2008; 75 
FR 81394, Dec. 28, 2010]



Sec. 708b.204  Notice to members of proposal to convert insurance.

    (a) When the board of directors of a federally-insured credit union 
adopts a resolution proposing to convert from federal to nonfederal 
insurance, including an insurance conversion associated with a merger or 
conversion of charter, it must provide its members with written notice 
of the proposal to convert insurance and of the date set for the 
membership vote. The first written communication following this 
resolution that is made by or on behalf of the credit union and that 
informs the members that the credit union will seek conversion of 
insurance is the notice of the proposal to convert. This notice must:
    (1) Inform the members of the requirement for a membership vote and 
the date for the vote;
    (2) Explain that the insurance provided by the NCUA is federal 
insurance and is backed by the full faith and credit of the United 
States government, while the insurance provided by

[[Page 950]]

the nonfederal insurer is not guaranteed by the federal or any state 
government;
    (3) Include a conspicuous statement that if the conversion or merger 
is approved, and the credit union, or the continuing credit union in the 
case of a merger, subsequently fails, the federal government does not 
guarantee the member will get his or her money back; and
    (4) Be in the form set forth in subpart C of this part, unless the 
Regional Director approves a different form.
    (b) The credit union must deliver the notice in person to each 
member or mail it to each member at the address for the member as it 
appears on the records of the credit union, not more than 30 nor less 
than 7 days before the date for the vote. The credit union must give the 
membership the opportunity to vote by mail ballot. The form of the 
ballot must be as set forth in subpart C of this part, unless the 
Regional Director approves the use of a different form. The notice of 
the proposal and the ballot may be provided to the members at the same 
time.
    (c) If the membership and the NCUA approve the proposition for 
conversion of insurance, the credit union will give prompt and 
reasonable notice to the membership. The credit union must deliver the 
notice at least 30 days before the effective date of the conversion. The 
notice must identify the effective date of the conversion, and the first 
page must also include a conspicuous statement (i.e., in bold and no 
smaller than any other font size used in the notice) that:
    (1) The conversion will result in the loss of federal share 
insurance, and
    (2) The credit union will, at any time before the effective date of 
conversion, permit all members who have share certificates or other term 
accounts to close the federally-insured portion of those accounts 
without an early withdrawal penalty.



Sec. 708b.205  Modifications to notice and ballot.

    (a) Converting credit unions will use the form notice and ballot as 
provided in subpart C of this part unless the Regional Director approves 
the use of a different form.
    (b) A converting credit union will provide the Regional Director 
with a copy of the notice and ballot, including any reasons for 
conversion and estimated costs of conversion, on or before the date the 
notice and ballot are mailed to the members.
    (c) Federally-insured state credit unions may include additional 
language in the notice and ballot regarding state requirements for 
mergers, where appropriate.



Sec. 708b.206  Share insurance communications to members.

    (a) Every share insurance communication must comply with Sec. 740.2 
of this chapter, which, in part, prohibits federally-insured credit 
unions from making any representation that is inaccurate or deceptive in 
any particular.
    (b) Every share insurance communication must contain the following 
conspicuous statement: ``IF YOU ARE A MEMBER OF THIS CREDIT UNION, YOUR 
ACCOUNTS ARE CURRENTLY INSURED BY THE NATIONAL CREDIT UNION 
ADMINISTRATION, A FEDERAL AGENCY. THIS FEDERAL INSURANCE IS BACKED BY 
THE FULL FAITH AND CREDIT OF THE UNITED STATES GOVERNMENT. IF THE CREDIT 
UNION CONVERTS TO PRIVATE INSURANCE WITH [insert name of private share 
insurer] AND THE CREDIT UNION FAILS, THE FEDERAL GOVERNMENT DOES NOT 
GUARANTEE THAT YOU WILL GET YOUR MONEY BACK.'' The statement must:
    (1) Appear on the first page of the communication where conversion 
is discussed and, if the communication is on an Internet Web site 
posting, the credit union must make reasonable efforts to make it 
visible without scrolling; and (2) Must be in capital letters, bolded, 
offset from the other text by use of a border, and at least one font 
size larger than any other text (exclusive of headings) used in the 
communication.
    (c) Every share insurance communication about share insurance 
termination must contain the following conspicuous statement: ``IF YOU 
ARE A MEMBER OF THIS CREDIT UNION, YOUR ACCOUNTS ARE CURRENTLY

[[Page 951]]

INSURED BY THE NATIONAL CREDIT UNION ADMINISTRATION, A FEDERAL AGENCY. 
THIS FEDERAL INSURANCE IS BACKED BY THE FULL FAITH AND CREDIT OF THE 
UNITED STATES GOVERNMENT. IF THE CREDIT UNION TERMINATES ITS FEDERAL 
INSURANCE AND THE CREDIT UNION FAILS, THE FEDERAL GOVERNMENT DOES NOT 
GUARANTEE THAT YOU WILL GET YOUR MONEY BACK.'' The statement must:
    (1) Appear on the first page of the communication where termination 
is discussed and, if the communication is on an internet website 
posting, the credit union must make reasonable efforts to make it 
visible without scrolling; and
    (2) Must be in capital letters, bolded, offset from the other text 
by use of a border, and at least one font size larger than any other 
text (exclusive of headings) used in the communication.
    (d) A converting credit union must provide the Regional Director 
with a copy of any share insurance communication that the credit union 
will make during the voting period. The Regional Director must receive 
the copy at or before the time the credit union makes it available to 
members. The converting credit union must inform the Regional Director 
when the communication is to be made, to which members it will be 
directed, and how it will be disseminated. For purposes of this section, 
the voting period begins on the date of the board of director's 
resolution to seek conversion or termination and ends on the date the 
member voting closes.
    (e) The Regional Director may take appropriate action, including 
disapproving a conversion, if he or she determines that a converting 
credit union, by inclusion or omission of information in a share 
insurance communication, materially mislead or misinformed its 
membership. For example, the Regional Director will treat any share 
insurance communication that compares the relative strength, safety, or 
claims paying ability of a private insurer with that of the National 
Credit Union Share Insurance Fund as materially misleading if the 
comparison fails to mention that the federal insurance provided by the 
NCUA is backed by the full faith and credit of the United States 
government.

[70 FR 3288, Jan. 24, 2005, as amended at 75 FR 81394, Dec. 28, 2010]



                             Subpart C_Forms



Sec. 708b.301  Conversion of insurance (State Chartered Credit Union).

    Unless the Regional Director approves the use of different forms, a 
state chartered credit union must use the forms in this section in 
connection with a conversion to nonfederal insurance.
    (a) Form letter notifying NCUA of intent to convert:

(insert name), NCUA Regional Director

(insert address of NCUA Regional Director)

Re: Notice of Intent to Convert to Private Share Insurance

Dear Director (insert name):
    In accordance with federal law at title 12, United States Code 
Section 1785(b)(1)(D), I request the National Credit Union 
Administration approve the conversion of (insert name of credit union) 
from federal share insurance to private primary share insurance with 
(insert name of private insurance company).
    On (insert date), the board of directors of (insert name of credit 
union) resolved to pursue the conversion from federal insurance to 
private insurance. A copy of the resolution is enclosed.
    On (insert date), the credit union plans to solicit the vote of our 
members on the conversion. The credit union will employ (insert name, 
address, and telephone number of independent entity) to conduct the 
member vote. The credit union will use the form notice and ballot 
required by NCUA regulations, and will certify the results to NCUA as 
required by NCUA regulations.
    Aside from the notice and ballot, the credit union (does)(does not) 
intend to provide its members with additional written information about 
the conversion. I understand that NCUA regulations forbid any 
communications to members, including communications about NCUA insurance 
or private insurance, that are inaccurate or deceptive.
    (Insert name of State) allows credit unions to obtain primary share 
insurance from (insert name of private insurance company). I have 
enclosed a copy of a letter from (insert name and title of state 
regulator) establishing that (insert name of private insurer) has the 
authority to provide (insert name of credit union) with primary share 
insurance.
    I have enclosed a copy of a letter from (insert name of private 
insurer) indicating it

[[Page 952]]

has accepted (insert name of credit union) for primary share insurance 
and will insure the credit union immediately upon the date that it loses 
its federal share insurance.
    I am aware of the requirements of 12 U.S.C. 1831t(b), including all 
notification and acknowledgment requirements.
    The point of contact for conversion matters is (insert name and 
title of credit union employee), who can be reached at (insert telephone 
number).

        Sincerely,

(signature)

Chief Executive Officer.

Enclosures

    (b) Form notice to members of intent to convert and special meeting 
of members:

Notice of Proposal to Convert to Nonfederally-Insured Status and Special 
                           Meeting of Members

                (Insert Name of Converting Credit Union)

    On (insert date), the board of directors of your credit union 
approved a proposition to convert from federal share (deposit) insurance 
to private insurance. You are encouraged to attend a special meeting of 
our credit union at (insert address) on (insert time and date) to 
address this proposition.

                           Purpose of Meeting

    The meeting has two purposes:
    1. To consider and act upon a proposal to convert your account 
insurance from federal insurance to private insurance.
    2. To approve the action of the Board of Directors in authorizing 
the officers of the credit union to carry out the proposed conversion.

                          Insurance Conversion

    Currently, your accounts have share insurance provided by the 
National Credit Union Administration, an agency of the federal 
government. The basic federal coverage is up to $100,000, but accounts 
may be structured in different ways, such as joint accounts, payable-on-
death accounts, or IRA accounts, to achieve federal coverage of much 
more than $100,000. If the conversion is approved, your federal 
insurance will terminate on the effective date of the conversion. 
Instead, your accounts in the credit union will be insured up to 
$(insert dollar amount) by (insert name of insurer), a corporation 
chartered by the State of (insert name of State). The federal insurance 
provided by the National Credit Union Administration is backed by the 
full faith and credit of the United States government. The private 
insurance you will receive from (insert name of insurer), however, is 
not guaranteed by the federal or any state or local government.

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
     IF THIS CONVERSION IS APPROVED, AND THE (insert name of credit
 
       union) FAILS, THE FEDERAL GOVERNMENT DOES NOT GUARANTEE YOU
 
                        WILL GET YOUR MONEY BACK.
 
------------------------------------------------------------------------

    Also, because this conversion, if approved, would result in the loss 
of federal share insurance, the credit union will, at any time between 
the approval of the conversion and the effective date of conversion and 
upon request by the member, permit all members who have share 
certificates or other term accounts to close the federally-insured 
portion of those accounts without an early withdrawal penalty. (This is 
an optional sentence. It may be deleted without the approval of the 
Regional Director. The members must be informed about this right, 
however, as described in 12 CFR 708b.204(c).)
    The board of directors has concluded that the proposed conversion is 
desirable for the following reasons: (insert reasons). (This is an 
optional paragraph. It may be deleted without the prior approval of the 
Regional Director.)
    The proposed conversion will result in the following one-time cost 
associated with the conversion: (List the total estimated dollar amount, 
including (1) the cost of conducting the vote, (2) the cost of changing 
the credit union's name and insurance logo, and (3) attorney and 
consultant fees.)
    The conversion must have the approval of a majority of members who 
vote on the proposal, provided at least 20 percent of the total 
membership participates in the voting.
    Enclosed with this Notice of Special Meeting is a ballot. If you 
cannot attend the meeting, please complete the ballot and return it to 
(insert name and address of independent entity conducting the vote) by 
no later than (insert time and date). To be counted, your ballot must 
reach us by that date and time.

    By order of the board of directors.

(signature of Board Presiding Officer)

(insert title and date)


[[Page 953]]


    (c) Form ballot:

          Ballot for Conversion to Nonfederally-Insured Status

                (Insert Name of Converting Credit Union)

Name of Member: (insert name)
Account Number: (insert account number)

    The credit union must receive this ballot by (insert date and time 
for vote). Please mail or bring it to: (Insert name of independent 
entity and address).
    I understand if the conversion of the (insert name of credit union) 
is approved, the National Credit Union Administration share (deposit) 
insurance I now have, up to $100,000, or possibly more if I use 
different account structures, will terminate upon the effective date of 
the conversion. Instead, my shares in the (insert name of credit union) 
will be insured up to $(insert dollar amount) by (insert name of 
insurer), a corporation chartered by the State of (insert name of 
state). The federal insurance provided by the National Credit Union 
Administration is backed by the full faith and credit of the United 
States Government. The private insurance provided by (insert name of 
insurer) is not.

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
        I FURTHER UNDERSTAND THAT IF THIS CONVERSION IS APPROVED
 
        AND THE (insert name of credit union) FAILS, THE FEDERAL
 
         GOVERNMENT DOES NOT GUARANTEE THAT I WILL GET MY MONEY
 
                                  BACK.
 
------------------------------------------------------------------------

    I vote on the proposal as follows (check one box):
    [  ] Approve the conversion to private insurance and authorize the 
Board of Directors to take all necessary action to accomplish the 
conversion.
    [  ] Do not approve the conversion to private insurance.

 Signed:________________________________________________________________
            (Insert printed member's name)
 Date:__________________________________________________________________

    (d) Form certification of member vote to NCUA:

   Certification of Vote on Conversion to Nonfederally-Insured Status

    We, the undersigned officers of the (insert name of converting 
credit union), certify the completion of the following actions:
    1. At a meeting on (insert date), the Board of Directors adopted a 
resolution to seek the conversion of our primary share insurance 
coverage from NCUA to (insert name of private insurer).
    2. Not more than 30 nor less than 7 days before the date of the 
vote, copies of the notice of special meeting and the ballot, as 
approved by the National Credit Union Administration, were mailed to our 
members.
    3. The credit union arranged for the conduct of a special meeting of 
our members at the time and place announced in the Notice to consider 
and act upon the proposed conversion.
    4. At the special meeting, the credit union arranged for an 
explanation of the conversion to the members present at the special 
meeting.
    5. The (insert name), an entity independent of the credit union, 
conducted the membership vote at the special meeting. The members voted 
as follows:
    (insert) Number of total members
    (insert) Number of members present at the special meeting
    (insert) Number of members present who voted in favor of the 
conversion
    (insert) Number of members present who voted against the conversion
    (insert) Number of additional written ballots in favor of the 
conversion
    (insert) Number of additional written ballots opposed to the 
conversion
    (insert ``20% or more'') OR (insert ``Less than 20%'') of the total 
membership voted. Of those who voted, a majority voted (insert ``in 
favor of'') OR (``against'') conversion.
    The action of the members at the special meeting was recorded in the 
minutes.
    This certification signed the (insert date).

(signature of Board Presiding Officer)
(insert typed name and title)
(signature of Board Secretary)
(insert typed name and title)

    I (insert name), an officer of the (insert name of independent 
entity that conducted the vote), hereby certify that the information 
recorded in paragraph 5 above is accurate.
    This certification signed the (insert date):

(signature of officer of independent entity)
(typed name, title, and phone number)

[70 FR 3288, Jan. 24, 2005, as amended at 73 FR 30477, May 28, 2008]

[[Page 954]]



Sec. 708b.302  Conversion of insurance (Federal Credit Union).

    Unless the Regional Director approves the use of different forms, a 
federal credit union must use the following forms in this section in 
connection with a conversion to a nonfederally-insured state charter.
    (a) Form letter notifying NCUA of intent to convert:

(insert name), NCUA Regional Director
(insert address of NCUA Regional Director)
Re: Notice of Intent To Convert to State Charter and to Private Share 
          Insurance

Dear Director (insert name):
    In accordance with federal law at title 12, United States Code 
Section 1785(b)(1)(D), I request the National Credit Union 
Administration approve the conversion of (insert name of federal credit 
union) to a state charter in (insert name of state) and from federal 
share insurance to private primary share insurance with (insert name of 
private insurance company).
    On (insert date), the board of directors of (insert name of credit 
union) resolved to pursue the charter conversion and the conversion from 
federal insurance to private insurance. A copy of the resolution is 
enclosed.
    On (insert date), the credit union plans to solicit the vote of our 
members on the conversion. The credit union will employ (insert name, 
address, and telephone number of independent entity) to conduct the 
vote. The credit union will use the form notice and ballot required by 
NCUA regulations, and will certify the results to NCUA as required by 
NCUA regulations.
    Aside from the notice and ballot, the credit union (does)(does not) 
intend to provide our members with additional written information about 
the conversion. I understand that NCUA regulations forbid any 
communications to members, including communications about NCUA insurance 
or private insurance, that are inaccurate or deceptive.
    I have enclosed a copy of a letter from (insert name and title of 
state regulator) indicating approval of our conversion to a state 
charter.
    (Insert name of State) allows credit unions to obtain primary share 
insurance from (insert name of private insurance company). I have 
enclosed a copy of a letter from (insert name and title of state 
regulator) establishing that (insert name of private insurer) has the 
authority to provide (insert name of credit union), after conversion to 
a state charter, with primary share insurance.
    I have enclosed a copy of a letter from (insert name of private 
insurer) indicating it has accepted (insert name of credit union) for 
primary share insurance and will insure the credit union immediately 
upon the date that it loses its federal share insurance.
    I am aware of the requirements of 12 U.S.C. 1831t(b), including all 
notification and acknowledgment requirements.
    Enclosed you will also find other information required by NCUA's 
Chartering and Field of Membership Manual, Chapter 4, Sec. III.C.
    The point of contact for conversion matters is (insert name and 
title of credit union employee), who can be reached at (insert telephone 
number).

        Sincerely,

(signature),
Chief Executive Officer.

Enclosures

    (b) Form notice to members of intent to convert and special meeting 
of members:

  Notice of Proposal To Convert to a State Charter and to Nonfederally-
              Insured Status and Special Meeting of Members

                (Insert Name of Converting Credit Union)

    On (insert date), the board of directors of your credit union 
approved a proposition to convert from federal share (deposit) insurance 
to private insurance and to convert from a federal credit union to a 
state-chartered credit union. You are encouraged to attend a special 
meeting of our credit union at (insert address) on (insert time and 
date) to address this proposition.

                           Purpose of Meeting

    The meeting has two purposes:
    1. To consider and act upon a proposal to convert your credit union 
from a federal charter to a state charter and your account insurance 
from federal insurance to private insurance.
    2. To approve the action of the Board of Directors in authorizing 
the officers of the credit union to carry out the proposed conversion.

                          Insurance Conversion

    Currently, your accounts have share insurance provided by the 
National Credit Union Administration, an agency of the federal 
government. The basic federal coverage is up to $100,000, but accounts 
may be structured in different ways, such as joint accounts, payable-on-
death accounts, or IRA accounts, to achieve federal coverage of much 
more than $100,000. If the conversion is approved, your federal 
insurance will terminate on the effective date of the conversion. 
Instead, your accounts in the credit union will be insured up to 
$(insert dollar amount) by (insert name of insurer), a corporation 
chartered by

[[Page 955]]

the State of (insert name of State). The federal insurance provided by 
the National Credit Union Administration is backed by the full faith and 
credit of the United States government. The private insurance you will 
receive from (insert name of insurer), however, is not guaranteed by the 
federal or any state or local government.

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
     IF THIS CONVERSION IS APPROVED, AND THE (insert name of credit
 
       union) FAILS, THE FEDERAL GOVERNMENT DOES NOT GUARANTEE YOU
 
                        WILL GET YOUR MONEY BACK.
 
------------------------------------------------------------------------

    Also, because this conversion, if approved, would result in the loss 
of federal share insurance, the credit union will, at any time between 
the approval of the conversion and the effective date of conversion and 
upon request of the member, permit all members who have share 
certificates or other term accounts to close the federally-insured 
portion of those accounts without an early withdrawal penalty. (This is 
an optional sentence. It may be deleted without the approval of the 
Regional Director. The members must be informed about this right, 
however, as described in 12 CFR 708b.204(c).)
    The board of directors has concluded that the proposed conversion is 
desirable for the following reasons: (Insert reasons). (This is an 
optional paragraph. It may be deleted without the approval of the 
Regional Director.).
    The proposed conversion will result in the following one-time cost 
associated with the conversion: (List the total estimated dollar amount, 
including (1) the cost of conducting the vote, (2) the cost of changing 
the credit union's name and insurance logo, and (3) attorney and 
consultant fees.)
    The conversion must have the approval of a majority of members who 
vote on the proposal, provided at least 20 percent of the total 
membership participates in the voting.
    Enclosed with this Notice of Special Meeting is a ballot. If you 
cannot attend the meeting, please complete the ballot and return it to 
(insert name and address of independent entity conducting the vote) by 
no later than (insert time and date). To be counted, your ballot must 
reach us by that date and time.

    By order of the board of directors.

(signature of Board Presiding Officer)

(insert title and date)

    (c) Form ballot:

 Ballot for Conversion to State Charter and Nonfederally-Insured Status

                (Insert Name of Converting Credit Union)

Name of Member: (insert name)
Account Number: (insert account number)

    The credit union must receive this ballot by (insert date and time 
for vote). Please mail or bring it to: (Insert name of independent 
entity and address).
    I understand if the conversion of the (insert name of credit union) 
is approved, the National Credit Union Administration share (deposit) 
insurance I now have, up to $100,000, or possibly more if I use 
different accounts structures, will terminate upon the effective date of 
the conversion. Instead, my shares in the (insert name of credit union) 
will be insured up to $(insert dollar amount) by (insert name of 
insurer), a corporation chartered by the State of (insert name of 
state). The federal insurance provided by the National Credit Union 
Administration is backed by the full faith and credit of the United 
States Government. The private insurance provided by (insert name of 
insurer) is not.

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
        I FURTHER UNDERSTAND THAT, IF THIS CONVERSION IS APPROVED
 
        AND THE (insert name of credit union) FAILS, THE FEDERAL
 
         GOVERNMENT DOES NOT GUARANTEE THAT I WILL GET MY MONEY
 
                                  BACK.
 
------------------------------------------------------------------------


[[Page 956]]

    I vote on the proposal as follows (check one box):
    [  ] Approve the conversion of charter and conversion to private 
insurance and authorize the Board of Directors to take all necessary 
action to accomplish the conversion.
    [  ] Do not approve the conversion of charter and the conversion to 
private insurance.

 Signed:________________________________________________________________
            (Insert printed member's name)
 Date:__________________________________________________________________

    (d) Form certification to NCUA of member vote:

 Certification of Vote on Conversion to State Charter and Nonfederally-
                             Insured Status

    We, the undersigned officers of the (insert name of converting 
credit union), certify the completion of the following actions:
    1. At a meeting on (insert date), the Board of Directors adopted a 
resolution to seek the conversion of our credit union to a state charter 
and the conversion of our primary share insurance coverage from NCUA to 
(insert name of private insurer).
    2. Not more than 30 nor less than 7 days before the date of the 
vote, copies of the notice of special meeting and ballot, as approved by 
the National Credit Union Administration, were mailed to our members.
    3. The credit union arranged for the conduct of a special meeting of 
our members at the time and place announced in the Notice to consider 
and act upon the proposed conversion.
    4. At the special meeting, the credit union arranged for an 
explanation of the conversion to the members present at the special 
meeting.
    5. The (insert name), an entity independent of the credit union, 
conducted the membership vote at the special meeting. The members voted 
as follows:
    (insert) Number of total members
    (insert) Number of members present at the special meeting
    (insert) Number of members present who voted in favor of the 
conversion
    (insert) Number of members present who voted against the conversion
    (insert) Number of additional written ballots in favor of the 
conversion
    (insert) Number of additional written ballots opposed to the 
conversion
    (insert ``20% or more'') OR (insert ``Less than 20%'') of the total 
membership voted. Of those who voted, a majority voted (inset ``in favor 
of'') OR (``against'') conversion.
    The action of the members at the special meeting was recorded in the 
minutes.
    This certification signed the (insert date).

(signature of Board Presiding Officer)
(insert typed name and title)
(signature of Board Secretary)
(insert typed name and title)

    I (insert name), an officer of the (insert name of independent 
entity that conducted the vote), hereby certify that the information 
recorded in paragraph 5 above is accurate.
    This certification signed the (insert date):

(signature of officer of independent entity)
(typed name, title, and phone number)

[70 FR 3288, Jan. 24, 2005, as amended at 73 FR 30477, May 28, 2008; 75 
FR 34621, June 18, 2010]



Sec. 708b.303  Conversion of insurance through merger.

    Unless the Regional Director approves the use of different forms, a 
federally-insured credit union that is merging into a nonfederally-
insured credit union must use the forms in this section.
    (a) Form notice to members of intent to merge and convert and 
special meeting of members:

     Notice of Special Meeting on Proposal To Merge and Convert to 
                       Nonfederally-Insured Status

                  (Insert Name of Merging Credit Union)

    On (insert date), the Board of Directors of your credit union 
approved a proposition to merge with (insert name of continuing credit 
union) and to convert from federal share (deposit) insurance to private 
insurance. You are encouraged to attend a special meeting of our credit 
union at (insert address) on (insert time and date).

                           Purpose of Meeting

    The meeting has two purposes:
    1. To consider and act upon a proposal to merge our credit union 
with (insert name of continuing credit union), the continuing credit 
union.
    2. To approve the action of the Board of Directors of our credit 
union in authorizing the officers of the credit union, subject to member 
approval, to carry out the proposed merger.
    If this merger is approved, our credit union will transfer all its 
assets and liabilities to the continuing credit union. As a member of 
our credit union, you will become a member of the continuing credit 
union. On the effective date of the merger, you will receive shares in 
the continuing credit union for the shares you own now in our credit 
union.

                          Insurance Conversion

    Currently, your accounts have share insurance provided by the 
National Credit Union Administration, an agency of the federal 
government. The basic federal coverage is up

[[Page 957]]

to $100,000, but accounts may be structured in different ways, such as 
joint accounts, payable-on-death accounts, or IRA accounts, to achieve 
federal coverage of much more than $100,000. If the merger is approved, 
your federal insurance will terminate on the effective date of the 
merger. Instead, your accounts in the credit union will be insured up to 
$(insert dollar amount) by (insert name of insurer), a corporation 
chartered by the State of (insert name of State). The federal insurance 
provided by the National Credit Union Administration is backed by the 
full faith and credit of the United States government. The private 
insurance you will receive from (insert name of insurer), however, is 
not guaranteed by the federal or any state or local government.

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
      IF THIS MERGER IS APPROVED AND THE (insert name of continuing
 
          credit union) FAILS, THE FEDERAL GOVERNMENT DOES NOT
 
                 GUARANTEE YOU WILL GET YOUR MONEY BACK.
 
------------------------------------------------------------------------

    Also, because this merger, if approved, would result in the loss of 
federal share insurance, the (insert name of merging credit union) will, 
at any time between the approval of the merger and the effective date of 
merger and upon request of the member, permit all members who have share 
certificates or other term accounts to close the federally-insured 
portion of those accounts without an early withdrawal penalty. (This is 
an optional sentence. It may be deleted without the approval of the 
Regional Director. The members must be informed about this right, 
however, as described in 12 CFR 708b.204(c).)

            Other Information Related to the Proposed Merger

    The directors of the participating credit unions carefully analyzed 
the assets and liabilities of the participating credit unions and 
appraised each credit union's share values. The appraisal of the share 
values appears on the attached individual and consolidated financial 
statements of the participating credit unions.
    The directors of the participating credit unions have concluded that 
the proposed merger is desirable for the following reasons: (insert 
reasons)
    The Board of Directors of our credit union believes the merger 
should include/not include an adjustment in shares for the following 
reasons: (insert reasons)
    The main office of the continuing credit union will be as follows: 
(insert location)
    The branch office(s) of the continuing credit union will be as 
follows: (insert locations)
    The merger must have the approval of a majority of members who vote 
on the proposal, provided at least 20 percent of the total membership 
participates in the voting.
    Enclosed with this Notice of Special Meeting is a Ballot for Merger 
Proposal and Conversion to Nonfederally-insured Status. If you cannot 
attend the meeting, please complete the ballot and return it to (insert 
name of independent entity conducting vote) at (insert mailing address) 
by no later than (insert date and time). To be counted, your ballot must 
reach (insert name of independent entity conducting vote) by the date 
and time announced for the meeting.

    By order of the board of directors.

(signature of Board Presiding Officer)
(insert name and title of Board Presiding Officer) (insert date)

    (b) Form ballot:

Ballot for Merger Proposal and Conversion to Nonfederally-Insured Status

Name of Member: (insert name)
Account Number: (insert account number)

    The credit union must receive this ballot by (insert date and time 
for vote). Please mail or bring it to: (Insert name of independent 
entity and address)
    I understand if the merger or conversion of the (insert name of 
merging credit union) into the (insert name of continuing credit union) 
is approved, the National Credit Union Administration share (deposit) 
insurance I now have, up to $100,000, or possibly more if I use 
different account structures, will terminate upon the effective date of 
the conversion. Instead, my shares in the (insert name of credit union) 
will be insured up to $(insert dollar amount) by (insert name of 
insurer), a corporation chartered by the State of (insert name of 
state). The federal insurance provided by the National Credit Union 
Administration is backed by the full faith and credit of the United 
States Government. The private insurance provided by (insert name of 
insurer) is not.

[[Page 958]]



------------------------------------------------------------------------
 
-------------------------------------------------------------------------
        I FURTHER UNDERSTAND THAT, IF THIS MERGER IS APPROVED AND
 
     THE (insert name of continuing credit union) FAILS, THE FEDERAL
 
         GOVERNMENT DOES NOT GUARANTEE THAT I WILL GET MY MONEY
 
                                  BACK.
 
------------------------------------------------------------------------

    I vote on the proposal as follows (check one box):
    [  ] Approve the merger and the conversion to private insurance and 
authorize the Board of Directors to take all necessary action to 
accomplish the merger and conversion.
    [  ] Do not approve the merger and the conversion to private 
insurance.

 Signed:________________________________________________________________
            (Insert printed member's name)
 Date:__________________________________________________________________

    (c) Form certification of vote:

Certification of Vote on Merger Proposal and Conversion to Nonfederally-
       Insured Status of the (Insert Name of Merging Credit Union)

    We, the undersigned officers of the (insert name of merging credit 
union), certify the completion of the following actions:
    1. At a meeting on (insert date), the Board of Directors adopted a 
resolution approving the merger of our credit union with (insert name of 
continuing credit union).
    2. Not more than 30 nor less than 7 days before the date of the 
vote, copies of the notice of special meeting and the ballot, as 
approved by the National Credit Union Administration, and a copy of the 
merger plan announced in the notice, were mailed to our members.
    3. The credit union arranged for the conduct of a special meeting of 
our members at the time and place announced in the Notice to consider 
and act upon the proposed merger.
    4. At the special meeting, the credit union arranged for an 
explanation of the merger proposal and any changes in federally-insured 
status to the members present at the special meeting.
    5. The (insert name), and entity independent of the credit union, 
conducted the membership vote at the special meeting. At least 20 
percent of our total membership voted and a majority of voting members 
favor the merger as follows:
    (insert) Number of total members
    (insert) Number of members present at the special meeting
    (insert) Number of members present who voted in favor of the merger
    (insert) Number of members present who voted against the merger
    (insert) Number of additional written ballots in favor of the merger
    (insert) Number of additional written ballots opposed to the merger
    6. The action of the members at the special meeting was recorded in 
the minutes.
    This certification signed the (insert date):

(signature of Board Presiding Officer)
(insert typed name and title)
(signature of Board Secretary)
(insert typed name and title)

    I (insert name), an officer of the (insert name of independent 
entity that conducted the vote), hereby certify that the information 
recorded in paragraph 5 above is accurate.
    This certification signed the (insert date):

(signature of officer of independent entity)
(typed name, title, and phone number)

[70 FR 3288, Jan. 24, 2005, as amended at 73 FR 30477, May 28, 2008]



PART 709_INVOLUNTARY LIQUIDATION OF FEDERAL CREDIT UNIONS AND 
ADJUDICATION OF CREDITOR CLAIMS INVOLVING FEDERALLY INSURED CREDIT
UNIONS IN LIQUIDATION--Table of Contents



Sec.
709.0  Scope.
709.1  Definitions.
709.2  NCUA Board as liquidating agent.
709.3  Challenge to revocation of charter and involuntary liquidation.
709.4  Powers and duties of liquidating agent.
709.5  Payout priorities in involuntary liquidation.
709.6  Initial determination of creditor claims by the liquidating 
          agent.
709.7  Procedures for appeal of initial determination.
709.8  Administrative appeal of the initial determination.
709.9  Expedited determination of creditor claims.
709.10  Treatment by conservator or liquidating agent of financial 
          assets transferred in connection with a securitization or 
          participation.

[[Page 959]]

709.11  Treatment by conservator or liquidating agent of collateralized 
          public funds.
709.12  Prepayment fees to Federal Home Loan Bank.
709.13  Treatment of swap agreements in liquidation or conservatorship.

    Authority: 12 U.S.C. 1757, 1766, 1767, 1786(h), 1787, 1788, 1789, 
1789a.

    Source: 56 FR 56925, Nov. 7, 1991, unless otherwise noted.



Sec. 709.0  Scope.

    The rules and procedures in this part apply to charter revocations 
of federal credit unions under 12 U.S.C. 1787(a)(1)(A), (B), the 
involuntary liquidation and adjudication of creditor claims in all cases 
involving federally-insured credit unions, the treatment by the Board as 
conservator or liquidating agent of financial assets transferred in 
connection with a securitization or participation or of public funds 
held by a federally-insured credit union, and the allowance of 
prepayment fees to Federal Home Loan Banks under specified conditions. 
Remaining sections of this part are applicable to all federally insured 
credit unions. This part does not apply to share insurance claims 
arising out of the liquidation of a federally insured credit union. 
Insurance claims are decided pursuant to part 745 of this chapter.

[56 FR 56925, Nov. 7, 1991, as amended at 65 FR 55442, Sept. 14, 2000; 
66 FR 11230, Feb. 23, 2001; 66 FR 40575, Aug. 3, 2001]



Sec. 709.1  Definitions.

    For the purposes of this part, the following definitions apply:
    (a) General Counsel means the General Counsel of the National Credit 
Union Administration or any attorney assigned to the General Counsel's 
staff.
    (b) Liquidating Agent means the NCUA Board or person(s) appointed by 
it with delegated authority to carry out the liquidation of the credit 
union.
    (c) Insolvent means insolvent as that term is defined in Sec. 700.2 
of this chapter.
    (d) Claim means a creditor's claim against the credit union in 
liquidation. This term does not include insurance claims arising out of 
the liquidation of a federally insured credit union. Insurance claims 
are decided pursuant to part 745 of this chapter.
    (e) Shareholder means members, nonmembers, accountholders or any 
other party or entity that is the owner of a share, share certificate or 
share draft account or the equivalent of such accounts under state law.

[56 FR 56925, Nov. 7, 1991, as amended at 69 FR 27828, May 17, 2004; 78 
FR 32545, May 31, 2013]



Sec. 709.2  NCUA Board as liquidating agent.

    (a) The Board, as liquidating agent, by operation of law and without 
any conveyance or other instrument, act or deed, shall succeed to all 
the rights, titles, powers, and privileges of the credit union, and of 
its shareholders, officers, and directors, with respect to the credit 
union and its assets, and such shareholders, officers, or directors, 
shall not thereafter have or exercise any such rights, powers, or 
privileges or act in connection with any assets or property of any 
nature of the credit union.
    (b) The Board, as liquidating agent, shall take possession of and 
title to books, records, and assets of every description of such credit 
union to which such credit union has rights of possession and title to 
all offices and other facilities of such credit union.



Sec. 709.3  Challenge to revocation of charter and involuntary 
liquidation.

    If a Federal credit union is determined to be insolvent and placed 
into liquidation pursuant to 12 U.S.C. 1787, the Federal credit union 
may, not later than 10 days after the date on which the Board closes the 
credit union for liquidation, apply to the United States District Court 
for the Judicial district in which the principal office of the credit 
union is located or the United States District Court for the District of 
Columbia for an order requiring the Board to show cause why it should 
not be prohibited from continuing such liquidation. Notwithstanding 
other provisions of this part, the board of directors of the credit 
union may meet following the placing of the institution into liquidation 
for the sole purpose of considering and authorizing the filing

[[Page 960]]

of this action in the name of the credit union. No such action in the 
name of the credit union may be instituted without the authorization of 
the board of directors of the institution pursuant to a valid board of 
directors resolution. No credit union funds shall be available to pay 
expenses incurred in bringing a legal action to challenge the Board's 
liquidation action.



Sec. 709.4  Powers and duties of liquidating agent.

    (a) Inventory of assets. As soon as practicable after taking 
possession, the liquidating agent shall inventory the assets of such 
credit union as of the date of taking possession, showing the value as 
carried on the books of the credit union, and the security therefore, if 
any, a brief description of the assets and any security, and a record of 
the credit union's creditor and accounts liabilities.
    (b) Notice to creditors. The liquidating agent shall promptly 
publish a notice to the credit union's creditors to present their 
claims, together with proof, to the liquidating agent by a date 
specified in the notice. This date shall be not less than 90 days after 
the publication of the notice. The liquidating agent shall republish 
such notice approximately one and two months, respectively, after the 
initial publication. At the time of initial publication, the liquidating 
agent shall mail a notice similar to the published notice to any 
creditor shown on the credit union's books at the last address appearing 
therein. If the liquidating agent discovers the name of a creditor whose 
name does not appear on the credit union's books, a notice similar to 
the published notice shall be mailed to such creditor within 30 days 
after the discovery of the name and address.
    (c) General. The liquidating agent shall collect all obligations and 
money due such credit union and may, to the extent consistent with its 
appointment, do all things desirable or expedient in its discretion to 
wind up the affairs of the credit union including, but not limited to, 
the following:
    (1) Exercise all rights and powers of the credit union including, 
but not limited to, any rights and powers under any mortgage, deed of 
trust, chose in action, option, collateral note, contract, judgment or 
decree, or instrument of any nature;
    (2) Institute, prosecute, maintain, defend, intervene, and otherwise 
participate in any and all actions, suits, or other legal proceedings by 
and against the liquidating agent or the credit union or in which the 
liquidating agent, the credit union, or its creditors or shareholders, 
or any of them, shall have an interest, and in every way to represent 
the credit union, its shareholders and creditors, subject to the 
direction of General Counsel;
    (3) Employ on a salary or fee basis such persons as in the judgment 
of the liquidating agent are necessary or desirable to carry out its 
responsibilities and functions, including, but not limited to, 
appraisers and Certified Public Accountants, and pay the costs out of 
the assets of the liquidated credit union;
    (4) Employ or retain any attorney or attorneys designated by, or 
acceptable to, the General Counsel in connection with litigation or for 
legal advice and assistance, for the liquidation generally or in 
particular instances, and pay compensation and retainers of such 
attorney or attorneys, together with all expenses, including, but not 
limited to, the costs and expenses of any litigation, as approved by the 
General Counsel, out of the assets of the liquidated credit union;
    (5) Execute, acknowledge, and deliver any and all deeds, contracts, 
leases, assignments, bills of sale, releases, extensions, satisfactions, 
and other instruments necessary or proper for any purposes, including, 
but not limited to, the effectuation, termination, or transfer of real, 
personal or mixed property, or that shall be necessary or proper to 
liquidate the credit union, and any deed or other instrument executed 
pursuant to the authority hereby given shall be as valid and effective 
for all purposes as if the same had been executed as the act and deed of 
the credit union;
    (6) With concurrence of General Counsel, disaffirm or repudiate any 
contract or lease to which the credit union is a party, the performance 
of which the liquidating agent, in his sole

[[Page 961]]

discretion, determines to be burdensome, and which disaffirmance or 
repudiation in the liquidating agent's sole discretion will promote the 
orderly administration of the credit union's affairs;
    (7) Deposit, withdraw, or transfer funds, and otherwise exercise 
complete control over all investment or depository accounts maintained 
by or for the credit union at financial dispository or similar 
institutions;
    (8) Do such things, and have such rights, powers, privileges, 
immunities, and duties, whether or not otherwise granted in this part 
709, as shall be authorized, directed, conferred, or imposed from time 
to time by the Board, or as shall be conferred by the Federal Credit 
Union Act;
    (9) Exercise such other authority as is conferred by the Federal 
Credit Union Act; and
    (10) Where acting as liquidating agent for a state-chartered 
federally insured credit union, exercise all the rights, powers, and 
privileges granted by state law to such a liquidating agent.
    (d) Expenditure of funds of the liquidation. The liquidating agent 
shall have power to:
    (1) Pay all costs and expenses of the liquidation as determined by 
the liquidating agent;
    (2) Pay off and discharge taxes and liens;
    (3) Pay out and expend such sums as are deemed necessary or 
advisable for or in connection with the preservation, maintenance, 
conservation, protection, remodeling, repair, rehabilitation, or 
improvement of any asset or property of any nature of the credit union 
or the liquidating agent;
    (4) Pay off and discharge any assessments, liens, claims, or charges 
of any kind against any asset or property of any nature on which the 
credit union or the liquidating agent has a lien by way of mortgage, 
deed of trust, pledge, or otherwise, or in which the credit union or 
liquidating agent has any interest;
    (5) Settle, compromise, or obtain the release of, for cash or other 
consideration, claims and demands against the credit union or the 
liquidating agent; and
    (6) Indemnify its employees and agents from the assets of the credit 
union against liabilities incurred in the good faith performance of 
their duties.
    (e) Assets, claims, and contracts. The liquidating agent shall have 
power to:
    (1) Sell for cash or on terms, exchange, assign, or otherwise 
dispose of, in whole or in part, any or all of the assets and property 
of the credit union, real, personal and mixed, tangible and intangible, 
of any nature, including any mortgage, deed of trust, chose in action, 
bond, note, contract, judgment, or decree, share or certificate of share 
of stock or debt, owing to the credit union or the liquidating agent; 
and
    (2) Surrender, abandon, and release any chose in action, or other 
assets or property of any nature, whether the subject of pending 
litigation or not, and settle, compromise, modify, or release, for cash 
or other consideration, claims and demands in favor of the credit union 
or the liquidating agent.

[56 FR 56925, Nov. 7, 1991, as amended at 75 FR 34621, June 18, 2010]



Sec. 709.5  Payout priorities in involuntary liquidation.

    (a) Claimants whose claims are secured shall receive their security. 
To the extent their respective claims exceed the value of the security 
for those claims, as determined to the satisfaction of the liquidating 
agent, they shall each have an unsecured claim against the credit union 
having priority as provided in paragraph (b) of this section.
    (b) Unsecured claims against the liquidation estate that are proved 
to the satisfaction of the liquidating agent shall have priority in the 
following order:
    (1) Administrative costs and expenses of liquidation;
    (2) Claims for wages and salaries, including vacation, severance, 
and sick leave pay;
    (3) Taxes legally due and owing to the United States or any state or 
subdivision thereof;
    (4) Debts due and owing the United States, including the National 
Credit Union Administration;

[[Page 962]]

    (5) General creditors, and secured creditors (to the extent that 
their respective claims exceed the value of the security for those 
claims);
    (6) Shareholders to the extent of their respective uninsured shares 
and the National Credit Union Share Insurance Fund to the extent of its 
payment of share insurance;
    (7) in a case involving liquidation of a corporate credit union, 
holders of then-outstanding membership capital accounts and nonperpetual 
capital accounts or instruments to the extent not depleted in a calendar 
year prior to the date of liquidation and also subject to the capital 
priority option described in appendix A of part 704 of this chapter;
    (8) In a case involving liquidation of a low-income designated 
credit union, any outstanding secondary capital accounts issued pursuant 
to the authority of Sec. 701.34 or Sec. 741.204(c) of this chapter; and
    (9) in a case involving liquidation of a corporate credit union, 
holders of then-outstanding paid in capital or perpetual contributed 
capital instruments to the extent not depleted in a calendar year prior 
to the date of liquidation and also subject to the capital priority 
option described in appendix A of part 704 of this chapter;
    (c) Priorities are to be based on the circumstances that exist on 
the date of liquidation.
    (d) If the repudiation or disaffirmance of any contract or lease 
gives rise to a claim for damages, such claim shall be considered a 
general creditor claim under paragraph (b)(5) of this section and not a 
cost or expense of liquidation under paragraph (b)(1) of this section.
    (e) All unsecured claims of any category or class or priority 
described in paragraphs (b)(1) through (b)(7) of this section shall be 
paid in full, or provisions made for such payment, before any claims of 
lesser priority are paid. If there are insufficient funds to pay all 
claims of a category or class, payment shall be made pro rata. 
Notwithstanding anything to the contrary herein, the liquidating agent 
may, at any time, and from time to time, prior to the payment in full of 
all claims of a category or class with higher priority, make such 
distributions to claimants in priority categories described in 
paragraphs (b)(1), (b)(2), (b)(3), (b)(4), and (b)(5) of this section as 
the liquidating agent believes are reasonably necessary to conduct the 
liquidation, provided that the liquidating agent determines that 
adequate funds exist or will be recovered during the liquidation to pay 
in full all claims of any higher priority. If a surplus remains after 
making distribution in full on all allowed claims described in 
paragraphs (b)(1) through (b)(9) of this section, such surplus shall be 
distributed pro rata to the credit union's shareholders.

[56 FR 56825, Nov. 7, 1991, as amended at 61 FR 3791, Feb. 2, 1996; 62 
FR 12949, Mar. 19, 1997; 64 FR 57365, Oct. 25, 1999; 75 FR 64859, Oct. 
20, 2010]



Sec. 709.6  Initial determination of creditor claims by the 
liquidating agent.

    (a)(1) Any party wishing to submit a claim against the liquidated 
credit union must submit a written proof of claim in accordance with the 
requirements set forth in the notice to creditors. A failure to submit a 
written claim within the time provided in the notice to creditors shall 
be deemed a waiver of said claim and claimant shall have no further 
rights or remedies with respect to such claim.
    (2) Notwithstanding paragraph (a)(1) of this section, the 
liquidating agent may, at his discretion, consider an untimely claim 
provide the following two criteria are present:
    (i) The claimant did not receive notice of the appointment of the 
liquidating agent in time to file a claim before the date provided for 
in the notice; and
    (ii) The claim is filed in time to permit payment of the claim.
    (b) The liquidating agent may require submission of supplemental 
evidence by the claimant and by interested parties in the event of a 
dispute concerning a claim against any asset of the liquidated credit 
union. In requiring the submission of supplemental evidence, the 
liquidating agent may set such limitations of time, scope, and size as 
the liquidating agent deems reasonable in the circumstances, and may

[[Page 963]]

refuse to include in the record submissions or portions of submissions 
not in compliance with such limitations or requirements. The liquidating 
agent shall compile such written record of a claim or dispute as, in its 
discretion, is deemed sufficient to provide a reasonable basis for 
allowing or disallowing a claim or resolving a dispute. This written 
record shall be considered the administrative record.
    (c) The liquidating agent shall determine whether to allow or 
disallow a claim and shall notify the claimant within 180 days from the 
date a claim against a credit union is filed pursuant to paragraph 
(a)(1) of the section. This 180-day period may be extended by written 
agreement between the claimant and the liquidating agent. Failure by the 
liquidating agent to determine a claim and notify the claimant within 
the 180-day period or, if the period is extended, within the extended 
period, shall be deemed a denial of the claim.
    (d) If a claim or any portion thereof is disallowed, the notice to 
the claimant shall contain a statement of the reasons for the 
disallowance and an explanation of appeal rights pursuant to Sec. 709.7 
of this part.
    (e) Notice of any determination with respect to a claim shall be 
sufficient if mailed to the most recent address of the claimant which 
appears:
    (1) On the credit union's books;
    (2) In the claim filed by the claimant; or
    (3) In the documents submitted in the proof of claim.
    (f) In the event the liquidating agent disallows all or part of a 
claim, the liquidating agent shall file with the Board, or its 
designated agent, a report of its determination. This report shall 
become part of the record and shall include the notice to the claimant 
and findings on all issues raised and decided by the liquidating agent.



Sec. 709.7  Procedures for appeal of initial determination.

    In order to appeal all or part of an initial decision which 
disallows a claim, in whole or in part, a claimant must, within 60 days 
of the mailing of the initial determination, file an administrative 
appeal pursuant to Sec. 709.8 of this part, or file suit against the 
liquidated credit union in the United States District Court for the 
District of Columbia or in the United States district court having 
jurisdiction over the place where the credit union's principal place of 
business is located, or continue an action commenced before the 
appointment of the liquidating agent. If the claimant does not appeal or 
file or continue a suit, any disallowance shall be final and the 
claimant shall have no further rights or remedies with respect to such 
claim.



Sec. 709.8  Administrative appeal of the initial determination.

    (a) General. A claimant requesting an administrative appeal may 
request review pursuant to any of the procedures listed in paragraph (b) 
or (c) of this section. Any appeal of the initial determination must be 
in writing and must specify what type of appeal the claimant requests. 
The determination of whether to agree to a request for administrative 
appeal shall rest solely with the Board, which shall notify the claimant 
of its decision in writing. The 60 day period for filing a lawsuit in 
United States district court, provided for in Sec. 709.7 of this part, 
shall be tolled from the date of claimant's request for an 
administrative appeal to the date of the Board's decision regarding that 
request.
    (b) Hearing on the record. Except as provided herein, any hearing 
requested pursuant to this section shall be conducted in accordance with 
the provisions of subpart A, part 747, of this chapter. The Board shall 
render a final decision with respect to such claim after consideration 
of the hearing record and recommended decision. The Board's 
determination shall be subject to judicial review under chapter 7 of 
title 5, United States Code. Any claimant seeking judicial review of the 
Board's final decision under this paragraph must file a petition in the 
court of appeals for the circuit in which the principal office of the 
credit union is located, or in the United States Court of Appeals for 
the District of Columbia Circuit, within 30 days of the date of the 
Board's final decision. If a claimant does not file a petition before 
the end of the 30-day period, the Board's

[[Page 964]]

decision shall be final, and the claimant shall have no further rights 
or remedies with respect to such claim.
    (1) Burden of proof. In any hearing on the record, the burden of 
proof to establish entitlement to any modification of the initial 
determination shall rest solely upon the claimant.
    (2) Order of procedure. In any hearing on the record, at the time 
for opening arguments, counsel for the claimant shall argue first, and 
at the time for closing arguments, counsel for the claimant shall argue 
last.
    (c) Alternative dispute resolution. Paragraphs (c) (1) and (2) of 
this section list alternatives for dispute resolution which may be 
available at the discretion of the Board. From time to time, the NCUA 
Board may authorize additional alternative dispute resolution processes.
    (1) Appeal to the Board. Pursuant to this paragraph (c)(1), the 
claimant may file an appeal with the NCUA Board within the time provided 
for in Sec. 709.7. The appeal must be in writing and filed with the 
Secretary of the Board, National Credit Union Administration, 1775 Duke 
Street, Alexandria, VA 22314-3428. There shall be no personal appearance 
before the Board in connection with an appeal under this paragraph 
(c)(1).
    (i) Content of appeal. Any appeal must include:
    (A) A statement of the facts on which the appeal is based;
    (B) A statement of the basis for the initial determination to which 
the claimant objects and the alleged error in such determination, 
including citations to applicable statutes and regulations;
    (C) Any other evidence relied upon by the claimant which was not 
previously provided to the liquidating agent.
    (ii) Procedures for review of the appeal. (A) Within 60 days of the 
date of the Board's receipt of an appeal, pursuant to paragraph (c)(1) 
of this section, the Board may request in writing that the claimant 
submit supplemental evidence in support of its appeal. If additional 
evidence is requested, the claimant shall have 45 days from the date of 
issuance of such request to provide such additional information. Failure 
by the claimant to provide such additional information may, as 
determined solely by the Board, result in denial of the claimant's 
appeal.
    (B) Within 60 days from the date of the Board's receipt of an 
appeal, pursuant to paragraph (c)(1) of this section, the claimant may 
amend or supplement the appeal in writing. In the event the claimant 
does amend or supplement the appeal, the provisions of paragraph 
(c)(1)(ii)(A) of this section, with respect to requests for additional 
information and responses to such requests, shall apply with equal force 
to any such amendment or supplement to an appeal.
    (iii) Determination on appeal. (A) Within 180 days from the date of 
receipt of an appeal by the Board, the Board shall issue a decision 
allowing or disallowing claimant's appeal.
    (B) The decision by the Board on appeal shall be provided to the 
claimant in writing, stating the reasons for the decision, and shall 
constitute a final agency decision regarding the claimant's claim.
    (C) Failure by the Board to issue a decision on appeal of the 
claimant's claim within the 180-day period provided for under paragraph 
(c)(1)(iii)(A) of this section shall be deemed to be a denial of such 
appeal for the purposes of paragraph (c)(1)(iv) of this section.
    (iv) Judicial review. (A) For the purposes of seeking judicial 
review of actions taken pursuant to paragraph (c)(1) of this section, 
only a determination on appeal issued by the NCUA Board pursuant to this 
section shall constitute a final determination regarding a claim.
    (B) A final determination by the Board is reviewable in accordance 
with the provisions of chapter 7, title 5, United States Code, by the 
United States Court of Appeals for the District of Columbia or the court 
of appeals for the Federal judicial circuit where the credit union's 
principal place of business is located. Any request for judicial review 
under this paragraph must be filed within 60 days of the date of the 
Board's final decision. If any claimant fails to file before the end of 
the 60-day period, the Board's decision shall be final, and the claimant 
shall have no further rights or remedies with respect to such claim.

[[Page 965]]

    (2) The following additional procedures for dispute resolution may 
be made available at the sole discretion of the Board: mediation; 
nonbinding arbitration; and neutral fact finding.

[56 FR 56925, Nov. 7, 1991, as amended at 59 FR 36041, July 15, 1994]



Sec. 709.9  Expedited determination of creditor claims.

    (a) General. The provisions of this section establish procedures 
under which claimants may request expedited relief in lieu of the 
procedures set forth in Sec. 709.6 of this part. A claimant shall be 
entitled to expedited determination of a claim only upon a showing that 
there exists a legally valid and enforceable or perfected security 
interest in assets of the liquidated credit union and that irreparable 
injury will occur if the routine claims procedure is followed.
    (b) Filing of request for expedited relief. All requests for 
expedited relief must be filed within 30 days from the date of mailing, 
by the liquidating agent, of the notice to the creditor concerned. The 
request shall be deemed to be filed when received by the Secretary of 
the Board, National Credit Union Administration, 1775 Duke Street, 
Alexandria, VA 22314-3428. A copy of the request must be simultaneously 
served upon the liquidating agent for the credit union concerned. There 
shall be no right of personal appearance before the Board in connection 
with any claim submitted under this paragraph.
    (c) Content of request for expedited relief. Any Request for 
Expedited Relief must contain the following:
    (1) A clear and concise statement of the facts and issues on which 
the request is based;
    (2) A clear and concise statement describing the nature of any 
security interests in any assets of the credit union;
    (3) A clear and concise statement of the probable, imminent and 
irreparable harm likely to occur if expedited relief is not granted;
    (4) An assessment of the likelihood of success on the merits of the 
underlying claim, including statutory citations and relevant 
documentation supporting the merits of the claim;
    (5) Any other relevant documentation that supports the request;
    (6) Citations to applicable statutes, regulations, or other legal 
authority; and
    (7) A signed statement certifying that a copy of the request has 
been mailed or hand delivered to the liquidating agent on or before the 
day that the request was filed with the Board.
    (d) Burden of proof. The burden of proving entitlement to expedited 
relief rests at all times with the requester.
    (e) Additional information. The Board may order the filing of 
additional information and or documentation in order to make its 
determination. Such filing shall be on a date certain, and failure to 
provide the additional documentation or information may constitute the 
sole grounds for denial of the request.
    (f) Decision. Before the end of the 90-day period beginning on the 
date a request filed, the Board shall render its decision and provide it 
to the requester. The Board will determine whether to grant expedited 
review and allow or disallow the claim or whether such claim should be 
resolved pursuant to the claims process described in Sec. 709.6 of this 
part.
    (1) Expedited review denied. A decision by the Board that expedited 
review is not appropriate shall be final and the claim shall be decided 
pursuant to the claims adjudication process set forth in Sec. 709.6 of 
this part.
    (2) Expedited review granted. If expedited review is granted, the 
Board shall decide the claim. If the claim is disallowed, in whole or 
part, the decision shall contain a statement of each reason for the 
disallowance and the procedure for obtaining judicial review.
    (g) Period for filing or renewing suit. Any claimant who files a 
request for expedited relief shall be permitted to file a suit, or to 
continue a suit filed before the appointment of the liquidating agent, 
seeking a determination of the claimant's rights with respect to its 
security interest after the earlier of:
    (1) The end of the 90-day period beginning on the date of the filing 
of a request for expedited relief; or
    (2) The date the Board denies all or part of the claim.

[[Page 966]]

    (h) Statute of limitations. If an action described in paragraph (g) 
of this section is not filed, or the motion to renew a previously filed 
suit is not made, before the end of the 30-day period beginning on the 
date on which such action or motion may be filed in accordance with 
paragraph (g) of this section, the claim shall be deemed to be 
disallowed as of the end of such period (other than any portion of such 
claim that was allowed by the Board). Such disallowance shall be final 
and the claimant shall have no further rights or remedies with respect 
to such claim.

[56 FR 56925, Nov. 7, 1991, as amended at 59 FR 36041, July 15, 1994; 75 
FR 34621, June 18, 2010]



Sec. 709.10  Treatment by conservator or liquidating agent of
financial assets transferred in connection with a securitization
or participation.

    (a) Definitions. (1) Beneficial interest means debt or equity (or 
mixed) interests or obligations of any type issued by a special purpose 
entity that entitle their holders to receive payments that depend 
primarily on the cash flow from financial assets owned by the special 
purpose entity.
    (2) Financial asset means cash or a contract or instrument that 
conveys to one entity a contractual right to receive cash or another 
financial instrument from another entity.
    (3) Legal isolation means that transferred financial assets have 
been put presumptively beyond the reach of the transferor, its 
creditors, a trustee in bankruptcy, or a receiver, either by a single 
transaction or a series of transactions taken as a whole.
    (4) Participation means the transfer or assignment of an undivided 
interest in all or part of a loan or a lease from a seller, known as the 
``lead,'' to a buyer, known as the ``participant,'' without recourse to 
the lead, under an agreement between the lead and the participant. 
Without recourse means that the participation is not subject to any 
agreement that requires the lead to repurchase the participant's 
interest or to otherwise compensate the participant due to a default on 
the underlying obligation.
    (5) Securitization means the pooling and repackaging by a special 
purpose entity of assets or other credit exposures that can be sold to 
investors. Securitization includes transactions that create stratified 
credit risk positions whose performance is dependent upon an underlying 
pool of credit exposures, including loans and commitments.
    (6) Special purpose entity means a trust, corporation, or other 
entity demonstrably distinct from the federally-insured credit union 
that is primarily engaged in acquiring and holding (or transferring to 
another special purpose entity) financial assets, and in activities 
related or incidental thereto, in connection with the issuance by such 
special purpose entity (or by another special purpose entity that 
acquires financial assets directly or indirectly from such special 
purpose entity) of beneficial interests.
    (b) The Board, by exercise of its authority to disaffirm or 
repudiate contracts under 12 U.S.C. 1787(c), will not reclaim, recover, 
or recharacterize as property of the credit union or the liquidation 
estate any financial assets transferred to another party by a federally-
insured credit union in connection with a securitization or 
participation, provided that a transfer meets all conditions for sale 
accounting treatment under generally accepted accounting principles, 
other than the ``legal isolation'' condition addressed by this section.
    (c) Paragraph (b) of this section will not apply unless the 
federally-insured credit union received adequate consideration for the 
transfer of financial assets at the time of the transfer, and the 
documentation effecting the transfer of financial assets reflects the 
intent of the parties to treat the transaction as a sale, and not as a 
secured borrowing, for accounting purposes.
    (d) Paragraph (b) of this section will not be construed as waiving, 
limiting, or otherwise affecting the power of the Board, as conservator 
or liquidating agent, to disaffirm or repudiate any agreement imposing 
continuing obligations or duties upon the federally-insured credit union 
in conservatorship or the liquidation estate.

[[Page 967]]

    (e) Paragraph (b) of this section will not be construed as waiving, 
limiting or otherwise affecting the rights or powers of the Board to 
take any action or to exercise any power not specifically limited by 
this section, including, but not limited to, any rights, powers or 
remedies of the Board regarding transfers taken in contemplation of the 
credit union's insolvency or with the intent to hinder, delay, or 
defraud the credit union or the creditors of such credit union, or that 
is a fraudulent transfer under applicable law.
    (f) The Board will not seek to avoid an otherwise legally 
enforceable securitization agreement or participation agreement executed 
by a federally-insured credit union solely because such agreement does 
not meet the ``contemporaneous'' requirement of sections 207(b)(9) and 
208(a)(3) of the Federal Credit Union Act.
    (g) This section may be repealed by the NCUA upon 30 days notice and 
opportunity for comment provided in the Federal Register, but any such 
repeal or amendment will not apply to any transfers of financial assets 
made in connection with a securitization or participation that was in 
effect before such repeal or modification. For purposes of this 
paragraph, a securitization would be in effect on the earliest date that 
the most senior level of beneficial interests is issued, and a 
participation would be in effect on the date that the parties executed 
the participation agreement.

[65 FR 55442, Sept. 14, 2000, as amended at 77 FR 74111, Dec. 13, 2012]



Sec. 709.11  Treatment by conservator or liquidating agent of 
collateralized public funds.

    An agreement to provide for the lawful collateralization of funds of 
a federal, state, or local governmental entity or of any depositor or 
member referred to in section 207(k)(2)(A) of the Act will not be deemed 
to be invalid under sections 207(b)(9) and 208(a)(3) of the Act solely 
because such agreement was not executed contemporaneously with the 
acquisition of collateral or with any changes, increases, or 
substitutions in the collateral made in accordance with such agreement, 
provided the following conditions are met:
    (a) The agreement was undertaken in the ordinary course of business, 
not in contemplation of insolvency, and with no intent to hinder, delay 
or defraud the credit union or its creditors;
    (b) The secured obligation represents a bona fide and arm's length 
transaction;
    (c) The secured party or parties are not insiders or affiliates of 
the credit union;
    (d) The grant or creation of the security interest was for adequate 
consideration; and,
    (e) The security agreement evidencing the security interest is in 
writing, was approved by the credit union's board of directors, and has 
been continuously an official record of the credit union from the time 
of its execution.

[65 FR 55443, Sept. 14, 2000]



Sec. 709.12  Prepayment fees to Federal Home Loan Bank.

    The Board as conservator or liquidating agent of a federally-insured 
credit union in receipt of any extension of credit from a Federal Home 
Loan Bank will allow a claim for a prepayment fee by the Bank if:
    (a) The claim is made pursuant to a written contract that provides 
for a prepayment fee but the prepayment fee allowed by the Board will 
not exceed the present value of the loss attributable to the difference 
between the contract rate of the secured borrowing and the reinvestment 
rate then available to the Bank; and
    (b) The indebtedness owed to the Bank is secured by sufficient 
collateral in which a perfected security interest in favor of the Bank 
exists or as to which the Bank's security interest is entitled to 
priority under section 306(d) of the Competitive Equality Banking Act of 
1987, 12 U.S.C. 1430(e), or otherwise so that the aggregate of the 
outstanding principal on the advances secured by the collateral, the 
accrued but unpaid interest on the outstanding principal and the 
prepayment fee applicable to the advances can be paid in full from the 
amounts realized from the collateral. For purposes of this paragraph, 
the adequacy of the collateral will be determined as of the date

[[Page 968]]

the prepayment fees are due and payable under the terms of the written 
contract.

[66 FR 40575, Aug. 3, 2001]



Sec. 709.13  Treatment of swap agreements in liquidation or 
conservatorship.

    The Board has determined that a swap agreement, as defined in the 
Federal Deposit Insurance Act at 12 U.S.C. 1821(e)(8)(D)(vi), is a 
qualified financial contract for purposes of the special treatment for 
qualified financial contracts provided in 12 U.S.C. 1787(c). Any master 
agreement for any swap agreement, together with all supplements to such 
master agreement, will be treated as one swap agreement.

[68 FR 32356, May 30, 2003]



PART 710_VOLUNTARY LIQUIDATION--Table of Contents



Sec.
710.0  Scope.
710.1  Definitions.
710.2  Responsibility for conducting voluntary liquidation.
710.3  Approval of the liquidation proposal by members.
710.4  Transaction of business during liquidation.
710.5  Notice of liquidation to creditors.
710.6  Distribution of assets.
710.7  Retention of records.
710.8  Certificate of dissolution and liquidation.
710.9  Federally insured state credit unions.

    Authority: 12 U.S.C. 1766(a), 1786, and 1787.

    Source: 58 FR 35365, July 1, 1993, unless otherwise noted.



Sec. 710.0  Scope.

    This part describes the requirements that must be followed to 
accomplish the voluntary liquidation of a Federal credit union. 
Federally insured state credit unions are only subject to the 
notification requirement provided in Sec. 710.9; voluntary liquidation 
is to be accomplished in accordance with state law or procedures 
established by the state regulatory authority.



Sec. 710.1  Definitions.

    For the purpose of this part, the following definitions apply:
    (a) Voluntary liquidation means the dissolution of a solvent Federal 
credit union with the assets being sold or collected, liabilities paid, 
and shares distributed under the direction of the board of directors or 
its duly appointed liquidating agent.
    (b) Liquidation date means the date the members vote to approve 
liquidation.
    (c) Liquidating agent means the person or persons, including any 
legally recognized entity, appointed by the board of directors to 
liquidate the Federal credit union.



Sec. 710.2  Responsibility for conducting voluntary liquidation.

    (a) The board of directors shall be responsible for conserving the 
assets, for expediting the liquidation, and for equitable distribution 
of the assets to the members.
    (b) After voting to present the question of liquidation to the 
members, the board of directors may appoint a liquidating agent and 
delegate all or part of the board's responsibility to such agent and 
authorize reasonable compensation for the services provided.
    (c) The board of directors shall determine that the liquidating 
agent and all persons who handle or have access to funds of the Federal 
credit union are adequately covered by surety bond and that either such 
coverage remains in effect, or the discovery period is extended, for at 
least four months after final distribution of assets.
    (d) Within three days after the decision of the board of directors 
to submit the question of liquidation to the members, the Regional 
Director will be notified in writing, setting forth in detail the 
reasons for the proposed action. A balance sheet and income statement as 
of the previous month-end will be included with the notification. During 
the liquidation process, financial statements will be submitted to the 
Regional Director as requested.
    (e) Promptly after the decision to present the question of 
liquidation to the members, the board of directors or liquidating agency 
shall develop a written plan for the liquidation of the assets and 
payment of shares (liquidation plan). The plan should provide for the 
liquidation of assets and payment

[[Page 969]]

of creditors and shareholders within one year of the liquidation date. 
If the liquidation period is projected to exceed one year, an 
explanation must be provided in the liquidation plan. A copy of the 
liquidation plan will be mailed to the Regional Director within 30 days 
of the date the board of directors votes to present the question of 
liquidation to the members.



Sec. 710.3  Approval of the liquidation proposal by members.

    (a) When the board of directors decides to present the question of 
liquidation to the members, it shall act promptly to obtain the members' 
approval. The members shall be given advance notice of the membership 
meeting at which the liquidation proposal is to be submitted. The notice 
shall:
    (1) Inform members that they have the right to vote on the 
liquidation proposal in person at the membership meeting called for that 
purpose or by written ballot to be received no later than the time and 
date indicated on the notice.
    (2) Include or be accompanied by a ballot for the liquidation 
proposal.
    (b) The liquidation proposal must be approved by the affirmative 
vote of a majority of the Federal credit union members who vote on the 
proposal.
    (c) If the members do not approve the liquidation, the board of 
directors, or if delegated the authority, the liquidating agent, must 
decide within seven days whether the Federal credit union should resume 
operations or, if good cause exists, to resubmit the question of 
liquidation to the members.
    (d) If the members approve the liquidation, neither the members nor 
the board of directors may rescind the decision to liquidate unless the 
Regional Director concurs in the recision.
    (e) The Regional Director will be notified in writing of the results 
of the membership vote on the voluntary liquidation proposal within 
three days of the date of the vote.

[58 FR 35365, July 1, 1993, as amended at 72 FR 30246, May 31, 2007]



Sec. 710.4  Transaction of business during liquidation.

    (a) Immediately upon decision by the board of directors to present 
the question of liquidation to the members, payments on shares, 
withdrawal of shares (except for transfer of shares to loans and 
interest), transfer of shares to another share account, granting of 
loans, and making of investments other than short-term investments shall 
be suspended pending action by the members on the proposal to liquidate. 
Collection of loans and interest, payment of necessary expenses, 
clearing of share drafts and credit card charges will continue.
    (b) Upon approval of the members, payments on shares, withdrawal of 
shares (except for transfer of shares to loans and interest), transfer 
of shares to another share account, granting of loans, and making of 
investments other than short-term investments shall be discontinued 
permanently. Collection of loans and interest and payment of necessary 
expenses will continue during the period of liquidation. Members will be 
notified to discontinue the use of share drafts and credit cards, and 
items will not be cleared 15 days from the liquidation date.
    (c) Approval of the Regional Director must be obtained prior to 
consummating any sale of assets which would not provide sufficient funds 
to pay shareholders at par.



Sec. 710.5  Notice of liquidation to creditors.

    (a) When approval for liquidation is obtained from the members, the 
board of directors or the liquidating agent shall cause notice to be 
given to creditors to present their claims.
    (1) Federal credit unions with assets equal to or greater than $50 
million as of the month end prior to the liquidation date shall publish 
the notice once a week in each of three successive weeks, in a newspaper 
of general circulation in each county in which the Federal credit union 
maintains an office or branch for the transaction of business on the 
liquidation date, or through any alternative publication through an 
electronic medium that is reasonably calculated to reach the general 
public in the relevant area or areas. The first notice shall be 
published within seven days of the liquidation date.

[[Page 970]]

    (2) Federal credit unions with assets equal to or greater than $1 
million but less than $50 million as of the month end prior to the 
liquidation date shall publish the notice described in paragraph (a)(1) 
of this section at least once. The notice shall be published within 
seven days of the liquidation date.
    (3) Federal credit unions with assets less than $1 million as of the 
month end prior to the liquidation date shall not be required to publish 
the notice.
    (b) Within 10 days of the liquidation date, a copy of the notice of 
liquidation shall be mailed to all creditors reflected on the records of 
the Federal credit union.
    (c) Creditors shall be provided 30 days from the liquidation date to 
submit their claims.

[58 FR 35365, July 1, 1993, as amended at 79 FR 36198, June 26, 2014]



Sec. 710.6  Distribution of assets.

    (a) With the approval of the Regional Director, a partial pro rata 
distribution of the Federal credit union's assets may be made to its 
members from cash funds available on authorization by the board of 
directors or liquidating agent. Payment of a partial distribution may 
exclude member accounts of less than $25.00 and must not exceed the 
insured amount applicable to any account or accounts, as determined 
under part 745 of this chapter.
    (b) After all assets of the Federal credit union have been converted 
to cash or found to be worthless and all loans and debts owing to it 
have been collected or found to be uncollectible and all obligations of 
the Federal credit union have been paid, with the exception of shares 
due its members, the books shall be closed and the pro rata distribution 
to the members shall be computed. The computation shall be based on the 
total amount in each share account as of the liquidation date or the 
date on which all share drafts have cleared, whichever is later.
    (c) Payments must be made to members promptly after the pro rata 
distribution has been computed. The Federal credit union may mail a 
check to a member at his or her last known address, deliver the check 
personally to the member, or make the payment by wire or any other 
electronic means approved by a member.
    (d) Unclaimed share accounts, unpaid claims, and unpaid claims of 
members or creditors who failed to cash their final distribution checks 
shall be trusteed or escheated in accordance with the laws of the state 
in which the member or creditor resides.
    (e) The Regional Director will be notified in writing within three 
days when the final distribution of assets to the members is started.

[58 FR 35365, July 1, 1993, as amended at 79 FR 36198, June 26, 2014]



Sec. 710.7  Retention of records.

    (a) The board of directors or liquidating agent shall appoint a 
custodian for the Federal credit union's records which are to be 
retained after the final distribution of assets.
    (b) All records of the liquidated Federal credit union necessary to 
establish that creditors were paid and that assets were equitably 
distributed to the members shall be retained by the custodian for a 
period of five years following the date of charter cancellation.



Sec. 710.8  Certificate of dissolution and liquidation.

    Within 120 days after the final distribution of assets to members is 
started, a duly executed Certificate of Dissolution and Liquidation 
shall be filed with the Regional Director.



Sec. 710.9  Federally insured state credit unions.

    A federal insured state credit union will notify the Regional 
Director in writing within three days after the board of directors' 
decision to liquidate is made. A balance sheet and income statement as 
of the previous month-end and a copy of any liquidation plan will be 
included with the notification to the Regional Director.



PART 711_MANAGEMENT OFFICIAL INTERLOCKS--Table of Contents



Sec.
711.1  Authority, purpose, and scope.
711.2  Definitions.
711.3  Prohibitions.
711.4  Interlocking relationships permitted by statute.

[[Page 971]]

711.5  Small market share exemption.
711.6  General exemption.
711.7  Change in circumstances.
711.8  Enforcement.

    Authority: 12 U.S.C. 1757 and 3201-3208.

    Source: 61 FR 50702, Sept. 27, 1996, unless otherwise noted.



Sec. 711.1  Authority, purpose, and scope.

    (a) Authority. This part is issued under the provisions of the 
Depository Institution Management Interlocks Act (Interlocks Act) (12 
U.S.C. 3201 et seq).
    (b) Purpose. The purpose of the Interlocks Act and this part is to 
foster competition by generally prohibiting a management official from 
serving two nonaffiliated depository organizations in situations where 
the management interlock likely would have an anticompetitive effect.
    (c) Scope. This part applies to management officials of federally 
insured credit unions. Section 711.4(c) exempts a management official of 
a credit union from the prohibitions of the Interlocks Act when the 
individual serves as a management official of another credit union. 
Therefore, the Interlocks Act prohibitions contained in this part only 
apply to a management official of a credit union when that individual 
also serves as a management official of another type of depository 
organization (usually a bank or thrift).



Sec. 711.2  Definitions.

    For purposes of this part, the following definitions apply:
    (a) Affiliate. (1) The term affiliate has the meaning given in 
section 202 of the Interlocks Act (12 U.S.C. 3201). For purposes of that 
section 202, shares held by an individual include shares held by members 
of his or her immediate family. ``Immediate family'' means spouse, 
mother, father, child, grandchild, sister, brother, or any of their 
spouses, whether or not any of their shares are held in trust.
    (2) For purposes of section 202(3)(B) of the Interlocks Act (12 
U.S.C. 3201(3)(B)), an affiliate relationship involving a depository 
institution based on common ownership does not exist if the appropriate 
federal supervisory agency determines, after giving the affected persons 
the opportunity to respond, that the asserted affiliation was 
established in order to avoid the prohibitions of the Interlocks Act and 
does not represent a true commonality of interest between the depository 
organizations. In making this determination, the appropriate Federal 
supervisory agency considers, among other things, whether a person, 
including members of his or her immediate family, whose shares are 
necessary to constitute the group owns a nominal percentage of the 
shares of one of the organizations and the percentage is substantially 
disproportionate to that person's ownership of shares in the other 
organization.
    (b) Area median income means:
    (1) The median family income for the metropolitan statistical area 
(MSA), if a depository organization is located in an MSA; or
    (2) The statewide nonmetropolitan median family income, if a 
depository organization is located outside an MSA.
    (c) Community means a city, town, or village, and contiguous or 
adjacent cities, towns, or villages.
    (d) Contiguous or adjacent cities, towns, or villages means cities, 
towns, or villages whose borders touch each other or whose borders are 
within 10 road miles of each other at their closest points. The property 
line of an office located in an unincorporated city, town, or village is 
the boundary line of that city, town, or village for the purpose of this 
definition.
    (e) Depository holding company means a bank holding company or a 
savings and loan holding company (as more fully defined in section 202 
of the Interlocks Act (12 U.S.C. 3201)) having its principal office 
located in the United States.
    (f) Depository institution means a commercial bank (including a 
private bank), a savings bank, a trust company, a savings and loan 
association, a building and loan association, a homestead association, a 
cooperative bank, an industrial bank, or a credit union, chartered under 
the laws of the United States and having a principal office located in 
the United States. Additionally, a United States office, including a 
branch or agency, of a foreign commercial bank is a depository 
institution.

[[Page 972]]

    (g) Depository institution affiliate means a depository institution 
that is an affiliate of a depository organization.
    (h) Depository organization means a depository institution or a 
depository holding company.
    (i) District bank means any State bank operating under the Code of 
Law of the District of Columbia.
    (j) Low and moderate-income areas means census tracts (or, if an 
area is not in a census tract, block numbering areas delineated by the 
United States Bureau of the Census) where the median family income is 
less than 100 percent of the area median income.
    (k) Management official. (1) The term management official means:
    (i) A director;
    (ii) An advisory or honorary director of a depository institution 
with total assets of $100 million or more;
    (iii) A senior executive officer as that term is defined in 12 CFR 
701.14(b)(2), or a person holding an equivalent position regardless of 
title;
    (iv) A branch manager;
    (v) A trustee of a depository organization under the control of 
trustees; and
    (vi) Any person who has a representative or nominee serving in any 
of the capacities in this paragraph (m)(1).
    (2) The term management official does not include:
    (i) A person whose management functions relate exclusively to the 
business of retail merchandising or manufacturing;
    (ii) A person whose management functions relate principally to the 
business outside the United States of a foreign commercial bank; or
    (iii) A person described in the provisions of section 202(4) of the 
Interlocks Act (12 U.S.C. 3201(4)) (referring to an officer of a State-
chartered savings bank, cooperative bank, or trust company that neither 
makes real estate mortgage loans nor accepts savings).
    (l) Office means a principal or branch office of a depository 
institution located in the United States. Office does not include a 
representative office of a foreign commercial bank, an electronic 
terminal, or a loan production office.
    (m) Person means a natural person, corporation, or other business 
entity.
    (n) Relevant metropolitan statistical area (RMSA) means an MSA, a 
primary MSA, or a consolidated MSA that is not comprised of designated 
primary MSAs to the extent that these terms are defined and applied by 
the Office of Management and Budget.
    (o) Representative or nominee means a natural person who serves as a 
management official and has an obligation to act on behalf of another 
person with respect to management responsibilities. NCUA will find that 
a person has an obligation to act on behalf of another person only if 
the first person has an agreement, express or implied, to act on behalf 
of the second person with respect to management responsibilities. NCUA 
will determine, after giving the affected persons an opportunity to 
respond, whether a person is a representative or nominee.
    (p) Total assets. (1) The term total assets means assets measured on 
a consolidated basis and reported in the most recent fiscal year-end 
Consolidated Report of Condition and Income.
    (2) The term total assets does not include:
    (i) Assets of a diversified savings and loan holding company as 
defined by section 10(a)(1)(F) of the Home Owners' Loan Act (12 U.S.C. 
1467a(a)(1)(F)) other than the assets of its depository institution 
affiliate;
    (ii) Assets of a bank holding company that is exempt from the 
prohibitions of section 4 of the Bank Holding Company Act of 1956 
pursuant to an order issued under section 4(d) of that Act (12 U.S.C. 
1843(d)) other than the assets of its depository institution affiliate; 
or
    (iii) Assets of offices of a foreign commercial bank other than the 
assets of its United States branch or agency.
    (q) United States includes any State or territory of the United 
States of America, the District of Columbia, Puerto Rico, Guam, American 
Samoa, and the Virgin Islands.

[61 FR 50702, Sept. 27, 1996, as amended at 64 FR 66360, Nov. 26, 1999; 
73 FR 30477, May 28, 2008; 75 FR 34621, June 18, 2010]



Sec. 711.3  Prohibitions.

    (a) Community. A management official of a depository organization 
may

[[Page 973]]

not serve at the same time as a management official of an unaffiliated 
depository organization if the depository organizations in question (or 
a depository institution affiliate thereof) have offices in the same 
community.
    (b) RMSA. A management official of a depository organization may not 
serve at the same time as a management official of an unaffiliated 
depository organization if the depository organizations in question (or 
a depository institution affiliate thereof) have offices in the same 
RMSA and each depository organization has total assets of $50 million or 
more.
    (c) Major assets. A management official of a depository organization 
with total assets exceeding $2.5 billion (or any affiliate thereof) may 
not serve at the same time as a management official of an unaffiliated 
depository organization with total assets exceeding $1.5 billion (or any 
affiliate thereof), regardless of the location of the two depository 
organizations. The NCUA will adjust these thresholds, as necessary, 
based on year-to-year change in the average of the Consumer Price Index 
for the Urban Wage Earners and Clerical Workers, not seasonally 
adjusted, with rounding to the nearest $100 million. The NCUA will 
announce the revised thresholds by publishing a notice in the Federal 
Register.

[61 FR 50702, Sept. 27, 1996, as amended at 64 FR 66360, Nov. 26, 1999; 
72 FR 58249, Oct. 15, 2007]



Sec. 711.4  Interlocking relationships permitted by statute.

    The prohibitions of Sec. 711.3 do not apply in the case of any one 
or more of the following organizations or to a subsidiary thereof:
    (a) A depository organization that has been placed formally in 
liquidation, or which is in the hands of a receiver, conservator, or 
other official exercising a similar function;
    (b) A corporation operating under section 25 or section 25A of the 
Federal Reserve Act (12 U.S.C. 601 et seq. and 12 U.S.C. 611 et seq., 
respectively) (Edge Corporations and Agreement Corporations);
    (c) A credit union being served by a management official of another 
credit union;
    (d) A depository organization that does not do business within the 
United States except as an incident to its activities outside the United 
States;
    (e) A State-chartered savings and loan guaranty corporation;
    (f) A Federal Home Loan Bank or any other bank organized solely to 
serve depository institutions (a bankers' bank) or solely for the 
purpose of providing securities clearing services and services related 
thereto for depository institutions and securities companies;
    (g) A depository organization that is closed or is in danger of 
closing as determined by the appropriate Federal depository institutions 
regulatory agency and is acquired by another depository organization. 
This exemption lasts for five years, beginning on the date the 
depository organization is acquired; and
    (h)(1) A diversified savings and loan holding company (as defined in 
section 10(a)(1)(F) of the Home Owners' Loan Act (12 U.S.C. 
1467a(a)(1)(F)) with respect to the service of a director of such 
company who also is a director of an unaffiliated depository 
organization if:
    (i) Both the diversified savings and loan holding company and the 
unaffiliated depository organization notify their appropriate Federal 
depository institutions regulatory agency at least 60 days before the 
dual service is proposed to begin; and
    (ii) The appropriate regulatory agency does not disapprove the dual 
service before the end of the 60-day period.
    (2) The NCUA Board or its designee may disapprove a notice of 
proposed service if it finds that:
    (i) The service cannot be structured or limited so as to preclude an 
anticompetitive effect in financial services in any part of the United 
States;
    (ii) The service would lead to substantial conflicts of interest or 
unsafe or unsound practices; or
    (iii) The notificant failed to furnish all the information required 
by NCUA.
    (3) The NCUA Board or its designee may require that any interlock 
permitted under this paragraph (h) be terminated if a change in 
circumstances occurs with respect to one of the interlocked depository 
organizations that would have provided a basis for

[[Page 974]]

disapproval of the interlock during the notice period.



Sec. 711.5  Small market share exemption.

    (a) Exemption. A management interlock that is prohibited by 
Sec. 711.3(a) or Sec. 711.3(b) is permissible, provided:
    (1) The interlock is not prohibited by Sec. 711.3(c); and
    (2) The depository organizations (and their depository institution 
affiliates) hold, in the aggregate, no more than 20% of the deposits, in 
each RMSA or community in which the depository organizations (or their 
depository institution affiliates) are located. The amount of deposits 
will be determined by reference to the most recent annual Summary of 
Deposits published by the FDIC. This information is available on the 
Internet at http://www.fdic.gov.
    (b) Confirmation and records. Each depository organization must 
maintain records sufficient to support its determination of eligibility 
for the exemption under paragraph (a) of this section, and must 
reconfirm that determination on an annual basis.

[64 FR 66360, Nov. 26, 1999]



Sec. 711.6  General exemption.

    (a) Exemption. NCUA may, by agency order issued following receipt of 
an application, exempt an interlock from the prohibitions in Sec. 711.3, 
if NCUA finds that the interlock would not result in a monopoly or 
substantial lessening of competition, and would not present other safety 
and soundness concerns.
    (b) Presumptions. In reviewing applications for an exemption under 
this section, NCUA will apply a rebuttable presumption that an interlock 
will not result in a monopoly or substantial lessening of competition if 
the depository organization seeking to add a management official:
    (1) Primarily serves, low- and moderate-income areas;
    (2) Is controlled or managed by persons who are members of a 
minority group or women;
    (3) Is a depository institution that has been chartered for less 
than two years; or
    (4) Is deemed to be in ``troubled condition'' as defined in 
Sec. 701.14(b)(3) of this chapter.
    (c) Duration. Unless a shorter expiration period is provided in the 
NCUA approval, an exemption permitted by paragraph (a) of this section 
may continue so long as it would not result in a monopoly or substantial 
lessening of competition, or be unsafe or unsound. If the NCUA grants an 
interlock exemption in reliance upon a presumption under paragraph (b) 
of this section, the interlock may continue for three years, unless 
otherwise provided in the approval.

[64 FR 66360, Nov. 26, 1999]



Sec. 711.7  Change in circumstances.

    (a) Termination. A management official shall terminate his or her 
service if a change in circumstances causes the service to become 
prohibited. A change in circumstances may include, but is not limited 
to, an increase in asset size of an organization, a change in the 
delineation of the RMSA or community, the establishment of an office, an 
increase in the aggregate deposits of the depository organization, or an 
acquisition, merger, consolidation, or reorganization of the ownership 
structure of a depository organization that causes a previously 
permissible interlock to become prohibited.
    (b) Transition period. A management official described in paragraph 
(a) of this section may continue to serve the depository organization 
involved in the interlock for 15 months following the date of the change 
in circumstances. NCUA may shorten this period under appropriate 
circumstances.

[61 FR 50702, Sept. 27, 1996, as amended at 64 FR 66360, Nov. 26, 1999]



Sec. 711.8  Enforcement.

    Except as provided in this section, NCUA administers and enforces 
the Interlocks Act with respect to federally insured credit unions, and 
may refer any case of a prohibited interlocking relationship involving 
these entities to the Attorney General of the United States to enforce 
compliance with the Interlocks Act and this part.

[[Page 975]]



PART 712_CREDIT UNION SERVICE ORGANIZATIONS (CUSOs)--Table of Contents



Sec.
712.1  What does this part cover?
712.2  How much can an FCU invest in or loan to CUSOs, and what parties 
          may participate?
712.3  What are the characteristics of and what requirements apply to 
          CUSOs?
712.4  What must a FICU and a CUSO do to maintain separate corporate 
          identities?
712.5  What activities and services are preapproved for CUSOs?
712.6  What activities and services are prohibited for CUSOs?
712.8  What transaction and compensation limits might apply to 
          individuals related to both an FCU and a CUSO?
712.9  [Reserved]
712.10  How can a state supervisory authority obtain an exemption for 
          FISCUs from compliance with Sec. 712.3(d)(1), (2), and (3)?
712.11  What requirements apply to subsidiary CUSOs?

    Authority: 12 U.S.C. 1756, 1757(5)(D) and (7)(I), 1766, 1782, 1784, 
1785, and 1786.

    Source: 63 FR 10756, Mar. 5, 1998, unless otherwise noted.



Sec. 712.1  What does this part cover?

    (a) This part establishes when a federal credit union (FCU) can 
invest in and make loans to credit union service organizations (CUSOs). 
CUSOs are subject to review by NCUA. This part does not apply to 
corporate credit unions that have CUSOs subject to Sec. 704.11 of this 
chapter.
    (b) All sections of this part apply to FCUs. Sections 
712.2(d)(2)(ii), 712.3(d), 712.4 and 712.11(b) and (c) of this part 
apply to federally insured, state-chartered credit unions (FISCUs), as 
provided in Sec. 741.222 of this chapter. FISCUs must follow the law in 
the state in which they are chartered with respect to the sections in 
this part that only apply to FCUs.
    (c) As used in this part, federally insured credit union (FICU) 
means an FCU or FISCU.
    (d) As used in this part, CUSO means any entity in which a FICU has 
an ownership interest or to which a FICU has extended a loan, and that 
entity is engaged primarily in providing products or services to credit 
unions or credit union members, or, in the case of checking and currency 
services, including cashing checks and money orders for a fee, and 
selling negotiable checks, including travelers checks, money orders, and 
other similar money transfer instruments (including international and 
domestic electronic fund transfers and remittance transfers, as defined 
in section 919 of the Electronic Fund Transfer Act, 15 U.S.C. 1693o-1), 
to persons eligible for membership in any credit union having a loan, 
investment or contract with the entity. A CUSO also includes any entity 
in which a CUSO has an ownership interest of any amount, if that entity 
is engaged primarily in providing products or services to credit unions 
or credit union members.

[78 FR 72548, Dec. 3, 2013]



Sec. 712.2  How much can an FCU invest in or loan to CUSOs, 
and what parties may participate?

    (a) Investments. An FCU's total investments in CUSOs must not 
exceed, in the aggregate, 1% of its paid-in and unimpaired capital and 
surplus as of its last calendar year-end financial report.
    (b) Loans. An FCU's total loans to CUSOs must not exceed, in the 
aggregate, 1% of its paid-in and unimpaired capital and surplus as of 
its last calendar year-end financial report. Loan authority is 
independent and separate from the 1% investment authority of subsection 
(a) of this section.
    (c) Parties. An FCU may invest in or loan to a CUSO by itself, with 
other credit unions, or with non-credit union parties.
    (d) Measurement for calculating regulatory limitation. For purposes 
of paragraphs (a) and (b) of this section:
    (1) Total investments in and total loans to CUSOs will be measured 
consistent with GAAP.
    (2) Special rule in the case of less than adequately capitalized 
FICUs. This rule applies in the case of a FICU that is currently less 
than adequately capitalized, as determined under part 702 of this 
chapter, or where the making of an investment in a CUSO would render the 
FICU less than adequately capitalized under part 702 of this chapter. 
Before making an investment in a CUSO:
    (i) A less than adequately capitalized FCU, or an FCU that would be 
rendered less than adequately capitalized by the

[[Page 976]]

recapitalization of a CUSO, must obtain prior written approval from the 
appropriate NCUA regional office if the making of the investment would 
result in an aggregate cash outlay, measured on a cumulative basis 
(regardless of how the investment is valued for accounting purposes, but 
limited to the immediately preceding seven (7) years) in an amount that 
is in excess of 1% of its paid-in and unimpaired capital and surplus; or
    (ii) A less than adequately capitalized FISCU, or a FISCU that would 
be rendered less than adequately capitalized by the recapitalization of 
a CUSO, must obtain prior written approval from the appropriate state 
supervisory authority if the making of the investment would result in an 
aggregate cash outlay, measured on a cumulative basis (regardless of how 
the investment is valued for accounting purposes, but limited to the 
immediately preceding seven (7) years) in an amount that is in excess of 
the investment limit in the state in which it is chartered. A FISCU must 
also contemporaneously submit a copy of this request to the appropriate 
NCUA regional office. If there is no state limit in the state in which a 
FISCU is chartered, the requirements in paragraph (d)(2)(i) of this 
section will apply to that FISCU.
    (e) Divestiture. If the limitations in paragraph (a) of this section 
are reached or exceeded because of the profitability of the CUSO and the 
related GAAP valuation of the investment under the equity method, 
without an additional cash outlay by the FCU, divestiture is not 
required. An FCU may continue to invest up to 1% without regard to the 
increase in the GAAP valuation resulting from a CUSO's profitability.

[63 FR 10756, Mar. 5, 1998, as amended at 64 FR 33187, June 22, 1999; 66 
FR 65624, Dec. 20, 2001; 73 FR 79312, Dec. 29, 2008; 78 FR 32545, May 
31, 2013; 78 FR 72548, Dec. 3, 2013]



Sec. 712.3  What are the characteristics of and what requirements
apply to CUSOs?

    (a) Structure. An FCU can invest in or loan to a CUSO only if the 
CUSO is structured as a corporation, limited liability company, or 
limited partnership. An FCU may only participate in a limited 
partnership as a limited partner. For purposes of this part, 
``corporation'' means a legally incorporated corporation as established 
and maintained under relevant federal or state law. For purposes of this 
part, ``limited partnership'' means a legally established limited 
partnership as established and maintained under relevant state law. For 
purposes of this part, ``limited liability company'' means a legally 
established limited liability company as established and maintained 
under relevant state law, provided that the FCU obtains written legal 
advice that the limited liability company is a recognized legal entity 
under the applicable laws of the state of formation and that the limited 
liability company is established in a manner that will limit potential 
exposure of the FCU to no more than the amount of funds invested in, or 
loaned to, the CUSO.
    (b) Customer base. An FCU can invest in or loan to a CUSO only if 
the CUSO primarily serves credit unions, its membership, or the 
membership of credit unions contracting with the CUSO provided, however, 
that with respect to any approved CUSO service, as set out in 
Sec. 712.5, that also meets the description of services set out in 
Sec. 701.30 of this chapter, this requirement is met if the CUSO 
primarily provides such services to persons who are eligible for 
membership in the FCU or are eligible for membership in credit unions 
contracting with the CUSO.
    (c) Federal credit union accounting for financial reporting 
purposes. An FCU must account for its investments in or loans to a CUSO 
in conformity with ``generally accepted accounting principles'' (GAAP).
    (d) CUSO accounting; audits and financial statements; NCUA access to 
information. A FICU must obtain a written agreement from a CUSO before 
investing in or lending to the CUSO that the CUSO will:
    (1) Account for all of its transactions in accordance with GAAP;
    (2) Prepare quarterly financial statements and obtain an annual 
financial statement audit of its financial statements by a licensed 
certified public accountant in accordance with generally accepted 
auditing standards. A wholly

[[Page 977]]

owned CUSO is not required to obtain a separate annual financial 
statement audit if that wholly owned CUSO is included in the annual 
consolidated financial statement audit of the investing FICU;
    (3) Provide NCUA, its representatives, and the state supervisory 
authority having jurisdiction over any FISCU with an outstanding loan 
to, investment in or contractual agreement for products or services with 
the CUSO with complete access to any books and records of the CUSO and 
the ability to review the CUSO's internal controls, as deemed necessary 
by NCUA or the state supervisory authority in carrying out their 
respective responsibilities under the Act and the relevant state credit 
union statute;
    (4) Annually submit, pursuant to NCUA guidance, a report directly to 
NCUA and the appropriate state supervisory authority, if applicable. A 
newly formed CUSO (including a pre-existing business which becomes 
subject to this regulation by virtue of a credit union investment or 
loan) must file a report within 60 days of its formation. The report 
must contain basic registration information, including the CUSO's legal 
name; tax identification number; address; telephone number; Web site; 
primary point of contact; services offered; the name(s) and charter(s) 
of credit union(s) investing in, lending to, or receiving services from 
the CUSO; and investor and/or subsidiary CUSO(s). In addition, for any 
CUSO engaged in complex or high-risk activities, the report must 
contain:
    (i) For each credit union investing in, lending to, or receiving 
services from the CUSO:
    (A) A list of services provided to each credit union;
    (B) The investment amount, loan amount, or level of activity of each 
credit union;
    (ii) The CUSO's most recent year-end audited financial statements; 
and
    (iii)(A) For CUSOs engaged in credit and lending services:
    (1) The total dollar amount of loans outstanding;
    (2) The total number of loans outstanding;
    (3) The total dollar amount of loans granted year-to-date; and
    (4) The total number of loans granted year-to-date.
    (B) Such information must be provided by loan type for each type of 
loan originated or serviced by the CUSO.
    (5) For purposes of paragraph (d)(4) of this section, complex or 
high-risk activities include preapproved CUSO activities and services 
related to credit and lending, information technology, and custody, 
safekeeping, and investment management services for credit unions. 
Specific activities related to these categories include:
    (i) Credit and lending:
    (A) Business loan origination;
    (B) Consumer mortgage loan origination;
    (C) Loan support services, including servicing;
    (D) Student loan origination; and
    (E) Credit card loan origination.
    (ii) Information technology:
    (A) Electronic transaction services;
    (B) Record retention, security, and disaster recovery services; and
    (C) Payroll processing services.
    (iii) Custody, safekeeping, and investment management services for 
credit unions.
    (e) Other laws. A CUSO must comply with applicable Federal, state 
and local laws.

[63 FR 10756, Mar. 5, 1998, as amended at 64 FR 33187, June 22, 1999; 64 
FR 57365, Oct. 25, 1999; 66 FR 40578, Aug. 3, 2001; 70 FR 55228, Sept. 
21, 2005; 73 FR 79312, Dec. 29, 2008; 78 FR 72548, Dec. 3, 2013]



Sec. 712.4  What must a FICU and a CUSO do to maintain separate
corporate identities?

    (a) Corporate separateness. A FICU and a CUSO must be operated in a 
manner that demonstrates to the public the separate corporate existence 
of the FICU and the CUSO. Good business practices dictate that each must 
operate so that:
    (1) Its respective business transactions, accounts, and records are 
not intermingled;
    (2) Each observes the formalities of its separate corporate 
procedures;
    (3) Each is adequately financed as a separate unit in the light of 
normal obligations reasonably foreseeable in a business of its size and 
character;

[[Page 978]]

    (4) Each is held out to the public as a separate enterprise;
    (5) The FICU does not dominate the CUSO to the extent that the CUSO 
is treated as a department of the FICU; and
    (6) Unless the FICU has guaranteed a loan obtained by the CUSO, all 
borrowings by the CUSO indicate that the FICU is not liable.
    (b) Written legal advice. Prior to a FICU investing in a CUSO, the 
FICU must obtain written legal advice as to whether the CUSO is 
established in a manner that will limit potential exposure of the FICU 
to no more than the loss of funds invested in, or loaned to, the CUSO. 
In addition, if a FICU invests in, or makes a loan to, a CUSO, and that 
CUSO plans to change its structure under Sec. 712.3(a), the FICU must 
also obtain prior written legal advice that the CUSO will remain 
established in a manner that will limit potential exposure of the FICU 
to no more than the loss of funds invested in, or loaned to, the CUSO. 
The written legal advice must address factors that have led courts to 
``pierce the corporate veil,'' such as inadequate capitalization, lack 
of separate corporate identity, common boards of directors and 
employees, control of one entity over another, and lack of separate 
books and records. The written legal advice must be provided by 
independent legal counsel of the investing FICU or the CUSO.

[78 FR 72549, Dec. 3, 2013]



Sec. 712.5  What activities and services are preapproved for CUSOs?

    NCUA may at any time, based upon supervisory, legal, or safety and 
soundness reasons, limit any CUSO activities or services, or refuse to 
permit any CUSO activities or services. Otherwise, an FCU may invest in, 
loan to, and/or contract with only those CUSOs that are sufficiently 
bonded or insured for their specific operations and engaged in the 
preapproved activities and services related to the routine daily 
operations of credit unions. The specific activities listed within each 
preapproved category are provided in this section as illustrations of 
activities permissible under the particular category, not as an 
exclusive or exhaustive list.
    (a) Checking and currency services:
    (1) Check cashing;
    (2) Coin and currency services;
    (3) Money order, savings bonds, travelers checks, and purchase and 
sale of U.S. Mint commemorative coins services; and
    (4) Stored value products
    (b) Clerical, professional and management services:
    (1) Accounting services;
    (2) Courier services;
    (3) Credit analysis;
    (4) Facsimile transmissions and copying services;
    (5) Internal audits for credit unions;
    (6) Locator services;
    (7) Management and personnel training and support;
    (8) Marketing services;
    (9) Research services;
    (10) Supervisory committee audits; and
    (11) Employee leasing services.
    (c) Business loan origination, including the authority to buy and 
sell participation interests in such loans;
    (d) Consumer mortgage loan origination, including the authority to 
buy and sell participation interests in such loans;
    (e) Electronic transaction services:
    (1) Automated teller machine (ATM) services;
    (2) Credit card and debit card services;
    (3) Data processing;
    (4) Electronic fund transfer (EFT) services;
    (5) Electronic income tax filing;
    (6) Payment item processing;
    (7) Wire transfer services; and
    (8) Cyber financial services;
    (f) Financial counseling services:
    (1) Developing and administering Individual Retirement Accounts 
(IRA), Keogh, deferred compensation, and other personnel benefit plans;
    (2) Estate planning;
    (3) Financial planning and counseling;
    (4) Income tax preparation;
    (5) Investment counseling;
    (6) Retirement counseling; and
    (7) Business counseling and consultant services;
    (g) Fixed asset services:
    (1) Management, development, sale, or lease of fixed assets; and

[[Page 979]]

    (2) Sale, lease, or servicing of computer hardware or software;
    (h) Insurance brokerage or agency:
    (1) Agency for sale of insurance;
    (2) Provision of vehicle warranty programs;
    (3) Provision of group purchasing programs; and
    (4) Real estate settlement services;
    (i) Leasing:
    (1) Personal property; and
    (2) Real estate leasing of excess CUSO property;
    (j) Loan support services:
    (1) Debt collection services;
    (2) Loan processing, servicing, and sales;
    (3) Sale of repossessed collateral; and
    (4) Real estate settlement services;
    (5) Purchase and servicing of non-performing loans; and
    (6) Referral and processing of loan applications for members whose 
loan applications have been denied by the credit union;
    (k) Record retention, security and disaster recovery services:
    (1) Alarm-monitoring and other security services;
    (2) Disaster recovery services;
    (3) Microfilm, microfiche, optical and electronic imaging, CD-ROM 
data storage and retrieval services;
    (4) Provision of forms and supplies; and
    (5) Record retention and storage;
    (l) Securities brokerage services;
    (m) Shared credit union branch (service center) operations;
    (n) Student loan origination, including the authority to buy and 
sell participation interests in such loans;
    (o) Travel agency services; and
    (p) Trust and trust-related services:
    (1) Acting as administrator for prepaid legal service plans;
    (2) Acting as trustee, guardian, conservator, estate administrator, 
or in any other fiduciary capacity; and
    (3) Trust services.
    (q) Real estate brokerage services.
    (r) CUSO investments in non-CUSO service providers: In connection 
with providing a permissible service, a CUSO may invest in a non-CUSO 
service provider. The amount of the CUSO's investment is limited to the 
amount necessary to participate in the service provider, or a greater 
amount if necessary to receive a reduced price for goods or services.
    (s) Credit card loan origination;
    (t) Payroll processing services.

[63 FR 10756, Mar. 5, 1998, as amended at 64 FR 33187, June 22, 1999; 64 
FR 66361, Nov. 26, 1999; 66 FR 40578, Aug. 3, 2001; 68 FR 56551, Oct. 1, 
2003; 73 FR 79312, Dec. 29, 2008; 75 FR 34621, June 18, 2010]



Sec. 712.6  What activities and services are prohibited for CUSOs?

    General. CUSOs must not acquire control of, either directly or 
indirectly, another depository financial institution, nor invest in 
shares, stocks, or obligations of an insurance company, trade 
association, liquidity facility or similar organization, corporation, or 
association.

[63 FR 10756, Mar. 5, 1998, as amended at 64 FR 66361, Nov. 26, 1999]



Sec. 712.8  What transaction and compensation limits might apply to
individuals related to both an FCU and a CUSO?

    (a) Officials and Senior Management Employees. The officials, senior 
management employees, and their immediate family members of an FCU that 
has outstanding loans or investments in a CUSO must not receive any 
salary, commission, investment income, or other income or compensation 
from the CUSO either directly or indirectly, or from any person being 
served through the CUSO. This provision does not prohibit such FCU 
officials or senior management employees from assisting in the operation 
of a CUSO, provided the officials or senior management employees are not 
compensated by the CUSO. Further, the CUSO may reimburse the FCU for the 
services provided by such FCU officials and senior management employees 
only if the account receivable of the FCU due from the CUSO is paid in 
full at least every 120 days. For purposes of this paragraph (a), 
``official'' means affiliated credit union directors or committee 
members. For purposes of this paragraph (a), ``senior management 
employee'' means affiliated credit union chief executive officer 
(typically this individual holds the title of President or Treasurer/
Manager), any assistant chief executive officers (e.g. Assistant

[[Page 980]]

President, Vice President, or Assistant Treasurer/Manager) and the chief 
financial officer (Comptroller). For purposes of this paragraph (a), 
``immediate family member'' means a spouse or other family members 
living in the same household.
    (b) Employees. The prohibition contained in paragraph (a) of this 
section also applies to FCU employees not otherwise covered if the 
employees are directly involved in dealing with the CUSO unless the 
FCU's board of directors determines that the FCU employees' positions do 
not present a conflict of interest.
    (c) Others. All transactions with business associates or family 
members of FCU officials, senior management employees, and their 
immediate family members, not specifically prohibited by paragraphs (a) 
and (b) of this section must be conducted at arm's length and in the 
interest of the FCU.



Sec. 712.9  [Reserved]



Sec. 712.10  How can a state supervisory authority obtain an
exemption for FISCUs from compliance with Sec. 712.3(d)(1), (2),
and (3)?

    (a) The NCUA Board may exempt FISCUs in a given state from 
compliance with any or all of Sec. 712.3(d)(1), (2), and (3) if the NCUA 
Board determines the laws in that state are equal to, or more stringent 
than, Sec. 712.3(d)(1), (2), and (3), and the laws and procedures 
available to the supervisory authority in that state are sufficient to 
provide NCUA with the degree of access and information it believes is 
necessary to evaluate the safety and soundness of FICUs having business 
relationships with CUSOs owned by FISCUs in that state.
    (b) To obtain an exemption, the state supervisory authority must 
submit a copy of the legal authority pursuant to which it secures the 
information required in Sec. 712.3(d)(1), (2), and (3) of this part to 
NCUA's regional office having responsibility for that state, along with 
all procedural and operational documentation supporting and describing 
the actual practices by which it implements and exercises the authority.
    (c) The state supervisory authority must provide the regional 
director with an assurance that NCUA examiners will be provided with co-
extensive authority and will be allowed direct access to CUSO books and 
records at such times as NCUA, in its sole discretion, may determine 
necessary or appropriate. For purposes of this section, access includes 
the right to make and retain copies of any CUSO record, as to which NCUA 
will accord the same level of control and confidentiality that it uses 
with respect to all other examination-related materials it obtains in 
the course of its duties.
    (d) The state supervisory authority must also provide the regional 
director with an assurance that NCUA, upon request, will have access to 
copies of any financial statements or reports which a CUSO has provided 
to the state supervisory authority.
    (e) The regional director will review the applicable authority, 
procedures and assurances and forward the exemption request, along with 
the regional director's recommendation, to the NCUA Board for a final 
determination.
    (f) For purposes of this section, whether an entity is a CUSO shall 
be determined in accordance with the definition set out in Sec. 741.222 
of this chapter.

[78 FR 72549, Dec. 3, 2013]



Sec. 712.11  What requirements apply to subsidiary CUSOs?

    (a) FCUs investing in a CUSO with a subsidiary CUSO. FCUs may only 
invest in or loan to a CUSO, which has a subsidiary CUSO, if the 
subsidiary CUSO satisfies all of the requirements of this part. The 
requirements of this part apply to all tiers or levels of a CUSO's 
structure.
    (b) FISCUs investing in a CUSO with a subsidiary CUSO. FISCUs may 
only invest in or loan to a CUSO which has a subsidiary CUSO, if the 
subsidiary CUSO complies with the following:
    (1) All applicable state laws and rules regarding CUSOs; and
    (2) All of the requirements of this part that apply to FISCUs, which 
are listed in Sec. 712.1. The requirements of this part that apply to 
FISCUs apply to all tiers or levels of a CUSO's structure.
    (c) For purposes of this section, a subsidiary CUSO is any entity in 
which a CUSO has an ownership interest of

[[Page 981]]

any amount, if that entity is engaged primarily in providing products or 
services to credit unions or credit union members.

[78 FR 72549, Dec. 3, 2013]



PART 713_FIDELITY BOND AND INSURANCE COVERAGE FOR FEDERAL CREDIT
UNIONS--Table of Contents



Sec.
713.1  What is the scope of this section?
713.2  What are the responsibilities of a credit union's board of 
          directors under this section?
713.3  What bond coverage must a credit union have?
713.4  What bond forms may be used?
713.5  What is the required minimum dollar amount of coverage?
713.6  What is the permissible deductible?
713.7  May the NCUA Board require a credit union to secure additional 
          insurance coverage?

    Authority: 12 U.S.C. 1761a, 1761b, 1766(a), 1766(h), 1789(a)(11).

    Source: 64 FR 28720, May 27, 1999, unless otherwise noted.



Sec. 713.1  What is the scope of this section?

    This section provides the requirements for fidelity bonds for 
Federal credit union employees and officials and for other insurance 
coverage for losses such as theft, holdup, vandalism, etc., caused by 
persons outside the credit union.



Sec. 713.2  What are the responsibilities of a credit union's board 
of directors under this section?

    The board of directors of each Federal credit union must at least 
annually review its fidelity and other insurance coverage to ensure that 
it is adequate in relation to the potential risks facing the credit 
union and the minimum requirements set by the Board.

[64 FR 28720, May 27, 1999, as amended at 64 FR 57365, Oct. 25, 1999]



Sec. 713.3  What bond coverage must a credit union have?

    At a minimum, your bond coverage must:
    (a) Be purchased in an individual policy from a company holding a 
certificate of authority from the Secretary of the Treasury; and
    (b) Include fidelity bonds that cover fraud and dishonesty by all 
employees, directors, officers, supervisory committee members, and 
credit committee members.



Sec. 713.4  What bond forms may be used?

    (a) A current listing of basic bond forms that may be used without 
prior NCUA Board approval is on NCUA's Web site, http://www.ncua.gov. If 
you are unable to access the NCUA website, you can get a current listing 
of approved bond forms by contacting NCUA's Public and Congressional 
Affairs Office, at (703) 518-6330.
    (b) To use any of the following, you need prior written approval 
from the Board:
    (1) Any other basic bond form; or
    (2) Any rider or endorsement that limits coverage of approved basic 
bond forms.

[64 FR 28720, May 27, 1999, as amended at 70 FR 61716, Oct. 26, 2005; 73 
FR 30478, May 28, 2008]



Sec. 713.5  What is the required minimum dollar amount of coverage?

    (a) The minimum required amount of fidelity bond coverage for any 
single loss is computed based on a federal credit union's total assets.

------------------------------------------------------------------------
                 Assets                            Minimum bond
------------------------------------------------------------------------
$0 to $4,000,000.......................  Lesser of total assets or
                                          $250,000.
$4,000,001 to $50,000,000..............  $100,000 plus $50,000 for each
                                          million or fraction thereof
                                          over $1,000,000.
$50,000,000 to $500,000,000............  $2,550,000 plus $10,000 for
                                          each million or fraction
                                          thereof over $50,000,000, to a
                                          maximum of $5,000,000.
Over $500,000,000......................  One percent of assets, rounded
                                          to the nearest hundred
                                          million, to a maximum of
                                          $9,000,000.
------------------------------------------------------------------------

    (b) This is the minimum coverage required, but a federal credit 
union's board of directors should purchase additional or enhanced 
coverage when its

[[Page 982]]

circumstances warrant. In making this determination, a board of 
directors should consider its own internal risk assessment, its fraud 
trends and loss experience, and factors such as its cash on hand, cash 
in transit, and the nature and risks inherent in any expanded services 
it offers such as wire transfer and remittance services.
    (c) While the above is the required minimum amount of bond coverage, 
credit unions should maintain increased coverage equal to the greater of 
either of the following amounts within thirty days of discovery of the 
need for such increase:
    (1) The amount of the daily cash fund, i.e. daily cash plus 
anticipated daily money receipts on the credit union's premises, or
    (2) The total amount of the credit union's money in transit in any 
one shipment.
    (3) Increased coverage is not required pursuant to paragraph (c) of 
this section, however, when the credit union temporarily increased its 
cash fund because of unusual events which cannot reasonably be expected 
to recur.
    (d) Any aggregate limit of liability provided for in a fidelity bond 
policy must be at least twice the single loss limit of liability. This 
requirement does not apply to optional insurance coverage.
    (e) Any proposal to reduce your required bond coverage must be 
approved in writing by the NCUA Board at least twenty days in advance of 
the proposed effective date of the reduction.

[64 FR 28720, May 27, 1999, as amended at 70 FR 61716, Oct. 26, 2005]



Sec. 713.6  What is the permissible deductible?

    (a)(1) The maximum amount of allowable deductible is computed based 
on a federal credit union's asset size and capital level, as follows:

------------------------------------------------------------------------
                 Assets                         Maximum deductible
------------------------------------------------------------------------
$0 to $100,000.........................  No deductible allowed.
$100,001 to $250,000...................  $1,000.
$250,000 to $1,000,000.................  $2,000.
Over $1,000,000........................  $2,000 plus \1/1000\ of total
                                          assets up to a maximum of
                                          $200,000; for credit unions
                                          that have received a composite
                                          CAMEL rating of ``1'' or ``2''
                                          for the last two (2) full
                                          examinations and maintained a
                                          net worth classification of
                                          ``well capitalized'' under
                                          part 702 of this chapter for
                                          the six (6) immediately
                                          preceding quarters or, if
                                          subject to a risk-based net
                                          worth (RBNW) requirement under
                                          part 702 of this chapter, has
                                          remained ``well capitalized''
                                          for the six (6) immediately
                                          preceding quarters after
                                          applying the applicable RBNW
                                          requirement, the maximum
                                          deductible is $1,000,000.
------------------------------------------------------------------------

    (2) The deductibles may apply to one or more insurance clauses in a 
policy. Any deductibles in excess of the above amounts must receive the 
prior written permission of the NCUA Board.
    (b) A deductible may not exceed 10 percent of a credit union's 
Regular Reserve unless a separate Contingency Reserve is set up for the 
excess. In computing the maximum deductible, valuation accounts such as 
the allowance for loan losses cannot be considered.
    (c) A federal credit union that has received a composite CAMEL 
rating of ``1'' or ``2'' for the last two (2) full examinations and 
maintained a net worth classification of ``well capitalized'' under part 
702 of this chapter for the six (6) immediately preceding quarters or, 
if subject to a risk-based net worth (RBNW) requirement under part 702 
of this chapter, has remained ``well capitalized'' for the six (6) 
immediately preceding quarters after applying the applicable RBNW 
requirement is eligible to qualify for a deductible in excess of 
$200,000. The credit union's eligibility is determined based on it 
having assets in excess of $1 million as reflected in its most recent 
year-end 5300 call report. A federal credit union that previously 
qualified for a deductible in excess of $200,000, but that subsequently 
fails to qualify based on its most recent year-end 5300 call report 
because either its assets have decreased or it no longer meets the net 
worth requirements of this paragraph or fails to meet the CAMEL rating 
requirements of this paragraph as determined by its most recent 
examination

[[Page 983]]

report, must obtain the coverage otherwise required by paragraph (b) of 
this section within 30 days of filing its year-end call report and must 
notify the appropriate NCUA regional office in writing of its changed 
status and confirm that it has obtained the required coverage.

[64 FR 28720, May 27, 1999, as amended at 70 FR 61716, Oct. 26, 2005; 77 
FR 31992, May 31, 2012]

    Effective Date Note: At 80 FR 66723, Oct. 29, 2015, Sec. 713.6 was 
amended by revising the table in paragraph (a)(1) and, in paragraph (c), 
by removing the words ``net worth'' each place they appear and adding in 
their place the word ``capital'', and removing the words ``or, if 
subject to a risk-based net worth (RBNW) requirement under part 702 of 
this chapter, has remained `well capitalized' for the six (6) 
immediately preceding quarters after applying the applicable RBNW 
requirement,'', effective Jan. 1, 2019. For the convenience of the user, 
the revised text is set forth as follows:



Sec. 713.6  What is the permissible deductible?

    (a)(1) * * *

------------------------------------------------------------------------
                 Assets                         Maximum deductible
------------------------------------------------------------------------
$0 to $100,000.........................  No deductible allowed.
$100,001 to $250,000...................  $1,000.
$250,000 to $1,000,000.................  $2,000.
Over $1,000,000........................  $2,000 plus 1/1000 of total
                                          assets up to a maximum of
                                          $200,000; for credit unions
                                          that have received a composite
                                          CAMEL rating of ``1'' or ``2''
                                          for the last two (2) full
                                          examinations and maintained a
                                          capital classification of
                                          ``well capitalized'' under
                                          part 702 of this chapter for
                                          the six (6) immediately
                                          preceding quarters the maximum
                                          deductible is $1,000,000.
------------------------------------------------------------------------

                                * * * * *



Sec. 713.7  May the NCUA Board require a credit union to secure 
additional insurance coverage?

    The NCUA Board may require additional coverage when the Board 
determines that a credit union's current coverage is inadequate. The 
credit union must purchase this additional coverage within 30 days.



PART 714_LEASING--Table of Contents



Sec.
714.1  What does this part cover?
714.2  What are the permissible leasing arrangements?
714.3  Must you own the leased property in an indirect leasing 
          arrangement?
714.4  What are the lease requirements?
714.5  What is required if you rely on an estimated residual value 
          greater than 25% of the original cost of the leased property?
714.6  Are you required to retain salvage powers over the leased 
          property?
714.7  What are the insurance requirements applicable to leasing?
714.8  Are the early payment provisions, or interest rate provisions, 
          applicable in leasing arrangements?
714.9  Are indirect leasing arrangements subject to the purchase of 
          eligible obligation limit set forth in Sec. 701.23 of this 
          chapter?
714.10  What other laws must you comply with when engaged in leasing?

    Authority: 12 U.S.C. 1756, 1757, 1766, 1785, 1789.

    Source: 65 FR 34585, May 31, 2000, unless otherwise noted.



Sec. 714.1  What does this part cover?

    This part covers the standards and requirements that you, a federal 
credit union, must follow when engaged in the leasing of personal 
property.



Sec. 714.2  What are the permissible leasing arrangements?

    (a) You may engage in direct leasing. In direct leasing, you 
purchase personal property from a vendor, becoming the owner of the 
property at the request of your member, and then lease the property to 
that member.
    (b) You may engage in indirect leasing. In indirect leasing, a third 
party leases property to your member and you then purchase that lease 
from the third party for the purpose of leasing the property to your 
member. You do not have to purchase the leased property if you comply 
with the requirements of Sec. 714.3.
    (c) You may engage in open-end leasing. In an open-end lease, your 
member assumes the risk and responsibility for any difference in the 
estimated residual value and the actual value of the property at lease 
end.
    (d) You may engage in closed-end leasing. In a closed-end lease, you 
assume the risk and responsibility for any difference in the estimated 
residual value and the actual value of the property at lease end. 
However, your member is always responsible for any

[[Page 984]]

excess wear and tear and excess mileage charges as established under the 
lease.



Sec. 714.3  Must you own the leased property in an indirect leasing
arrangement?

    You do not have to own the leased property in an indirect leasing 
arrangement if:
    (a) You obtain a full assignment of the lease. A full assignment is 
the assignment of all the rights, interests, obligations, and title in a 
lease to you, that is, you become the owner of the lease;
    (b) You are named as the sole lienholder of the leased property;
    (c) You receive a security agreement, signed by the leasing company, 
granting you a sole lien in the leased property and the right to take 
possession and dispose of the leased property in the event of a default 
by the lessee, a default in the leasing company's obligations to you, or 
a material adverse change in the leasing company's financial condition; 
and
    (d) You take all necessary steps to record and perfect your security 
interest in the leased property. Your state's Commercial Code may treat 
the automobiles as inventory, and require a filing with the Secretary of 
State.



Sec. 714.4  What are the lease requirements?

    (a) Your lease must be a net lease. In a net lease, your member 
assumes all the burdens of ownership including maintenance and repair, 
licensing and registration, taxes, and insurance;
    (b) Your lease must be a full payout lease. In a full payout lease, 
you must reasonably expect to recoup your entire investment in the 
leased property, plus the estimated cost of financing, from the lessee's 
payments and the estimated residual value of the leased property at the 
expiration of the lease term; and
    (c) The amount of the estimated residual value you rely upon to 
satisfy the full payout lease requirement may not exceed 25% of the 
original cost of the leased property unless the amount above 25% is 
guaranteed. Estimated residual value is the projected value of the 
leased property at lease end. Estimated residual value must be 
reasonable in light of the nature of the leased property and all 
circumstances relevant to the leasing arrangement.



Sec. 714.5  What is required if you rely on an estimated residual
value greater than 25% of the original cost of the leased property?

    If the amount of the estimated residual value you rely upon to 
satisfy the full payout lease requirement of Sec. 714.4(b) exceeds 25% 
of the original cost of the leased property, a financially capable party 
must guarantee the excess. The guarantor may be the manufacturer. The 
guarantor may also be an insurance company with an A.M. Best rating of 
at least a B + , or with at least the equivalent of an A.M. Best B + 
rating from another major rating company. You must obtain or have on 
file financial documentation demonstrating that the guarantor has the 
resources to meet the guarantee.



Sec. 714.6  Are you required to retain salvage powers over the
leased property?

    You must retain salvage powers over the leased property. Salvage 
powers protect you from a loss and provide you with the power to take 
action if there is an unanticipated change in conditions that threatens 
your financial position by significantly increasing your exposure to 
risk. Salvage powers allow you:
    (a) As the owner and lessor, to take reasonable and appropriate 
action to salvage or protect the value of the property or your interests 
arising under the lease; or
    (b) As the assignee of a lease, to become the owner and lessor of 
the leased property pursuant to your contractual rights, or take any 
reasonable and appropriate action to salvage or protect the value of the 
property or your interests arising under the lease.



Sec. 714.7  What are the insurance requirements applicable to leasing?

    (a) You must maintain a contingent liability insurance policy with 
an endorsement for leasing or be named as the co-insured if you do not 
own the leased property. Contingent liability insurance protects you 
should you be

[[Page 985]]

sued as the owner of the leased property. You must use an insurance 
company with a nationally recognized industry rating of at least a B + .
    (b) Your member must carry the normal liability and property 
insurance on the leased property. You must be named as an additional 
insured on the liability insurance policy and as the loss payee on the 
property insurance policy.



Sec. 714.8  Are the early payment provisions, or interest rate
provisions, applicable in leasing arrangements?

    You are not subject to the early payment provisions set forth in 
Sec. 701.21(c)(6) of this chapter. You are also not subject to the 
interest rate provisions in Sec. 701.21(c)(7).



Sec. 714.9  Are indirect leasing arrangements subject to the purchase 
of eligible obligation limit set forth in Sec. 701.23 of this chapter?

    Your indirect leasing arrangements are not subject to the eligible 
obligation limit if they satisfy the provisions of Sec. 701.23(b)(3)(iv) 
that require that you make the final underwriting decision and that the 
lease contract is assigned to you very soon after it is signed by the 
member and the dealer or leasing company.



Sec. 714.10  What other laws must you comply with when engaged 
in leasing?

    You must comply with the Consumer Leasing Act, 15 U.S.C. 1667-67f, 
and its implementing regulation, Regulation M, 12 CFR part 1013. You 
must comply with state laws on consumer leasing, but only to the extent 
that the state leasing laws are consistent with the Consumer Leasing 
Act, 15 U.S.C. 1667e, or provide the member with greater protections or 
benefits than the Consumer Leasing Act. You are also subject to the 
lending rules set forth in Sec. 701.21 of this chapter, except as 
provided in Secs. 714.8 and 714.9 of this part. The lending rules in 
Sec. 701.21 address the preemption of other state and federal laws that 
impact on credit transactions.

[65 FR 34585, May 31, 2000, as amended at 77 FR 71085, Nov. 29, 2012]



PART 715_SUPERVISORY COMMITTEE AUDITS AND VERIFICATIONS--
Table of Contents



Sec.
715.1  Scope of this part.
715.2  Definitions used in this part.
715.3  General responsibilities of the Supervisory Committee.
715.4  Audit responsibility of the Supervisory Committee.
715.5  Audit of Federal Credit Unions.
715.6  Audit of Federally-insured State-chartered credit unions.
715.7  Supervisory Committee audit alternatives to a financial statement 
          audit.
715.8  Requirements for verification of accounts and passbooks.
715.9  Assistance from outside, compensated person.
715.10  Audit report and working paper maintenance and access.
715.11  Sanctions for failure to comply with this part.
715.12  Statutory audit remedies for Federal credit unions.

    Authority: 12 U.S.C. 1761(b), 1761d, 1782(a)(6).

    Source: 64 FR 41035, July 29, 1999, unless otherwise noted.



Sec. 715.1  Scope of this part.

    This part implements section 202(a)(6)(D) of the Federal Credit 
Union Act, 12 U.S.C. 1782(a)(6)(D), as added by section 201(a) of the 
Credit Union Membership Access Act, Pub. L. No. 105-219, 112 Stat. 918 
(1998). This part prescribes the responsibilities of the Supervisory 
Committee to obtain an annual audit of the credit union according to its 
charter type and asset size, and to conduct a verification of members' 
accounts.



Sec. 715.2  Definitions used in this part.

    As used in this part:
    (a) Balance sheet audit refers to the examination of a credit 
union's assets, liabilities, and equity under generally accepted 
auditing standards (GAAS) by an independent public accountant for the 
purpose of opining on the fairness of the presentation on the balance 
sheet. Credit unions required to file call reports consistent with GAAP 
should ensure the audited balance sheet is likewise prepared on a GAAP 
basis. The opinion under this type of engagement would not address the 
fairness of the presentation of the credit

[[Page 986]]

union's income statement, statement of changes in equity (including 
comprehensive income), or statement of cash flows.
    (b) Compensated person refers to any accounting/auditing 
professional, excluding a credit union employee, who is compensated for 
performing more than one supervisory committee audit and/or verification 
of members' accounts per calendar year.
    (c) Financial statements refers to a presentation of financial data, 
including accompanying notes, derived from accounting records of the 
credit union, and intended to disclose a credit union's economic 
resources or obligations at a point in time, or the changes therein for 
a period of time, in conformity with GAAP, as defined herein, or 
regulatory accounting procedures. Each of the following is considered to 
be a financial statement: a balance sheet or statement of financial 
condition; statement of income or statement of operations; statement of 
undivided earnings; statement of cash flows; statement of changes in 
members' equity; statement of revenue and expenses; and statement of 
cash receipts and disbursements.
    (d) Financial statement audit (also known as an ``opinion audit'') 
refers to an audit of the financial statements of a credit union 
performed in accordance with GAAS by an independent person who is 
licensed by the appropriate State or jurisdiction. The objective of a 
financial statement audit is to express an opinion as to whether those 
financial statements of the credit union present fairly, in all material 
respects, the financial position and the results of its operations and 
its cash flows in conformity with GAAP, as defined herein, or regulatory 
accounting practices.
    (e) GAAP is an acronym for ``generally accepted accounting 
principles'' which refers to the conventions, rules, and procedures 
which define accepted accounting practice. GAAP includes both broad 
general guidelines and detailed practices and procedures, provides a 
standard by which to measure financial statement presentations, and 
encompasses not only accounting principles and practices but also the 
methods of applying them.
    (f) GAAS is an acronym for ``generally accepted auditing standards'' 
which refers to the standards approved and adopted by the American 
Institute of Certified Public Accountants which apply when an 
``independent, licensed certified public accountant'' audits financial 
statements. Auditing standards differ from auditing procedures in that 
``procedures'' address acts to be performed, whereas ``standards'' 
measure the quality of the performance of those acts and the objectives 
to be achieved by use of the procedures undertaken. In addition, 
auditing standards address the auditor's professional qualifications as 
well as the judgment exercised in performing the audit and in preparing 
the report of the audit.
    (g) Independent means the impartiality necessary for the 
dependability of the compensated auditor's findings. Independence 
requires the exercise of fairness toward credit union officials, 
members, creditors and others who may rely upon the report of a 
supervisory committee audit report.
    (h) Internal control refers to the process, established by the 
credit union's board of directors, officers and employees, designed to 
provide reasonable assurance of reliable financial reporting and 
safeguarding of assets against unauthorized acquisition, use, or 
disposition. A credit union's internal control structure consists of 
five components: control environment; risk assessment; control 
activities; information and communication; and monitoring. Reliable 
financial reporting refers to preparation of Call Reports (NCUA Forms 
5300 and 5310) that meet management's financial reporting objectives. 
Internal control over safeguarding of assets against unauthorized 
acquisition, use, or disposition refers to prevention or timely 
detection of transactions involving such unauthorized access, use, or 
disposition of assets which could result in a loss that is material to 
the financial statements.
    (i) Reportable conditions refers to a matter coming to the attention 
of the independent, compensated auditor which, in his or her judgment, 
represents a significant deficiency in the design or operation of the 
internal control structure of the credit union, which could adversely 
affect its ability

[[Page 987]]

to record, process, summarize, and report financial data consistent with 
the representations of management in the financial statements.
    (j) Report on Examination of Internal Control over Call Reporting 
refers to an engagement in which an independent, licensed, certified 
public accountant or public accountant, consistent with attestation 
standards, examines and reports on management's written assertions 
concerning the effectiveness of its internal control over financial 
reporting in its most recently filed semiannual or year-end Call Report, 
with a concentration in high risk areas. For credit unions, such high 
risk areas most often include: lending activity; investing activity; and 
cash handling and deposit-taking activity.
    (k) State-licensed person refers to a certified public accountant or 
public accountant who is licensed by the State or jurisdiction where the 
credit union is principally located to perform accounting or auditing 
services for that credit union.
    (l) Supervisory committee refers to a supervisory committee as 
defined in Section 111(b) of the Federal Credit Union Act, 12 U.S.C. 
1761(b). For some federally-insured state chartered credit unions, the 
``audit committee'' designated by state statute or regulation is the 
equivalent of a supervisory committee.
    (m) Supervisory committee audit refers to an engagement under either 
Sec. 715.5 or Sec. 715.6 of this part.
    (n) Working papers refers to the principal record, in any form, of 
the work performed by the auditor and/or supervisory committee to 
support its findings and/or conclusions concerning significant matters. 
Examples include the written record of procedures applied, tests 
performed, information obtained, and pertinent conclusions reached in 
the engagement, proprietary audit programs, analyses, memoranda, letters 
of confirmation and representation, abstracts of credit union documents, 
reviewer's notes, if retained, and schedules or commentaries prepared or 
obtained in the course of the engagement.

[64 FR 41035, July 29, 1999, as amended at 66 FR 65624, Dec. 20, 2001]



Sec. 715.3  General responsibilities of the Supervisory Committee.

    (a) Basic. The supervisory committee is responsible for ensuring 
that the board of directors and management of the credit union--
    (1) Meet required financial reporting objectives and
    (2) Establish practices and procedures sufficient to safeguard 
members' assets.
    (b) Specific. To carry out the responsibilities set forth in 
paragraph (a) of this section, the supervisory committee must determine 
whether:
    (1) Internal controls are established and effectively maintained to 
achieve the credit union's financial reporting objectives which must be 
sufficient to satisfy the requirements of the supervisory committee 
audit, verification of members' accounts and its additional 
responsibilities;
    (2) The credit union's accounting records and financial reports are 
promptly prepared and accurately reflect operations and results;
    (3) The relevant plans, policies, and control procedures established 
by the board of directors are properly administered; and
    (4) Policies and control procedures are sufficient to safeguard 
against error, conflict of interest, self-dealing and fraud.
    (c) Mandates. In carrying out the responsibilities set forth in 
paragraphs (a) and (b) of this section, the Supervisory Committee must:
    (1) Ensure that the credit union adheres to the measurement and 
filing requirements for reports filed with the NCUA Board under 
Sec. 741.6 of this chapter;
    (2) Perform or obtain a supervisory committee audit, as prescribed 
in Sec. 715.4 of this part;
    (3) Verify or cause the verification of members' passbooks and 
accounts against the records of the credit union, as prescribed in 
Sec. 715.8 of this part;
    (4) Act to avoid imposition of sanctions for failure to comply with 
the requirements of this part, as prescribed in Secs. 715.11 and 715.12 
of this part.

[64 FR 41035, July 29, 1999, as amended at 69 FR 27828, May 17, 2004]

[[Page 988]]



Sec. 715.4  Audit responsibility of the Supervisory Committee.

    (a) Annual audit requirement. A federally-insured credit union is 
required to obtain an annual supervisory committee audit which occurs at 
least once every calendar year (period of performance) and must cover 
the period elapsed since the last audit period (period effectively 
covered).
    (b) Financial statement audit option. Any federally-insured credit 
union, whether Federally- or State-chartered and regardless of asset 
size, may choose to fulfill its Supervisory Committee audit 
responsibility by obtaining an annual audit of its financial statements 
performed in accordance with GAAS by an independent person who is 
licensed to do so by the State or jurisdiction in which the credit union 
is principally located. (A ``financial statement audit'' is distinct 
from a ``supervisory committee audit,'' although a financial statement 
audit is included among the options for fulfilling the supervisory 
committee audit requirement. Compare Sec. 715.2(c) and (j).)
    (c) Other audit options. A federally insured credit union which does 
not choose to obtain a financial statement audit as permitted by 
subsection (b) must fulfill its supervisory audit responsibility under 
either of Sec. 715.5 or Sec. 715.6 of this part, whichever is 
applicable. See Table 1. For purposes of this part, a credit union's 
asset size is the amount of total assets reported in the year-end Call 
Report (NCUA form 5300) filed for the calendar year-end immediately 
preceding the period under audit.
[GRAPHIC] [TIFF OMITTED] TR29JY99.000

    \1\ The Supervisory Committee audit responsibility under part 715 
can always be fulfilled by obtaining a financial statement audit. 
Sec. 715.4(b).



Sec. 715.5  Audit of Federal Credit Unions.

    (a) Total assets of $500 million or greater. To fulfill its 
Supervisory Committee audit responsibility, a Federal credit union 
having total assets of $500 million or greater, except as provided in 
Sec. 703.106(b)(3) of this chapter, must obtain an annual audit of its 
financial statements performed in accordance with Generally Accepted 
Auditing Standards by an independent person who is licensed to do so by 
the State or jurisdiction in which the credit union is principally 
located.

[[Page 989]]

    (b) Total assets of less than $500 million but more than $10 
million. To fulfill its Supervisory Committee audit responsibility, a 
Federally-chartered credit union having total assets of less than $500 
million but more than $10 million which does not choose to obtain an 
audit under Sec. 715.5(a), must obtain an annual supervisory committee 
audit as prescribed in Sec. 715.7.
    (c) Total assets of $10 million or less. To fulfill its Supervisory 
Committee audit responsibility, a Federally-chartered credit union 
having total assets of $10 million or less must obtain an annual 
Supervisory Committee audit as prescribed in Sec. 715.7.
    (d) Other requirements. A federally chartered credit union, 
regardless of which audit it is required to obtain under this section, 
must meet other applicable requirements of this part.

[64 FR 41035, July 29, 1999, as amended at 75 FR 34621, June 18, 2010; 
79 FR 5247, Jan. 31, 2014]



Sec. 715.6  Audit of Federally-insured State-chartered credit unions.

    (a) Total assets of $500 million or greater. To fulfill its 
Supervisory Committee audit responsibility, a federally-insured State-
chartered credit union having total assets of $500 million or greater 
must obtain an annual audit of its financial statements performed in 
accordance with GAAS by an independent person who is licensed to do so 
by the State or jurisdiction in which the credit union is principally 
located.
    (b) Total assets of less than $500 million. To fulfill its 
Supervisory Committee audit responsibility, a federally-insured State-
chartered credit union having total assets of less than $500 million 
must obtain either an annual supervisory committee audit as prescribed 
under either Sec. 715.6(a) or Sec. 715.7, or an audit as prescribed by 
the State or jurisdiction in which the credit union is principally 
located, whichever audit is more stringent.
    (c) Other requirements. A federally-insured, state-chartered credit 
union, regardless of which audit it is required to obtain under this 
section, must meet other applicable requirements of this part except 
Secs. 715.5 and 715.12.



Sec. 715.7  Supervisory Committee audit alternatives to a financial
statement audit.

    A credit union which is not required to obtain a financial statement 
audit may fulfill its supervisory committee responsibility by any one of 
the following engagements:
    (a) Balance sheet audit. A balance sheet audit, as defined in 
Sec. 715.2(a), performed by a person who is licensed to do so by the 
State or jurisdiction in which the credit union is principally located; 
or
    (b) Report on Examination of Internal Control over Call Reporting. 
An engagement and report on management's written assertions concerning 
the effectiveness of internal control over financial reporting in the 
credit union's most recently filed semiannual or year-end call report 
(NCUA Form 5300), as defined in Sec. 715.2(j), performed by a person who 
is licensed to do so by the State or jurisdiction in which the credit 
union is principally located, and in which management specifies the 
criteria on which it based its evaluation of internal control; or
    (c) Audit per Supervisory Committee Guide. An audit performed by the 
supervisory committee, its internal auditor, or any other qualified 
person (such as a certified public accountant, public accountant, league 
auditor, credit union auditor consultant, retired financial institutions 
examiner, etc.) in accordance with the procedures prescribed in NCUA's 
Supervisory Committee Guide. Qualified persons who are not State-
licensed cannot provide assurance services under this subsection.



Sec. 715.8  Requirements for verification of accounts and passbooks.

    (a) Verification obligation. The Supervisory Committee shall, at 
least once every two years, cause the passbooks (including any book, 
statements of account, or other record approved by the NCUA Board) and 
accounts of the members to be verified against the records of the 
treasurer of the credit union.
    (b) Methods. Any of the following methods may be used to verify 
members' passbooks and accounts, as appropriate:

[[Page 990]]

    (1) Controlled verification. A controlled verification of 100 
percent of members' share and loan accounts;
    (2) Statistical method. A sampling method which provides for:
    (i) Random selection:
    (ii) A sample which is representative of the population from which 
it was selected;
    (iii) An equal chance of selecting each dollar in the population;
    (iv) Sufficient accounts in both number and scope on which to base 
conclusions concerning management's financial reporting objectives; and
    (v) Additional procedures to be performed if evidence provided by 
confirmations alone is not sufficient.
    (3) Non-statistical method. When the verification is performed by an 
Independent person licensed by the State or jurisdiction in which the 
credit union is principally located, the auditor may choose among the 
sampling methods set forth in paragraphs (b)(1) and (2) of this section 
and non-statistical sampling methods consistent with GAAS if such 
methods provide for:
    (i) Sufficient accounts in both number and scope on which to base 
conclusions concerning management's financial reporting objectives to 
provide assurance that the General Ledger accounts are fairly stated in 
relation to the financial statements taken as a whole;
    (ii) Additional procedures to be performed by the auditor if 
evidence provided by confirmations alone is not sufficient; and
    (iii) Documentation of the sampling procedures used and of their 
consistency with GAAS (to be provided to the NCUA Board upon request).
    (c) Retention of records. The supervisory committee must retain the 
records of each verification of members' passbooks and accounts until it 
completes the next verification of members' passbooks and accounts.



Sec. 715.9  Assistance from outside, compensated person.

    (a) Unrelated to officials. A compensated auditor who performs a 
Supervisory Committee audit on behalf of a credit union shall not be 
related by blood or marriage to any management employee, member of 
either the board of directors, the Supervisory Committee or the credit 
committee, or loan officer of that credit union.
    (b) Engagement letter. The engagement of a compensated auditor to 
perform all or a portion of the scope of a financial statement audit or 
supervisory committee audit shall be evidenced by an engagement letter. 
In all cases, the engagement must be contracted directly with the 
Supervisory Committee. The engagement letter must be signed by the 
compensated auditor and acknowledged therein by the Supervisory 
Committee prior to commencement of the engagement.
    (c) Contents of letter. The engagement letter shall:
    (1) Specify the terms, conditions, and objectives of the engagement;
    (2) Identify the basis of accounting to be used;
    (3) If a Supervisory Committee Guide audit, include an appendix 
setting forth the procedures to be performed;
    (4) Specify the rate of, or total, compensation to be paid for the 
audit;
    (5) Provide that the auditor shall, upon completion of the 
engagement, deliver to the Supervisory Committee a written report of the 
audit and notice in writing, either within the report or communicated 
separately, of any internal control reportable conditions and/or 
irregularities or illegal acts, if any, which come to the auditor's 
attention during the normal course of the audit (i.e., no notice 
required if none noted);
    (6) Specify a target date of delivery of the written reports, such 
target date not to exceed 120 days from date of calendar or fiscal year-
end under audit (period covered), unless the supervisory committee 
obtains a waiver from the supervising NCUA Regional Director;
    (7) Certify that NCUA staff and/or the State credit union 
supervisor, or designated representatives of each, will be provided 
unconditional access to the complete set of original working papers, 
either at the offices of the credit union or at a mutually agreed upon 
location, for purposes of inspection; and
    (8) Acknowledge that working papers shall be retained for a minimum 
of three years from the date of the written audit report.
    (d) Complete scope. If the engagement is to perform a Supervisory 
Committee

[[Page 991]]

Guide audit intended to fully meet the requirements of Sec. 715.7(c), 
the engagement letter shall certify that the audit will address the 
complete scope of that engagement;
    (e) Exclusions from scope. If the engagement is to perform a 
Supervisory Committee Guide audit which will exclude any item required 
by the applicable section, the engagement letter shall:
    (1) Identify the excluded items;
    (2) State that, because of the exclusion(s), the resulting audit 
will not, by itself, fulfill the scope of a supervisory committee audit; 
and
    (3) Caution that the supervisory committee will remain responsible 
for fulfilling the scope of a supervisory committee audit with respect 
to the excluded items.



Sec. 715.10  Audit report and working paper maintenance and access.

    (a) Audit report. Upon completion and/or receipt of the written 
report of a financial statement audit or a supervisory committee audit, 
the Supervisory Committee must verify that the audit was performed and 
reported in accordance with the terms of the engagement letter 
prescribed herein. The Supervisory Committee must submit the report(s) 
to the board of directors, and provide a summary of the results of the 
audit to the members of the credit union orally or in writing at the 
next annual meeting of the credit union. If a member so requests, the 
Supervisory Committee shall provide the member access to the full audit 
report. If the National Credit Union Administration (``NCUA'') so 
requests, the Supervisory Committee shall provide NCUA a copy of each of 
the audit reports it receives or produces.
    (b) Working papers. The supervisory committee shall be responsible 
for preparing and maintaining, or making available, a complete set of 
original working papers supporting each supervisory committee audit. The 
supervisory committee shall, upon request, provide NCUA staff 
unconditional access to such working papers, either at the offices of 
the credit union or at a mutually agreeable location, for purposes of 
inspecting such working papers.



Sec. 715.11  Sanctions for failure to comply with this part.

    (a) Sanctions. Failure of a supervisory committee and/or its 
independent compensated auditor or other person to comply with the 
requirements of this section, or the terms of an engagement letter 
required by this section, is grounds for:
    (1) The regional director to reject the supervisory committee audit 
and provide a reasonable opportunity to correct deficiencies;
    (2) The regional director to impose the remedies available in 
Sec. 715.12, provided any of the conditions specified therein is 
present; and
    (3) The NCUA Board to seek formal administrative sanctions against 
the supervisory committee and/or its independent, compensated auditor 
pursuant to section 206(r) of the Federal Credit Union Act, 12 U.S.C. 
1786(r).
    (b) State Charters. In the case of a federally-insured state 
chartered credit union, NCUA shall provide the state regulator an 
opportunity to timely impose a remedy satisfactory to NCUA before 
exercising it authority under Sec. 741.202 of this chapter to impose a 
sanction permitted under paragraph (a) of this section.



Sec. 715.12  Statutory audit remedies for Federal credit unions.

    (a) Audit by alternative licensed person. The NCUA Board may compel 
a federal credit union to obtain a supervisory committee audit which 
meets the minimum requirements of Sec. 715.5 or Sec. 715.7, and which is 
performed by an independent person who is licensed by the State or 
jurisdiction in which the credit union is principally located, for any 
fiscal year in which any of the following three conditions is present:
    (1) The Supervisory Committee has not obtained an annual financial 
statement audit or performed a supervisory committee audit; or
    (2) The Supervisory Committee has obtained a financial statement 
audit or performed a supervisory committee audit which does not meet the 
requirements of part 715 including those in Sec. 715.8.
    (3) The credit union has experienced serious and persistent 
recordkeeping

[[Page 992]]

deficiencies as defined in paragraph (c) of this section.
    (b) Financial statement audit required. The NCUA Board may compel a 
federal credit union to obtain a financial statement audit performed in 
accordance with GAAS by an independent person who is licensed by the 
State or jurisdiction in which the credit union is principally located 
(even if such audit is not required by Sec. 715.5), for any fiscal year 
in which the credit union has experienced serious and persistent 
recordkeeping deficiencies as defined in paragraph (c) of this section. 
The objective of a financial statement audit performed under this 
paragraph is to reconstruct the records of the credit union sufficient 
to allow an unqualified or, if necessary, a qualified opinion on the 
credit union's financial statements. An adverse opinion or disclaimer of 
opinion should be the exception rather than the norm.
    (c) ``Serious and persistent recordkeeping deficiencies.'' A record-
keeping deficiency is ``serious'' if the NCUA Board reasonably believes 
that the board of directors and management of the credit union have not 
timely met financial reporting objectives and established practices and 
procedures sufficient to safeguard members' assets. A serious 
recordkeeping deficiency is ``persistent'' when it continues beyond a 
usual, expected or reasonable period of time.



PART 716_PRIVACY OF CONSUMER FINANCIAL INFORMATION--Table of Contents



    Authority: 15 U.S.C. 6801 et seq., 12 U.S.C. 1751 et seq.

    Source: 78 FR 32545, May 31, 2013, unless otherwise noted.



Sec. 716.1  Cross reference.

    The rules formerly at 12 CFR part 716 have been republished by the 
Consumer Financial Protection Bureau at 12 CFR part 1016, ``Privacy of 
Consumer Financial Information (Regulation P)''.



PART 717_FAIR CREDIT REPORTING--Table of Contents



                      Subpart A_General Provisions

Sec.
717.1  Purpose, scope, and effective dates.
717.2  Examples.
717.3  Definitions.

Subpart B [Reserved]

                      Subpart C_Affiliate Marketing

717.20  Coverage and definitions.
717.21  Affiliate marketing opt-out and exceptions.
717.22  Scope and duration of opt-out.
717.23  Contents of opt-out notice; consolidated and equivalent notices.
717.24  Reasonable opportunity to opt out.
717.25  Reasonable and simple methods of opting out.
717.26  Delivery of opt-out notices.
717.27  Renewal of opt-out.
717.28  Effective date, compliance date, and prospective application.

                      Subpart D_Medical Information

717.30  Obtaining or using medical information in connection with a 
          determination of eligibility for credit.
717.31  Limits on redisclosure of information.
717.32  Sharing medical information with affiliates.

              Subpart E_Duties of Furnishers of Information

717.40  Scope.
717.41  Definitions.
717.42  Reasonable policies and procedures concerning the accuracy and 
          integrity of furnished information.
717.43  Direct disputes.

Subparts F-H [Reserved]

    Subpart I_Duties of Users of Consumer Reports Regarding Address 
                   Discrepancies and Records Disposal

717.80-717.81  [Reserved]
717.82  Duties of users regarding address discrepancies.
717.83  Disposal of consumer information.

                   Subpart J_Identity Theft Red Flags

717.90  Duties regarding the detection, prevention, and mitigation of 
          identity theft.
717.91  Duties of card issuers regarding changes of address.

Appendixes A-B to part 717 [Reserved]
Appendix C to Part 717--Model Forms for Opt-Out Notices

[[Page 993]]

Appendix D to Part 717 [Reserved]
Appendix E to Part 717--Interagency Guidelines Concerning the Accuracy 
          and Integrity of Information Furnished to Consumer Reporting 
          Agencies
Appendixes F-I to Part 717 [Reserved]
Appendix J to Part 717--Interagency Guidelines on Identity Theft 
          Detection, Prevention, and Mitigation

    Authority: 12 U.S.C. 1751 et seq.; 15 U.S.C. 1681a, 1681b, 1681c, 
1681m, 1681s, 1681s-1, 1681t, 1681w, 6801 and 6805, Public Law 108-159, 
117 Stat. 1952.

    Source: 69 FR 69273, Nov. 29, 2004, unless otherwise noted.



                      Subpart A_General Provisions

    Source: 70 FR 70692, Nov. 22, 2005, unless otherwise noted.



Sec. 717.1  Purpose, scope, and effective dates.

    (a) Purpose. The purpose of this part is to implement the provisions 
of the Fair Credit Reporting Act. This part generally applies to federal 
credit unions that obtain and use information about consumers to 
determine the consumer's eligibility for products, services, or 
employment, share such information among affiliates, and furnish 
information to consumer reporting agencies.
    (b) Scope. (1) [Reserved]
    (2) Institutions covered. (i) Except as otherwise provided in this 
part, the regulations in this part apply to federal credit unions.

[72 FR 62981, Nov. 7, 2007]



Sec. 717.2  Examples.

    The examples in this part are not exclusive. Compliance with an 
example, to the extent applicable, constitutes compliance with this 
part. Examples in a paragraph illustrate only the issue described in the 
paragraph and do not illustrate any other issue that may arise in this 
part.



Sec. 717.3  Definitions.

    For purposes of this part, unless explicitly stated otherwise:
    (a) Act means the Fair Credit Reporting Act (15 U.S.C. 1681 et 
seq.).
    (b) Affiliate means any company that is related by common ownership 
or common corporate control with another company. For example, an 
affiliate of a Federal credit union is a credit union service 
corporation (CUSO), as provided in 12 CFR part 712, that is controlled 
by the Federal credit union.
    (c) [Reserved]
    (d) Company means any corporation, limited liability company, 
business trust, general or limited partnership, association, or similar 
organization.
    (e) Consumer means an individual.
    (f)-(h) [Reserved]
    (i) Common ownership or common corporate control means a 
relationship between two companies under which:
    (1) One company has, with respect to the other company:
    (i) Ownership, control, or power to vote 25 percent or more of the 
outstanding shares of any class of voting security of a company, 
directly or indirectly, or acting through one or more other persons;
    (ii) Control in any manner over the election of a majority of the 
directors, trustees, or general partners (or individuals exercising 
similar functions) of a company; or
    (iii) The power to exercise, directly or indirectly, a controlling 
influence over the management or policies of a company, as the NCUA 
determines; or
    (iv) Example. NCUA will presume a credit union has a controlling 
influence over the management or policies of a CUSO, if the CUSO is 67% 
owned by credit unions.
    (2) Any other person has, with respect to both companies, a 
relationship described in paragraphs (i)(1)(i) through (i)(1)(iii) of 
this section.
    (j) [Reserved]
    (k) Medical information means:
    (1) Information or data, whether oral or recorded, in any form or 
medium, created by or derived from a health care provider or the 
consumer, that relates to:
    (i) The past, present, or future physical, mental, or behavioral 
health or condition of an individual;
    (ii) The provision of health care to an individual; or
    (iii) The payment for the provision of health care to an individual.
    (2) The term does not include:
    (i) The age or gender of a consumer;

[[Page 994]]

    (ii) Demographic information about the consumer, including a 
consumer's residence address or e-mail address;
    (iii) Any other information about a consumer that does not relate to 
the physical, mental, or behavioral health or condition of a consumer, 
including the existence or value of any insurance policy; or
    (iv) Information that does not identify a specific consumer.
    (l) Person means any individual, partnership, corporation, trust, 
estate, cooperative, association, government or governmental subdivision 
or agency, or other entity.

[70 FR 70692, Nov. 22, 2005, as amended at 72 FR 63768, Nov. 9, 2007; 75 
FR 34621, June 18, 2010]

Subpart B [Reserved]



                      Subpart C_Affiliate Marketing

    Source: 72 FR 62981, Nov. 7, 2007, unless otherwise noted.



Sec. 717.20  Coverage and definitions.

    (a) Coverage. Subpart C of this part applies to federal credit 
unions and their affiliates as defined in Sec. 717.3(a) of Subpart A.
    (b) Definitions. For purposes of this subpart:
    (1) Clear and conspicuous. The term ``clear and conspicuous'' means 
reasonably understandable and designed to call attention to the nature 
and significance of the information presented.
    (2) Concise. (i) In general. The term ``concise'' means a reasonably 
brief expression or statement.
    (ii) Combination with other required disclosures. A notice required 
by this subpart may be concise even if it is combined with other 
disclosures required or authorized by federal or state law.
    (3) Eligibility information. The term ``eligibility information'' 
means any information the communication of which would be a consumer 
report if the exclusions from the definition of ``consumer report'' in 
section 603(d)(2)(A) of the Act did not apply. Eligibility information 
does not include aggregate or blind data that does not contain personal 
identifiers such as account numbers, names, or addresses.
    (4) Pre-existing business relationship--(i) In general. The term 
``pre-existing business relationship'' means a relationship between a 
person, or a person's licensed agent, and a consumer based on--
    (A) A financial contract between the person and the consumer which 
is in force on the date on which the consumer is sent a solicitation 
covered by this subpart;
    (B) The purchase, rental, or lease by the consumer of the person's 
goods or services, or a financial transaction (including holding an 
active account or a policy in force or having another continuing 
relationship) between the consumer and the person, during the 18-month 
period immediately preceding the date on which the consumer is sent a 
solicitation covered by this subpart; or
    (C) An inquiry or application by the consumer regarding a product or 
service offered by that person during the three-month period immediately 
preceding the date on which the consumer is sent a solicitation covered 
by this subpart.
    (ii) Examples of pre-existing business relationships. (A) If a 
consumer has a time deposit account, such as a share certificate, at a 
federal credit union that is currently in force, the federal credit 
union has a pre-existing business relationship with the consumer and can 
use eligibility information it receives from its affiliates to make 
solicitations to the consumer about its products or services.
    (B) If a consumer obtained a share certificate from a federal credit 
union, but did not renew the certificate at maturity, the federal credit 
union has a pre-existing business relationship with the consumer and can 
use eligibility information it receives from its affiliates to make 
solicitations to the consumer about its products or services for 18 
months after the date of maturity of the share certificate.
    (C) If a consumer obtains a mortgage, the mortgage lender has a pre-
existing business relationship with the consumer. If the mortgage lender 
sells the consumer's entire loan to an investor, the mortgage lender has 
a pre-existing

[[Page 995]]

business relationship with the consumer and can use eligibility 
information it receives from its affiliates to make solicitations to the 
consumer about its products or services for 18 months after the date it 
sells the loan, and the investor has a pre-existing business 
relationship with the consumer upon purchasing the loan. If, however, 
the mortgage lender sells a fractional interest in the consumer's loan 
to an investor but also retains an ownership interest in the loan, the 
mortgage lender continues to have a pre-existing business relationship 
with the consumer, but the investor does not have a pre-existing 
business relationship with the consumer. If the mortgage lender retains 
ownership of the loan, but sells ownership of the servicing rights to 
the consumer's loan, the mortgage lender continues to have a pre-
existing business relationship with the consumer. The purchaser of the 
servicing rights also has a pre-existing business relationship with the 
consumer as of the date it purchases ownership of the servicing rights, 
but only if it collects payments from or otherwise deals directly with 
the consumer on a continuing basis.
    (D) If a consumer applies to a federal credit union for a product or 
service that it offers, but does not obtain a product or service from or 
enter into a financial contract or transaction with the institution, the 
federal credit union has a pre-existing business relationship with the 
consumer and can therefore use eligibility information it receives from 
an affiliate to make solicitations to the consumer about its products or 
services for three months after the date of the application.
    (E) If a consumer makes a telephone inquiry to a federal credit 
union about its products or services and provides contact information to 
the institution, but does not obtain a product or service from or enter 
into a financial contract or transaction with the institution, the 
federal credit union has a pre-existing business relationship with the 
consumer and can therefore use eligibility information it receives from 
an affiliate to make solicitations to the consumer about its products or 
services for three months after the date of the inquiry.
    (F) If a consumer makes an inquiry to a federal credit union by e-
mail about its products or services, but does not obtain a product or 
service from or enter into a financial contract or transaction with the 
institution, the federal credit union has a pre-existing business 
relationship with the consumer and can therefore use eligibility 
information it receives from an affiliate to make solicitations to the 
consumer about its products or services for three months after the date 
of the inquiry.
    (G) If a consumer has an existing relationship with a federal credit 
union that is part of a group of affiliated companies, makes a telephone 
call to the centralized call center for the group of affiliated 
companies to inquire about products or services offered by the insurance 
brokerage affiliate, and provides contact information to the call 
center, the call constitutes an inquiry to the insurance brokerage 
affiliate that offers those products or services. The insurance 
brokerage affiliate has a pre-existing business relationship with the 
consumer and can therefore use eligibility information it receives from 
its affiliated federal credit union to make solicitations to the 
consumer about its products or services for three months after the date 
of the inquiry.
    (iii) Examples where no pre-existing business relationship is 
created. (A) If a consumer makes a telephone call to a centralized call 
center for a group of affiliated companies to inquire about the 
consumer's existing account at a federal credit union, the call does not 
constitute an inquiry to any affiliate other than the federal credit 
union that holds the consumer's account and does not establish a pre-
existing business relationship between the consumer and any affiliate of 
the account-holding federal credit union.
    (B) If a consumer who has a deposit account with a federal credit 
union makes a telephone call to an affiliate of the institution to ask 
about the affiliate's retail locations and hours, but does not make an 
inquiry about the affiliate's products or services, the call does not 
constitute an inquiry and does not establish a pre-existing business 
relationship between the consumer and

[[Page 996]]

the affiliate. Also, the affiliate's capture of the consumer's telephone 
number does not constitute an inquiry and does not establish a pre-
existing business relationship between the consumer and the affiliate.
    (C) If a consumer makes a telephone call to a federal credit union 
in response to an advertisement that offers a free promotional item to 
consumers who call a toll-free number, but the advertisement does not 
indicate that the federal credit union's products or services will be 
marketed to consumers who call in response, the call does not create a 
pre-existing business relationship between the consumer and the federal 
credit union because the consumer has not made an inquiry about a 
product or service offered by the institution, but has merely responded 
to an offer for a free promotional item.
    (5) Solicitation--(i) In general. The term ``solicitation'' means 
the marketing of a product or service initiated by a person to a 
particular consumer that is--
    (A) Based on eligibility information communicated to that person by 
its affiliate as described in this subpart; and
    (B) Intended to encourage the consumer to purchase or obtain such 
product or service.
    (ii) Exclusion of marketing directed at the general public. A 
solicitation does not include marketing communications that are directed 
at the general public. For example, television, general circulation 
magazine, and billboard advertisements do not constitute solicitations, 
even if those communications are intended to encourage consumers to 
purchase products and services from the person initiating the 
communications.
    (iii) Examples of solicitations. A solicitation would include, for 
example, a telemarketing call, direct mail, e-mail, or other form of 
marketing communication directed to a particular consumer that is based 
on eligibility information received from an affiliate.
    (6) You means a person described in paragraph (a) of this section.

[70 FR 70692, Nov. 22, 2005, as amended at 75 FR 34621, June 18, 2010]



Sec. 717.21  Affiliate marketing opt-out and exceptions.

    (a) Initial notice and opt-out requirement--(1) In general. You may 
not use eligibility information about a consumer that you receive from 
an affiliate to make a solicitation for marketing purposes to the 
consumer, unless--
    (i) It is clearly and conspicuously disclosed to the consumer in 
writing or, if the consumer agrees, electronically, in a concise notice 
that you may use eligibility information about that consumer received 
from an affiliate to make solicitations for marketing purposes to the 
consumer;
    (ii) The consumer is provided a reasonable opportunity and a 
reasonable and simple method to ``opt out,'' or prohibit you from using 
eligibility information to make solicitations for marketing purposes to 
the consumer; and
    (iii) The consumer has not opted out.
    (2) Example. A consumer has a homeowner's insurance policy obtained 
through an insurance brokerage. The insurance brokerage furnishes 
eligibility information about the consumer to its affiliated federal 
credit union. Based on that eligibility information, the federal credit 
union wants to make a solicitation to the consumer about its home equity 
loan products. The federal credit union does not have a pre-existing 
business relationship with the consumer and none of the other exceptions 
apply. The federal credit union is prohibited from using eligibility 
information received from its insurance brokerage affiliate to make 
solicitations to the consumer about its home equity loan products unless 
the consumer is given a notice and opportunity to opt out and the 
consumer does not opt out.
    (3) Affiliates who may provide the notice. The notice required by 
this paragraph must be provided:
    (i) By an affiliate that has or has previously had a pre-existing 
business relationship with the consumer; or
    (ii) As part of a joint notice from two or more members of an 
affiliated group of companies, provided that at least one of the 
affiliates on the joint notice

[[Page 997]]

has or has previously had a pre-existing business relationship with the 
consumer.
    (b) Making solicitations--(1) In general. For purposes of this 
subpart, you make a solicitation for marketing purposes if--
    (i) You receive eligibility information from an affiliate;
    (ii) You use that eligibility information to do one or more of the 
following:
    (A) Identify the consumer or type of consumer to receive a 
solicitation;
    (B) Establish criteria used to select the consumer to receive a 
solicitation; or
    (C) Decide which of your products or services to market to the 
consumer or tailor your solicitation to that consumer; and
    (iii) As a result of your use of the eligibility information, the 
consumer is provided a solicitation.
    (2) Receiving eligibility information from an affiliate, including 
through a common database. You may receive eligibility information from 
an affiliate in various ways, including when the affiliate places that 
information into a common database that you may access.
    (3) Receipt or use of eligibility information by your service 
provider. Except as provided in paragraph (b)(5) of this section, you 
receive or use an affiliate's eligibility information if a service 
provider acting on your behalf (whether an affiliate or a nonaffiliated 
third party) receives or uses that information in the manner described 
in paragraphs (b)(1)(i) or (b)(1)(ii) of this section. All relevant 
facts and circumstances will determine whether a person is acting as 
your service provider when it receives or uses an affiliate's 
eligibility information in connection with marketing your products and 
services.
    (4) Use by an affiliate of its own eligibility information. Unless 
you have used eligibility information that you receive from an affiliate 
in the manner described in paragraph (b)(1)(ii) of this section, you do 
not make a solicitation subject to this subpart if your affiliate:
    (i) Uses its own eligibility information that it obtained in 
connection with a pre-existing business relationship it has or had with 
the consumer to market your products or services to the consumer; or
    (ii) Directs its service provider to use the affiliate's own 
eligibility information that it obtained in connection with a pre-
existing business relationship it has or had with the consumer to market 
your products or services to the consumer, and you do not communicate 
directly with the service provider regarding that use.
    (5) Use of eligibility information by a service provider--(i) In 
general. You do not make a solicitation subject to subpart C of this 
part if a service provider (including an affiliated or third-party 
service provider that maintains or accesses a common database that you 
may access) receives eligibility information from your affiliate that 
your affiliate obtained in connection with a pre-existing business 
relationship it has or had with the consumer and uses that eligibility 
information to market your products or services to the consumer, so long 
as--
    (A) Your affiliate controls access to and use of its eligibility 
information by the service provider (including the right to establish 
the specific terms and conditions under which the service provider may 
use such information to market your products or services);
    (B) Your affiliate establishes specific terms and conditions under 
which the service provider may access and use the affiliate's 
eligibility information to market your products and services (or those 
of affiliates generally) to the consumer, such as the identity of the 
affiliated companies whose products or services may be marketed to the 
consumer by the service provider, the types of products or services of 
affiliated companies that may be marketed, and the number of times the 
consumer may receive marketing materials, and periodically evaluates the 
service provider's compliance with those terms and conditions;
    (C) Your affiliate requires the service provider to implement 
reasonable policies and procedures designed to ensure that the service 
provider uses the affiliate's eligibility information in accordance with 
the terms and conditions established by the affiliate relating to the 
marketing of your products or services;

[[Page 998]]

    (D) Your affiliate is identified on or with the marketing materials 
provided to the consumer; and
    (E) You do not directly use your affiliate's eligibility information 
in the manner described in paragraph (b)(1)(ii) of this section.
    (ii) Writing requirements. (A) The requirements of paragraphs 
(b)(5)(i)(A) and (C) of this section must be set forth in a written 
agreement between your affiliate and the service provider; and
    (B) The specific terms and conditions established by your affiliate 
as provided in paragraph (b)(5)(i)(B) of this section must be set forth 
in writing.
    (6) Examples of making solicitations. (i) A consumer has a deposit 
account with a federal credit union, which is affiliated with an 
insurance brokerage. The insurance brokerage receives eligibility 
information about the consumer from the federal credit union. The 
insurance brokerage uses that eligibility information to identify the 
consumer to receive a solicitation about insurance brokerage services, 
and, as a result, the insurance brokerage provides a solicitation to the 
consumer about its services. Pursuant to paragraph (b)(1) of this 
section, the insurance brokerage has made a solicitation to the 
consumer.
    (ii) The same facts as in the example in paragraph (b)(6)(i) of this 
section, except that after using the eligibility information to identify 
the consumer to receive a solicitation about insurance brokerage 
services, the insurance brokerage asks the federal credit union to send 
the solicitation to the consumer and the federal credit union does so. 
Pursuant to paragraph (b)(1) of this section, the insurance brokerage 
has made a solicitation to the consumer because it used eligibility 
information about the consumer that it received from an affiliate to 
identify the consumer to receive a solicitation about its products or 
services, and, as a result, a solicitation was provided to the consumer 
about the insurance brokerage's services.
    (iii) The same facts as in the example in paragraph (b)(6)(i) of 
this section, except that eligibility information about consumers that 
have deposit accounts with the federal credit union is placed into a 
common database that all members of the affiliated group of companies 
may independently access and use. Without using the federal credit 
union's eligibility information, the insurance brokerage develops 
selection criteria and provides those criteria, marketing materials, and 
related instructions to the federal credit union. The federal credit 
union reviews eligibility information about its own consumers using the 
selection criteria provided by the insurance brokerage to determine 
which consumers should receive the insurance brokerage's marketing 
materials and sends marketing materials about the insurance brokerage's 
services to those consumers. Even though the insurance brokerage has 
received eligibility information through the common database as provided 
in paragraph (b)(2) of this section, it did not use that information to 
identify consumers or establish selection criteria; instead, the federal 
credit union used its own eligibility information. Therefore, pursuant 
to paragraph (b)(4)(i) of this section, the insurance brokerage has not 
made a solicitation to the consumer.
    (iv) The same facts as in the example in paragraph (b)(6)(iii) of 
this section, except that the federal credit union provides the 
insurance brokerage's criteria to the federal credit union's service 
provider and directs the service provider to use the federal credit 
union's eligibility information to identify federal credit union 
consumers who meet the criteria and to send the insurance brokerage's 
marketing materials to those consumers. The insurance brokerage does not 
communicate directly with the service provider regarding the use of the 
federal credit union's information to market its services to the federal 
credit union's consumers. Pursuant to paragraph (b)(4)(ii) of this 
section, the insurance brokerage has not made a solicitation to the 
consumer.
    (v) An affiliated group of companies includes a federal credit 
union, an insurance brokerage, and a service provider. Each affiliate in 
the group places information about its consumers into a common database. 
The service provider has access to all information in the common 
database. The federal credit

[[Page 999]]

union controls access to and use of its eligibility information by the 
service provider. This control is set forth in a written agreement 
between the federal credit union and the service provider. The written 
agreement also requires the service provider to establish reasonable 
policies and procedures designed to ensure that the service provider 
uses the federal credit union's eligibility information in accordance 
with specific terms and conditions established by the federal credit 
union relating to the marketing of the products and services of all 
affiliates, including the insurance brokerage. In a separate written 
communication, the federal credit union specifies the terms and 
conditions under which the service provider may use the federal credit 
union's eligibility information to market the insurance brokerage's 
products and services to the federal credit union's consumers. The 
specific terms and conditions are: a list of affiliated companies 
(including the insurance brokerage) whose products or services may be 
marketed to the federal credit union's consumers by the service 
provider; the specific products or types of products that may be 
marketed to the federal credit union's consumers by the service 
provider; the categories of eligibility information that may be used by 
the service provider in marketing products or services to the federal 
credit union's consumers; the types or categories of the federal credit 
union's consumers to whom the service provider may market products or 
services of federal credit union affiliates; the number and/or types of 
marketing communications that the service provider may send to the 
federal credit union's consumers; and the length of time during which 
the service provider may market the products or services of the federal 
credit union's affiliates to its consumers. The federal credit union 
periodically evaluates the service provider's compliance with these 
terms and conditions. The insurance brokerage asks the service provider 
to market insurance products to certain consumers who have deposit 
accounts with the federal credit union. Without using the federal credit 
union's eligibility information, the insurance brokerage develops 
selection criteria and provides those criteria, marketing materials, and 
related instructions to the service provider. The service provider uses 
the federal credit union's eligibility information from the common 
database to identify the federal credit union's consumers to whom 
insurance brokerage services will be marketed. When the insurance 
brokerage's marketing materials are provided to the identified 
consumers, the name of the federal credit union is displayed on the 
brokerage marketing materials, an introductory letter that accompanies 
the marketing materials, an account statement that accompanies the 
marketing materials, or the envelope containing the marketing materials. 
The requirements of paragraph (b)(5) of this section have been 
satisfied, and the insurance brokerage has not made a solicitation to 
the consumer.
    (vi) The same facts as in the example in paragraph (b)(6)(v) of this 
section, except that the terms and conditions permit the service 
provider to use the federal credit union's eligibility information to 
market the products and services of other affiliates to the federal 
credit union's consumers whenever the service provider deems it 
appropriate to do so. The service provider uses the federal credit 
union's eligibility information in accordance with the discretion 
afforded to it by the terms and conditions. Because the terms and 
conditions are not specific, the requirements of paragraph (b)(5) of 
this section have not been satisfied.
    (c) Exceptions. The provisions of this subpart do not apply to you 
if you use eligibility information that you receive from an affiliate:
    (1) To make a solicitation for marketing purposes to a consumer with 
whom you have a pre-existing business relationship;
    (2) To facilitate communications to an individual for whose benefit 
you provide employee benefit or other services pursuant to a contract 
with an employer related to and arising out of the current employment 
relationship or status of the individual as a participant or beneficiary 
of an employee benefit plan;

[[Page 1000]]

    (3) To perform services on behalf of an affiliate, except that this 
subparagraph shall not be construed as permitting you to send 
solicitations on behalf of an affiliate if the affiliate would not be 
permitted to send the solicitation as a result of the election of the 
consumer to opt out under this subpart;
    (4) In response to a communication about your products or services 
initiated by the consumer;
    (5) In response to an authorization or request by the consumer to 
receive solicitations; or
    (6) If your compliance with this subpart would prevent you from 
complying with any provision of State insurance laws pertaining to 
unfair discrimination in any State in which you are lawfully doing 
business.
    (d) Examples of exceptions--(1) Example of the pre-existing business 
relationship exception. A consumer has a deposit account with a federal 
credit union. The consumer also has a relationship with the federal 
credit union's securities brokerage affiliate. The federal credit union 
receives eligibility information about the consumer from its securities 
brokerage affiliate and uses that information to make a solicitation to 
the consumer about the federal credit union's wealth management 
services. The federal credit union may make this solicitation even if 
the consumer has not been given a notice and opportunity to opt out 
because the federal credit union has a pre-existing business 
relationship with the consumer.
    (2) Examples of service provider exception. (i) A consumer has an 
insurance policy obtained through an insurance brokerage. The insurance 
brokerage furnishes eligibility information about the consumer to its 
affiliated federal credit union. Based on that eligibility information, 
the federal credit union wants to make a solicitation to the consumer 
about membership and its deposit products. The federal credit union does 
not have a pre-existing business relationship with the consumer and none 
of the other exceptions in paragraph (c) of this section apply. The 
consumer has been given an opt-out notice and has elected to opt out of 
receiving such solicitations. The federal credit union asks a service 
provider to send the solicitation to the consumer on its behalf. The 
service provider may not send the solicitation on behalf of the federal 
credit union because, as a result of the consumer's opt-out election, 
the federal credit union is not permitted to make the solicitation.
    (ii) The same facts as in paragraph (d)(2)(i) of this section, 
except the consumer has been given an opt-out notice, but has not 
elected to opt out. The federal credit union asks a service provider to 
send the solicitation to the consumer on its behalf. The service 
provider may send the solicitation on behalf of the federal credit union 
because, as a result of the consumer's not opting out, the federal 
credit union is permitted to make the solicitation.
    (3) Examples of consumer-initiated communications. (i) A consumer 
who has a deposit account with a federal credit union initiates a 
communication with the federal credit union's credit card affiliate to 
request information about a credit card. The credit card affiliate may 
use eligibility information about the consumer it obtains from the 
federal credit union or any other affiliate to make solicitations 
regarding credit card products in response to the consumer-initiated 
communication.
    (ii) A consumer who has a deposit account with a federal credit 
union contacts the institution to request information about how to save 
and invest for a child's college education without specifying the type 
of product in which the consumer may be interested. Information about a 
range of different products or services offered by the federal credit 
union and one or more affiliates of the institution may be responsive to 
that communication. Such products or services may include the following: 
Mutual funds offered by the institution; section 529 plans offered by 
the institution or its securities brokerage affiliate; or trust services 
offered by the institution or its trust services affiliate. Any 
affiliate offering investment counseling services that would be 
responsive to the consumer's request for information about saving and 
investing for a child's college education may use eligibility 
information to make solicitations to the consumer in response to this 
communication.

[[Page 1001]]

    (iii) A credit card issuer makes a marketing call to the consumer 
without using eligibility information received from an affiliate. The 
issuer leaves a voice-mail message that invites the consumer to call a 
toll-free number to apply for the issuer's credit card. If the consumer 
calls the toll-free number to inquire about the credit card, the call is 
a consumer-initiated communication about a product or service and the 
credit card issuer may now use eligibility information it receives from 
its affiliates to make solicitations to the consumer.
    (iv) A consumer calls a federal credit union to ask about retail 
locations and hours, but does not request information about products or 
services. The institution may not use eligibility information it 
receives from an affiliate to make solicitations to the consumer about 
its products or services because the consumer-initiated communication 
does not relate to the federal credit union's products or services. 
Thus, the use of eligibility information received from an affiliate 
would not be responsive to the communication and the exception does not 
apply.
    (v) A consumer calls a federal credit union to ask about retail 
locations and hours. The customer service representative asks the 
consumer if there is a particular product or service about which the 
consumer is seeking information. The consumer responds that the consumer 
wants to stop in and find out about share certificates. The customer 
service representative offers to provide that information by telephone 
and mail additional information and application materials to the 
consumer. The consumer agrees and provides or confirms contact 
information for receipt of the materials to be mailed. The federal 
credit union may use eligibility information it receives from an 
affiliate to make solicitations to the consumer about share certificates 
because such solicitations would respond to the consumer-initiated 
communication about products or services.
    (4) Examples of consumer authorization or request for solicitations. 
(i) A consumer who obtains a mortgage from a federal credit union 
authorizes or requests information about obtaining homeowner's insurance 
through the federal credit union's insurance brokerage affiliate. Such 
authorization or request, whether given to the federal credit union or 
to the insurance brokerage affiliate, would permit the insurance 
brokerage to use eligibility information about the consumer it obtains 
from the federal credit union or any other affiliate to make 
solicitations to the consumer about its homeowner's insurance services.
    (ii) A consumer completes an online application to apply for a 
credit card from a credit card issuer. The issuer's online application 
contains a blank check box that the consumer may check to authorize or 
request information from the credit card issuer's affiliates. The 
consumer checks the box. The consumer has authorized or requested 
solicitations from the card issuer's affiliates.
    (iii) A consumer completes an online application to apply for a 
credit card from a credit card issuer. The issuer's online application 
contains a pre-selected check box indicating that the consumer 
authorizes or requests information from the issuer's affiliates. The 
consumer does not deselect the check box. The consumer has not 
authorized or requested solicitations from the card issuer's affiliates.
    (iv) The terms and conditions of a credit card account agreement 
contain preprinted boilerplate language stating that by applying to open 
an account the consumer authorizes or requests to receive solicitations 
from the credit card issuer's affiliates. The consumer has not 
authorized or requested solicitations from the card issuer's affiliates.
    (e) Relation to affiliate-sharing notice and opt-out. Nothing in 
this subpart limits the responsibility of a person to comply with the 
notice and opt-out provisions of section 603(d)(2)(A)(iii) of the Act 
where applicable.



Sec. 717.22  Scope and duration of opt-out.

    (a) Scope of opt-out--(1) In general. Except as otherwise provided 
in this section, the consumer's election to opt out prohibits any 
affiliate covered by

[[Page 1002]]

the opt-out notice from using eligibility information received from 
another affiliate as described in the notice to make solicitations to 
the consumer.
    (2) Continuing relationship--(i) In general. If the consumer 
establishes a continuing relationship with you or your affiliate, an 
opt-out notice may apply to eligibility information obtained in 
connection with--
    (A) A single continuing relationship or multiple continuing 
relationships that the consumer establishes with you or your affiliates, 
including continuing relationships established subsequent to delivery of 
the opt-out notice, so long as the notice adequately describes the 
continuing relationships covered by the opt-out; or
    (B) Any other transaction between the consumer and you or your 
affiliates as described in the notice.
    (ii) Examples of continuing relationships. A consumer has a 
continuing relationship with you or your affiliate if the consumer--
    (A) Opens a deposit or investment account with you or your 
affiliate;
    (B) Obtains a loan for which you or your affiliate owns the 
servicing rights;
    (C) Purchases an insurance product from you or your affiliate;
    (D) Holds an investment product through you or your affiliate, such 
as when you act or your affiliate acts as a custodian for securities or 
for assets in an individual retirement arrangement;
    (E) Enters into an agreement or understanding with you or your 
affiliate whereby you or your affiliate undertakes to arrange or broker 
a home mortgage loan for the consumer;
    (F) Enters into a lease of personal property with you or your 
affiliate; or
    (G) Obtains financial, investment, or economic advisory services 
from you or your affiliate for a fee.
    (3) No continuing relationship--(i) In general. If there is no 
continuing relationship between a consumer and you or your affiliate, 
and you or your affiliate obtain eligibility information about a 
consumer in connection with a transaction with the consumer, such as an 
isolated transaction or a credit application that is denied, an opt-out 
notice provided to the consumer only applies to eligibility information 
obtained in connection with that transaction.
    (ii) Examples of isolated transactions. An isolated transaction 
occurs if--
    (A) The consumer uses your or your affiliate's ATM to withdraw cash 
from an account at another financial institution; or
    (B) You or your affiliate sells the consumer a cashier's check or 
money order, airline tickets, travel insurance, or traveler's checks in 
isolated transactions.
    (4) Menu of alternatives. A consumer may be given the opportunity to 
choose from a menu of alternatives when electing to prohibit 
solicitations, such as by electing to prohibit solicitations from 
certain types of affiliates covered by the opt-out notice but not other 
types of affiliates covered by the notice, electing to prohibit 
solicitations based on certain types of eligibility information but not 
other types of eligibility information, or electing to prohibit 
solicitations by certain methods of delivery but not other methods of 
delivery. However, one of the alternatives must allow the consumer to 
prohibit all solicitations from all of the affiliates that are covered 
by the notice.
    (5) Special rule for a notice following termination of all 
continuing relationships--(i) In general. A consumer must be given a new 
opt-out notice if, after all continuing relationships with you or your 
affiliate(s) are terminated, the consumer subsequently establishes 
another continuing relationship with you or your affiliate(s) and the 
consumer's eligibility information is to be used to make a solicitation. 
The new opt-out notice must apply, at a minimum, to eligibility 
information obtained in connection with the new continuing relationship. 
Consistent with paragraph (b) of this section, the consumer's decision 
not to opt out after receiving the new opt-out notice would not override 
a prior opt-out election by the consumer that applies to eligibility 
information obtained in connection with a terminated relationship, 
regardless of whether the new opt-out notice applies to eligibility 
information obtained in connection with the terminated relationship.

[[Page 1003]]

    (ii) Example. A consumer is a member of a federal credit union that 
is part of an affiliated group. The consumer terminates his membership. 
One year later, the consumer rejoins and opens a savings account with 
the same federal credit union. The consumer must be given a new notice 
and opportunity to opt out before the federal credit union's affiliates 
may make solicitations to the consumer using eligibility information 
obtained by the federal credit union in connection with the newly 
established account relationship, regardless of whether the consumer 
opted out in connection with accounts held during the previous member 
relationship.
    (b) Duration of opt-out. The election of a consumer to opt out must 
be effective for a period of at least five years (the ``opt-out 
period'') beginning when the consumer's opt-out election is received and 
implemented, unless the consumer subsequently revokes the opt-out in 
writing or, if the consumer agrees, electronically. An opt-out period of 
more than five years may be established, including an opt-out period 
that does not expire unless revoked by the consumer.
    (c) Time of opt-out. A consumer may opt out at any time.



Sec. 717.23  Contents of opt-out notice; consolidated and equivalent
notices.

    (a) Contents of opt-out notice--(1) In general. A notice must be 
clear, conspicuous, and concise, and must accurately disclose:
    (i) The name of the affiliate(s) providing the notice. If the notice 
is provided jointly by multiple affiliates and each affiliate shares a 
common name, such as ``ABC,'' then the notice may indicate that it is 
being provided by multiple companies with the ABC name or multiple 
companies in the ABC group or family of companies, for example, by 
stating that the notice is provided by ``all of the ABC companies,'' 
``the ABC federal credit union, credit card, insurance brokerage, and 
securities brokerage companies,'' or by listing the name of each 
affiliate providing the notice. But if the affiliates providing the 
joint notice do not all share a common name, then the notice must either 
separately identify each affiliate by name or identify each of the 
common names used by those affiliates, for example, by stating that the 
notice is provided by ``all of the ABC and XYZ companies'' or by ``the 
ABC federal credit union and credit card companies and the XYZ insurance 
brokerage company''
    (ii) A list of the affiliates or types of affiliates whose use of 
eligibility information is covered by the notice, which may include 
companies that become affiliates after the notice is provided to the 
consumer. If each affiliate covered by the notice shares a common name, 
such as ``ABC,'' then the notice may indicate that it applies to 
multiple companies with the ABC name or multiple companies in the ABC 
group or family of companies, for example, by stating that the notice is 
provided by ``all of the ABC companies,'' ``the ABC federal credit 
union, credit card, insurance brokerage, and securities brokerage 
companies,'' or by listing the name of each affiliate providing the 
notice. But if the affiliates covered by the notice do not all share a 
common name, then the notice must either separately identify each 
covered affiliate by name or identify each of the common names used by 
those affiliates, for example, by stating that the notice applies to 
``all of the ABC and XYZ companies'' or to ``the ABC federal credit 
union and credit card companies and the XYZ insurance brokerage 
company''
    (iii) A general description of the types of eligibility information 
that may be used to make solicitations to the consumer;
    (iv) That the consumer may elect to limit the use of eligibility 
information to make solicitations to the consumer;
    (v) That the consumer's election will apply for the specified period 
of time stated in the notice and, if applicable, that the consumer will 
be allowed to renew the election once that period expires;
    (vi) If the notice is provided to consumers who may have previously 
opted out, such as if a notice is provided to consumers annually, that 
the consumer who has chosen to limit solicitations does not need to act 
again until the consumer receives a renewal notice; and

[[Page 1004]]

    (vii) A reasonable and simple method for the consumer to opt out.
    (2) Joint relationships. (i) If two or more consumers jointly obtain 
a product or service, a single opt-out notice may be provided to the 
joint consumers. Any of the joint consumers may exercise the right to 
opt out.
    (ii) The opt-out notice must explain how an opt-out direction by a 
joint consumer will be treated. An opt-out direction by a joint consumer 
may be treated as applying to all of the associated joint consumers, or 
each joint consumer may be permitted to opt-out separately. If each 
joint consumer is permitted to opt out separately, one of the joint 
consumers must be permitted to opt out on behalf of all of the joint 
consumers and the joint consumers must be permitted to exercise their 
separate rights to opt out in a single response.
    (iii) It is impermissible to require all joint consumers to opt out 
before implementing any opt-out direction.
    (3) Alternative contents. If the consumer is afforded a broader 
right to opt out of receiving marketing than is required by this 
subpart, the requirements of this section may be satisfied by providing 
the consumer with a clear, conspicuous, and concise notice that 
accurately discloses the consumer's opt-out rights.
    (4) Model notices. Model notices are provided in appendix C of this 
part.
    (b) Coordinated and consolidated notices. A notice required by this 
subpart may be coordinated and consolidated with any other notice or 
disclosure required to be issued under any other provision of law by the 
entity providing the notice, including but not limited to the notice 
described in section 603(d)(2)(A)(iii) of the Act and the Gramm-Leach-
Bliley Act privacy notice.
    (c) Equivalent notices. A notice or other disclosure that is 
equivalent to the notice required by this subpart, and that is provided 
to a consumer together with disclosures required by any other provision 
of law, satisfies the requirements of this section.



Sec. 717.24  Reasonable opportunity to opt out.

    (a) In general. You must not use eligibility information about a 
consumer that you receive from an affiliate to make a solicitation to 
the consumer about your products or services, unless the consumer is 
provided a reasonable opportunity to opt out, as required by 
Sec. 717.21(a)(1)(ii) of this part.
    (b) Examples of a reasonable opportunity to opt out. The consumer is 
given a reasonable opportunity to opt out if:
    (1) By mail. The opt-out notice is mailed to the consumer. The 
consumer is given 30 days from the date the notice is mailed to elect to 
opt out by any reasonable means.
    (2) By electronic means. (i) The opt-out notice is provided 
electronically to the consumer, such as by posting the notice at an 
Internet Web site at which the consumer has obtained a product or 
service. The consumer acknowledges receipt of the electronic notice. The 
consumer is given 30 days after the date the consumer acknowledges 
receipt to elect to opt out by any reasonable means.
    (ii) The opt-out notice is provided to the consumer by e-mail where 
the consumer has agreed to receive disclosures by e-mail from the person 
sending the notice. The consumer is given 30 days after the e-mail is 
sent to elect to opt out by any reasonable means.
    (3) At the time of an electronic transaction. The opt-out notice is 
provided to the consumer at the time of an electronic transaction, such 
as a transaction conducted on an Internet Web site. The consumer is 
required to decide, as a necessary part of proceeding with the 
transaction, whether to opt out before completing the transaction. There 
is a simple process that the consumer may use to opt out at that time 
using the same mechanism through which the transaction is conducted.
    (4) At the time of an in-person transaction. The opt-out notice is 
provided to the consumer in writing at the time of an in-person 
transaction. The consumer is required to decide, as a necessary part of 
proceeding with the transaction, whether to opt out before completing 
the transaction, and is not permitted to complete the transaction 
without making a choice. There is a

[[Page 1005]]

simple process that the consumer may use during the course of the in-
person transaction to opt out, such as completing a form that requires 
consumers to write a ``yes'' or ``no'' to indicate their opt-out 
preference or that requires the consumer to check one of two blank check 
boxes--one that allows consumers to indicate that they want to opt out 
and one that allows consumers to indicate that they do not want to opt 
out.
    (5) By including in a privacy notice. The opt-out notice is included 
in a Gramm-Leach-Bliley Act privacy notice. The consumer is allowed to 
exercise the opt-out within a reasonable period of time and in the same 
manner as the opt-out under that privacy notice.



Sec. 717.25  Reasonable and simple methods of opting out.

    (a) In general. You must not use eligibility information about a 
consumer that you receive from an affiliate to make a solicitation to 
the consumer about your products or services, unless the consumer is 
provided a reasonable and simple method to opt out, as required by 
Sec. 717.21(a)(1)(ii) of this part.
    (b) Examples--(1) Reasonable and simple opt-out methods. Reasonable 
and simple methods for exercising the opt-out right include--
    (i) Designating a check-off box in a prominent position on the opt-
out form;
    (ii) Including a reply form and a self-addressed envelope together 
with the opt-out notice;
    (iii) Providing an electronic means to opt out, such as a form that 
can be electronically mailed or processed at an Internet Web site, if 
the consumer agrees to the electronic delivery of information;
    (iv) Providing a toll-free telephone number that consumers may call 
to opt out; or
    (v) Allowing consumers to exercise all of their opt-out rights 
described in a consolidated opt-out notice that includes the privacy 
opt-out under the Gramm-Leach-Bliley Act, 15 U.S.C. 6801 et seq., the 
affiliate sharing opt-out under the Act, and the affiliate marketing 
opt-out under the Act, by a single method, such as by calling a single 
toll-free telephone number.
    (2) Opt-out methods that are not reasonable and simple. Reasonable 
and simple methods for exercising an opt-out right do not include--
    (i) Requiring the consumer to write his or her own letter;
    (ii) Requiring the consumer to call or write to obtain a form for 
opting out, rather than including the form with the opt-out notice;
    (iii) Requiring the consumer who receives the opt-out notice in 
electronic form only, such as through posting at an Internet Web site, 
to opt out solely by paper mail or by visiting a different Web site 
without providing a link to that site.
    (c) Specific opt-out means. Each consumer may be required to opt out 
through a specific means, as long as that means is reasonable and simple 
for that consumer.

[70 FR 70692, Nov. 22, 2005, as amended at 75 FR 34621, June 18, 2010]



Sec. 717.26  Delivery of opt-out notices.

    (a) In general. The opt-out notice must be provided so that each 
consumer can reasonably be expected to receive actual notice. For opt-
out notices provided electronically, the notice may be provided in 
compliance with either the electronic disclosure provisions in this 
subpart or the provisions in section 101 of the Electronic Signatures in 
Global and National Commerce Act, 15 U.S.C. 7001 et seq.
    (b) Examples of reasonable expectation of actual notice. A consumer 
may reasonably be expected to receive actual notice if the affiliate 
providing the notice:
    (1) Hand-delivers a printed copy of the notice to the consumer;
    (2) Mails a printed copy of the notice to the last known mailing 
address of the consumer;
    (3) Provides a notice by e-mail to a consumer who has agreed to 
receive electronic disclosures by e-mail from the affiliate providing 
the notice; or
    (4) Posts the notice on the Internet Web site at which the consumer 
obtained a product or service electronically and requires the consumer 
to acknowledge receipt of the notice.
    (c) Examples of no reasonable expectation of actual notice. A 
consumer may not reasonably be expected to receive

[[Page 1006]]

actual notice if the affiliate providing the notice:
    (1) Only posts the notice on a sign in a branch or office or 
generally publishes the notice in a newspaper;
    (2) Sends the notice via e-mail to a consumer who has not agreed to 
receive electronic disclosures by e-mail from the affiliate providing 
the notice; or
    (3) Posts the notice on an Internet Web site without requiring the 
consumer to acknowledge receipt of the notice.



Sec. 717.27  Renewal of opt-out.

    (a) Renewal notice and opt-out requirement--(1) In general. After 
the opt-out period expires, you may not make solicitations based on 
eligibility information you receive from an affiliate to a consumer who 
previously opted out, unless:
    (i) The consumer has been given a renewal notice that complies with 
the requirements of this section and Secs. 717.24 through 717.26 of this 
part, and a reasonable opportunity and a reasonable and simple method to 
renew the opt-out, and the consumer does not renew the opt-out; or
    (ii) An exception in Sec. 717.21(c) of this part applies.
    (2) Renewal period. Each opt-out renewal must be effective for a 
period of at least five years as provided in Sec. 717.22(b) of this 
part.
    (3) Affiliates who may provide the notice. The notice required by 
this paragraph must be provided:
    (i) By the affiliate that provided the previous opt-out notice, or 
its successor; or
    (ii) As part of a joint renewal notice from two or more members of 
an affiliated group of companies, or their successors, that jointly 
provided the previous opt-out notice.
    (b) Contents of renewal notice. The renewal notice must be clear, 
conspicuous, and concise, and must accurately disclose:
    (1) The name of the affiliate(s) providing the notice. If the notice 
is provided jointly by multiple affiliates and each affiliate shares a 
common name, such as ``ABC,'' then the notice may indicate that it is 
being provided by multiple companies with the ABC name or multiple 
companies in the ABC group or family of companies, for example, by 
stating that the notice is provided by ``all of the ABC companies,'' 
``the ABC federal credit union, credit card, insurance brokerage, and 
securities brokerage companies,'' or by listing the name of each 
affiliate providing the notice. But if the affiliates providing the 
joint notice do not all share a common name, then the notice must either 
separately identify each affiliate by name or identify each of the 
common names used by those affiliates, for example, by stating that the 
notice is provided by ``all of the ABC and XYZ companies'' or by ``the 
ABC federal credit union and credit card companies and the XYZ insurance 
brokerage company'';
    (2) A list of the affiliates or types of affiliates whose use of 
eligibility information is covered by the notice, which may include 
companies that become affiliates after the notice is provided to the 
consumer. If each affiliate covered by the notice shares a common name, 
such as ``ABC,'' then the notice may indicate that it applies to 
multiple companies with the ABC name or multiple companies in the ABC 
group or family of companies, for example, by stating that the notice is 
provided by ``all of the ABC companies,'' ``the ABC federal credit 
union, credit card, insurance brokerage, and securities brokerage 
companies,'' or by listing the name of each affiliate providing the 
notice. But if the affiliates covered by the notice do not all share a 
common name, then the notice must either separately identify each 
covered affiliate by name or identify each of the common names used by 
those affiliates, for example, by stating that the notice applies to 
``all of the ABC and XYZ companies'' or to ``the ABC federal credit 
union and credit card companies and the XYZ insurance brokerage 
company'';
    (3) A general description of the types of eligibility information 
that may be used to make solicitations to the consumer;
    (4) That the consumer previously elected to limit the use of certain 
information to make solicitations to the consumer;
    (5) That the consumer's election has expired or is about to expire;

[[Page 1007]]

    (6) That the consumer may elect to renew the consumer's previous 
election;
    (7) If applicable, that the consumer's election to renew will apply 
for the specified period of time stated in the notice and that the 
consumer will be allowed to renew the election once that period expires; 
and
    (8) A reasonable and simple method for the consumer to opt out.
    (c) Timing of the renewal notice--(1) In general. A renewal notice 
may be provided to the consumer either--
    (i) A reasonable period of time before the expiration of the opt-out 
period; or
    (ii) Any time after the expiration of the opt-out period but before 
solicitations that would have been prohibited by the expired opt-out are 
made to the consumer.
    (2) Combination with annual privacy notice. If you provide an annual 
privacy notice under the Gramm-Leach-Bliley Act, 15 U.S.C. 6801 et seq., 
providing a renewal notice with the last annual privacy notice provided 
to the consumer before expiration of the opt-out period is a reasonable 
period of time before expiration of the opt-out in all cases.
    (d) No effect on opt-out period. An opt-out period may not be 
shortened by sending a renewal notice to the consumer before expiration 
of the opt-out period, even if the consumer does not renew the opt out.

[70 FR 70692, Nov. 22, 2005, as amended at 75 FR 34621, June 18, 2010]



Sec. 717.28  Effective date, compliance date, and prospective 
application.

    (a) Effective date. This subpart is effective January 1, 2008.
    (b) Mandatory compliance date. Compliance with this subpart is 
required not later than October 1, 2008.
    (c) Prospective application. The provisions of this subpart shall 
not prohibit you from using eligibility information that you receive 
from an affiliate to make solicitations to a consumer if you receive 
such information prior to October 1, 2008. For purposes of this section, 
you are deemed to receive eligibility information when such information 
is placed into a common database and is accessible by you.



                      Subpart D_Medical Information

    Source: 70 FR 70693, Nov. 22, 2005, and 70 FR 75931, Dec. 22, 2005, 
unless otherwise noted.



Sec. 717.30  Obtaining or using medical information in connection
with a determination of eligibility for credit.

    (a) Scope. This section applies to:
    (1) A Federal credit union that participates as a creditor in a 
transaction; or
    (2) Any other person that participates as a creditor in a 
transaction involving a person described in paragraph (a)(1) of this 
section.
    (b) General prohibition on obtaining or using medical information--
(1) In general. A creditor may not obtain or use medical information 
pertaining to a consumer in connection with any determination of the 
consumer's eligibility, or continued eligibility, for credit, except as 
provided in this section.
    (2) Definitions. (i) Credit has the same meaning as in section 702 
of the Equal Credit Opportunity Act, 15 U.S.C. 1691a.
    (ii) Creditor has the same meaning as in section 702 of the Equal 
Credit Opportunity Act, 15 U.S.C. 1691a.
    (iii) Eligibility, or continued eligibility, for credit means the 
consumer's qualification or fitness to receive, or continue to receive, 
credit, including the terms on which credit is offered. The term does 
not include:
    (A) Any determination of the consumer's qualification or fitness for 
employment, insurance (other than a credit insurance product), or other 
non-credit products or services;
    (B) Authorizing, processing, or documenting a payment or transaction 
on behalf of the consumer in a manner that does not involve a 
determination of the consumer's eligibility, or continued eligibility, 
for credit; or
    (C) Maintaining or servicing the consumer's account in a manner that 
does not involve a determination of the consumer's eligibility, or 
continued eligibility, for credit.
    (c) Rule of construction for obtaining and using unsolicited medical 
information--(1) In general. A creditor does not obtain medical 
information in violation of the prohibition if it receives medical 
information pertaining to a

[[Page 1008]]

consumer in connection with any determination of the consumer's 
eligibility, or continued eligibility, for credit without specifically 
requesting medical information.
    (2) Use of unsolicited medical information. A creditor that receives 
unsolicited medical information in the manner described in paragraph 
(c)(1) of this section may use that information in connection with any 
determination of the consumer's eligibility, or continued eligibility, 
for credit to the extent the creditor can rely on at least one of the 
exceptions in Sec. 717.30(d) or (e).
    (3) Examples. A creditor does not obtain medical information in 
violation of the prohibition if, for example:
    (i) In response to a general question regarding a consumer's debts 
or expenses, the creditor receives information that the consumer owes a 
debt to a hospital.
    (ii) In a conversation with the creditor's loan officer, the 
consumer informs the creditor that the consumer has a particular medical 
condition.
    (iii) In connection with a consumer's application for an extension 
of credit, the creditor requests a consumer report from a consumer 
reporting agency and receives medical information in the consumer report 
furnished by the agency even though the creditor did not specifically 
request medical information from the consumer reporting agency.
    (d) Financial information exception for obtaining and using medical 
information--(1) In general. A creditor may obtain and use medical 
information pertaining to a consumer in connection with any 
determination of the consumer's eligibility, or continued eligibility, 
for credit so long as:
    (i) The information is the type of information routinely used in 
making credit eligibility determinations, such as information relating 
to debts, expenses, income, benefits, assets, collateral, or the purpose 
of the loan, including the use of proceeds;
    (ii) The creditor uses the medical information in a manner and to an 
extent that is no less favorable than it would use comparable 
information that is not medical information in a credit transaction; and
    (iii) The creditor does not take the consumer's physical, mental, or 
behavioral health, condition or history, type of treatment, or prognosis 
into account as part of any such determination.
    (2) Examples--(i) Examples of the types of information routinely 
used in making credit eligibility determinations. Paragraph (d)(1)(i) of 
this section permits a creditor, for example, to obtain and use 
information about:
    (A) The dollar amount, repayment terms, repayment history, and 
similar information regarding medical debts to calculate, measure, or 
verify the repayment ability of the consumer, the use of proceeds, or 
the terms for granting credit;
    (B) The value, condition, and lien status of a medical device that 
may serve as collateral to secure a loan;
    (C) The dollar amount and continued eligibility for disability 
income, workers' compensation income, or other benefits related to 
health or a medical condition that is relied on as a source of 
repayment; or
    (D) The identity of creditors to whom outstanding medical debts are 
owed in connection with an application for credit, including but not 
limited to, a transaction involving the consolidation of medical debts.
    (ii) Examples of uses of medical information consistent with the 
exception. (A) A consumer includes on an application for credit 
information about two $20,000 debts. One debt is to a hospital; the 
other debt is to a retailer. The creditor contacts the hospital and the 
retailer to verify the amount and payment status of the debts. The 
creditor learns that both debts are more than 90 days past due. Any two 
debts of this size that are more than 90 days past due would disqualify 
the consumer under the creditor's established underwriting criteria. The 
creditor denies the application on the basis that the consumer has a 
poor repayment history on outstanding debts. The creditor has used 
medical information in a manner and to an extent no less favorable than 
it would use comparable non-medical information.
    (B) A consumer indicates on an application for a $200,000 mortgage 
loan that she receives $15,000 in long-term disability income each year 
from her

[[Page 1009]]

former employer and has no other income. Annual income of $15,000, 
regardless of source, would not be sufficient to support the requested 
amount of credit. The creditor denies the application on the basis that 
the projected debt-to-income ratio of the consumer does not meet the 
creditor's underwriting criteria. The creditor has used medical 
information in a manner and to an extent that is no less favorable than 
it would use comparable non-medical information.
    (C) A consumer includes on an application for a $10,000 home equity 
loan that he has a $50,000 debt to a medical facility that specializes 
in treating a potentially terminal disease. The creditor contacts the 
medical facility to verify the debt and obtain the repayment history and 
current status of the loan. The creditor learns that the debt is 
current. The applicant meets the income and other requirements of the 
creditor's underwriting guidelines. The creditor grants the application. 
The creditor has used medical information in accordance with the 
exception.
    (iii) Examples of uses of medical information inconsistent with the 
exception. (A) A consumer applies for $25,000 of credit and includes on 
the application information about a $50,000 debt to a hospital. The 
creditor contacts the hospital to verify the amount and payment status 
of the debt, and learns that the debt is current and that the consumer 
has no delinquencies in her repayment history. If the existing debt were 
instead owed to a retail department store, the creditor would approve 
the application and extend credit based on the amount and repayment 
history of the outstanding debt. The creditor, however, denies the 
application because the consumer is indebted to a hospital. The creditor 
has used medical information, here the identity of the medical creditor, 
in a manner and to an extent that is less favorable than it would use 
comparable non-medical information.
    (B) A consumer meets with a loan officer of a creditor to apply for 
a mortgage loan. While filling out the loan application, the consumer 
informs the loan officer orally that she has a potentially terminal 
disease. The consumer meets the creditor's established requirements for 
the requested mortgage loan. The loan officer recommends to the credit 
committee that the consumer be denied credit because the consumer has 
that disease. The credit committee follows the loan officer's 
recommendation and denies the application because the consumer has a 
potentially terminal disease. The creditor has used medical information 
in a manner inconsistent with the exception by taking into account the 
consumer's physical, mental, or behavioral health, condition, or 
history, type of treatment, or prognosis as part of a determination of 
eligibility or continued eligibility for credit.
    (C) A consumer who has an apparent medical condition, such as a 
consumer who uses a wheelchair or an oxygen tank, meets with a loan 
officer to apply for a home equity loan. The consumer meets the 
creditor's established requirements for the requested home equity loan 
and the creditor typically does not require consumers to obtain a debt 
cancellation contract, debt suspension agreement, or credit insurance 
product in connection with such loans. However, based on the consumer's 
apparent medical condition, the loan officer recommends to the credit 
committee that credit be extended to the consumer only if the consumer 
obtains a debt cancellation contract, debt suspension agreement, or 
credit insurance product from a nonaffiliated third party. The credit 
committee agrees with the loan officer's recommendation. The loan 
officer informs the consumer that the consumer must obtain a debt 
cancellation contract, debt suspension agreement, or credit insurance 
product from a nonaffiliated third party to qualify for the loan. The 
consumer obtains one of these products and the creditor approves the 
loan. The creditor has used medical information in a manner inconsistent 
with the exception by taking into account the consumer's physical, 
mental, or behavioral health, condition, or history, type of treatment, 
or prognosis in setting conditions on the consumer's eligibility for 
credit.
    (e) Specific exceptions for obtaining and using medical 
information--(1) In general. A creditor may obtain and use medical 
information pertaining to a consumer

[[Page 1010]]

in connection with any determination of the consumer's eligibility, or 
continued eligibility, for credit:
    (i) To determine whether the use of a power of attorney or legal 
representative that is triggered by a medical condition or event is 
necessary and appropriate or whether the consumer has the legal capacity 
to contract when a person seeks to exercise a power of attorney or act 
as legal representative for a consumer based on an asserted medical 
condition or event;
    (ii) To comply with applicable requirements of local, state, or 
Federal laws;
    (iii) To determine, at the consumer's request, whether the consumer 
qualifies for a legally permissible special credit program or credit-
related assistance program that is:
    (A) Designed to meet the special needs of consumers with medical 
conditions; and
    (B) Established and administered pursuant to a written plan that:
    (1) Identifies the class of persons that the program is designed to 
benefit; and
    (2) Sets forth the procedures and standards for extending credit or 
providing other credit-related assistance under the program;
    (iv) To the extent necessary for purposes of fraud prevention or 
detection;
    (v) In the case of credit for the purpose of financing medical 
products or services, to determine and verify the medical purpose of a 
loan and the use of proceeds;
    (vi) Consistent with safe and sound practices, if the consumer or 
the consumer's legal representative specifically requests that the 
creditor use medical information in determining the consumer's 
eligibility, or continued eligibility, for credit, to accommodate the 
consumer's particular circumstances, and such request is documented by 
the creditor;
    (vii) Consistent with safe and sound practices, to determine whether 
the provisions of a forbearance practice or program that is triggered by 
a medical condition or event apply to a consumer;
    (viii) To determine the consumer's eligibility for, the triggering 
of, or the reactivation of a debt cancellation contract or debt 
suspension agreement if a medical condition or event is a triggering 
event for the provision of benefits under the contract or agreement; or
    (ix) To determine the consumer's eligibility for, the triggering of, 
or the reactivation of a credit insurance product if a medical condition 
or event is a triggering event for the provision of benefits under the 
product.
    (2) Example of determining eligibility for a special credit program 
or credit assistance program. A not-for-profit organization establishes 
a credit assistance program pursuant to a written plan that is designed 
to assist disabled veterans in purchasing homes by subsidizing the down 
payment for the home purchase mortgage loans of qualifying veterans. The 
organization works through mortgage lenders and requires mortgage 
lenders to obtain medical information about the disability of any 
consumer that seeks to qualify for the program, use that information to 
verify the consumer's eligibility for the program, and forward that 
information to the organization. A consumer who is a veteran applies to 
a creditor for a home purchase mortgage loan. The creditor informs the 
consumer about the credit assistance program for disabled veterans and 
the consumer seeks to qualify for the program. Assuming that the program 
complies with all applicable law, including applicable fair lending 
laws, the creditor may obtain and use medical information about the 
medical condition and disability, if any, of the consumer to determine 
whether the consumer qualifies for the credit assistance program.
    (3) Examples of verifying the medical purpose of the loan or the use 
of proceeds. (i) If a consumer applies for $10,000 of credit for the 
purpose of financing vision correction surgery, the creditor may verify 
with the surgeon that the procedure will be performed. If the surgeon 
reports that surgery will not be performed on the consumer, the creditor 
may use that medical information to deny the consumer's application for 
credit, because the loan would not be used for the stated purpose.
    (ii) If a consumer applies for $10,000 of credit for the purpose of 
financing cosmetic surgery, the creditor may confirm the cost of the 
procedure with the

[[Page 1011]]

surgeon. If the surgeon reports that the cost of the procedure is 
$5,000, the creditor may use that medical information to offer the 
consumer only $5,000 of credit.
    (iii) A creditor has an established medical loan program for 
financing particular elective surgical procedures. The creditor receives 
a loan application from a consumer requesting $10,000 of credit under 
the established loan program for an elective surgical procedure. The 
consumer indicates on the application that the purpose of the loan is to 
finance an elective surgical procedure not eligible for funding under 
the guidelines of the established loan program. The creditor may deny 
the consumer's application because the purpose of the loan is not for a 
particular procedure funded by the established loan program.
    (4) Examples of obtaining and using medical information at the 
request of the consumer. (i) If a consumer applies for a loan and 
specifically requests that the creditor consider the consumer's medical 
disability at the relevant time as an explanation for adverse payment 
history information in his credit report, the creditor may consider such 
medical information in evaluating the consumer's willingness and ability 
to repay the requested loan to accommodate the consumer's particular 
circumstances, consistent with safe and sound practices. The creditor 
may also decline to consider such medical information to accommodate the 
consumer, but may evaluate the consumer's application in accordance with 
its otherwise applicable underwriting criteria. The creditor may not 
deny the consumer's application or otherwise treat the consumer less 
favorably because the consumer specifically requested a medical 
accommodation, if the creditor would have extended the credit or treated 
the consumer more favorably under the creditor's otherwise applicable 
underwriting criteria.
    (ii) If a consumer applies for a loan by telephone and explains that 
his income has been and will continue to be interrupted on account of a 
medical condition and that he expects to repay the loan by liquidating 
assets, the creditor may, but is not required to, evaluate the 
application using the sale of assets as the primary source of repayment, 
consistent with safe and sound practices, provided that the creditor 
documents the consumer's request by recording the oral conversation or 
making a notation of the request in the consumer's file.
    (iii) If a consumer applies for a loan and the application form 
provides a space where the consumer may provide any other information or 
special circumstances, whether medical or non-medical, that the consumer 
would like the creditor to consider in evaluating the consumer's 
application, the creditor may use medical information provided by the 
consumer in that space on that application to accommodate the consumer's 
application for credit, consistent with safe and sound practices, or may 
disregard that information.
    (iv) If a consumer specifically requests that the creditor use 
medical information in determining the consumer's eligibility, or 
continued eligibility, for credit and provides the creditor with medical 
information for that purpose, and the creditor determines that it needs 
additional information regarding the consumer's circumstances, the 
creditor may request, obtain, and use additional medical information 
about the consumer as necessary to verify the information provided by 
the consumer or to determine whether to make an accommodation for the 
consumer. The consumer may decline to provide additional information, 
withdraw the request for an accommodation, and have the application 
considered under the creditor's otherwise applicable underwriting 
criteria.
    (v) If a consumer completes and signs a credit application that is 
not for medical purpose credit and the application contains boilerplate 
language that routinely requests medical information from the consumer 
or that indicates that by applying for credit the consumer authorizes or 
consents to the creditor obtaining and using medical information in 
connection with a determination of the consumer's eligibility, or 
continued eligibility, for credit, the consumer has not specifically 
requested that the creditor obtain and use medical information to 
accommodate the consumer's particular circumstances.

[[Page 1012]]

    (5) Example of a forbearance practice or program. After an 
appropriate safety and soundness review, a creditor institutes a program 
that allows consumers who are or will be hospitalized to defer payments 
as needed for up to three months, without penalty, if the credit account 
has been open for more than one year and has not previously been in 
default, and the consumer provides confirming documentation at an 
appropriate time. A consumer is hospitalized and does not pay her bill 
for a particular month. This consumer has had a credit account with the 
creditor for more than one year and has not previously been in default. 
The creditor attempts to contact the consumer and speaks with the 
consumer's adult child, who is not the consumer's legal representative. 
The adult child informs the creditor that the consumer is hospitalized 
and is unable to pay the bill at that time. The creditor defers payments 
for up to three months, without penalty, for the hospitalized consumer 
and sends the consumer a letter confirming this practice and the date on 
which the next payment will be due. The creditor has obtained and used 
medical information to determine whether the provisions of a medically-
triggered forbearance practice or program apply to a consumer.



Sec. 717.31  Limits on redisclosure of information

    (a) Scope. This section applies to Federal credit unions.
    (b) Limits on redisclosure. If a Federal credit union receives 
medical information about a consumer from a consumer reporting agency or 
its affiliate, the person must not disclose that information to any 
other person, except as necessary to carry out the purpose for which the 
information was initially disclosed, or as otherwise permitted by 
statute, regulation, or order.



Sec. 717.32  Sharing medical information with affiliates.

    (a) Scope. This section applies to Federal credit unions.
    (b) In general. The exclusions from the term ``consumer report'' in 
section 603(d)(2) of the Act that allow the sharing of information with 
affiliates do not apply if a Federal credit union communicates to an 
affiliate:
    (1) Medical information;
    (2) An individualized list or description based on the payment 
transactions of the consumer for medical products or services; or
    (3) An aggregate list of identified consumers based on payment 
transactions for medical products or services.
    (c) Exceptions. A Federal credit union may rely on the exclusions 
from the term ``consumer report'' in section 603(d)(2) of the Act to 
communicate the information in paragraph (b) to an affiliate:
    (1) In connection with the business of insurance or annuities 
(including the activities described in section 18B of the model Privacy 
of Consumer Financial and Health Information Regulation issued by the 
National Association of Insurance Commissioners, as in effect on January 
1, 2003);
    (2) For any purpose permitted without authorization under the 
regulations promulgated by the Department of Health and Human Services 
pursuant to the Health Insurance Portability and Accountability Act of 
1996 (HIPAA);
    (3) For any purpose referred to in section 1179 of HIPAA;
    (4) For any purpose described in section 502(e) of the Gramm-Leach-
Bliley Act;
    (5) In connection with a determination of the consumer's 
eligibility, or continued eligibility, for credit consistent with 
Sec. 717.30; or
    (6) As otherwise permitted by order of the NCUA.



              Subpart E_Duties of Furnishers of Information

    Source: 74 FR 31522, July 1, 2009, unless otherwise noted.



Sec. 717.40  Scope.

    This subpart applies to a Federal credit union that furnishes 
information to a consumer reporting agency.



Sec. 717.41  Definitions.

    For purposes of this subpart and appendix E of this part, the 
following definitions apply:

[[Page 1013]]

    (a) Accuracy means that information that a furnisher provides to a 
consumer reporting agency about an account or other relationship with 
the consumer correctly:
    (1) Reflects the terms of and liability for the account or other 
relationship;
    (2) Reflects the consumer's performance and other conduct with 
respect to the account or other relationship; and
    (3) Identifies the appropriate consumer.
    (b) Direct dispute means a dispute submitted directly to a furnisher 
(including a furnisher that is a debt collector) by a consumer 
concerning the accuracy of any information contained in a consumer 
report and pertaining to an account or other relationship that the 
furnisher has or had with the consumer.
    (c) Furnisher means an entity that furnishes information relating to 
consumers to one or more consumer reporting agencies for inclusion in a 
consumer report. An entity is not a furnisher when it:
    (1) Provides information to a consumer reporting agency solely to 
obtain a consumer report in accordance with sections 604(a) and (f) of 
the Fair Credit Reporting Act;
    (2) Is acting as a ``consumer reporting agency'' as defined in 
section 603(f) of the Fair Credit Reporting Act;
    (3) Is a consumer to whom the furnished information pertains; or
    (4) Is a neighbor, friend, or associate of the consumer, or another 
individual with whom the consumer is acquainted or who may have 
knowledge about the consumer, and who provides information about the 
consumer's character, general reputation, personal characteristics, or 
mode of living in response to a specific request from a consumer 
reporting agency.
    (d) Identity theft has the same meaning as in 16 CFR 603.2(a).
    (e) Integrity means that information that a furnisher provides to a 
consumer reporting agency about an account or other relationship with 
the consumer:
    (1) Is substantiated by the furnisher's records at the time it is 
furnished;
    (2) Is furnished in a form and manner that is designed to minimize 
the likelihood that the information may be incorrectly reflected in a 
consumer report; and
    (3) Includes the information in the furnisher's possession about the 
account or other relationship that the NCUA has:
    (i) Determined that the absence of which would likely be materially 
misleading in evaluating a consumer's creditworthiness, credit standing, 
credit capacity, character, general reputation, personal 
characteristics, or mode of living; and
    (ii) Listed in section I.(b)(2)(iii) of appendix E of this part.



Sec. 717.42  Reasonable policies and procedures concerning the 
accuracy and integrity of furnished information.

    (a) Policies and procedures. Each furnisher must establish and 
implement reasonable written policies and procedures regarding the 
accuracy and integrity of the information relating to consumers that it 
furnishes to a consumer reporting agency. The policies and procedures 
must be appropriate to the nature, size, complexity, and scope of each 
furnisher's activities.
    (b) Guidelines. Each furnisher must consider the guidelines in 
appendix E of this part in developing its policies and procedures 
required by this section, and incorporate those guidelines that are 
appropriate.
    (c) Reviewing and updating policies and procedures. Each furnisher 
must review its policies and procedures required by this section 
periodically and update them as necessary to ensure their continued 
effectiveness.



Sec. 717.43  Direct disputes.

    (a) General rule. Except as otherwise provided in this section, a 
furnisher must conduct a reasonable investigation of a direct dispute if 
it relates to:
    (1) The consumer's liability for a credit account or other debt with 
the furnisher, such as direct disputes relating to whether there is or 
has been identity theft or fraud against the consumer, whether there is 
individual or joint liability on an account, or whether the consumer is 
an authorized user of a credit account;
    (2) The terms of a credit account or other debt with the furnisher, 
such as

[[Page 1014]]

direct disputes relating to the type of account, principal balance, 
scheduled payment amount on an account, or the amount of the credit 
limit on an open-end account;
    (3) The consumer's performance or other conduct concerning an 
account or other relationship with the furnisher, such as direct 
disputes relating to the current payment status, high balance, date a 
payment was made, the amount of a payment made, or the date an account 
was opened or closed; or
    (4) Any other information contained in a consumer report regarding 
an account or other relationship with the furnisher that bears on the 
consumer's creditworthiness, credit standing, credit capacity, 
character, general reputation, personal characteristics, or mode of 
living.
    (b) Exceptions. The requirements of paragraph (a) of this section do 
not apply to a furnisher if:
    (1) The direct dispute relates to:
    (i) The consumer's identifying information (other than a direct 
dispute relating to a consumer's liability for a credit account or other 
debt with the furnisher, as provided in paragraph (a)(1) of this 
section) such as name(s), date of birth, Social Security number, 
telephone number(s), or address(es);
    (ii) The identity of past or present employers;
    (iii) Inquiries or requests for a consumer report;
    (iv) Information derived from public records, such as judgments, 
bankruptcies, liens, and other legal matters (unless provided by a 
furnisher with an account or other relationship with the consumer);
    (v) Information related to fraud alerts or active duty alerts; or
    (vi) Information provided to a consumer reporting agency by another 
furnisher; or
    (2) The furnisher has a reasonable belief that the direct dispute is 
submitted by, is prepared on behalf of the consumer by, or is submitted 
on a form supplied to the consumer by, a credit repair organization, as 
defined in 15 U.S.C. 1679a(3), or an entity that would be a credit 
repair organization, but for 15 U.S.C. 1679a(3)(B)(i).
    (c) Direct dispute address. A furnisher is required to investigate a 
direct dispute only if a consumer submits a dispute notice to the 
furnisher at:
    (1) The address of a furnisher provided by a furnisher and set forth 
on a consumer report relating to the consumer;
    (2) An address clearly and conspicuously specified by the furnisher 
for submitting direct disputes that is provided to the consumer in 
writing or electronically (if the consumer has agreed to the electronic 
delivery of information from the furnisher); or
    (3) Any business address of the furnisher if the furnisher has not 
so specified and provided an address for submitting direct disputes 
under paragraphs (c)(1) or (2) of this section.
    (d) Direct dispute notice contents. A dispute notice must include:
    (1) Sufficient information to identify the account or other 
relationship that is in dispute, such as an account number and the name, 
address, and telephone number of the consumer, if applicable;
    (2) The specific information that the consumer is disputing and an 
explanation of the basis for the dispute; and
    (3) All supporting documentation or other information reasonably 
required by the furnisher to substantiate the basis of the dispute. This 
documentation may include, for example: a copy of the relevant portion 
of the consumer report that contains the allegedly inaccurate 
information; a police report; a fraud or identity theft affidavit; a 
court order; or account statements.
    (e) Duty of furnisher after receiving a direct dispute notice. After 
receiving a dispute notice from a consumer pursuant to paragraphs (c) 
and (d) of this section, the furnisher must:
    (1) Conduct a reasonable investigation with respect to the disputed 
information;
    (2) Review all relevant information provided by the consumer with 
the dispute notice;
    (3) Complete its investigation of the dispute and report the results 
of the investigation to the consumer before the expiration of the period 
under section 611(a)(1) of the Fair Credit Reporting Act (15 U.S.C. 
1681i(a)(1)) within which a consumer reporting agency would be required 
to complete its action if the

[[Page 1015]]

consumer had elected to dispute the information under that section; and
    (4) If the investigation finds that the information reported was 
inaccurate, promptly notify each consumer reporting agency to which the 
furnisher provided inaccurate information of that determination and 
provide to the consumer reporting agency any correction to that 
information that is necessary to make the information provided by the 
furnisher accurate.
    (f) Frivolous or irrelevant disputes. (1) A furnisher is not 
required to investigate a direct dispute if the furnisher has reasonably 
determined that the dispute is frivolous or irrelevant. A dispute 
qualifies as frivolous or irrelevant if:
    (i) The consumer did not provide sufficient information to 
investigate the disputed information as required by paragraph (d) of 
this section;
    (ii) The direct dispute is substantially the same as a dispute 
previously submitted by or on behalf of the consumer, either directly to 
the furnisher or through a consumer reporting agency, with respect to 
which the furnisher has already satisfied the applicable requirements of 
the Act or this section; provided, however, that a direct dispute is not 
substantially the same as a dispute previously submitted if the dispute 
includes information listed in paragraph (d) of this section that had 
not previously been provided to the furnisher; or
    (iii) The furnisher is not required to investigate the direct 
dispute because one or more of the exceptions listed in paragraph (b) of 
this section applies.
    (2) Notice of determination. Upon making a determination that a 
dispute is frivolous or irrelevant, the furnisher must notify the 
consumer of the determination not later than five business days after 
making the determination, by mail or, if authorized by the consumer for 
that purpose, by any other means available to the furnisher.
    (3) Contents of notice of determination that a dispute is frivolous 
or irrelevant. A notice of determination that a dispute is frivolous or 
irrelevant must include the reasons for such determination and identify 
any information required to investigate the disputed information, which 
notice may consist of a standardized form describing the general nature 
of such information.

Subparts F-H [Reserved]



    Subpart I_Duties of Users of Consumer Reports Regarding Address 
                   Discrepancies and Records Disposal



Secs. 717.80-717.81  [Reserved]



Sec. 717.82  Duties of users regarding address discrepancies.

    (a) Scope. This section applies to a user of consumer reports (user) 
that receives a notice of address discrepancy from a consumer reporting 
agency described in 15 U.S.C. 1681a(p), and that is federal credit 
union.
    (b) Definition. For purposes of this section, a notice of address 
discrepancy means a notice sent to a user by a consumer reporting agency 
described in 15 U.S.C. 1681a(p) pursuant to 15 U.S.C. 1681c(h)(1), that 
informs the user of a substantial difference between the address for the 
consumer that the user provided to request the consumer report and the 
address(es) in the agency's file for the consumer.
    (c) Reasonable belief--(1) Requirement to form a reasonable belief. 
A user must develop and implement reasonable policies and procedures 
designed to enable the user to form a reasonable belief that a consumer 
report relates to the consumer about whom it has requested the report, 
when the user receives a notice of address discrepancy.
    (2) Examples of reasonable policies and procedures. (i) Comparing 
the information in the consumer report provided by the consumer 
reporting agency with information the user:
    (A) Obtains and uses to verify the consumer's identity in accordance 
with the requirements of the Customer Identification Program (CIP) rules 
implementing 31 U.S.C. 5318(l) (31 CFR 1020.220);
    (B) Maintains in its own records, such as applications, change of 
address notifications, other member account records, or retained CIP 
documentation; or
    (C) Obtains from third-party sources; or

[[Page 1016]]

    (ii) Verifying the information in the consumer report provided by 
the consumer reporting agency with the consumer.
    (d) Consumer's address--(1) Requirement to furnish consumer's 
address to a consumer reporting agency. A user must develop and 
implement reasonable policies and procedures for furnishing an address 
for the consumer that the user has reasonably confirmed is accurate to 
the consumer reporting agency described in 15 U.S.C. 1681a(p) from whom 
it received the notice of address discrepancy when the user:
    (i) Can form a reasonable belief that the consumer report relates to 
the consumer about whom the user requested the report;
    (ii) Establishes a continuing relationship with the consumer; and
    (iii) Regularly and in the ordinary course of business furnishes 
information to the consumer reporting agency from which the notice of 
address discrepancy relating to the consumer was obtained.
    (2) Examples of confirmation methods. The user may reasonably 
confirm an address is accurate by:
    (i) Verifying the address with the consumer about whom it has 
requested the report;
    (ii) Reviewing its own records to verify the address of the 
consumer;
    (iii) Verifying the address through third-party sources; or
    (iv) Using other reasonable means.
    (3) Timing. The policies and procedures developed in accordance with 
paragraph (d)(1) of this section must provide that the user will furnish 
the consumer's address that the user has reasonably confirmed is 
accurate to the consumer reporting agency described in 15 U.S.C. 
1681a(p) as part of the information it regularly furnishes for the 
reporting period in which it establishes a relationship with the 
consumer.

[72 FR 63768, Nov. 9, 2007, as amended at 74 FR 22644, May 14, 2009; 76 
FR 18365, Apr. 4, 2011]



Sec. 717.83  Disposal of consumer information.

    (a) In general. You must properly dispose of any consumer 
information that you maintain or otherwise possess in a manner 
consistent with the Guidelines for Safeguarding Member Information, in 
appendix A to part 748 of this chapter.
    (b) Examples. Appropriate measures to properly dispose of consumer 
information include the following examples. These examples are 
illustrative only and are not exclusive or exhaustive methods for 
complying with this section.
    (1) Burning, pulverizing, or shredding papers containing consumer 
information so that the information cannot practicably be read or 
reconstructed.
    (2) Destroying or erasing electronic media containing consumer 
information so that the information cannot practicably be read or 
reconstructed.
    (c) Rule of construction. This section does not:
    (1) Require you to maintain or destroy any record pertaining to a 
consumer that is not imposed under any other law; or
    (2) Alter or affect any requirement imposed under any other 
provision of law to maintain or destroy such a record.
    (d) Definitions. As used in this section:
    (1) Consumer information means any record about an individual, 
whether in paper, electronic, or other form, that is a consumer report 
or is derived from a consumer report and that is maintained or otherwise 
possessed by or on behalf of the credit union for a business purpose. 
Consumer information also means a compilation of such records. The term 
does not include any record that does not identify an individual.
    (i) Consumer information includes:
    (A) A consumer report that you obtain;
    (B) Information from a consumer report that you obtain from your 
affiliate after the consumer has been given a notice and has elected not 
to opt out of that sharing;
    (C) Information from a consumer report that you obtain about an 
individual who applies for but does not receive a loan, including any 
loan sought by an individual for a business purpose;
    (D) Information from a consumer report that you obtain about an 
individual who guarantees a loan (including a loan to a business 
entity); or

[[Page 1017]]

    (E) Information from a consumer report that you obtain about an 
employee or prospective employee.
    (ii) Consumer information does not include:
    (A) Aggregate information, such as the mean credit score, derived 
from a group of consumer reports; or
    (B) Blind data, such as payment history on accounts that are not 
personally identifiable, you use for developing credit scoring models or 
for other purposes.
    (2) Consumer report has the same meaning as set forth in the Fair 
Credit Reporting Act, 15 U.S.C. 1681a(d). The meaning of consumer report 
is broad and subject to various definitions, conditions and exceptions 
in the Fair Credit Reporting Act. It includes written or oral 
communications from a consumer reporting agency to a third party of 
information used or collected for use in establishing eligibility for 
credit or insurance used primarily for personal, family or household 
purposes, and eligibility for employment purposes. Examples include 
credit reports, bad check lists, and tenant screening reports.



                   Subpart J_Identity Theft Red Flags

    Source: 72 FR 63768, Nov. 9, 2007, unless otherwise noted.



Sec. 717.90  Duties regarding the detection, prevention, and
mitigation of identity theft.

    (a) Scope. This section applies to a financial institution or 
creditor that is a federal credit union.
    (b) Definitions. For purposes of this section and appendix J, the 
following definitions apply:
    (1) Account means a continuing relationship established by a person 
with a federal credit union to obtain a product or service for personal, 
family, household or business purposes. Account includes:
    (i) An extension of credit, such as the purchase of property or 
services involving a deferred payment; and
    (ii) A share or deposit account.
    (2) The term board of directors refers to a federal credit union's 
board of directors.
    (3) Covered account means:
    (i) An account that a federal credit union offers or maintains, 
primarily for personal, family, or household purposes, that involves or 
is designed to permit multiple payments or transactions, such as a 
credit card account, mortgage loan, automobile loan, checking account, 
or share account; and
    (ii) Any other account that the federal credit union offers or 
maintains for which there is a reasonably foreseeable risk to members or 
to the safety and soundness of the federal credit union from identity 
theft, including financial, operational, compliance, reputation, or 
litigation risks.
    (4) Credit has the same meaning as in 15 U.S.C. 1681a(r)(5).
    (5) Creditor has the same meaning as in 15 U.S.C. 1681a(r)(5).
    (6) Customer means a member that has a covered account with a 
federal credit union.
    (7) Financial institution has the same meaning as in 15 U.S.C. 
1681a(t).
    (8) Identity theft has the same meaning as in 16 CFR 603.2(a).
    (9) Red Flag means a pattern, practice, or specific activity that 
indicates the possible existence of identity theft.
    (10) Service provider means a person that provides a service 
directly to the federal credit union.
    (c) Periodic Identification of Covered Accounts. Each federal credit 
union must periodically determine whether it offers or maintains covered 
accounts. As a part of this determination, a federal credit union must 
conduct a risk assessment to determine whether it offers or maintains 
covered accounts described in paragraph (b)(3)(ii) of this section, 
taking into consideration:
    (1) The methods it provides to open its accounts;
    (2) The methods it provides to access its accounts; and
    (3) Its previous experiences with identity theft.
    (d) Establishment of an Identity Theft Prevention Program--(1) 
Program requirement. Each federal credit union that offers or maintains 
one or more covered accounts must develop and implement a written 
Identity Theft Prevention Program (Program) that is designed to detect, 
prevent, and mitigate identity theft in connection with the opening of

[[Page 1018]]

a covered account or any existing covered account. The Program must be 
appropriate to the size and complexity of the federal credit union and 
the nature and scope of its activities.
    (2) Elements of the Program. The Program must include reasonable 
policies and procedures to:
    (i) Identify relevant Red Flags for the covered accounts that the 
federal credit union offers or maintains, and incorporate those Red 
Flags into its Program;
    (ii) Detect Red Flags that have been incorporated into the Program 
of the federal credit union;
    (iii) Respond appropriately to any Red Flags that are detected 
pursuant to paragraph (d)(2)(ii) of this section to prevent and mitigate 
identity theft; and
    (iv) Ensure the Program (including the Red Flags determined to be 
relevant) is updated periodically, to reflect changes in risks to 
members and to the safety and soundness of the federal credit union from 
identity theft.
    (e) Administration of the Program. Each federal credit union that is 
required to implement a Program must provide for the continued 
administration of the Program and must:
    (1) Obtain approval of the initial written Program from either its 
board of directors or an appropriate committee of the board of 
directors;
    (2) Involve the board of directors, an appropriate committee 
thereof, or a designated employee at the level of senior management in 
the oversight, development, implementation and administration of the 
Program;
    (3) Train staff, as necessary, to effectively implement the Program; 
and
    (4) Exercise appropriate and effective oversight of service provider 
arrangements.
    (f) Guidelines. Each federal credit union that is required to 
implement a Program must consider the guidelines in appendix J of this 
part and include in its Program those guidelines that are appropriate.



Sec. 717.91  Duties of card issuers regarding changes of address.

    (a) Scope. This section applies to an issuer of a debit or credit 
card (card issuer) that is a federal credit union.
    (b) Definitions. For purposes of this section:
    (1) Cardholder means a member who has been issued a credit or debit 
card.
    (2) Clear and conspicuous means reasonably understandable and 
designed to call attention to the nature and significance of the 
information presented.
    (c) Address validation requirements. A card issuer must establish 
and implement reasonable policies and procedures to assess the validity 
of a change of address if it receives notification of a change of 
address for a member's debit or credit card account and, within a short 
period of time afterwards (during at least the first 30 days after it 
receives such notification), the card issuer receives a request for an 
additional or replacement card for the same account. Under these 
circumstances, the card issuer may not issue an additional or 
replacement card, until, in accordance with its reasonable policies and 
procedures and for the purpose of assessing the validity of the change 
of address, the card issuer:
    (1)(i) Notifies the cardholder of the request:
    (A) At the cardholder's former address; or
    (B) By any other means of communication that the card issuer and the 
cardholder have previously agreed to use; and
    (ii) Provides to the cardholder a reasonable means of promptly 
reporting incorrect address changes; or
    (2) Otherwise assesses the validity of the change of address in 
accordance with the policies and procedures the card issuer has 
established pursuant to Sec. 717.90 of this part.
    (d) Alternative timing of address validation. A card issuer may 
satisfy the requirements of paragraph (c) of this section if it 
validates an address pursuant to the methods in paragraph (c)(1) or 
(c)(2) of this section when it receives an address change notification, 
before it receives a request for an additional or replacement card.
    (e) Form of notice. Any written or electronic notice that the card 
issuer provides under this paragraph must be clear and conspicuous and 
provided separately from its regular correspondence with the cardholder.

[[Page 1019]]



               Sec. Appendixes A-B to Part 717 [Reserved]



      Sec. Appendix C to Part 717--Model Forms for Opt-Out Notices

    a. Although use of the model forms is not required, use of the model 
forms in this appendix (as applicable) complies with the requirement in 
section 624 of the Act for clear, conspicuous, and concise notices.
    b. Certain changes may be made to the language or format of the 
model forms without losing the protection from liability afforded by use 
of the model forms. These changes may not be so extensive as to affect 
the substance, clarity, or meaningful sequence of the language in the 
model forms. Persons making such extensive revisions will lose the safe 
harbor that this appendix provides. Acceptable changes include, for 
example:
    1. Rearranging the order of the references to ``your income,'' 
``your account history,'' and ``your credit score.''
    2. Substituting other types of information for ``income,'' ``account 
history,'' or ``credit score'' for accuracy, such as ``payment 
history,'' ``credit history,'' ``payoff status,'' or ``claims history.''
    3. Substituting a clearer and more accurate description of the 
affiliates providing or covered by the notice for phrases such as ``the 
[ABC] group of companies,'' including without limitation a statement 
that the entity providing the notice recently purchased the consumer's 
account.
    4. Substituting other types of affiliates covered by the notice for 
``credit card,'' ``insurance brokerage,'' or ``securities brokerage'' 
affiliates.
    5. Omitting items that are not accurate or applicable. For example, 
if a person does not limit the duration of the opt-out period, the 
notice may omit information about the renewal notice.
    6. Adding a statement informing consumers how much time they have to 
opt out before shared eligibility information may be used to make 
solicitations to them.
    7. Adding a statement that the consumer may exercise the right to 
opt out at any time.
    8. Adding the following statement, if accurate: ``If you previously 
opted out, you do not need to do so again.''
    9. Providing a place on the form for the consumer to fill in 
identifying information, such as his or her name and address:
    10. Adding disclosures regarding the treatment of opt-outs by joint 
consumers to comply with Sec. 717.23(a)(2) of this part.

C-1 Model Form for Initial Opt-out Notice (Single-Affiliate Notice)
C-2 Model Form for Initial Opt-out Notice (Joint Notice)
C-3 Model Form for Renewal Notice (Single-Affiliate Notice)
C-4 Model Form for Renewal Notice (Joint Notice)
C-5 Model Form for Voluntary ``No Marketing'' Notice

 C-1--Model Form for Initial Opt-out Notice (Single-Affiliate Notice)--
          [Your Choice To Limit Marketing]/[Marketing Opt-out]

      [Name of Affiliate] is providing this notice.
      [Optional: Federal law gives you the right to limit some 
but not all marketing from our affiliates. Federal law also requires us 
to give you this notice to tell you about your choice to limit marketing 
from our affiliates.]
      You may limit our affiliates in the [ABC] group of 
companies, such as our [credit card, insurance brokerage, and securities 
brokerage] affiliates, from marketing their products or services to you 
based on your personal information that we collect and share with them. 
This information includes your [income], your [account history with us], 
and your [credit score].
      Your choice to limit marketing offers from our affiliates 
will apply [until you tell us to change your choice]/[for x years from 
when you tell us your choice]/[for at least 5 years from when you tell 
us your choice]. [Include if the opt-out period expires.] Once that 
period expires, you will receive a renewal notice that will allow you to 
continue to limit marketing offers from our affiliates for [another x 
years]/[at least another 5 years].
      [Include, if applicable, in a subsequent notice, including 
an annual notice, for consumers who may have previously opted out.] If 
you have already made a choice to limit marketing offers from our 
affiliates, you do not need to act again until you receive the renewal 
notice.
    To limit marketing offers, contact us [include all that apply]:
      By telephone: 1-877--
      On the Web: www._.com
      By mail: Check the box and complete the form below, and 
send the form to:

[Company name]
[Company address]

    --Do not allow your affiliates to use my personal information to 
market to me.

C-2--Model Form for Initial Opt-out Notice (Joint Notice)--[Your Choice 
                 To Limit Marketing]/[Marketing Opt-out]

      The [ABC group of companies] is providing this notice.
      [Optional: Federal law gives you the right to limit some 
but not all marketing from the [ABC] companies. Federal law also 
requires us to give you this notice to tell you about your choice to 
limit marketing from the [ABC] companies.]

[[Page 1020]]

      You may limit the [ABC] companies, such as the [ABC credit 
card, insurance brokerage, and securities brokerage] affiliates, from 
marketing their products or services to you based on your personal 
information that they receive from other [ABC] companies. This 
information includes your [income], your [account history], and your 
[credit score].
      Your choice to limit marketing offers from the [ABC] 
companies will apply [until you tell us to change your choice]/[for x 
years from when you tell us your choice]/[for at least 5 years from when 
you tell us your choice]. [Include if the opt-out period expires.] Once 
that period expires, you will receive a renewal notice that will allow 
you to continue to limit marketing offers from the [ABC] companies for 
[another x years]/[at least another 5 years].
      [Include, if applicable, in a subsequent notice, including 
an annual notice, for consumers who may have previously opted out.] If 
you have already made a choice to limit marketing offers from the [ABC] 
companies, you do not need to act again until you receive the renewal 
notice.
    To limit marketing offers, contact us [include all that apply]:
      By telephone: 1-877--
      On the Web: www._.com
      By mail: Check the box and complete the form below, and 
send the form to:

[Company name]
[Company address]

    --Do not allow any company [in the ABC group of companies] to use my 
personal information to market to me.

C-3--Model Form for Renewal Notice (Single-Affiliate Notice)--[Renewing 
    Your Choice To Limit Marketing]/[Renewing Your Marketing Opt-out]

      [Name of Affiliate] is providing this notice.
      [Optional: Federal law gives you the right to limit some 
but not all marketing from our affiliates. Federal law also requires us 
to give you this notice to tell you about your choice to limit marketing 
from our affiliates.]
      You previously chose to limit our affiliates in the [ABC] 
group of companies, such as our [credit card, insurance brokerage, and 
securities brokerage] affiliates, from marketing their products or 
services to you based on your personal information that we share with 
them. This information includes your [income], your [account history 
with us], and your [credit score].
      Your choice has expired or is about to expire.
    To renew your choice to limit marketing for [x] more years, contact 
us [include all that apply]:
      By telephone: 1-877--
      On the Web: www._.com
      By mail: Check the box and complete the form below, and 
send the form to:

[Company name]
[Company address]

    --Renew my choice to limit marketing for [x] more years.

C-4--Model Form for Renewal Notice (Joint Notice)--[Renewing Your Choice 
          To Limit Marketing]/[Renewing Your Marketing Opt-out]

      The [ABC group of companies] is providing this notice.
      [Optional: Federal law gives you the right to limit some 
but not all marketing from the [ABC] companies. Federal law also 
requires us to give you this notice to tell you about your choice to 
limit marketing from the [ABC] companies.]
      You previously chose to limit the [ABC] companies, such as 
the [ABC credit card, insurance brokerage, and securities brokerage] 
affiliates, from marketing their products or services to you based on 
your personal information that they receive from other ABC companies. 
This information includes your [income], your [account history], and 
your [credit score].
      Your choice has expired or is about to expire.
    To renew your choice to limit marketing for [x] more years, contact 
us [include all that apply]:
      By telephone: 1-877--
      On the Web: www._.com
      By mail: Check the box and complete the form below, and 
send the form to:

[Company name]
[Company address]

    --Renew my choice to limit marketing for [x] more years.

          C-5--Model Form for Voluntary ``No Marketing'' Notice

                      Your Choice To Stop Marketing

      [Name of Affiliate] is providing this notice.
      You may choose to stop all marketing from us and our 
affiliates.
      [Your choice to stop marketing from us and our affiliates 
will apply until you tell us to change your choice.]
    To stop all marketing, contact us [include all that apply]:
      By telephone: 1-877--
      On the Web: www._.com
      By mail: Check the box and complete the form below, and 
send the form to:
[Company name]
[Company address]
--Do not market to me.

[72 FR 62989, Nov. 7, 2007, as amended at 74 FR 22644, May 14, 2009]

[[Page 1021]]



                 Sec. Appendix D to Part 717 [Reserved]



   Sec. Appendix E to Part 717--Interagency Guidelines Concerning the 
 Accuracy and Integrity of Information Furnished to Consumer Reporting 
                                Agencies

    The NCUA encourages voluntary furnishing of information to consumer 
reporting agencies. Section 717.42 of this part requires each furnisher 
to establish and implement reasonable written policies and procedures 
concerning the accuracy and integrity of the information it furnishes to 
consumer reporting agencies. Under Sec. 717.42(b), a furnisher must 
consider the guidelines set forth below in developing its policies and 
procedures. In establishing these policies and procedures, a furnisher 
may include any of its existing policies and procedures that are 
relevant and appropriate. Section 717.42(c) requires each furnisher to 
review its policies and procedures periodically and update them as 
necessary to ensure their continued effectiveness.

       I. Nature, Scope, and Objectives of Policies and Procedures

    (a) Nature and Scope. Section 717.42(a) of this part requires that a 
furnisher's policies and procedures be appropriate to the nature, size, 
complexity, and scope of the furnisher's activities. In developing its 
policies and procedures, a furnisher should consider, for example:
    (1) The types of business activities in which the furnisher engages;
    (2) The nature and frequency of the information the furnisher 
provides to consumer reporting agencies; and
    (3) The technology used by the furnisher to furnish information to 
consumer reporting agencies.
    (b) Objectives. A furnisher's policies and procedures should be 
reasonably designed to promote the following objectives:
    (1) To furnish information about accounts or other relationships 
with a consumer that is accurate, such that the furnished information:
    (i) Identifies the appropriate consumer;
    (ii) Reflects the terms of and liability for those accounts or other 
relationships; and
    (iii) Reflects the consumer's performance and other conduct with 
respect to the account or other relationship;
    (2) To furnish information about accounts or other relationships 
with a consumer that has integrity, such that the furnished information:
    (i) Is substantiated by the furnisher's records at the time it is 
furnished;
    (ii) Is furnished in a form and manner that is designed to minimize 
the likelihood that the information may be incorrectly reflected in a 
consumer report; thus, the furnished information should:
    (A) Include appropriate identifying information about the consumer 
to whom it pertains; and
    (B) Be furnished in a standardized and clearly understandable form 
and manner and with a date specifying the time period to which the 
information pertains; and
    (iii) Includes the credit limit, if applicable and in the 
furnisher's possession;
    (3) To conduct reasonable investigations of consumer disputes and 
take appropriate actions based on the outcome of such investigations; 
and
    (4) To update the information it furnishes as necessary to reflect 
the current status of the consumer's account or other relationship, 
including, for example:
    (i) Any transfer of an account (e.g., by sale or assignment for 
collection) to a third party; and
    (ii) Any cure of the consumer's failure to abide by the terms of the 
account or other relationship.

        II. Establishing and Implementing Policies and Procedures

    In establishing and implementing its policies and procedures, a 
furnisher should:
    (a) Identify practices or activities of the furnisher that can 
compromise the accuracy or integrity of information furnished to 
consumer reporting agencies, such as by:
    (1) Reviewing its existing practices and activities, including the 
technological means and other methods it uses to furnish information to 
consumer reporting agencies and the frequency and timing of its 
furnishing of information;
    (2) Reviewing its historical records relating to accuracy or 
integrity or to disputes; reviewing other information relating to the 
accuracy or integrity of information provided by the furnisher to 
consumer reporting agencies; and considering the types of errors, 
omissions, or other problems that may have affected the accuracy or 
integrity of information it has furnished about consumers to consumer 
reporting agencies;
    (3) Considering any feedback received from consumer reporting 
agencies, consumers, or other appropriate parties;
    (4) Obtaining feedback from the furnisher's staff; and
    (5) Considering the potential impact of the furnisher's policies and 
procedures on consumers.
    (b) Evaluate the effectiveness of existing policies and procedures 
of the furnisher regarding the accuracy and integrity of information 
furnished to consumer reporting agencies; consider whether new, 
additional, or different policies and procedures are necessary; and 
consider whether implementation of existing policies and procedures 
should be modified to enhance the accuracy

[[Page 1022]]

and integrity of information about consumers furnished to consumer 
reporting agencies.
    (c) Evaluate the effectiveness of specific methods (including 
technological means) the furnisher uses to provide information to 
consumer reporting agencies; how those methods may affect the accuracy 
and integrity of the information it provides to consumer reporting 
agencies; and whether new, additional, or different methods (including 
technological means) should be used to provide information to consumer 
reporting agencies to enhance the accuracy and integrity of that 
information.

           III. Specific Components of Policies and Procedures

    In developing its policies and procedures, a furnisher should 
address the following, as appropriate:
    (a) Establishing and implementing a system for furnishing 
information about consumers to consumer reporting agencies that is 
appropriate to the nature, size, complexity, and scope of the 
furnisher's business operations.
    (b) Using standard data reporting formats and standard procedures 
for compiling and furnishing data, where feasible, such as the 
electronic transmission of information about consumers to consumer 
reporting agencies.
    (c) Maintaining records for a reasonable period of time, not less 
than any applicable recordkeeping requirement, in order to substantiate 
the accuracy of any information about consumers it furnishes that is 
subject to a direct dispute.
    (d) Establishing and implementing appropriate internal controls 
regarding the accuracy and integrity of information about consumers 
furnished to consumer reporting agencies, such as by implementing 
standard procedures and verifying random samples of information provided 
to consumer reporting agencies.
    (e) Training staff that participates in activities related to the 
furnishing of information about consumers to consumer reporting agencies 
to implement the policies and procedures.
    (f) Providing for appropriate and effective oversight of relevant 
service providers whose activities may affect the accuracy or integrity 
of information about consumers furnished to consumer reporting agencies 
to ensure compliance with the policies and procedures.
    (g) Furnishing information about consumers to consumer reporting 
agencies following mergers, portfolio acquisitions or sales, or other 
acquisitions or transfers of accounts or other obligations in a manner 
that prevents re-aging of information, duplicative reporting, or other 
problems that may similarly affect the accuracy or integrity of the 
information furnished.
    (h) Deleting, updating, and correcting information in the 
furnisher's records, as appropriate, to avoid furnishing inaccurate 
information.
    (i) Conducting reasonable investigations of disputes.
    (j) Designing technological and other means of communication with 
consumer reporting agencies to prevent duplicative reporting of 
accounts, erroneous association of information with the wrong 
consumer(s), and other occurrences that may compromise the accuracy or 
integrity of information provided to consumer reporting agencies.
    (k) Providing consumer reporting agencies with sufficient 
identifying information in the furnisher's possession about each 
consumer about whom information is furnished to enable the consumer 
reporting agency properly to identify the consumer.
    (l) Conducting a periodic evaluation of its own practices, consumer 
reporting agency practices of which the furnisher is aware, 
investigations of disputed information, corrections of inaccurate 
information, means of communication, and other factors that may affect 
the accuracy or integrity of information furnished to consumer reporting 
agencies.
    (m) Complying with applicable requirements under the Fair Credit 
Reporting Act and its implementing regulations.

[74 FR 31524, July 1, 2009]



               Sec. Appendixes F-I to Part 717 [Reserved]



 Sec. Appendix J to Part 717--Interagency Guidelines on Identity Theft 
                  Detection, Prevention, and Mitigation

    Section 717.90 of this part requires each federal credit union that 
offers or maintains one or more covered accounts, as defined in 
Sec. 717.90(b)(3) of this part, to develop and provide for the continued 
administration of a written Program to detect, prevent, and mitigate 
identity theft in connection with the opening of a covered account or 
any existing covered account. These guidelines are intended to assist 
federal credit unions in the formulation and maintenance of a Program 
that satisfies the requirements of Sec. 717.90 of this part.

                             I. The Program

    In designing its Program, a federal credit union may incorporate, as 
appropriate, its existing policies, procedures, and other arrangements 
that control reasonably foreseeable risks to members or to the safety 
and soundness of the federal credit union from identity theft.

[[Page 1023]]

                   II. Identifying Relevant Red Flags

    (a) Risk Factors. A federal credit union should consider the 
following factors in identifying relevant Red Flags for covered 
accounts, as appropriate:
    (1) The types of covered accounts it offers or maintains;
    (2) The methods it provides to open its covered accounts;
    (3) The methods it provides to access its covered accounts; and
    (4) Its previous experiences with identity theft.
    (b) Sources of Red Flags. Federal credit unions should incorporate 
relevant Red Flags from sources such as:
    (1) Incidents of identity theft that the federal credit union has 
experienced;
    (2) Methods of identity theft that the federal credit union has 
identified that reflect changes in identity theft risks; and
    (3) Applicable supervisory guidance.
    (c) Categories of Red Flags. The Program should include relevant Red 
Flags from the following categories, as appropriate. Examples of Red 
Flags from each of these categories are appended as Supplement A to this 
appendix J.
    (1) Alerts, notifications, or other warnings received from consumer 
reporting agencies or service providers, such as fraud detection 
services;
    (2) The presentation of suspicious documents;
    (3) The presentation of suspicious personal identifying information, 
such as a suspicious address change;
    (4) The unusual use of, or other suspicious activity related to, a 
covered account; and
    (5) Notice from members, victims of identity theft, law enforcement 
authorities, or other persons regarding possible identity theft in 
connection with covered accounts held by the federal credit union.

                        III. Detecting Red Flags

    The Program's policies and procedures should address the detection 
of Red Flags in connection with the opening of covered accounts and 
existing covered accounts, such as by:
    (a) Obtaining identifying information about, and verifying the 
identity of, a person opening a covered account; for example, using the 
policies and procedures regarding identification and verification set 
forth in the Customer Identification Program rules implementing 31 
U.S.C. 5318(l) (31 CFR 1020.220); and
    (b) Authenticating members, monitoring transactions, and verifying 
the validity of change of address requests, in the case of existing 
covered accounts.

              IV. Preventing and Mitigating Identity Theft

    The Program's policies and procedures should provide for appropriate 
responses to the Red Flags the federal credit union has detected that 
are commensurate with the degree of risk posed. In determining an 
appropriate response, a federal credit union should consider aggravating 
factors that may heighten the risk of identity theft, such as a data 
security incident that results in unauthorized access to a member's 
account records held by the federal credit union or a third party, or 
notice that a member has provided information related to a covered 
account held by the federal credit union to someone fraudulently 
claiming to represent the federal credit union or to a fraudulent 
website. Appropriate responses may include the following:
    (a) Monitoring a covered account for evidence of identity theft;
    (b) Contacting the member;
    (c) Changing any passwords, security codes, or other security 
devices that permit access to a covered account;
    (d) Reopening a covered account with a new account number;
    (e) Not opening a new covered account;
    (f) Closing an existing covered account;
    (g) Not attempting to collect on a covered account or not selling a 
covered account to a debt collector;
    (h) Notifying law enforcement; or
    (i) Determining that no response is warranted under the particular 
circumstances.

                         V. Updating the Program

    Federal credit unions should update the Program (including the Red 
Flags determined to be relevant) periodically, to reflect changes in 
risks to members or to the safety and soundness of the federal credit 
union from identity theft, based on factors such as:
    (a) The experiences of the federal credit union with identity theft;
    (b) Changes in methods of identity theft;
    (c) Changes in methods to detect, prevent, and mitigate identity 
theft;
    (d) Changes in the types of accounts that the federal credit union 
offers or maintains; and
    (e) Changes in the business arrangements of the federal credit 
union, including mergers, acquisitions, alliances, joint ventures, and 
service provider arrangements.

                VI. Methods for Administering the Program

    (a) Oversight of Program. Oversight by the board of directors, an 
appropriate committee of the board, or a designated employee at the 
level of senior management should include:
    (1) Assigning specific responsibility for the Program's 
implementation;
    (2) Reviewing reports prepared by staff regarding compliance by the 
federal credit union with Sec. 717.90 of this part; and

[[Page 1024]]

    (3) Approving material changes to the Program as necessary to 
address changing identity theft risks.
    (b) Reports. (1) In general. Staff of the federal credit union 
responsible for development, implementation, and administration of its 
Program should report to the board of directors, an appropriate 
committee of the board, or a designated employee at the level of senior 
management, at least annually, on compliance by the federal credit union 
with Sec. 717.90 of this part.
    (2) Contents of report. The report should address material matters 
related to the Program and evaluate issues such as: the effectiveness of 
the policies and procedures of the federal credit union in addressing 
the risk of identity theft in connection with the opening of covered 
accounts and with respect to existing covered accounts; service provider 
arrangements; significant incidents involving identity theft and 
management's response; and recommendations for material changes to the 
Program.
    (c) Oversight of service provider arrangements. Whenever a federal 
credit union engages a service provider to perform an activity in 
connection with one or more covered accounts the federal credit union 
should take steps to ensure that the activity of the service provider is 
conducted in accordance with reasonable policies and procedures designed 
to detect, prevent, and mitigate the risk of identity theft. For 
example, a federal credit union could require the service provider by 
contract to have policies and procedures to detect relevant Red Flags 
that may arise in the performance of the service provider's activities, 
and either report the Red Flags to the federal credit union, or to take 
appropriate steps to prevent or mitigate identity theft.

                VII. Other Applicable Legal Requirements

    Federal credit unions should be mindful of other related legal 
requirements that may be applicable, such as:
    (a) Filing a Suspicious Activity Report under 31 U.S.C. 5318(g) and 
12 CFR 748.1(c);
    (b) Implementing any requirements under 15 U.S.C. 1681c-1(h) 
regarding the circumstances under which credit may be extended when the 
federal credit union detects a fraud or active duty alert;
    (c) Implementing any requirements for furnishers of information to 
consumer reporting agencies under 15 U.S.C. 1681s-2, for example, to 
correct or update inaccurate or incomplete information, and to not 
report information that the furnisher has reasonable cause to believe is 
inaccurate; and
    (d) Complying with the prohibitions in 15 U.S.C. 1681m on the sale, 
transfer, and placement for collection of certain debts resulting from 
identity theft.

                       Supplement A to Appendix J

    In addition to incorporating Red Flags from the sources recommended 
in section II.b. of the Guidelines in appendix J of this part, each 
federal credit union may consider incorporating into its Program, 
whether singly or in combination, Red Flags from the following 
illustrative examples in connection with covered accounts:

   Alerts, Notifications or Warnings From a Consumer Reporting Agency

    1. A fraud or active duty alert is included with a consumer report.
    2. A consumer reporting agency provides a notice of credit freeze in 
response to a request for a consumer report.
    3. A consumer reporting agency provides a notice of address 
discrepancy, as defined in Sec. 717.82(b) of this part.
    4. A consumer report indicates a pattern of activity that is 
inconsistent with the history and usual pattern of activity of an 
applicant or member, such as:
    a. A recent and significant increase in the volume of inquiries;
    b. An unusual number of recently established credit relationships;
    c. A material change in the use of credit, especially with respect 
to recently established credit relationships; or
    d. An account that was closed for cause or identified for abuse of 
account privileges by a financial institution or creditor.

                          Suspicious Documents

    5. Documents provided for identification appear to have been altered 
or forged.
    6. The photograph or physical description on the identification is 
not consistent with the appearance of the applicant or member presenting 
the identification.
    7. Other information on the identification is not consistent with 
information provided by the person opening a new covered account or 
member presenting the identification.
    8. Other information on the identification is not consistent with 
readily accessible information that is on file with the federal credit 
union, such as a signature card or a recent check.
    9. An application appears to have been altered or forged, or gives 
the appearance of having been destroyed and reassembled.

               Suspicious Personal Identifying Information

    10. Personal identifying information provided is inconsistent when 
compared against external information sources used by the federal credit 
union. For example:
    a. The address does not match any address in the consumer report; or
    b. The Social Security Number (SSN) has not been issued, or is 
listed on the Social Security Administration's Death Master File.

[[Page 1025]]

    11. Personal identifying information provided by the member is not 
consistent with other personal identifying information provided by the 
member. For example, there is a lack of correlation between the SSN 
range and date of birth.
    12. Personal identifying information provided is associated with 
known fraudulent activity as indicated by internal or third-party 
sources used by the federal credit union. For example:
    a. The address on an application is the same as the address provided 
on a fraudulent application; or
    b. The phone number on an application is the same as the number 
provided on a fraudulent application.
    13. Personal identifying information provided is of a type commonly 
associated with fraudulent activity as indicated by internal or third-
party sources used by the federal credit union. For example:
    a. The address on an application is fictitious, a mail drop, or 
prison; or
    b. The phone number is invalid, or is associated with a pager or 
answering service.
    14. The SSN provided is the same as that submitted by other persons 
opening an account or other members.
    15. The address or telephone number provided is the same as or 
similar to the address or telephone number submitted by an unusually 
large number of other persons opening accounts or by other members.
    16. The person opening the covered account or the member fails to 
provide all required personal identifying information on an application 
or in response to notification that the application is incomplete.
    17. Personal identifying information provided is not consistent with 
personal identifying information that is on file with the federal credit 
union.
    18. For federal credit unions that use challenge questions, the 
person opening the covered account or the member cannot provide 
authenticating information beyond that which generally would be 
available from a wallet or consumer report.

 Unusual Use of, or Suspicious Activity Related to, the Covered Account

    19. Shortly following the notice of a change of address for a 
covered account, the institution or creditor receives a request for a 
new, additional, or replacement card or a cell phone, or for the 
addition of authorized users on the account.
    20. A new revolving credit account is used in a manner commonly 
associated with known patterns of fraud. For example:
    a. The majority of available credit is used for cash advances or 
merchandise that is easily convertible to cash (e.g., electronics 
equipment or jewelry); or
    b. The member fails to make the first payment or makes an initial 
payment but no subsequent payments.
    21. A covered account is used in a manner that is not consistent 
with established patterns of activity on the account. There is, for 
example:
    a. Nonpayment when there is no history of late or missed payments;
    b. A material increase in the use of available credit;
    c. A material change in purchasing or spending patterns;
    d. A material change in electronic fund transfer patterns in 
connection with a deposit account; or
    e. A material change in telephone call patterns in connection with a 
cellular phone account.
    22. A covered account that has been inactive for a reasonably 
lengthy period of time is used (taking into consideration the type of 
account, the expected pattern of usage and other relevant factors).
    23. Mail sent to the member is returned repeatedly as undeliverable 
although transactions continue to be conducted in connection with the 
member's covered account.
    24. The federal credit union is notified that the member is not 
receiving paper account statements.
    25. The federal credit union is notified of unauthorized charges or 
transactions in connection with a member's covered account.

    Notice From Members, Victims of Identity Theft, Law Enforcement 
   Authorities, or Other Persons Regarding Possible Identity Theft in 
    Connection With Covered Accounts Held by the Federal Credit Union

    26. The federal credit union is notified by a member, a victim of 
identity theft, a law enforcement authority, or any other person that it 
has opened a fraudulent account for a person engaged in identity theft.

[72 FR 63769, Nov. 9, 2007, as amended at 74 FR 22644, May 14, 2009; 76 
FR 18365, Apr. 4, 2011]



PART 721_INCIDENTAL POWERS--Table of Contents



Sec.
721.1  What does this part cover?
721.2  What is an incidental powers activity?
721.3  What categories of activities are preapproved as incidental 
          powers necessary or requisite to carry on a credit union's 
          business?
721.4  How may a credit union apply to engage in an activity that is not 
          preapproved as within a credit union's incidental powers?
721.5  What limitations apply to a credit union engaging in activities 
          approved under this part?

[[Page 1026]]

721.6  May a credit union derive income from activities approved under 
          this part?
721.7  What are the potential conflicts of interest for officials and 
          employees when credit unions engage in activities approved 
          under this part?

    Authority: 12 U.S.C. 1757(17), 1766 and 1789.

    Source: 66 FR 40857, Aug. 6, 2001, unless otherwise noted.



Sec. 721.1  What does this part cover?

    This part authorizes a federal credit union (you) to engage in 
activities incidental to your business as set out in this part. This 
part also describes how interested parties may request a legal opinion 
on whether an activity is within a federal credit union's incidental 
powers or apply to add new activities or categories to the regulation. 
An activity approved in a legal opinion to an interested party or as a 
result of an application by an interested party to add new activities or 
categories is recognized as an incidental powers activity for all 
federal credit unions. This part does not apply to the activities of 
corporate credit unions.



Sec. 721.2  What is an incidental powers activity?

    An incidental powers activity is one that is necessary or requisite 
to enable you to carry on effectively the business for which you are 
incorporated. An activity meets the definition of an incidental power 
activity if the activity:
    (a) Is convenient or useful in carrying out the mission or business 
of credit unions consistent with the Federal Credit Union Act;
    (b) Is the functional equivalent or logical outgrowth of activities 
that are part of the mission or business of credit unions; and
    (c) Involves risks similar in nature to those already assumed as 
part of the business of credit unions.



Sec. 721.3  What categories of activities are preapproved as incidental
powers necessary or requisite to carry on a credit union's business?

    The categories of activities in this section are preapproved as 
incidental to carrying on your business under Sec. 721.2. The examples 
of incidental powers activities within each category are provided in 
this section as illustrations of activities permissible under the 
particular category, not as an exclusive or exhaustive list.
    (a) Certification services. Certification services are services 
whereby you attest or authenticate a fact for your members' use. 
Certification services may include such services as notary services, 
signature guarantees, certification of electronic signatures, and share 
draft certifications.
    (b)(1) Charitable contributions and donations. Charitable 
contributions and donations are gifts you provide to assist others 
through contributions of staff, equipment, money, or other resources. 
Examples of charitable contributions include donations to community 
groups, nonprofit organizations, other credit unions or credit union 
affiliated causes, political donations, as well as donations to create 
charitable foundations.
    (2) Charitable donation accounts. A charitable donation account 
(CDA) is a hybrid charitable and investment vehicle, satisfying the 
conditions in paragraphs (b)(2)(i) through (vii) of this section, that 
you may fund as a means to provide charitable contributions and 
donations to qualified charities. If you fund a CDA that satisfies all 
of the conditions in paragraphs (b)(2)(i) through (vii) of this section, 
then you may do so free from the investment limitations of the Federal 
Credit Union Act and part 703 of this chapter.
    (i) Maximum aggregate funding. The book value of your investments in 
all CDAs, in the aggregate, as carried on your statement of financial 
condition prepared in accordance with generally accepted accounting 
principles, must be limited to 5 percent of your net worth at all times 
for the duration of the accounts, as measured every quarterly Call 
Report cycle. This means that regardless of how many CDAs you invest in, 
the combined book value of all such investments must not exceed 5 
percent of your net worth. You must bring your aggregate accounts into 
compliance with the maximum aggregate funding limit within 30 days of 
any breach of this limit.

[[Page 1027]]

    (ii) Segregated account. The assets of a CDA must be held in a 
segregated custodial account or special purpose entity and must be 
specifically identified as a CDA.
    (iii) Regulatory oversight. If you choose to establish a CDA using a 
trust vehicle, the trustee must be regulated by the Office of the 
Comptroller of the Currency (OCC), the U.S. Securities and Exchange 
Commission (SEC), another federal regulatory agency, or a state 
financial regulatory agency. A regulated trustee or other person or 
entity that is authorized to make investment decisions for a CDA 
(manager), other than the credit union itself, must be either a 
Registered Investment Adviser or regulated by the OCC.
    (iv) Account documentation and other written requirements. The 
parties to the CDA, typically the funding credit union and trustee or 
other manager of the account, must document the terms and conditions 
controlling the account in a written agreement. The terms of the 
agreement must be consistent with this section. Your board of directors 
must adopt written policies governing the creation, funding, and 
management of a CDA that are consistent with this section, must review 
the policies annually, and may amend them from time to time. Your CDA 
agreement and policies must at a minimum:
    (A) Provide that the CDA will make charitable contributions and 
donations only to charities you name therein that are exempt from 
taxation under section 501(c)(3) of the Internal Revenue Code;
    (B) Document the investment strategies and risk tolerances the CDA 
trustee or other manager must follow in administering the account;
    (C) Provide that you will account for all aspects of the CDA, 
including distributions to charities and liquidation of the account, in 
accordance with generally accepted accounting principles; and
    (D) Indicate the frequency with which the trustee or manager of the 
CDA will make distributions to qualified charities as provided in 
paragraph (b)(2)(v) of this section;
    (v) Minimum distribution to charities. You are required to 
distribute to one or more qualified charities, no less frequently than 
every 5 years, and upon termination of a CDA regardless of the length of 
its term, a minimum of 51 percent of the account's total return on 
assets over the period of up to 5 years. Other than upon termination, 
you may choose how frequently CDA distributions to charity will be made 
during each period of up to 5 years. For example, you may choose to make 
periodic distributions over a period of up to 5 years, or only a single 
distribution as required at the end of that period. You may choose to 
donate in excess of the minimum distribution frequency and amount;
    (vi) Liquidation of assets upon CDA termination. Upon termination of 
the CDA, you may receive a distribution of the remaining account assets 
in cash or you may receive a distribution in kind of the remaining 
account assets but only if those assets are permissible investments for 
federal credit unions under the Federal Credit Union Act and part 703 of 
this chapter; and
    (vii) Definitions. For purposes of this section, the following 
definitions apply:
    (A) Distribution in kind is your acceptance of remaining CDA assets, 
upon termination of the account, in their original form instead of in 
cash resulting from the liquidation of the assets.
    (B) Qualified charity is a charitable organization or other non-
profit entity recognized as exempt from taxation under section 501(c)(3) 
of the Internal Revenue Code.
    (C) Registered Investment Adviser is an investment adviser 
registered with the SEC pursuant to the Investment Advisers Act of 1940.
    (D) Total return is the actual rate of return on all investments in 
a CDA over a given period of up to 5 years, including realized interest, 
capital gains, dividends, and distributions, but exclusive of account 
fees and expenses provided they were not paid to the credit union that 
established the CDA or to any of its affiliates.
    (E) Affiliate is an entity in which the credit union has any 
ownership interest directly or indirectly. This would not apply to 
ownership due to the funding of employee benefits.
    (c) Correspondent services. Correspondent services are services you

[[Page 1028]]

provide to other credit unions including foreign credit unions that you 
are authorized to perform for your members or as part of your operation. 
These services may include loan processing, loan servicing, member check 
cashing services, disbursing share withdrawals and loan proceeds, 
cashing and selling money orders, performing internal audits, and 
automated teller machine deposit services.
    (d) Electronic financial services. Electronic financial services are 
any services, products, functions, or activities that you are otherwise 
authorized to perform, provide, or deliver to your members but performed 
through electronic means. Electronic services may include automated 
teller machines, electronic fund transfers, online transaction 
processing through a web site, web site hosting services, account 
aggregation services, and Internet access services to perform or deliver 
products or services to members.
    (e) Excess capacity. Excess capacity is the excess use or capacity 
remaining in facilities, equipment, or services that: You properly 
invested in or established, in good faith, with the intent of serving 
your members; and you reasonably anticipate will be taken up by the 
future expansion of services to your members. You may sell or lease the 
excess capacity in facilities, equipment or services such as office 
space, employees and data processing.
    (f) Financial counseling services. Financial counseling services 
means advice, guidance or services that you offer to your members to 
promote thrift or to otherwise assist members on financial matters. 
Financial counseling services may include income tax preparation 
service, electronic tax filing for your members, counseling regarding 
estate and retirement planning, investment counseling, and debt and 
budget counseling.
    (g) Finder activities. Finder activities are activities in which you 
introduce or otherwise bring together outside vendors with your members 
so that the two parties may negotiate and consummate transactions and 
include vendors of non-financial products, vendors that are other 
financial institutions, and vendors of financial products such as 
insurance and securities. Finder activities may include endorsing a 
product or service, negotiating group discounts on behalf of your 
members, offering third party products and services to members through 
the sale of advertising space on your website, account statements and 
receipts, and selling statistical or consumer financial information to 
outside vendors to facilitate the sale of their products to your 
members. You may perform administrative functions on behalf of vendors 
to facilitate transactions between your members and another institution.
    (h) Loan-related products. Loan-related products are the products, 
activities or services you provide to your members in a lending 
transaction that protect you against credit-related risks or are 
otherwise incidental to your lending authority. These products or 
activities may include debt cancellation agreements, debt suspension 
agreements, letters of credit and leases.
    (i) Marketing activities. Marketing activities are the activities or 
means you use to promote membership in your credit union and the 
products and services you offer to your members. Marketing activities 
may include advertising and other promotional activities such as 
raffles, membership referral drives, and the purchase or use of 
advertising.
    (j) Monetary instrument services. Monetary instrument services are 
services that enable your members to purchase, sell, or exchange various 
currencies. These services may include the sale and exchange of foreign 
currency and U.S. commemorative coins. You may also use accounts you 
have in foreign financial institutions to facilitate your members' 
transfer and negotiation of checks denominated in foreign currency or 
engage in monetary transfer services for your members.
    (k) Operational programs. Operational programs are programs that you 
establish within your business to establish or deliver products and 
services that enhance member service and promote safe and sound 
operation. Operational programs may include electronic funds transfers, 
remote tellers, point of purchase terminals, debit cards, payroll

[[Page 1029]]

deduction, payroll services, pre-authorized member transactions, direct 
deposit, check clearing services, savings bond purchases and 
redemptions, tax payment services, wire transfers, safe deposit boxes, 
loan collection services, and service fees.
    (l) Stored value products. Stored value products are alternate media 
to currency in which you transfer monetary value to the product and 
create a medium of exchange for your members' use. Examples of stored 
value products include stored value cards, public transportation 
tickets, event and attraction tickets, gift certificates, prepaid phone 
cards, postage stamps, electronic benefits transfer script, and similar 
media.
    (m) Trustee or custodial services. Trustee or custodial services are 
services in which you are authorized to act under any written trust 
instrument or custodial agreement created or organized in the United 
States and forming part of a tax-advantaged savings plan, as authorized 
under the Internal Revenue Code. These services may include acting as a 
trustee or custodian for member retirement, education and health savings 
accounts.

[66 FR 40857, Aug. 6, 2001, as amended at 69 FR 45238, July 29, 2004; 73 
FR 62856, Oct. 22, 2008; 75 FR 34621, June 18, 2010; 77 FR 31992, May 
31, 2012; 78 FR 76731, Dec. 19, 2013]

    Effective Date Note: At 81 FR 93580, Dec. 21, 2016, Sec. 721.3 was 
amended by revising paragraph (e), effective Jan. 20, 2017. For the 
convenience of the user, the revised text is set forth as follows:



Sec. 721.3  What categories of activities are preapproved as incidental 
          powers necessary or requisite to carry on a credit union's 
          business?

                                * * * * *

    (e) Excess capacity. Excess capacity is the excess use or capacity 
remaining in facilities, equipment, or services that you properly 
invested in or established, in good faith, with the intent of serving 
your members or supporting your business operations. You may sell or 
lease the excess capacity in facilities, such as office space and other 
premises. You may sell or lease the excess capacity in equipment or 
services, such as employees and data processing, if you reasonably 
anticipate that the excess capacity will be taken up by the future 
expansion of services to your members.

                                * * * * *



Sec. 721.4  How may a credit union apply to engage in an activity that
is not preapproved as within a credit union's incidental powers?

    (a) Application contents. To engage in an activity that may be 
within an FCU's incidental powers but that does not fall within a 
preapproved category listed in Sec. 721.3, you may submit an application 
by certified mail, return receipt requested, to the NCUA Board. Your 
application must describe the activity, your explanation, consistent 
with the test provided in paragraph (c) of this section, of why this 
activity is within your incidental powers, your plan for implementing 
the proposed activity, any state licenses you must obtain to conduct the 
activity, and any other information necessary to describe the proposed 
activity adequately. Before you engage in the petition process you 
should seek an advisory opinion from NCUA's Office of General Counsel, 
as to whether a proposed activity fits into one of the authorized 
categories or is otherwise within your incidental powers without filing 
a petition to amend the regulation.
    (b) Processing of application. Your application must be filed with 
the Secretary of the NCUA Board. NCUA will review your application for 
completeness and will notify you whether additional information is 
required or whether the activity requested is permissible under one of 
the categories listed in Sec. 721.3. If the activity falls within a 
category provided in Sec. 721.3, NCUA will notify you that the activity 
is permissible and treat the application as withdrawn. If the activity 
does not fall within a category provided in Sec. 721.3, NCUA staff will 
consider whether the proposed activity is legally permissible. Upon a 
recommendation by NCUA staff that the activity is within a credit 
union's incidental powers, the NCUA Board may amend Sec. 721.3 and will 
request public comment on the establishment of a new category of 
activities within Sec. 721.3. If the activity proposed in your 
application fails to meet

[[Page 1030]]

the criteria established in paragraph (c) of this section, NCUA will 
notify you within a reasonable period of time.
    (c) Decision on application. In determining whether an activity is 
authorized as an appropriate exercise of a federal credit union's 
incidental powers, the Board will consider:
    (1) Whether the activity is convenient or useful in carrying out the 
mission or business of credit unions consistent with the Act;
    (2) Whether the activity is the functional equivalent or logical 
outgrowth of activities that are part of the mission or business of 
credit unions; and
    (3) Whether the activity involves risks similar in nature to those 
already assumed as part of the business of credit unions.



Sec. 721.5  What limitations apply to a credit union engaging in
activities approved under this part?

    You must comply with any applicable NCUA regulations, policies, and 
legal opinions, as well as applicable state and federal law, if an 
activity authorized under this part is otherwise regulated or 
conditioned.



Sec. 721.6  May a credit union derive income from activities approved 
under this part?

    You may earn income for those activities determined to be incidental 
to your business.



Sec. 721.7  What are the potential conflicts of interest for officials
and employees when credit unions engage in activities approved under
this part?

    (a) Conflicts. No official, employee, or their immediate family 
member may receive any compensation or benefit, directly or indirectly, 
in connection with your engagement in an activity authorized under this 
part, except as otherwise provided in paragraph (b) of this section. 
This section does not apply if a conflicts of interest provision within 
another section of this chapter applies to a particular activity; in 
such case, the more specific conflicts of interest provision controls. 
For example: An official or employee that refers loan-related products 
offered by a third-party to a member, in connection with a loan made by 
you, is subject to the conflicts of interest provision in 
Sec. 701.21(c)(8) of this chapter.
    (b) Permissible payments. This section does not prohibit:
    (1) Payment, by you, of salary to your employees;
    (2) Payment, by you, of an incentive or bonus to an employee based 
on your overall financial performance;
    (3) Payment, by you, of an incentive or bonus to an employee, other 
than a senior management employee or paid official, in connection with 
an activity authorized by this part, provided that your board of 
directors establishes written policies and internal controls for the 
incentive program and monitors compliance with such policies and 
controls at least annually; and
    (4) Payment, by a person other than you, of any compensation or 
benefit to an employee, other than a senior management employee or paid 
official, in connection with an activity authorized by this part, 
provided that your board of directors establishes written policies and 
internal controls regarding third-party compensation and determines that 
the employee's involvement does not present a conflict of interest.
    (c) Business associates and family members. All transactions with 
business associates or family members not specifically prohibited by 
paragraph (a) of this section must be conducted at arm's length and in 
the interest of the credit union.
    (d) Definitions. For purposes of this part, the following 
definitions apply.
    (1) Senior management employee means your chief executive officer 
(typically, this individual holds the title of President or Treasurer/
Manager), any assistant chief executive officers (e.g. Assistant 
President, Vice President, or Assistant Treasurer/Manager), and the 
chief financial officer (Comptroller).
    (2) Official means any member of your board of directors, credit 
committee or supervisory committee.
    (3) Immediate family member means a spouse or other family member 
living in the same household.



PART 722_APPRAISALS--Table of Contents



Sec.
722.1  Authority, purpose, and scope.
722.2  Definitions.

[[Page 1031]]

722.3  Appraisals required; transactions requiring a State certified or 
          licensed appraiser.
722.4  Minimum appraisal standards.
722.5  Appraiser independence.
722.6  Professional association membership; competency.
722.7  Enforcement.

    Authority: 12 U.S.C. 1766, 1789 and 3339. Section 722.3(f) is also 
issued under 15 U.S.C. 1639h.

    Source: 55 FR 30207, July 25, 1990, unless otherwise noted.



Sec. 722.1  Authority, purpose, and scope.

    (a) Authority. Part 722 is issued by the National Credit Union 
Administration (``NCUA'') under title XI of the Financial Institutions 
Reform, Recovery, and Enforcement Act of 1989 (``FIRREA'') (Pub. L. 101-
73, 103 Stat. 183, 1989) and 12 U.S.C. 1757 and 1766.
    (b) Purpose and scope. (1) Title XI provides protection for federal 
financial and public policy interests in real estate-related 
transactions by requiring real estate appraisals used in connection with 
federally related transactions to be performed in writing, in accordance 
with uniform standards, by appraisers whose competency has been 
demonstrated and whose professional conduct will be subject to effective 
supervision. This part implements the requirements of title XI and 
applies to all federally related transactions entered into by the 
National Credit Union Administration or by federally insured credit 
unions (``regulated institutions'').
    (2) This part: (i) Identifies which real estate-related financial 
transactions require the services of an appraiser;
    (ii) Prescribes which categories of federally related transactions 
shall be appraised by a state-certified appraiser and which by a state-
licensed appraiser; and
    (iii) Prescribes minimum standards for the performance of real 
estate appraisals in connection with federally related transactions 
under the jurisdiction of the National Credit Union Administration.



Sec. 722.2  Definitions.

    (a) Appraisal means a written statement independently and 
impartially prepared by a qualified appraiser setting forth an opinion 
as to the market value of an adequately-described property as of a 
specific date(s), supported by the presentation and analysis of relevant 
market information.
    (b) Appraisal Foundation means the Appraisal Foundation established 
on November 30, 1987, as a not-for-profit corporation under the laws of 
Illinois.
    (c) Appraisal Subcommittee means the Appraisal Subcommittee of the 
Federal Financial Institutions Examination Council.
    (d) Complex 1- to 4-family residential property appraisal means one 
in which the property to be appraised, the form of ownership or market 
conditions are atypical.
    (e) Federally related transaction means any real estate-related 
financial transaction entered into on or after August 9, 1990 that:
    (1) The National Credit Union Administration, or any federally 
insured credit union, engages in or contracts for; and
    (2) Requires the services of an appraiser.
    (f) Market value means the most probable price which a property 
should bring in a competitive and open market under all conditions 
requisite to a fair sale, the buyer and seller each acting prudently and 
knowledgeably and assuming the price is not affected by undue stimulus. 
Implicit in this definition is the consummation of a sale as of a 
specified date and the passing of title from seller to buyer under 
conditions whereby:
    (1) Buyer and seller are typically motivated;
    (2) Both parties are well informed or well advised, and acting in 
what they consider their own best interests;
    (3) A reasonable time is allowed for exposure in the open market;
    (4) Payment is made in terms of cash in U.S. dollars or in terms of 
financial arrangements comparable thereto; and
    (5) The price represents the normal consideration for the property 
sold unaffected by special or creative financing or sales concessions 
granted by anyone associated with the sale.
    (g) Real estate or real property means an identified parcel or tract 
of land, including easements, rights of way, undivided or future 
interests and similar rights in a parcel or tract of land, but

[[Page 1032]]

does not include mineral rights, timber rights, and growing crops, water 
rights and similar interests severable from the land when the 
transaction does not involve the associated parcel or tract of land.
    (h) Real estate-related financial transaction means any transaction 
involving:
    (1) The sale, lease, purchase, investment in or exchange of real 
property, including interests in property, or the financing thereof; or
    (2) The refinancing of real property or interests in real property; 
or
    (3) The use of real property or interests in property as security 
for a loan or investment, including mortgage-backed securities.
    (i) State-certified appraiser means any individual who has satisfied 
the requirements for certification in a state or territory whose 
criteria for certification as a real estate appraiser currently meet the 
minimum criteria for certification issued by the Appraiser Qualification 
Board of the Appraisal Foundation. No individual shall be a state-
certified appraiser unless such individual has achieved a passing grade 
upon a suitable examination administered by a state or territory that is 
consistent with and equivalent to the Uniform State Certification 
Examination issued or endorsed by the Appraiser Qualification Board. In 
addition, the Appraisal Subcommittee must not have issued a finding that 
the policies, practices, or procedures of a state or territory are 
inconsistent with title XI of FIRREA. The National Credit Union 
Administration may, from time to time, impose additional qualification 
criteria for certified appraisers performing appraisals in connection 
with federally related transactions within its jurisdiction.
    (j) State-licensed appraiser means any individual who has satisfied 
the requirements for licensing in a state or territory where the 
licensing procedures comply with title XI of FIRREA and where the 
Appraisal Subcommittee has not issued a finding that the policies, 
practices, or procedures of the State or territory are inconsistent with 
title XI. The NCUA may, from time to time, impose additional 
qualification criteria for licensed appraisers performing appraisals in 
connection with federally related transactions within its jurisdiction.
    (k) Tract development means a project of five units or more that is 
constructed or is to be constructed as a single development.
    (l) Transaction value means: (1) For loans or other extensions of 
credit, the amount of the loan or extension of credit; and
    (2) For sales, leases, purchases, and investments in or exchanges of 
real property, the market value of the real property interest involved; 
and
    (3) For the pooling of loans or interests in real property for 
resale or purchase, the amount of the loan or market value of the real 
property calculated with respect to each such loan or interest in real 
property.

[55 FR 30207, July 25, 1990, as amended at 57 FR 28998, June 30, 1992; 
75 FR 34622, June 18, 2010]



Sec. 722.3  Appraisals required; transactions requiring a State
certified or licensed appraiser.

    (a) Appraisals required. An appraisal performed by a State certified 
or licensed appraiser is required for all real estate-related financial 
transactions except those in which:
    (1) The transaction value is $250,000 or less;
    (2) A lien on real property has been taken as collateral through an 
abundance of caution and where the terms of the transaction as a 
consequence have not been made more favorable than they would have been 
in the absence of a lien;
    (3) A lien on real estate has been taken for purposes other than the 
real estate's value;
    (4) A lease of real estate is entered into, unless the lease is the 
economic equivalent of a purchase or sale of the leased real estate;
    (5) The transaction involves an existing extension of credit at the 
lending credit union, provided that:
    (i) There is no advancement of new monies, other than funds 
necessary to cover reasonable closing costs; or
    (ii) There has been no obvious and material change in market 
conditions or physical aspects of the property that threatens the 
adequacy of the credit

[[Page 1033]]

union's real estate collateral protection after the transaction, even 
with the advancement of new monies;
    (6) The transaction involves the purchase, sale, investment in, 
exchange of, or extension of credit secured by, a loan or interest in a 
loan, pooled loans, or interests in real property, including mortgage-
backed securities, and each loan or interest in a loan, pooled loan, or 
real property interest met the requirements of this regulation, if 
applicable, at the time of origination;
    (7) The transaction is wholly or partially insured or guaranteed by 
a United States government agency or United States government sponsored 
agency;
    (8) The transaction either:
    (i) Qualifies for sale to a United States government agency or 
United States government sponsored agency; or
    (ii) Involves a residential real estate transaction in which the 
appraisal conforms to the Federal National Mortgage Association or 
Federal Home Loan Mortgage Corporation appraisal standards applicable to 
that category of real estate; or
    (9) The regional director has granted a waiver from the appraisal 
requirement for a category of loans meeting the definition of a member 
business loan.
    (b) Transactions requiring a State-certified appraiser. (1) (All 
transactions of $1,000,000 or more) All federally related transactions 
having a transaction value of $1,000,000 or more shall require an 
appraisal prepared by a state-certified appraiser.
    (2) (Nonresidential transactions) All federally related transactions 
having a transaction value of more than $250,000, other than those 
involving appraisals of 1- to 4-family residential properties, shall 
require an appraisal prepared by a state-certified appraiser.
    (3) (Complex residential transactions of $250,000 or more) All 
complex 1- to 4-family residential property appraisals rendered in 
connection with federally related transactions shall require a state-
certified appraiser if the transaction value is $250,000 or more. A 
regulated institution may presume that appraisals of 1- to 4-family 
residential properties are not complex unless the institution has 
readily available information that a given appraisal will be complex. 
The regulated institution shall be responsible for making the final 
determination of whether the appraisal is complex. If, during the course 
of the appraisal, a licensed appraiser identifies factors that would 
result in the property, form of ownership, or market conditions being 
considered atypical, then either:
    (i) The regulated institution may ask the licensed appraiser to 
complete the appraisal and have a certified appraiser approve and cosign 
the appraisal; or
    (ii) The institution may engage a certified appraiser to complete 
the appraisal.
    (c) Transactions requiring either a State-certified or -licensed 
appraiser. All appraisals for federally related transactions not 
requiring the services of a state-certified appraiser shall be prepared 
by either a state-certified appraiser or a state-licensed appraiser.
    (d) Valuation requirement. Secured transactions exempted from 
appraisal requirements pursuant to paragraphs (a)(1) and (a)(5) of this 
section and not otherwise exempted from this regulation or fully insured 
shall be supported by a written estimate of market value, as defined in 
this regulation, performed by an individual having no direct or indirect 
interest in the property, and qualified and experienced to perform such 
estimates of value for the type and amount of credit being considered.
    (e) Appraisals to address safety and soundness concerns. NCUA 
reserves the right to require an appraisal under this subpart whenever 
the agency believes it is necessary to address safety and soundness 
concerns.
    (f) Higher-priced mortgage loans. A credit union may not extend 
credit to a consumer in the form of a ``higher-priced mortgage loan'' as 
defined in 12 CFR 1026.35(a)(1), without meeting the requirements of 
section 129H of the Truth in Lending Act, 15 U.S.C. 1639h, and its 
implementing regulations in Regulation Z, 12 CFR 1026.35(c).

[55 FR 30207, July 25, 1990, as amended at 60 FR 51894, Oct. 4, 1995; 63 
FR 51799, Sept. 29, 1998; 67 FR 67102, Nov. 4, 2002; 72 FR 30247, May 
31, 2007; 78 FR 10442, Feb. 13, 2013; 79 FR 75748, Dec. 19, 2014]

[[Page 1034]]



Sec. 722.4  Minimum appraisal standards.

    For federally related transactions, all appraisals shall, at a 
minimum:
    (a) Conform to generally accepted appraisal standards as evidenced 
by the Uniform Standards of Professional Appraisal Practice (USPAP) 
promulgated by the Appraisal Standards Board of the Appraisal 
Foundation, 1029 Vermont Ave., NW., Washington, DC 20005;
    (b) Be written and contain sufficient information and analysis to 
support the institution's decision to engage in the transaction;
    (c) Analyze and report appropriate deductions and discounts for 
proposed construction or renovation, partially leased buildings, non-
market lease terms, and tract developments with unsold units;
    (d) Be based upon the definition of market value as set forth in 
Sec. 722.2(f); and
    (e) Be performed by State licensed or certified appraisers in 
accordance with requirements set forth in this subpart.

[60 FR 51894, Oct. 4, 1995]



Sec. 722.5  Appraiser independence.

    (a) Staff appraiser. If an appraisal is prepared by a staff 
appraiser, that appraiser must be independent of the lending, 
investment, and collection functions and not involved, except as an 
appraiser, in the federally related transaction, and have no direct or 
indirect interest, financial or otherwise, in the property. If the only 
qualified persons available to perform an appraisal are involved in the 
lending, investment, or collection functions of the credit union, the 
credit union shall take appropriate steps to ensure that the appraisers 
exercise independent judgment. Such steps include, but are not limited 
to, prohibiting an individual from performing an appraisal in connection 
with federally related transactions in which the appraiser is otherwise 
involved.
    (b) Fee appraisers. (1) If an appraisal is prepared by a fee 
appraiser, the appraiser shall be engaged directly by the credit union 
or its agent and have no direct or indirect interest, financial or 
otherwise, in the property or the transaction.
    (2) A credit union also may accept an appraisal that was prepared by 
an appraiser engaged directly by another financial services institution; 
if:
    (i) The appraiser has no direct or indirect interest, financial or 
otherwise, in the property or transaction; and
    (ii) The credit union determines that the appraisal conforms to the 
requirement of this regulation and is otherwise acceptable.

[55 FR 30207, July 25, 1990, as amended at 60 FR 51895, Oct. 4, 1995]



Sec. 722.6  Professional association membership; competency.

    (a) Membership in appraisal organization. A state-certified 
appraiser or a state-licensed appraiser may not be excluded from 
consideration for an assignment for a federally related transaction 
solely by virtue of membership or lack of membership in any particular 
appraisal organization.
    (b) Competency. All staff and fee appraisers performing appraisals 
in connection with federally related transactions must be state-
certified or -licensed as appropriate. However, a state-certified or -
licensed appraiser may not be considered competent solely by virtue of 
being certified or licensed. Any determination of competency shall be 
based upon the individual's experience and educational background as 
they relate to the particular appraisal assignment for which he or she 
is being considered.



Sec. 722.7  Enforcement.

    Credit unions and institution-affiliated parties, including staff 
appraisers and fee appraisers, may be subject to removal and/or 
prohibition orders, cease-and-desist orders, and the imposition of civil 
money penalties pursuant to section 1786 of the Federal Credit Union 
Act, or any other applicable law.



PART 723_MEMBER BUSINESS LOANS; COMMERCIAL LENDING--Table of Contents



Sec.
723.1  Purpose and scope.
723.2  Definitions.
723.3  Board of directors and management responsibilities.
723.4  Commercial loan policy.

[[Page 1035]]

723.5  Collateral and security.
723.6  Construction and development loans.
723.7  Prohibited activities.
723.8  Aggregate member business loan limit; exclusions and exceptions.
723.9  Transitional provisions.
723.10  State regulation of business lending.

    Authority: 12 U.S.C. 1756, 1757, 1757A, 1766, 1785, 1789.

    Source: 81 FR 13554, Mar. 14, 2016, unless otherwise noted.



Sec. 723.1  Purpose and scope.

    (a) Purpose. This part is intended to accomplish two broad 
objectives. First, it sets out policy and program responsibilities that 
a federally insured credit union must adopt and implement as part of a 
safe and sound commercial lending program. Second, it incorporates the 
statutory limit on the aggregate amount of member business loans that a 
federally insured credit union may make pursuant to Section 107A of the 
Federal Credit Union Act. The rule distinguishes between these two 
distinct objectives.
    (b) Credit unions and loans covered by this part. (1) This part 
applies to federally insured natural person credit unions. However, a 
federally insured natural person credit union is not subject to 
Secs. 723.3 and 723.4 of this part if it meets all of the following 
conditions:
    (i) The credit union's total assets are less than $250 million.
    (ii) The credit union's aggregate amount of outstanding commercial 
loan balances and unfunded commitments, plus any outstanding commercial 
loan balances and unfunded commitments of participations sold, plus any 
outstanding commercial loan balances and unfunded commitments sold and 
serviced by the credit union total less than 15 percent of the credit 
union's net worth.
    (iii) In a given calendar year the amount of originated and sold 
commercial loans the credit union does not continue to service total 
less than 15 percent of the credit union's net worth.
    (2) This part does not apply to loans:
    (i) Made by a corporate credit union, as defined in part 704 of this 
chapter;
    (ii) Made by a federally insured credit union to another federally 
insured credit union;
    (iii) Made by a federally insured credit union to a credit union 
service organization, as defined in part 712 and Sec. 741.222 of this 
chapter; or
    (iv) Fully secured by a lien on a 1- to 4-family residential 
property that is a member's primary residence.
    (c) Other regulations that apply. (1) For federal credit unions, the 
requirements of Sec. 701.21(a) through (g) of this chapter apply to 
commercial loans granted by a federal credit union to the extent they 
are consistent with this part. As required by Sec. 741.203 of this 
chapter, a federally insured, state-chartered credit union must comply 
with Sec. 701.21(c)(8) of this chapter concerning prohibited fees, and 
Sec. 701.21(d)(5) of this chapter concerning non-preferential loans.
    (2) If a Federal credit union makes a commercial loan through a 
program in which a federal or state agency (or its political 
subdivision) insures repayment, guarantees repayment, or provides an 
advance commitment to purchase the loan in full, and that program has 
requirements that are less restrictive than those required by this rule, 
then the Federal credit union may follow the loan requirements of the 
relevant guaranteed loan program. A federally insured, state-chartered 
credit union that is subject to this part and that makes a commercial 
loan as part of a loan program in which a federal or state agency (or 
its political subdivision) insures repayment, guarantees repayment, or 
provides an advance commitment to purchase the loan in full, and that 
program has requirements that are less restrictive than those required 
by this rule, then the federally insured, state-chartered credit union 
may follow the loan requirements of the relevant guaranteed loan 
program, provided that its state supervisory authority has determined 
that it has authority to do so under state law.
    (3) The requirements of Sec. 701.23 of this chapter apply to a 
Federal credit union's purchase, sale, or pledge of a commercial loan as 
an eligible obligation.
    (4) The requirements of Sec. 701.22 of this chapter apply to a 
federally insured credit union's purchase of a participation interest in 
a commercial loan.

    Effective Date Note: At 80 FR 66723, Oct. 29, 2015, Sec. 723.1 was 
amended in paragraph (d)

[[Page 1036]]

by removing the words ``and the risk weighting standards of part 702 of 
this chapter''; and in paragraph (e), by removing the words ``and the 
risk weighting standards under part 702 of this chapter'', effective 
Jan. 1, 2019.



Sec. 723.2  Definitions.

    For purposes of this part, the following definitions apply:
    Associated borrower means any other person or entity with a shared 
ownership, investment, or other pecuniary interest in a business or 
commercial endeavor with the borrower. This means any person or entity 
named as a borrower or debtor in a loan or extension of credit, or any 
other person or entity, such as a drawer, endorser, or guarantor, 
engaged in a common enterprise with the borrower, or deriving a direct 
benefit from the loan to the borrower. Exceptions to this definition for 
partnerships, joint ventures and associations are as follows:
    (1) If the borrower is a partnership, joint venture or association, 
and the other person with a shared ownership, investment, or other 
pecuniary interest in a business or commercial endeavor with the 
borrower is a member or partner of the borrower, and neither a direct 
benefit nor a common enterprise exists, such other person is not an 
associated borrower.
    (2) If the borrower is a member or partner of a partnership, joint 
venture, or association, and the other entity with a shared ownership, 
investment, or other pecuniary interest in a business or commercial 
endeavor with the borrower is the partnership, joint venture, or 
association and the borrower is a limited partner of that other entity, 
and by the terms of a partnership or membership agreement valid under 
applicable law, the borrower is not held generally liable for the debts 
or actions of that other entity, such other entity is not an associated 
borrower.
    (3) If the borrower is a member or partner of a partnership, joint 
venture, or association, and the other person with a shared ownership, 
investment, or other pecuniary interest in a business or commercial 
endeavor with the borrower is another member or partner of the 
partnership, joint venture, or association, and neither a direct benefit 
nor a common enterprise exists, such other person is not an associated 
borrower.
    Commercial loan means any loan, line of credit, or letter of credit 
(including any unfunded commitments), and any interest a credit union 
obtains in such loans made by another lender, to individuals, sole 
proprietorships, partnerships, corporations, or other business 
enterprises for commercial, industrial, agricultural, or professional 
purposes, but not for personal expenditure purposes. Excluded from this 
definition are loans made by a corporate credit union; loans made by a 
federally insured credit union to another federally insured credit 
union; loans made by a federally insured credit union to a credit union 
service organization; loans secured by a 1- to 4-family residential 
property (whether or not it is the borrower's primary residence); loans 
fully secured by shares in the credit union making the extension of 
credit or deposits in other financial institutions; loans secured by a 
vehicle manufactured for household use; and loans that would otherwise 
meet the definition of commercial loan and which, when the aggregate 
outstanding balances plus unfunded commitments less any portion secured 
by shares in the credit union to a borrower or an associated borrower, 
are equal to less than $50,000.
    Common enterprise means:
    (1) The expected source of repayment for each loan or extension of 
credit is the same for each borrower and no individual borrower has 
another source of income from which the loan (together with the 
borrower's other obligations) may be fully repaid. An employer will not 
be treated as a source of repayment because of wages and salaries paid 
to an employee, unless the standards described in paragraph (2) of this 
definition are met;
    (2) Loans or extensions of credit are made:
    (i) To borrowers who are related directly or indirectly through 
common control, including where one borrower is directly or indirectly 
controlled by another borrower; and
    (ii) Substantial financial interdependence exists between or among 
the borrowers. Substantial financial interdependence means 50 percent or 
more of one borrower's gross receipts

[[Page 1037]]

or gross expenditures (on an annual basis) are derived from transactions 
with another borrower. Gross receipts and expenditures include gross 
revenues or expenses, intercompany loans, dividends, capital 
contributions, and similar receipts or payments; or
    (3) Separate borrowers obtain loans or extensions of credit to 
acquire a business enterprise of which those borrowers will own more 
than 50 percent of the voting securities or voting interests.
    Control means a person or entity directly or indirectly, or acting 
through or together with one or more persons or entities:
    (1) Owns, controls, or has the power to vote 25 percent or more of 
any class of voting securities of another person or entity;
    (2) Controls, in any manner, the election of a majority of the 
directors, trustees, or other persons exercising similar functions of 
another person or entity; or
    (3) Has the power to exercise a controlling influence over the 
management or policies of another person or entity.
    Credit risk rating system means a formal process that identifies and 
assigns a relative credit risk score to each commercial loan in a 
federally insured credit union's portfolio, using ordinal ratings to 
represent the degree of risk. The credit risk score is determined 
through an evaluation of quantitative factors based on financial 
performance and qualitative factors based on management, operational, 
market, and business environmental factors.
    Direct benefit means the proceeds of a loan or extension of credit 
to a borrower, or assets purchased with those proceeds, that are 
transferred to another person or entity, other than in a bona fide 
arm's-length transaction where the proceeds are used to acquire 
property, goods, or services.
    Immediate family member means a spouse or other family member living 
in the same household.
    Loan secured by a 1- to 4-family residential property means a loan 
that, at origination, is secured wholly or substantially by a lien on a 
1- to 4-family residential property for which the lien is central to the 
extension of the credit; that is, the borrower would not have been 
extended credit in the same amount or on terms as favorable without the 
lien. A loan is wholly or substantially secured by a lien on a 1- to 4-
family residential property if the estimated value of the real estate 
collateral at origination (after deducting any senior liens held by 
others) is greater than 50 percent of the principal amount of the loan.
    Loan secured by a vehicle manufactured for household use means a 
loan that, at origination, is secured wholly or substantially by a lien 
on a new and used passenger car and other vehicle such as a minivan, 
sport-utility vehicle, pickup truck, and similar light truck or heavy-
duty truck generally manufactured for personal, family, or household use 
and not used as a fleet vehicle or to carry fare-paying passengers, for 
which the lien is central to the extension of credit. A lien is central 
to the extension of credit if the borrower would not have been extended 
credit in the same amount or on terms as favorable without the lien. A 
loan is wholly or substantially secured by a lien on a vehicle 
manufactured for household use if the estimated value of the collateral 
at origination (after deducting any senior liens held by others) is 
greater than 50 percent of the principal amount of the loan.
    Loan-to-value ratio means, with respect to any item of collateral, 
the aggregate amount of all sums borrowed and secured by that 
collateral, including outstanding balances plus any unfunded commitment 
or line of credit from another lender that is senior to the federally 
insured credit union's lien position, divided by the current collateral 
value. The current collateral value must be established by prudent and 
accepted commercial lending practices and comply with all regulatory 
requirements. For a construction and development loan, the collateral 
value is the lesser of cost to complete or prospective market value, as 
determined in accordance with Sec. 723.6 of this part.
    Net worth means a federally insured credit union's net worth, as 
defined in part 702 of this chapter.
    Readily marketable collateral means a financial instrument or 
bullion that is

[[Page 1038]]

salable under ordinary market conditions with reasonable promptness at a 
fair market value determined by quotations based upon actual 
transactions on an auction or similarly available daily bid and ask 
price market.
    Residential property means a house, condominium unit, cooperative 
unit, manufactured home (whether completed or under construction), or 
unimproved land zoned for 1- to 4-family residential use. A boat or 
motor home, even if used as a primary residence, or timeshare property 
is not residential property.



Sec. 723.3  Board of directors and management responsibilities.

    Prior to engaging in commercial lending, a federally insured credit 
union must address the following board responsibilities and operational 
requirements:
    (a) Board of directors. A federally insured credit union's board of 
directors, at a minimum, must:
    (1) Approve a commercial loan policy that complies with Sec. 723.4 
of this part. The board must review its policy on an annual basis, prior 
to any material change in the federally insured credit union's 
commercial lending program or related organizational structure, and in 
response to any material change in portfolio performance or economic 
conditions, and update it when warranted.
    (2) Ensure the federally insured credit union appropriately staffs 
its commercial lending program in compliance with paragraph (b) of this 
section.
    (3) Understand and remain informed, through periodic briefings from 
responsible staff and other methods, about the nature and level of risk 
in the federally insured credit union's commercial loan portfolio, 
including its potential impact on the federally insured credit union's 
earnings and net worth.
    (b) Required expertise and experience. A federally insured credit 
union making, purchasing, or holding any commercial loan must internally 
possess the following experience and competencies:
    (1) Senior executive officers. A federally insured credit union's 
senior executive officers overseeing the commercial lending function 
must understand the federally insured credit union's commercial lending 
activities. At a minimum, senior executive officers must have a 
comprehensive understanding of the role of commercial lending in the 
federally insured credit union's overall business model and establish 
risk management processes and controls necessary to safely conduct 
commercial lending.
    (2) Qualified lending personnel. A federally insured credit union 
must employ qualified staff with experience in the following areas:
    (i) Underwriting and processing for the type(s) of commercial 
lending in which the federally insured credit union is engaged;
    (ii) Overseeing and evaluating the performance of a commercial loan 
portfolio, including rating and quantifying risk through a credit risk 
rating system; and
    (iii) Conducting collection and loss mitigation activities for the 
type(s) of commercial lending in which the federally insured credit 
union is engaged.
    (3) Options to meet the required experience. A federally insured 
credit union may meet the experience requirements in paragraphs (b)(1) 
and (2) of this section by conducting internal training and development, 
hiring qualified individuals, or using a third-party, such as an 
independent contractor or a credit union service organization. However, 
with respect to the qualified lending personnel requirements in 
paragraph (b)(2) of this section, use of a third-party is permissible 
only if the following conditions are met:
    (i) The third-party has no affiliation or contractual relationship 
with the borrower or any associated borrowers;
    (ii) The actual decision to grant a loan must reside with the 
federally insured credit union;
    (iii) Qualified federally insured credit union staff exercises 
ongoing oversight over the third party by regularly evaluating the 
quality of any work the third party performs for the federally insured 
credit union; and
    (iv) The third-party arrangement must otherwise comply with 
Sec. 723.7 of this part.



Sec. 723.4  Commercial loan policy.

    Prior to engaging in commercial lending, a federally insured credit

[[Page 1039]]

union must adopt and implement a comprehensive written commercial loan 
policy and establish procedures for commercial lending. The board-
approved policy must ensure the federally insured credit union's 
commercial lending activities are performed in a safe and sound manner 
by providing for ongoing control, measurement, and management of the 
federally insured credit union's commercial lending activities. At a 
minimum, a federally insured credit union's commercial loan policy must 
address each of the following:
    (a) Type(s) of commercial loans permitted.
    (b) Trade area.
    (c) Maximum amount of assets, in relation to net worth, allowed in 
secured, unsecured, and unguaranteed commercial loans and in any given 
category or type of commercial loan and to any one borrower or group of 
associated borrowers. The policy must specify that the aggregate dollar 
amount of commercial loans to any one borrower or group of associated 
borrowers may not exceed the greater of 15 percent of the federally 
insured credit union's net worth or $100,000, plus an additional 10 
percent of the credit union's net worth if the amount that exceeds the 
credit union's 15 percent general limit is fully secured at all times 
with a perfected security interest by readily marketable collateral as 
defined in Sec. 723.2 of this part. Any insured or guaranteed portion of 
a commercial loan made through a program in which a federal or state 
agency (or its political subdivision) insures repayment, guarantees 
repayment, or provides an advance commitment to purchase the loan in 
full, is excluded from this limit.
    (d) Qualifications and experience requirements for personnel 
involved in underwriting, processing, approving, administering, and 
collecting commercial loans.
    (e) Loan approval processes, including establishing levels of loan 
approval authority commensurate with the individual's or committee's 
proficiency in evaluating and understanding commercial loan risk, when 
considered in terms of the level of risk the borrowing relationship 
poses to the federally insured credit union.
    (f) Underwriting standards commensurate with the size, scope and 
complexity of the commercial lending activities and borrowing 
relationships contemplated. The standards must, at a minimum, address 
the following:
    (1) The level and depth of financial analysis necessary to evaluate 
the financial trends and condition of the borrower and the ability of 
the borrower to meet debt service requirements;
    (2) Thorough due diligence of the principal(s) to determine whether 
any related interests of the principal(s) might have a negative impact 
or place an undue burden on the borrower and related interests with 
regard to meeting the debt obligations with the credit union;
    (3) Requirements of a borrower-prepared projection when historic 
performance does not support projected debt payments. The projection 
must be supported by reasonable rationale and, at a minimum, must 
include a projected balance sheet and income and expense statement;
    (4) The financial statement quality and the degree of verification 
sufficient to support an accurate financial analysis and risk 
assessment;
    (5) The methods to be used in collateral evaluation, for all types 
of collateral authorized, including loan-to-value ratio limits. Such 
methods must be appropriate for the particular type of collateral. The 
means to secure various types of collateral, and the measures taken for 
environmental due diligence must also be appropriate for all authorized 
collateral; and
    (6) Other appropriate risk assessment including analysis of the 
impact of current market conditions on the borrower and associated 
borrowers.
    (g) Risk management processes commensurate with the size, scope and 
complexity of the federally insured credit union's commercial lending 
activities and borrowing relationships. These processes must, at a 
minimum, address the following:
    (1) Use of loan covenants, if appropriate, including frequency of 
borrower and guarantor financial reporting;
    (2) Periodic loan review, consistent with loan covenants and 
sufficient to conduct portfolio risk management.

[[Page 1040]]

This review must include a periodic reevaluation of the value and 
marketability of any collateral;
    (3) A credit risk rating system. Credit risk ratings must be 
assigned to commercial loans at inception and reviewed as frequently as 
necessary to satisfy the federally insured credit union's risk 
monitoring and reporting policies, and to ensure adequate reserves as 
required by generally accepted accounting principles (GAAP); and
    (4) A process to identify, report, and monitor loans approved as 
exceptions to the credit union's loan policy.



Sec. 723.5  Collateral and security.

    (a) A federally insured credit union must require collateral 
commensurate with the level of risk associated with the size and type of 
any commercial loan. Collateral must be sufficient to ensure adequate 
loan balance protection along with appropriate risk sharing with the 
borrower and principal(s). A federally insured credit union making an 
unsecured loan must determine and document in the loan file that 
mitigating factors sufficiently offset the relevant risk.
    (b) A federally insured credit union that does not require the full 
and unconditional personal guarantee from the principal(s) of the 
borrower who has a controlling interest in the borrower must determine 
and document in the loan file that mitigating factors sufficiently 
offset the relevant risk.
    (1) Transitional provision. A federally insured credit union that, 
between May 13, 2016 and January 1, 2017, makes a member business loan 
and does not require the full and unconditional personal guarantee from 
the principal(s) of the borrower who has a controlling interest in the 
borrower is not required to seek a waiver from the requirement for 
personal guarantee, but it must determine and document in the loan file 
that mitigating factors sufficiently offset the relevant risk.
    (2) [Reserved]



Sec. 723.6  Construction and development loans.

    In addition to the foregoing, the following requirements apply to a 
construction and development loan made by any federally insured credit 
union.
    (a) For the purposes of this section, a construction or development 
loan means any financing arrangement to enable the borrower to acquire 
property or rights to property, including land or structures, with the 
intent to construct or renovate an income producing property, such as 
residential housing for rental or sale, or a commercial building, such 
as may be used for commercial, agricultural, industrial, or other 
similar purposes. It also means a financing arrangement for the 
construction, major expansion or renovation of the property types 
referenced in this section. The collateral valuation for securing a 
construction or development loan depends on the satisfactory completion 
of the proposed construction or renovation where the loan proceeds are 
disbursed in increments as the work is completed. A loan to finance 
maintenance, repairs, or improvements to an existing income producing 
property that does not change its use or materially impact the property 
is not a construction or development loan.
    (b) A federally insured credit union that elects to make a 
construction or development loan must ensure that its commercial loan 
policy includes adequate provisions by which the collateral value 
associated with the project is properly determined and established. For 
a construction or development loan, collateral value is the lesser of 
the project's cost to complete or its prospective market value.
    (1) For the purposes of this section, cost to complete means the sum 
of all qualifying costs necessary to complete a construction project and 
documented in an approved construction budget. Qualifying costs 
generally include on- or off-site improvements, building construction, 
other reasonable and customary costs paid to construct or improve a 
project, including general contractor's fees, and other expenses 
normally included in a construction contract such as bonding and 
contractor insurance. Qualifying costs include the value of the land, 
determined as the lesser of appraised market value or purchase price 
plus the cost of any improvements. Qualifying costs also include 
interest, a contingency account to fund unanticipated overruns, and

[[Page 1041]]

other development costs such as fees and related pre-development 
expenses. Interest expense is a qualifying cost only to the extent it is 
included in the construction budget and is calculated based on the 
projected changes in the loan balance up to the expected ``as-complete'' 
date for owner-occupied non-income producing commercial real estate or 
the ``as-stabilized'' date for income producing real estate. Project 
costs for related parties, such as developer fees, leasing expenses, 
brokerage commissions, and management fees, are included in qualifying 
costs only if reasonable in comparison to the cost of similar services 
from a third party. Qualifying costs exclude interest or preferred 
returns payable to equity partners or subordinated debt holders, the 
developer's general corporate overhead, and selling costs to be funded 
out of sales proceeds such as brokerage commissions and other closing 
costs.
    (2) For the purposes of this section, prospective market value means 
the market value opinion determined by an independent appraiser in 
compliance with the relevant standards set forth in the Uniform 
Standards of Professional Appraisal Practice. Prospective value opinions 
are intended to reflect the current expectations and perceptions of 
market participants, based on available data. Two prospective value 
opinions may be required to reflect the time frame during which 
development, construction, and occupancy occur. The prospective market 
value ``as-completed'' reflects the property's market value as of the 
time that development is to be completed. The prospective market value 
``as-stabilized'' reflects the property's market value as of the time 
the property is projected to achieve stabilized occupancy. For an income 
producing property, stabilized occupancy is the occupancy level that a 
property is expected to achieve after the property is exposed to the 
market for lease over a reasonable period of time and at comparable 
terms and conditions to other similar properties.
    (c) A federally insured credit union that elects to make a 
construction and development loan must also assure its commercial loan 
policy meets the following conditions:
    (1) Qualified personnel representing the interests of the federally 
insured credit union must conduct a review and approval of any line item 
construction budget prior to closing the loan;
    (2) A credit union approved requisition and loan disbursement 
process is established;
    (3) Release or disbursement of loan funds occurs only after on-site 
inspections, documented in a written report by qualified personnel 
representing the interests of the federally insured credit union, 
certifying that the work requisitioned for payment has been 
satisfactorily completed, and the remaining funds available to be 
disbursed from the construction and development loan is sufficient to 
complete the project; and
    (4) Each loan disbursement is subject to confirmation that no 
intervening liens have been filed.



Sec. 723.7  Prohibited activities.

    (a) Ineligible borrowers. A federally insured credit union may not 
grant a commercial loan to the following:
    (1) Any senior management employee directly or indirectly involved 
in the credit union's commercial loan underwriting, servicing, and 
collection process, and any of their immediate family members;
    (2) Any person meeting the definition of an associated borrower with 
respect to persons identified in paragraph (a)(1) of this section; or
    (3) Any compensated director, unless the federally insured credit 
union's board of directors approves granting the loan and the 
compensated director was recused from the board's decision making 
process.
    (b) Equity agreements/joint ventures. A federally insured credit 
union may not grant a commercial loan if any additional income received 
by the federally insured credit union or its senior management employees 
is tied to the profit or sale of any business or commercial endeavor 
that benefits from the proceeds of the loan.
    (c) Conflicts of interest. Any third party used by a federally 
insured credit union to meet the requirements of this part must be 
independent from the commercial loan transaction and may not have a 
participation interest in a

[[Page 1042]]

loan or an interest in any collateral securing a loan that the third 
party is responsible for reviewing, or an expectation of receiving 
compensation of any sort that is contingent on the closing of the loan, 
with the following exceptions:
    (1) A third party may provide a service to the federally insured 
credit union that is related to the transaction, such as loan servicing.
    (2) The third party may provide the requisite experience to a 
federally insured credit union and purchase a loan or a participation 
interest in a loan originated by the federally insured credit union that 
the third party reviewed.
    (3) A federally insured credit union may use the services of a 
credit union service organization that otherwise meets the requirements 
of Sec. 723.3(b)(3) of this part even if the credit union service 
organization is not independent from the transaction, provided the 
federally insured credit union has a controlling financial interest in 
the credit union service organization as determined under GAAP.

    Effective Date Note: At 80 FR 66723, Oct. 29, 2015, Sec. 723.7 was 
amended in paragraph (c)(1) by removing the words ``as defined by 
Sec. 702.102(a)(1)'' and adding in their place the words ``under part 
702'', effective Jan. 1, 2019.



Sec. 723.8  Aggregate member business loan limit; exclusions and
exceptions.

    This section incorporates the statutory limits on the aggregate 
amount of member business loans that may be held by a federally insured 
credit union and establishes the method for calculating a federally 
insured credit union's net member business loan balance for purposes of 
the statutory limits and NCUA form 5300 reporting.
    (a) Statutory limits. The aggregate limit on a federally insured 
credit union's net member business loan balances is the lesser of 1.75 
times the actual net worth of the credit union, or 1.75 times the 
minimum net worth required under section 1790d(c)(1)(A) of the Federal 
Credit Union Act.
    (b) Definition. For the purposes of this section, member business 
loan means any commercial loan as defined in 723.2 of this part, except 
that the following commercial loans are not member business loans and 
are not counted toward the aggregate limit on a federally insured credit 
union's member business loans:
    (1) Any loan in which a federal or state agency (or its political 
subdivision) fully insures repayment, fully guarantees repayment, or 
provides an advance commitment to purchase the loan in full; and
    (2) Any non-member commercial loan or non-member participation 
interest in a commercial loan made by another lender, provided the 
federally insured credit union acquired the non-member loans and 
participation interests in compliance with all relevant laws and 
regulations and it is not, in conjunction with one or more other credit 
unions, trading member business loans to circumvent the aggregate limit.
    (c) Exceptions. Any loan secured by a lien on a 1- to 4-family 
residential property that is not a member's primary residence, and any 
loan secured by a vehicle manufactured for household use that will be 
used for a commercial, corporate, or other business investment property 
or venture, or agricultural purpose, is not a commercial loan but it is 
a member business loan (if the outstanding aggregate net member business 
loan balance is $50,000 or greater) and must be counted toward the 
aggregate limit on a federally insured credit union's member business 
loans.
    (d) Statutory exemptions. A federally insured credit union that has 
a low-income designation, or participates in the Community Development 
Financial Institutions program, or was chartered for the purpose of 
making member business loans, or which as of the date of enactment of 
the Credit Union Membership Access Act of 1998 had a history of 
primarily making commercial loans, is exempt from compliance with the 
aggregate member business loan limits in this section.
    (e) Method of calculation for net member business loan balance. For 
the purposes of NCUA form 5300 reporting, a federally insured credit 
union's net member business loan balance is determined by calculating 
the outstanding loan balance plus any unfunded commitments, reduced by 
any portion of

[[Page 1043]]

the loan that is secured by shares in the credit union, or by shares or 
deposits in other financial institutions, or by a lien on a member's 
primary residence, or insured or guaranteed by any agency of the federal 
government, a state or any political subdivision of such state, or 
subject to an advance commitment to purchase by any agency of the 
Federal Government, a state or any political subdivision of such state, 
or sold as a participation interest without recourse and qualifying for 
true sales accounting under generally accepted accounting principles.



Sec. 723.9  Transitional provisions.

    This section governs circumstances in which, as of January 1, 2017, 
a federally insured credit union is operating in accordance with an 
approved waiver from NCUA or is subject to any enforcement constraint 
relative to its commercial lending activities.
    (a) Waivers. As of January 1, 2017, any waiver approved by NCUA 
concerning a federally insured credit union's commercial lending 
activity is rendered moot except for waivers granted for borrowing 
relationship limits. Borrowing relationships granted a waiver will be 
grandfathered however the debt associated with those relationships may 
not be increased.
    (b) Enforcement constraints. Limitations or other conditions imposed 
on a federally insured credit union in any written directive from NCUA, 
including but not limited to items specified in any Document of 
Resolution, any published or unpublished Letter of Understanding and 
Agreement, Regional Director Letter, Preliminary Warning Letter, or 
formal enforcement action, are unaffected by the adoption of this part. 
Included within this paragraph are any constraints or conditions 
embedded within any waiver issued by NCUA. As of January 1, 2017, all 
such limitations or other conditions remain in place until such time as 
they are modified by NCUA.



Sec. 723.10  State regulation of business lending.

    (a) State rules. Federally insured state chartered credit unions in 
a given state are exempted from compliance with this part if the state 
supervisory authority administers a state commercial and member business 
loan rule for use by federally insured credit unions chartered in that 
state, provided the state rule at least covers all the provisions in 
this part and is no less restrictive, upon determination by NCUA.
    (b) Grandfathering of NCUA-approved state rules. A state supervisory 
authority that administers a state commercial and member business loan 
rule previously approved by NCUA may continue to administer that rule in 
its current NCUA-approved format. Any modification of that rule must be 
consistent with this rule, but modification of one part of an existing 
NCUA-approved state rule will not cause other parts of that rule to lose 
their grandfathered status.
      



PART 724_TRUSTEES AND CUSTODIANS OF CERTAIN TAX-ADVANTAGED SAVINGS
PLANS--Table of Contents



Sec.
724.1  Federal credit unions acting as trustees and custodians of 
          certain tax-advantaged savings plans.
724.2  Self-directed plans.
724.3  Appointment of successor trustee or custodian.

    Authority: 12 U.S.C. 1757, 1765, 1766 and 1787.

    Source: 55 FR 30211, July 25, 1990, unless otherwise noted.



Sec. 724.1  Federal credit unions acting as trustees and custodians
of certain tax-advantaged savings plans.

    A federal credit union is authorized to act as trustee or custodian, 
and may receive reasonable compensation for so acting, under any written 
trust instrument or custodial agreement created or organized in the 
United States and forming part of a tax-advantaged savings plan which 
qualifies or qualified for specific tax treatment under sections 223, 
401(d), 408, 408A and 530 of the Internal Revenue Code (26 U.S.C. 223, 
401(d), 408, 408A and 530), for its members or groups of its members, 
provided the funds of such plans are invested in share accounts or share 
certificate accounts of the Federal credit union. Federal credit unions 
located in a territory, including the trust territories,

[[Page 1044]]

or a possession of the United States, or the Commonwealth of Puerto 
Rico, are also authorized to act as trustee or custodian for such plans, 
if authorized under sections 223, 401(d), 408, 408A and 530 of the 
Internal Revenue Code as applied to the territory or possession under 
similar provisions of territorial law. All funds held in a trustee or 
custodial capacity must be maintained in accordance with applicable laws 
and rules and regulations as may be promulgated by the Secretary of 
Labor, the Secretary of the Treasury, or any other authority exercising 
jurisdiction over such trust or custodial accounts. The federal credit 
union shall maintain individual records for each participant which show 
in detail all transactions relating to the funds of each participant or 
beneficiary.

[55 FR 30211, July 25, 1990, as amended at 63 FR 14026, Mar. 24, 1998; 
65 FR 10934, Mar. 1, 2000; 69 FR 45238, July 29, 2004]



Sec. 724.2  Self-directed plans.

    A federal credit union may facilitate transfers of plan funds to 
assets other than share and share certificates of the credit union, 
provided the conditions of Sec. 724.1 are met and the following 
additional conditions are met:
    (a) All contributions of funds are initially made to a share or 
share certificate account in the Federal credit union;
    (b) Any subsequent transfer of funds to other assets is solely at 
the direction of the member and the Federal credit union exercises no 
investment discretion and provides no investment advice with respect to 
plan assets (i.e., the credit union performs only custodial duties); and
    (c) The member is clearly notified of the fact that National Credit 
Union Share Insurance Fund coverage is limited to funds held in share or 
share certificate accounts of NCUSIF-insured credit unions.

[55 FR 30211, July 25, 1990, as amended at 69 FR 45239, July 29, 2004]



Sec. 724.3  Appointment of successor trustee or custodian.

    Any plan operated pursuant to this part shall provide for the 
appointment of a successor trustee or custodian by a person, committee, 
corporation or organization other than the Federal credit union or any 
person acting in his capacity as a director, employee or agent of the 
Federal credit union upon notice from the Federal credit union or the 
Board that the Federal credit union is unwilling or unable to continue 
to act as trustee or custodian.



PART 725_NATIONAL CREDIT UNION ADMINISTRATION CENTRAL LIQUIDITY 
FACILITY--Table of Contents



Sec.
725.1  Scope.
725.2  Definitions.
725.3  Regular membership.
725.4  Agent membership.
725.5  Capital stock.
725.6  Termination of membership.
725.7  Special share accounts in federally chartered agent members.
725.8-725.16  [Reserved]
725.17  Applications for extensions of credit.
725.18  Creditworthiness.
725.19  Collateral requirements.
725.20  Repayment, security and credit reporting agreements; other terms 
          and conditions.
725.21  Modification of agreements.
725.22  Advances to insurance organizations.
725.23  Other advances.

    Authority: Secs. 301-307 Federal Credit Union Act, 92 Stat. 3719-
3722 (12 U.S.C. 1795-1795f).

    Source: 44 FR 49437, Aug. 23, 1979, unless otherwise noted.



Sec. 725.1  Scope.

    This part contains the regulations implementing the National Credit 
Union Central Liquidity Facility Act, subchapter III of the Federal 
Credit Union Act. The National Credit Union Administration Central 
Liquidity Facility is a mixed-ownership Government corporation within 
the National Credit Union Administration. It is managed by the National 
Credit Union Administration Board and is owned by its member credit 
unions. The purpose of the Facility is to improve the general financial 
stability of credit unions by meeting their liquidity needs and thereby 
encourage savings, support consumer and mortgage lending and provide 
basic financial resources to all segments of the economy.

[[Page 1045]]



Sec. 725.2  Definitions.

    As used in this part:
    (a) Agent means an Agent member of the Facility.
    (b) Agent group means an Agent member of the Facility consisting of 
a group of central credit unions, one of which is designated as the 
group's Agent group representative and authorized to transact business 
with the Facility on behalf of the group or any member of the group.
    (c) Agent loan means an advance of funds by an Agent to a member 
natural person credit union to meet liquidity needs which have been the 
basis for a Facility advance.
    (d) Central credit union means a Federal or state-chartered credit 
union primarily serving other credit unions. A credit union is primarily 
serving other credit unions when the total dollar amount of the shares 
and deposits received from other credit unions plus loans to other 
credit unions exceeds 50 percent of the total dollar amount of all 
shares and deposits plus loans during the qualifying period, as defined 
in paragraph (o) of this section.
    (e) Facility or Central Liquidity Facility means the National Credit 
Union Administration Central Liquidity Facility.
    (f) Facility advance means an advance of funds by the Facility to a 
Regular or Agent member.
    (g) Facility lending officer means any employee of the Facility or 
the National Credit Union Administration who has been designated by the 
NCUA Board as a Facility lending officer.
    (h) Liquid assets means the following unpledged assets:
    (1) Cash on hand;
    (2) Share or deposit accounts with remaining maturities of one year 
or less maintained in central credit unions or institutions insured by 
the Federal Deposit Insurance Corporation or Federal Savings and Loan 
Insurance Corporation;
    (3) Investments in obligations of the United States or any agency 
thereof, or securities fully guaranteed as to principal and interest 
thereby, which are authorized under 12 U.S.C. 1757(7) and which have a 
remaining maturity of one year or less;
    (4) Common trust investments and similar investments in funds or 
securities authorized for Federal credit unions, the objectives of which 
are to provide daily liquidity for participating credit unions;
    (5) Shares in the National Credit Union Administration Central 
Liquidity Facility or in special share accounts authorized by Sec. 725.7 
of this part;
    (6) In the case of a federally-insured state-chartered credit union, 
any asset held in satisfaction of liquidity requirements imposed by 
applicable state law or regulation; and
    (7) Balances maintained by federally-insured credit unions in a 
Federal Reserve bank, or in a pass-through account to a Federal Reserve 
bank, pursuant to the requirements of section 19(b) of the Federal 
Reserve Act (12 U.S.C. 461(b)).
    (i) Liquidity needs means the needs of credit unions primarily 
serving natural persons for:
    (1) Short-term adjustment credit available to assist in meeting 
temporary requirements for funds or to cushion more persistent outflows 
of funds pending an orderly adjustment of credit union assets and 
liabilities;
    (2) Seasonal credit available for longer periods to assist in 
meeting seasonal needs for funds arising from a combination of expected 
patterns of movement in share and deposit accounts and loans; and
    (3) Protracted adjustment credit available in the event of unusual 
or emergency circumstances of a longer term nature resulting from 
national, regional or local difficulties.
    (j) Management policies means policies of a credit union with 
respect to membership, shares, deposits, dividends, interest rates, 
lending, investing, borrowing, safeguarding of assets, hiring, training 
and supervision of employees, and general operating and control 
practices and procedures.
    (k) Member means a Regular or Agent member of the Facility, unless 
the context indicates otherwise.
    (l) Member natural person credit union means a natural person credit 
union which is a member of an Agent or of any central credit union in an 
Agent group. Member natural person credit unions are not members of the 
Facility

[[Page 1046]]

unless they are also Regular members of the Facility.
    (m) Natural person credit union means a Federal or state-chartered 
credit union primarily serving natural persons. A credit union is 
primarily serving natural persons if it is not a central credit union as 
defined in paragraph (d) of this section.
    (n) Paid-in and unimpaired capital and surplus means shares and 
deposits plus post-closing, undivided earnings. This does not include 
regular reserves or special reserves required by law, regulation or 
special agreement between the credit union and its regulator or share 
insurer.
    (o) Qualifying Period means:
    (1) For initial qualification, any 7 months out of the 12 months 
immediately preceding the month in which application is made to become a 
member of the Facility; and
    (2) For qualification during each subsequent calendar year, any 7 
months out of the previous calendar year.
    (p) Stock subscription means the stock subscription required for 
membership in the Facility. ``Total subscribed Facility stock'' is the 
sum of all members' stock subscriptions.

[44 FR 49437, Aug. 23, 1979, as amended at 53 FR 22472, June 16, 1988; 
66 FR 65624, Dec. 20, 2001; 78 FR 32545, May 31, 2013]



Sec. 725.3  Regular membership.

    (a) A natural person credit union may become a Regular member of the 
Facility by:
    (1) Making application on a form approved by the Facility;
    (2) Subscribing to capital stock of the Facility in an amount equal 
to one-half of 1 percent of the credit union's paid-in and unimpaired 
capital and surplus, as determined in accordance with Sec. 725.5(b) of 
this part, and forwarding with its completed application funds equal to 
one-half of this stock subscription;\1\ and
---------------------------------------------------------------------------

    \1\ A credit union which submits its application for membership 
prior to October 1, 1979, is not required to forward these funds to the 
Facility until October 1, 1979.
---------------------------------------------------------------------------

    (3) Furnishing the following reports and documents with the 
completed membership application:
    (i) A copy of the credit union's financial and statistical report 
for the most recent calendar month; and
    (ii) Copies of the credit union's charter and bylaws, unless the 
credit union is federally chartered.
    (b) A credit union which becomes a Regular member of the Facility 
after February 23, 1980, may not receive Facility advances without 
approval of the NCUA Board for a period of six months after becoming a 
member. This subsection shall not apply to any credit union which 
becomes a Regular member of the Facility within six months after such 
credit union is chartered, or which has had access to Facility funds 
through an Agent member of the Facility at any time within six months 
prior to becoming a Regular member of the Facility.

[44 FR 49437, Aug. 23, 1979, as amended at 47 FR 1371, Jan. 13, 1982]



Sec. 725.4  Agent membership.

    (a) A central credit union or a group of central credit unions may 
become an Agent member of the Facility by (in the case of a group of 
central credit unions, each central credit union in the group must do 
each of the following except for paragraph (a)(2) of this section, which 
shall be done by the Agent group representative):
    (1) Making application on a form approved by the Facility;
    (2) Subscribing to the capital stock of the Facility in an amount 
equal to one-half of 1 percent of the paid-in and unimpaired capital and 
surplus (as determined in accordance with Sec. 725.5(b) of this part) of 
all the central credit union's or central credit union group's member 
natural person credit unions, except those which are Regular members of 
the Facility or which have access to the Facility through, and are 
included in the stock subscription of, another Agent. \2\ Upon approval 
of the application, the Agent shall forward

[[Page 1047]]

funds equal to one-half of this initial stock subscription to the 
Facility. \3\
---------------------------------------------------------------------------

    \2\ A natural person credit union which is a member of more than one 
Agent member of the Facility must designate through which Agent it will 
deal with the Facility, and the designated Agent will be responsible for 
including the capital and surplus of such credit union in the 
calculation of its stock subscription.
    \3\ If the application is approved prior to October 1, 1979, these 
funds are not required to be forwarded to the Facility until October 1, 
1979.
---------------------------------------------------------------------------

    (3) Furnishing the following reports and documents with the 
completed membership application:
    (i) A copy of the central credit union's financial and statistical 
report for the most recent calendar month;
    (ii) Copies of the central credit union's charter and bylaws, unless 
such credit union is federally chartered; and
    (iii) A list of all the central credit union's member natural person 
credit unions.
    (4) Agreeing to submit to the supervision of the NCUA Board and to 
comply with all regulations and reporting requirements which the NCUA 
Board shall prescribe for Agent members;
    (5) Agreeing to submit to periodic unrestricted examinations by the 
NCUA Board or its designee; and
    (6) Obtaining the written approval of the NCUA Board.
    (b) The NCUA Board may approve a central credit union or group of 
central credit unions as an Agent member of the Facility, provided the 
NCUA Board is satisfied that such credit union or credit union group 
meets certain criteria, including but not limited to the following (in 
the case of a group of central credit unions, each central credit union 
in the group must meet these criteria):
    (1) The management policies are in writing, approved by the central 
credit union's board of directors, and reviewed annually by such board;
    (2) Adequate internal controls are in place to assure accurate and 
timely reporting of transactions and the safeguarding of assets;
    (3) The financial condition of the central credit union is sound 
with adequate reserves for losses;
    (4) Surety bond coverage provides protection for the central credit 
union while the central credit union is performing the duties of an 
Agent member of Facility;
    (5) Management has demonstrated its ability to use such techniques 
as cash flow analysis, budgeting, and projections of sources and uses of 
funds to manage the affairs of the central credit union efficiently and 
in conformity with sound business practices; and
    (6) There are no practices, procedures, policies, or other factors 
that would result in discrimination by the central credit union among 
natural person credit unions or inhibit its ability to act independently 
in its role as an Agent member of the Facility.
    (c) Each Agent, or in the case of an Agent group, each central 
credit union in the group, must:
    (1) Maintain records related to Facility activity in conformity with 
requirements prescribed by the NCUA Board from time to time; and
    (2) Submit such reports as may be required by the Facility to 
determine financial soundness, quality and level of service, and 
conformity with established guidelines and procedures.
    (d) Each Agent, or in the case of an Agent group, each central 
credit union in the group, must have on an annual basis a third party 
independent audit of its books and records and provide the Facility with 
copies of the report of such audit. The auditor selected must be 
recognized by a State or territorial licensing authority as possessing 
the requisite knowledge and experience to perform audits.
    (e) Within 30 days after a natural person credit union becomes a 
member of a central credit union which is an Agent or a member of an 
Agent group, the agent, or in the case of an Agent group, the Agent 
group representative, shall subscribe to additional capital stock of the 
Facility in an amount equal to one-half of 1 percent of such credit 
union's paid-in and unimpaired capital and surplus, and shall forward 
funds equal to one-half of this stock subscription to the Facility. This 
subsection shall not apply if the natural person credit union is a 
Regular member of the Facility or has access to the Facility through, 
and is included in the stock subscription of, another Agent.
    (f) A central credit union or group of central credit unions which 
becomes an Agent member of the Facility after February 23, 1980, may not 
receive a Facility advance without approval of the NCUA Board for a 
period of six months after becoming a member. This

[[Page 1048]]

subsection shall not apply to any credit union which becomes an Agent 
member or a member of an Agent group within six months after such credit 
union is chartered within six months after such credit union has been an 
Agent or a member of another Agent group.
    (g) Agent members will be compensated for the services they perform 
for the Facility in a manner to be specified by the NCUA Board.



Sec. 725.5  Capital stock.

    (a) The capital stock of the Facility is divided into nonvoting 
shares having a par value of $50 each. The Facility issues whole and 
fractional shares. Shares are issued in book entry form upon receipt of 
payment for such shares, and cannot be transferred or hypothecated 
except to the Facility.
    (b) The capital stock subscriptions provided for in Secs. 725.3 and 
725.4 shall be:
    (1) Based on an arithmetic average of paid-in and unimpaired capital 
and surplus over the six months preceding application for membership, 
and
    (2) Adjusted at the close of each calendar year in accordance with 
an arithmetic average of paid-in and unimpaired capital and surplus over 
the twelve months in such calendar year. Payments for adjustments to the 
capital stock subscription must be received by the Facility no later 
than March 31 of the following year.
    (c) That part of a member's stock subscription which is not paid-in 
shall be held by the member on call of the NCUA Board and shall be 
invested in liquid assets.
    (d) Any member may at any time purchase additional shares of capital 
stock in the Facility. Any shares in excess of the member's required 
paid-in portion of its stock subscription can be redeemed by the member 
as long as the member maintains investments in other assets sufficient 
to meet the requirement of paragraph (c) of this section. The member's 
required paid-in portion of its stock subscription includes one-half of 
its stock subscription plus any ``calls'' that may have been issued by 
the NCUA Board against the ``on-call'' portion of such stock 
subscription.
    (e) Dividends will be paid on capital stock at such times and rates 
as are determined by the NCUA Board. The NCUA Board shall declare such 
dividends no less frequently than annually. All issued (paid for) 
capital stock shall share in dividend distributions without preference. 
Payment of dividends will be made by the issuance of capital stock to 
the member in the amount of the dividend.

[44 FR 49437, Aug. 23, 1979, as amended at 45 FR 47122, July 14, 1980; 
47 FR 1371, Jan. 13, 1982; 53 FR 22472, June 16, 1988]



Sec. 725.6  Termination of membership.

    (a) A member of the Facility whose stock subscription constitutes 
less than 5 percent of total subscribed Facility stock may withdraw from 
membership in the Facility six months after notifying the NCUA Board in 
writing of its intention to do so.
    (b) A member of the Facility whose stock subscription constitutes 5 
percent or more of total subscribed Facility stock may withdraw from 
membership in the Facility twenty-four months after notifying the NCUA 
Board in writing of its intention to do so.
    (c) The NCUA Board may terminate membership in the Facility if, 
after the opportunity for a hearing, the NCUA Board determines the 
member has failed to comply with any provision of the National Credit 
Union Central Liquidity Facility Act or any regulation issued pursuant 
thereto. If membership is terminated under this subsection, the credit 
union will be required to obtain the approval of the NCUA Board before 
becoming a member of the Facility again. Such approval will be granted 
only if the NCUA Board is satisfied that the credit union will comply 
with such Act and regulations.
    (d)(1) If membership is terminated under any provision of this 
section, the terminated member's stock shall be redeemed upon 
termination. In such event, the Facility may retain any amount owed to 
the Facility by the member.
    (2) When a member natural person credit union withdraws from 
membership in a central credit union which is an Agent or a member of an 
Agent group, the stock subscription of the

[[Page 1049]]

Agent, or in the case of an Agent group, the stock subscription of the 
Agent group representative, will be adjusted after the waiting period 
which would apply under paragraph (a) or (b) of this section if the 
withdrawing credit union were a member of the Facility.



Sec. 725.7  Special share accounts in federally chartered agent 
members.

    (a) A federally chartered Agent member of the Facility may require 
its member natural person credit unions to establish and maintain 
special share accounts in the Agent member to reimburse it for the 
portion of the Agent's Facility stock subscription which is attributable 
to the paid-in and unimpaired capital and surplus of each such natural 
person credit union.
    (b) The amount which the Agent member requires each member natural 
person credit union to maintain in such special share accounts shall be 
based on a uniform percentage of the paid-in and unimpaired capital and 
surplus of such credit unions, and shall not exceed the amount of the 
Agent's stock subscription which is attributable to the capital and 
surplus of each such credit union. An Agent shall not permit a member to 
maintain in a special share account any amounts in excess of the 
required amount.
    (c) A natural person credit union that withdraws from membership in 
an Agent member or that becomes a Regular member of the Facility, shall 
be entitled to the return of all amounts in its special share account 
upon withdrawal from membership in the Agent or upon becoming a Regular 
member, as applicable.

[45 FR 47122, July 14, 1980]



Secs. 725.8-725.16  [Reserved]



Sec. 725.17  Applications for extensions of credit.

    (a) A Regular member may apply for a Facility advance to meet its 
liquidity needs by filing an application on a Facility-approved form, or 
by any other method approved by the Facility.
    (b)(1) An Agent member may apply for a Facility advance by filing an 
application on a Facility-approved form, or by any other method approved 
by the Facility. \4\
---------------------------------------------------------------------------

    \4\ If the Agent is an Agent group, the application must be filed by 
the Agent group representative, and any Facility advance will be made to 
the Agent group representative.
---------------------------------------------------------------------------

    (2) The Agent's application shall be based on the following:
    (i) Approved applications to the Agent by its member natural person 
credit unions for pending loans to meet liquidity needs; or
    (ii) Outstanding loans previously made by the Agent to meet 
liquidity needs of its member natural person credit unions; or
    (iii) Such other demonstrable liquidity needs as the NCUA Board may 
specify.
    (3) An Agent shall not submit an application to the Facility based 
on the liquidity needs of any member natural person credit union which 
has not agreed to the repayment, security and credit reporting terms 
prescribed by the Facility for Agent loans;
    (4) Any loan to meet liquidity needs which have been or will be the 
basis for an application by the Agent for a Facility advance must be 
applied for on an application form approved by the Facility.
    (5) Unless approved by the Facility, an Agent shall not submit an 
application to the Facility based on the liquidity needs of any credit 
union which became a member natural person credit union of the Agent 
after February 2, 1980, unless such credit union has been a member 
natural person credit union of the Agent for six months, was chartered 
within six months before becoming a member natural person credit union 
of the Agent, or had access to the Facility either as a Regular member 
or through another Agent within six months before becoming a member 
natural person credit union of the Agent.
    (c) In emergency circumstances, the applications for extensions of 
credit required under paragraph (a) and paragraphs (b)(1) and (b)(4) of 
this section may be verbal, but must be confirmed within five working 
days by an application as required by such subsection or paragraphs.
    (d) Applications of Regular and Agent members shall be filed with a

[[Page 1050]]

Facility lending officer. Each application for credit which is completed 
and properly filed will be approved or denied within five working days 
after the day of receipt.

[44 FR 49437, Aug. 23, 1979, as amended at 47 FR 1371, Jan. 13, 1982]



Sec. 725.18  Creditworthiness.

    (a) Prior to Facility approval of each application of a Regular 
member for a Facility advance, the Facility shall consider the 
creditworthiness of such member.
    (b) Prior to an Agent's approval of each application of a member 
natural person credit union for an extension of credit on which an 
application by the Agent to the Facility will be based, an Agent shall 
consider the creditworthiness of such member natural person credit 
union.
    (c) Specific characteristics of an uncreditworthy credit union 
include, but are not limited to, insolvency as defined in paragraph (1) 
to the definition of ``insolvency in Sec. 700.2 of this chapter, 
unsatisfactory practices in extending credit, lower than desirable 
reserve levels, high expense ratio, failure to repay previous Facility 
advances as agreed, excessive dependence on borrowed funds, inadequate 
cash management policies and planning, or any other relevant 
characteristics creating a less than satisfactory condition. The 
presence of one or more of these characteristics will not necessarily 
mean that a credit union will be considered uncreditworthy.
    (d) A natural person credit union (whether a Regular member of the 
Facility or a member natural person credit union) which does not meet 
the Facility's creditworthiness standards may be limited in or denied 
the use of advances for its liquidity needs.

[44 FR 49437, Aug. 23, 1979, as amended at 69 FR 27829, May 17, 2004; 76 
FR 60367, Sept. 29, 2011]



Sec. 725.19  Collateral requirements.

    (a) Each Facility advance and each Agent loan shall be secured by a 
first priority security interest in collateral of the credit union with 
a net book value at least equal to 110% of all amounts due under the 
applicable Facility advance or Agent loan, or by guarantee of the 
National Credit Union Share Insurance Fund.
    (b) The Facility may accept as collateral for each Facility advance 
to a Regular member, a security interest in all assets of the Regular 
member; provided however, that the value of any assets in which any 
third party has a perfected security interest that is superior to the 
security interest of the Facility shall be excluded for purposes of 
complying with the requirements of paragraph (a) of this section.
    (c) The Facility may accept as collateral for each Facility advance 
to an Agent member, a security interest in the Agent loans for which the 
Facility advance was made; provided however, that the collateral for 
such Agent loan meets the requirements of paragraph (a) of this section.

[62 FR 67550, Dec. 29, 1997]



Sec. 725.20  Repayment, security and credit reporting agreements;
other terms and conditions.

    (a) Regular and Agent members, or in the case of an Agent group, the 
Agent group representative, shall sign the repayment, security and 
credit reporting agreements prescribed by the Facility, and all Facility 
advances to Regular and Agent members shall be governed by the terms and 
conditions of such agreements.
    (b) All Agent loans shall be made subject to the repayment, security 
and credit reporting terms prescribed by the Facility for Agent loans.
    (c) Other terms and conditions applicable to Facility advances and 
Agent loans will be specified in confirmations of credit provided in 
connection with such advances and loans, and/or in operating circulars 
of the Facility.



Sec. 725.21  Modification of agreements.

    The repayment, security, and credit reporting terms under which 
Facility advances and Agent loans will be made, as provided in 
Sec. 725.20 of this part, shall be subject to modification from time to 
time as the NCUA Board may determine. Any change in such terms shall be 
published in the Federal Register and shall apply to all advances 
disbursed by the Facility after the effective date of the change.

[[Page 1051]]



Sec. 725.22  Advances to insurance organizations.

    (a) In accordance with policies established by the NCUA Board, the 
Facility may advance funds to a State credit union share or deposit 
insurance corporation, guaranty credit union, guaranty association, or 
similar organization. Requests for such advances shall be supported by 
an application which sets forth and supports the need for the advance.
    (b) Advances under paragraph (a) shall be subject to the approval of 
the NCUA Board and shall be made subject to the following terms:
    (1) The advance shall be fully secured,
    (2) The maturity of the advance shall not exceed 12 months,
    (3) The advance shall not be renewable at maturity, and
    (4) The funds advanced shall not be relent at an interest rate 
exceeding that imposed by the Facility.



Sec. 725.23  Other advances.

    (a) The NCUA Board may authorize extensions of credit to members of 
the Facility for purposes other than liquidity needs if the NCUA Board, 
the Board of Governors of the Federal Reserve System, and the Secretary 
of the Treasury concur in a determination that such extensions of credit 
are in the national economic interest.
    (b) Extensions of credit approved under the conditions of paragraph 
(a) of this section shall be subject to such terms and conditions as 
shall be established by the NCUA Board.
      



PART 740_ACCURACY OF ADVERTISING AND NOTICE OF INSURED STATUS--
Table of Contents



Sec.
740.0  Scope.
740.1  Definitions.
740.2  Accuracy of advertising.
740.3  Advertising of excess insurance.
740.4  Requirements for the official sign.
740.5  Requirements for the official advertising statement.

    Authority: 12 U.S.C. 1766, 1781, 1785, and 1789.

    Source: 68 FR 23382, May 2, 2003, unless otherwise noted.



Sec. 740.0  Scope.

    This part applies to all federally insured credit unions. It 
prescribes the requirements for the official sign insured credit unions 
must display and the requirements with regard to the official 
advertising statement insured credit unions must include in their 
advertisements. It requires that all other kinds of advertisements be 
accurate. It also establishes requirements for advertisements of excess 
insurance.



Sec. 740.1  Definitions.

    (a) Account or accounts as used in this part means share, share 
certificate or share draft accounts (or their equivalent under state 
law, as determined by the Board in the case of insured state credit 
unions) of a member (which includes other credit unions, public units, 
and nonmembers where permitted under the Act) in a credit union of a 
type approved by the Board which evidences money or its equivalent 
received or held by a credit union in the usual course of business and 
for which it has given or is obligated to give credit to the account of 
the member.
    (b) Advertisement as used in this part means a commercial message, 
in any medium, that is designed to attract public attention or patronage 
to a product or business.
    (c) Insured credit union and federally insured credit union as used 
in this part mean a credit union with National Credit Union 
Administration share insurance.
    (d) Nonfederally insured credit union as used in this part means a 
credit union with either no account insurance or with primary account 
insurance provided by some entity other than the National Credit Union 
Administration.

[68 FR 23382, May 2, 2003, as amended at 74 FR 9348, Mar. 4, 2009; 76 FR 
30523, May 26, 2011]



Sec. 740.2  Accuracy of advertising.

    No insured credit union may use any advertising (which includes 
print, electronic, or broadcast media, displays and signs, stationery, 
and other promotional material) or make any representation which is 
inaccurate or deceptive in any particular, or which in any way 
misrepresents its services,

[[Page 1052]]

contracts, or financial condition, or which violates the requirements of 
Sec. 707.8 of this subchapter, if applicable. This provision does not 
prohibit an insured credit union from using a trade name or a name other 
than its official charter name in advertising or signage, so long as it 
uses its official charter name in communications with NCUA and for share 
certificates or certificates of deposit, signature cards, loan 
agreements, account statements, checks, drafts and other legal 
documents.



Sec. 740.3  Advertising of excess insurance.

    Any advertising that mentions share or savings account insurance 
provided by a party other than the NCUA must clearly explain the type 
and amount of such insurance and the identity of the carrier and must 
avoid any statement or implication that the carrier is affiliated with 
the NCUA or the federal government.



Sec. 740.4  Requirements for the official sign.

    (a) Each insured credit union must continuously display the official 
sign described in paragraph (b) of this section at each station or 
window where insured account funds or deposits are normally received in 
its principal place of business and in all its branches, 30 days after 
its first day of operation as an insured credit union. Each insured 
credit union must also display the official sign on its Internet page, 
if any, where it accepts deposits or open accounts, but it may vary the 
font sizes from that depicted in paragraph (b) of this section to ensure 
its legibility.
    (b) The official sign shall be as depicted below:
    [GRAPHIC] [TIFF OMITTED] TR02SE10.000
    
    (1) NCUA will automatically supply all insured credit unions an 
initial supply of official signs with a blue background and white 
lettering at no cost for compliance with paragraph (a) of this section. 
If the initial supply is not adequate, the insured credit unions must 
immediately request additional signs from NCUA. Any credit union that 
does not have an adequate supply but requests additional signs from NCUA 
will not be considered to have violated paragraph (a) of this section 
unless the credit union fails to display the signs after receiving them.
    (2) An insured credit union may purchase signs from commercial 
suppliers or develop its own in any color scheme so long as they are 
legible and otherwise comply with this part. A credit union may alter 
the font size of the official sign to make it legible on its Internet 
page and on documents it provides to its members including 
advertisements, but it may not do so on signs to be placed at each 
station or

[[Page 1053]]

window where the credit union normally receives insured funds or 
deposits in its principal place of business and all of its branches.
    (c) To avoid any member confusion from the use of the official NCUA 
sign, federally insured credit unions are prohibited from receiving 
account funds at any teller station or window where any nonfederally 
insured credit union also receives account funds. As exceptions to this 
prohibition:
    (1) A teller in a branch of a federally insured credit union may 
accept account funds for nonfederally insured credit unions, but only if 
the teller displays a conspicuous sign next to the official sign that 
states ``This credit union participates in a shared branch network with 
other credit unions and accepts share deposits for members of those 
other credit unions. While this credit union is federally insured, not 
all of these other credit unions are federally insured. If you need 
information on the insurance status of your credit union, please contact 
your credit union directly.'' This sign must be similar to the official 
sign in terms of design, color, and font.
    (2) A teller in a facility operated by a non-credit union entity may 
accept account funds for both federally insured credit unions and 
nonfederally insured credit unions, but only if the teller displays a 
conspicuous sign next to the official sign stating ``This facility 
accepts share deposits for multiple credit unions. Not all of these 
credit unions are federally insured. If you need information on the 
insurance status of your credit union, please contact your credit union 
directly.'' This sign must be similar to the official sign in terms of 
design, color, and font.
    (3) A teller in a branch of a nonfederally insured credit union may 
accept account funds for federally insured credit unions. No teller in a 
nonfederally insured credit union may display the official NCUA sign.
    (d) The Board may require any insured credit union, upon at least 30 
days' written notice, to change the wording of its official signs in a 
manner deemed necessary for the protection of shareholders or others.
    (e) For purposes of this section, the terms ``branch,'' ``station,'' 
``teller station,'' and ``window'' do not include automated teller 
machines or point of sale terminals.
    (f) An insured credit union that fails to comply with Section 205(a) 
of the Federal Credit Union Act regarding the official sign, 12 U.S.C. 
1785(a), or any requirement in this part is subject to a daily penalty 
in the amount set forth in Sec. 747.1001 of this chapter.

[68 FR 23382, May 2, 2003, as amended at 71 FR 67438, Nov. 22, 2006; 73 
FR 62858, Oct. 22, 2008; 74 FR 9348, Mar. 4, 2009; 74 FR 55749, Oct. 29, 
2009; 75 FR 53843, Sept. 2, 2010; 80 FR 57288, Sept. 23, 2015]



Sec. 740.5  Requirements for the official advertising statement.

    (a) Each insured credit union must include the official advertising 
statement, prescribed in paragraph (b) of this section, in all of its 
advertisements including, but not limited to, annual reports and 
statements of condition required to be published by law, and on its main 
Internet page, except as provided in paragraph (c) of this section. For 
annual reports and statements of condition required to be published by 
law, an insured credit union must place the official advertising 
statement in a prominent position on the cover page of such documents or 
on the first page a reader sees if there is no cover page.
    (b) The official advertising statement is in substance as follows: 
``This credit union is federally insured by the National Credit Union 
Administration.'' Insured credit unions, at their option, may use the 
short title ``Federally insured by NCUA'' or a reproduction of the 
official sign, as described in Sec. 740.4(b), as the official 
advertising statement. The official advertising statement must be in a 
size and print that is clearly legible and may be no smaller than the 
smallest font size used in other portions of the advertisement intended 
to convey information to the consumer. If the official sign is used as 
the official advertising statement, an insured credit union may alter 
the font size to ensure its legibility as provided in Sec. 740.4(b)(2).
    (c) The following advertisements need not include the official 
advertising statement:

[[Page 1054]]

    (1) Credit union supplies such as stationery (except when used for 
circular letters), envelopes, deposit slips, checks, drafts, signature 
cards, account passbooks, and noninsurable certificates;
    (2) Signs or plates in the credit union office or attached to the 
building or buildings in which the offices are located;
    (3) Listings in directories;
    (4) Advertisements not setting forth the name of the insured credit 
union;
    (5) Display advertisements in credit union directories, provided the 
name of the credit union is listed on any page in the directory with a 
symbol or other descriptive matter indicating it is insured;
    (6) Joint or group advertisements of credit union services where the 
names of insured credit unions and noninsured credit unions are listed 
and form a part of such advertisement;
    (7) Advertisements by radio that are less than fifteen (15) seconds 
in time;
    (8) Advertisements by television, other than display advertisements, 
that are less than fifteen (15) seconds in time;
    (9) Advertisements that because of their type or character would be 
impractical to include the official advertising statement, including but 
not limited to, promotional items such as calendars, matchbooks, pens, 
pencils, and key chains;
    (10) Advertisements that contain a statement to the effect that the 
credit union is insured by the National Credit Union Administration, or 
that its accounts and shares or members are insured by the 
Administration to the maximum insurance amount for each member or 
shareholder;
    (11) Advertisements that do not relate to member accounts, including 
but not limited to advertisements relating to loans by the credit union, 
safekeeping box business or services, traveler's checks on which the 
credit union is not primarily liable, and credit life or disability 
insurance.
    (d) The non-English equivalent of the official advertising statement 
may be used in any advertisement provided that the Regional Director 
gives prior approval to the translation.

[68 FR 23382, May 2, 2003, as amended at 71 FR 67439, Nov. 22, 2006; 73 
FR 56936, Oct. 1, 2008; 76 FR 30523, May 26, 2011]



PART 741_REQUIREMENTS FOR INSURANCE--Table of Contents



Sec.
741.0  Scope.

   Subpart A_Regulations That Apply to Both Federal Credit Unions and 
    Federally Insured State-Chartered Credit Unions and That Are Not 
                Codified Elsewhere in NCUA's Regulations

741.1  Examination.
741.2  Maximum borrowing authority.
741.3  Criteria.
741.4  Insurance premium and one percent deposit.
741.5  Notice of termination of excess insurance coverage.
741.6  Financial and statistical and other reports.
741.7  Conversion to a state-chartered credit union.
741.8  Purchase of assets and assumption of liabilities.
741.9  Uninsured membership shares.
741.10  Disclosure of share insurance.
741.11  Foreign branching.
741.12  Liquidity and contingency funding plans.

   Subpart B_Regulations Codified Elsewhere in NCUA's Regulations as 
 Applying to Federal Credit Unions That Also Apply to Federally Insured 
                      State-Chartered Credit Unions

741.201  Minimum fidelity bond requirements.
741.202  Audit and verification requirements.
741.203  Minimum loan policy requirements.
741.204  Maximum public unit and nonmember accounts, and low-income 
          designation.
741.205  Reporting requirements for credit unions that are newly 
          chartered or in troubled condition.
741.206  Corporate credit unions.
741.207  Community development revolving loan program for credit unions.
741.208  Mergers of federally insured credit unions: voluntary 
          termination or conversion of insured status.
741.209  Management official interlocks.
741.210  Central liquidity facility.
741.211  Advertising.
741.212  Share insurance.
741.213  Administrative actions, adjudicative hearings, rules of 
          practice and procedure.

[[Page 1055]]

741.214  Report of crime or catastrophic act and Bank Secrecy Act 
          compliance.
741.215  Records preservation program.
741.216  Flood insurance.
741.217  Truth in savings.
741.218  Involuntary liquidation and creditor claims.
741.219  Investment requirements.
741.220  Privacy of consumer financial information.
741.221  Suretyship and guaranty requirements.
741.222  Credit union service organizations.
741.223  Registration of residential mortgage loan originators.
741.224  Golden parachute and indemnification payments.
741.225  Loan participations.

Appendix A to Part 741--Examples of Partial-Year NCUSIF Assessment and 
          Distribution Calculations Under Sec. 741.4
Appendix B to Part 741--Guidance for an Interest Rate Risk Policy and an 
          Effective Program
Appendix C to Part 741--Interpretive Ruling and Policy Statement on Loan 
          Workouts, Nonaccrual Policy, and Regulatory Reporting of 
          Troubled Debt Restructured Loans

    Authority: 12 U.S.C. 1757, 1766(a), 1781-1790, and 1790d; 31 U.S.C. 
3717.

    Source: 60 FR 58504, Nov. 28, 1995, unless otherwise noted.



Sec. 741.0  Scope.

    The provisions of this part apply to federal credit unions, 
federally insured state-chartered credit unions, and credit unions 
making application for insurance of accounts pursuant to title II of the 
Act, unless the context of a provision indicates its application is 
otherwise limited. This part prescribes various requirements for 
obtaining and maintaining federal insurance and the payment of insurance 
premiums and capitalization deposit. Subpart A of this part contains 
substantive requirements that are not codified elsewhere in this 
chapter. Subpart B of this part lists additional regulations, set forth 
elsewhere in this chapter as applying to federal credit unions, that 
also apply to federally insured state-chartered credit unions. As used 
in this part, ``insured credit union'' means a credit union whose 
accounts are insured by the National Credit Union Share Insurance Fund 
(NCUSIF).



   Subpart A_Regulations That Apply to Both Federal Credit Unions and 
    Federally Insured State-Chartered Credit Unions and That Are Not 
                Codified Elsewhere in NCUA's Regulations



Sec. 741.1  Examination.

    As provided in Sections 201 and 204 of the Act (12 U.S.C. 1781 and 
1784), the NCUA Board is authorized to examine any insured credit union 
or any credit union making application for insurance of its accounts. 
Such examination may require access to all records, reports, contracts 
to which the credit union is a party, and information concerning the 
affairs of the credit union. Upon request, such documentation must be 
provided to the NCUA Board or its representative. Any credit union which 
makes application for insurance will be required to pay the cost of such 
examination and processing. To the maximum extent feasible, the NCUA 
Board will utilize examinations conducted by state regulatory agencies.



Sec. 741.2  Maximum borrowing authority.

    (a)Any credit union which makes application for insurance of its 
accounts pursuant to title II of the Act, or any insured credit union, 
must not borrow, from any source, an aggregate amount in excess of 50 
per centum of its paid-in and unimpaired capital and surplus (shares and 
undivided earnings, plus net income or minus net loss).
    (b) A federally insured state-chartered credit union may apply to 
the regional director for a waiver of paragraph (a) of this section up 
to the amount permitted under the applicable state law or by the state 
regulator. The waiver request must include:
    (1) Written approval from the state regulator;
    (2) A detailed analysis of the safety and soundness implications of 
the proposed waiver;
    (3) A proposed aggregate dollar amount or percentage of paid-in and 
unimpaired capital and surplus limitation; and
    (4) An explanation demonstrating the need to raise the limit.

[[Page 1056]]

    (c) The regional director will approve the waiver request if the 
proposed borrowing limit will not adversely affect the safety and 
soundness of the federally insured state-chartered credit union.

[60 FR 58504, Nov. 28, 1995, as amended at 69 FR 8547, Feb. 25, 2004]



Sec. 741.3  Criteria.

    In determining the insurability of a credit union which makes 
application for insurance and in continuing the insurability of its 
accounts pursuant to title II of the Act, the following criteria shall 
be applied:
    (a) Reserves--(1) General rule. State-chartered credit unions are 
subject to section 216 of the Act, 12 U.S.C. 1790d, and to part 702 and 
subpart L of part 747 of this chapter.
    (2) Special reserve for nonconforming investments. State-chartered 
credit unions (except state-chartered corporate credit unions) are 
required to establish an additional special reserve for investments if 
those credit unions are permitted by their respective state laws to make 
investments beyond those authorized in the Act or the NCUA Rules and 
Regulations. For purposes of this paragraph, if a state-chartered credit 
union conducts and documents an analysis that reasonably concludes an 
investment is at least investment grade, as defined in Sec. 703.2 of 
this chapter, and the investment is otherwise permissible for Federal 
credit unions, that investment is not considered to be beyond those 
authorized by the Act or the NCUA Rules and Regulations. For any 
investment other than loans to members and obligations or securities 
expressly authorized in title I of the Act and part 703 of this chapter, 
as amended, state-chartered credit unions (except state-chartered 
corporate credit unions) are required to establish and maintain at the 
end of each accounting period and prior to payment of any dividend, an 
Appropriation for Non-conforming Investments in an amount at least equal 
to the net excess of book value over current market value of the 
investments. If the market value cannot be determined, an amount equal 
to the full book value will be established. When at the end of any 
dividend period, the amount in the Appropriation for Non-conforming 
Investments exceeds the difference between book value and market value, 
the board of directors may authorize the transfer of the excess to 
Undivided Earnings.
    (b) Financial condition and policies. The following factors are to 
be considered in determining whether the credit union's financial 
condition and policies are both safe and sound:
    (1) The existence of unfavorable trends which may include excessive 
losses on loans (i.e., losses which exceed the regular reserve or its 
equivalent [in the case of state-chartered credit unions] plus other 
irrevocable reserves established as a contingency against losses on 
loans), the presence of special reserve accounts used specifically for 
charging off loan balances of deceased borrowers, and an expense ratio 
so high that the required transfers to reserves create a net operating 
loss for the period or that the net gain after these transfers is not 
sufficient to permit the payment of a nominal dividend;
    (2) The existence of written lending policies, including adequate 
documentation of secured loans and the protection of security interests 
by recording, bond, insurance or other adequate means, adequate 
determination of the financial capacity of borrowers and co-makers for 
repayment of the loan, adequate determination of value of security on 
loans to ascertain that said security is adequate to repay the loan in 
the event of default, loan workout arrangements, and nonaccrual 
standards that include the discontinuance of interest accrual on loans 
past due by 90 days or more and requirements for returning such loans, 
including member business loans, to accrual status.
    (3) Investment policies which are within the provisions of 
applicable law and regulations, i.e., the Act and part 703 of this 
chapter for federal credit unions and the laws of the state in which the 
credit union operates for state-chartered credit unions, except state-
chartered corporate credit unions. State-chartered corporate credit 
unions are permitted to make only

[[Page 1057]]

those investments that are in conformance with part 704 of this chapter 
and applicable state laws and regulations;
    (4) The presence of any account or security, the form of which has 
not been approved by the Board, except for accounts authorized by state 
law for state-chartered credit unions.
    (5) The existence of a written interest rate risk policy (``IRR 
policy'') and an effective interest rate risk management program 
(``effective IRR program'') as part of asset liability management. 
Federally insured credit unions (``FICUs'') with assets of more than $50 
million, as measured by the most recent Call Report filing, must adopt a 
written IRR policy and implement an effective IRR program. Appendix B to 
this part 741 provides guidance on how to develop an IRR policy and an 
effective IRR program. The guidance describes widely accepted best 
practices in the management of interest rate risk for the benefit of all 
FICUs.
    (c) Fitness of management. The officers, directors, and committee 
members of the credit union must have conducted its operations in 
accordance with provisions of applicable law, regulations, its charter 
and bylaws. No person shall serve as a director, officer, committee 
member, or employee of an insured credit union who has been convicted of 
any criminal offense involving dishonesty or breach of trust, except 
with the written consent of the Board.
    (d) Insurance of member accounts would not otherwise involve undue 
risk to the NCUSIF. The credit union must maintain adequate fidelity 
bond coverage as specified in Sec. 741.201. Any circumstances which may 
be unique to the particular credit union concerned shall also be 
considered in arriving at the determination of whether or not an undue 
risk to the NCUSIF is or may be present. For purposes of this section, 
the term ``undue risk to the NCUSIF'' is defined as a condition which 
creates a probability of loss in excess of that normally found in a 
credit union and which indicates a reasonably foreseeable probability of 
the credit union becoming insolvent because of such condition, with a 
resultant claim against the NCUSIF.
    (e) Powers and purposes. The credit union must not perform services 
other than those which are consistent with the promotion of thrift and 
the creation of a source of credit for its members, except as otherwise 
permitted by law or regulation.
    (f) Letter of disapproval. A credit union whose application for 
share insurance is disapproved shall receive a letter indicating the 
reasons for such disapproval, a citation of the authority for such 
disapproval, and suggested methods by which the applying credit union 
may correct its deficiencies and thereby qualify for share insurance.
    (g) Nothing in this section shall preclude the NCUA Board from 
imposing additional terms or conditions pursuant to the insurance 
agreement.

[60 FR 58504, Nov. 28, 1995, as amended at 64 FR 41040, July 29, 1999; 
65 FR 8593, Feb. 18, 2000; 67 FR 71094, Nov. 29, 2002; 77 FR 32001, May 
31, 2012; 77 FR 5162, Feb. 2, 2012; 77 FR 74112, Dec. 13, 2012; 78 FR 
4037, Jan. 18, 2013]



Sec. 741.4  Insurance premium and one percent deposit.

    (a) Scope. This section implements the requirements of Section 202 
of the Act (12 U.S.C. 1782) providing for capitalization of the NCUSIF 
through the maintenance of a deposit by each insured credit union in an 
amount equaling one percent of its insured shares and payment of an 
insurance premium.
    (b) Definitions. For purposes of this section:
    Available assets ratio means the ratio of:
    (i) The amount determined by subtracting all liabilities of the 
NCUSIF, including contingent liabilities for which no provision for 
losses has been made, from the sum of cash and the market value of 
unencumbered investments authorized under Section 203(c) of the Act (12 
U.S.C. 1783(c)), to:
    (ii) The aggregate amount of the insured shares in all insured 
credit unions.
    (iii) Shown as an abbreviated mathematical formula, the available 
assets ratio is:

[[Page 1058]]

[GRAPHIC] [TIFF OMITTED] TR03DE09.000

    Equity ratio which shall be calculated using the financial 
statements of the NCUSIF alone, without any consolidation or combination 
with the financial statements of any other fund or entity, means the 
ratio of:
    (i) The amount of NCUSIF's capitalization, meaning insured credit 
unions' one percent capitalization deposits plus the retained earnings 
balance of the NCUSIF (less contingent liabilities for which no 
provision for losses has been made) to:
    (ii) The aggregate amount of the insured shares in all insured 
credit unions.
    (iii) Shown as an abbreviated mathematical formula, the equity ratio 
is:
[GRAPHIC] [TIFF OMITTED] TR03DE09.001

    Insured shares means the total amount of a federally-insured credit 
union's share, share draft and share certificate accounts, or their 
equivalent under state law (which may include deposit accounts), 
authorized to be issued to members, other credit unions, public units, 
or nonmembers (where permitted under the Act or equivalent state law), 
but does not include amounts in excess of insurance coverage as provided 
in part 745 of this chapter. For a credit union or other entity that is 
not federally insured, ``insured shares'' means, for purposes of this 
section only, the amount of deposits or shares that would have been 
insured by the NCUSIF under part 745 had the institution been federally 
insured on the date of measurement.
    Modified premium/distribution ratio means one minus the premium/
distribution ratio.
    Normal operating level means an equity ratio not less than 1.2 
percent and not more than 1.5 percent, as established by action of the 
NCUA Board.
    Premium/distribution ratio means the number of full remaining months 
in the calendar year following the date of the institution's conversion 
or merger divided by 12.
    Reporting period means calendar year for credit unions with total 
assets of less than $50,000,000 and means semiannual period for credit 
union with total assets of $50,000,000 or more.
    (c) One percent deposit. Each insured credit union must maintain 
with the NCUSIF during each reporting period a deposit in an amount 
equaling one percent of the total of the credit union's insured shares 
at the close of the preceding reporting period. For credit unions with 
total assets of less than $50,000,000, insured shares will be measured 
and adjusted annually based on the insured shares reported in the credit 
union's 5300 report for December 31 of each year. For credit unions with 
total assets of $50,000,000 or more, insured shares will be measured and 
adjusted semiannually based on the insured shares reported in the credit 
union's 5300 reports for December 31 and June 30 of each year.
    (d) Insurance premium charges--(1) In general. Each insured credit 
union will pay to the NCUSIF, on dates the NCUA Board determines, but 
not more than twice in any calendar year, an insurance premium in an 
amount stated as a percentage of insured shares, which will be the same 
percentage for all insured credit unions.
    (2) Relation of premium charge to equity ratio of NCUSIF. (i) The 
NCUA Board may assess a premium charge only if

[[Page 1059]]

the NCUSIF's equity ratio is less than 1.3 percent and the premium 
charge does not exceed the amount necessary to restore the equity ratio 
to 1.3 percent.
    (ii) If the equity ratio of the NCUSIF falls to between 1.0 and 1.2 
percent, the NCUA Board is required to assess a premium in an amount it 
determines is necessary to restore the equity ratio to at least 1.2 
percent, as provided for in the restoration plan adopted under Section 
202(c)(2)(D) of the Act (12 U.S.C. 1782(c)(20)(D)). If the equity ratio 
of the NCUSIF falls below 1.0 percent, the NCUA Board is required to 
assess a deposit replenishment charge in an amount it determines is 
necessary to restore the equity ratio to 1.0 percent and to assess a 
premium charge in an amount it determines is necessary to restore the 
equity ratio to, at least 1.2 percent, as provided for in the 
restoration plan adopted under Section 202(c)(2)(D) of the Act (12 
U.S.C. 1782(c)(20)(D)).
    (e) Distribution of NCUSIF equity. If, as of the end of a calendar 
year, the NCUSIF exceeds its normal operating level and its available 
assets ratio exceeds 1.0 percent, the NCUA Board will make a 
proportionate distribution of NCUSIF equity to insured credit unions. 
The distribution will be the maximum amount possible that does not 
reduce the NCUSIF's equity ratio below its normal operating level and 
does not reduce its available assets ratio below 1.0 percent. The 
distribution will be after the calendar year and in the form determined 
by the NCUA Board. The form of the distribution may include a waiver of 
insurance premiums, premium rebates, or distributions from NCUSIF equity 
in the form of dividends. The NCUA Board will use the aggregate amount 
of the insured shares from all insured credit unions from the final 
reporting period of the calendar year in calculating the NCUSIF's equity 
ratio and available assets ratio for purposes of this paragraph.
    (f) Invoices. The NCUA provides invoices to all federally insured 
credit unions stating any change in the amount of a credit union's one 
percent deposit and the computation and funding of any NCUSIF premium or 
deposit replenishment assessments due. Invoices for federal credit 
unions also include any annual operating fees that are due. Invoices are 
calculated based on a credit union's insured shares as of the most 
recently ended reporting period. The invoices may also provide for any 
distribution the NCUA Board declares in accordance with paragraph (e) of 
this section, resulting in a single net transfer of funds between a 
credit union and the NCUA.
    (g) New charters. A newly-chartered credit union that obtains share 
insurance coverage from the NCUSIF during the calendar year in which it 
has obtained its charter will not be required to pay an insurance 
premium for that calendar year. The credit union will fund its one 
percent deposit on a date to be determined by the NCUA Board in the 
following calendar year, but will not participate in any distribution 
from NCUSIF equity related to the period prior to the credit union's 
funding of its deposit.
    (h) Depletion of one percent deposit. All or part of the one percent 
deposit may be used by the NCUSIF if necessary to meet its expenses. The 
NCUSIF may invoice credit unions in an amount necessary to replenish the 
one percent deposit at any time following the effective date of the 
depletion.
    (i) Conversion to Federal insurance. (1) A credit union or other 
institution that converts to insurance coverage with the NCUSIF will:
    (i) Immediately fund its one percent deposit based on the total of 
its insured shares as of the last day of the most recently ended 
reporting period prior to the date of conversion;
    (ii) If the NCUSIF assesses a premium in the calendar year of 
conversion, pay a premium based on the institution's insured shares as 
of the last day of the most recently ended reporting period preceding 
the invoice date times the institution's premium/distribution ratio;
    (iii) If the NCUSIF declares, in the calendar year of conversion on 
or before the date of conversion, an assessment to replenish the one-
percent deposit, pay nothing related to that assessment;
    (iv) If the NCUSIF declares, at any time after the date of 
conversion

[[Page 1060]]

through the end of that calendar year, an assessment to replenish the 
one-percent deposit, pay a replenishment amount based on the 
institution's insured shares as of the last day of the most recently 
ended reporting period preceding the invoice date; and
    (v) If the NCUSIF declares a distribution in the year following 
conversion based the NCUSIF's equity at the end of the year of 
conversion, receive a distribution based on the institution's insured 
shares as of the end of the year of conversion times the institution's 
premium/distribution ratio. With regard to distributions declared in the 
calendar year of conversion but based on the NCUSIF's equity from the 
end of the preceding year, the converting institution will receive no 
distribution.
    (2) A federally-insured credit union that merges with a nonfederally 
insured credit union or other nonfederally insured institution (the 
``merging institution''), where the federally insured credit union is 
the continuing institution, will:
    (i) Immediately on the date of merger increase the amount of its 
NCUSIF deposit by an amount equal to one percent of the merging 
institution's insured shares as of the last day of the merging 
institution's most recently ended reporting period preceding the date of 
merger;
    (ii) With regard to any NCUSIF premiums assessed in the calendar 
year of merger, pay a two-part premium, with one part calculated on the 
merging institution's insured shares as described in paragraph 
(i)(1)(ii) of this section, and the other part calculated on the 
continuing institution's insured shares as of the last day of its most 
recently ended reporting period preceding the date of merger; and
    (iii) If the NCUSIF declares a distribution in the year following 
the merger based the NCUSIF's equity at the end of the year of merger, 
receive a distribution based on the continuing institution's insured 
shares as of the end of the year of merger. With regard to distributions 
declared in the calendar year of merger but based on the NCUSIF's equity 
from the end of the preceding year, the institution will receive a 
distribution based on its insured shares as of the end of the preceding 
year.
    (j) Conversion from, or termination of, Federal share insurance. (1) 
A federally insured credit union whose insurance coverage with the 
NCUSIF terminates, including through a conversion to, or merger into, a 
nonfederally insured credit union or a noncredit union entity, will:
    (i) Receive the full amount of its NCUSIF deposit paid, less any 
amounts applied to cover NCUSIF losses that exceed NCUSIF retained 
earnings, immediately after the final date on which any shares of the 
credit union are NCUSIF-insured;
    (ii) If the NCUSIF declares a distribution at the end of the 
calendar year of conversion, receive a distribution based on the 
institution's insured shares as of the last day of the most recently 
ended reporting period preceding the date of conversion times the 
institution's modified premium/distribution ratio; and
    (iii) If the NCUSIF assesses a premium in the calendar year of 
conversion or merger on or before the day in which the conversion or 
merger is completed, pay a premium based on the institution's insured 
shares as of the last day of the most recently ended reporting period 
preceding the conversion or merger date times the institution's modified 
premium/distribution ratio. If the institution has previously paid a 
premium based on this same assessment that exceeds this amount, the 
institution will receive a refund of the difference following completion 
of the conversion or merger.
    (2) Notwithstanding the requirements of paragraph (j)(1) of this 
section:
    (i) Any insolvent credit union that is closed for involuntary 
liquidation will not be entitled to a return of its deposit;
    (ii) Any solvent credit union that is closed due to voluntary or 
involuntary liquidation will be entitled to a return of its deposit 
paid, less any amounts applied to cover NCUSIF losses that exceed NCUSIF 
retained earnings, prior to final distribution of member shares; and

[[Page 1061]]

    (iii) The Board reserves the right to delay return of the deposit to 
any credit union converting from or terminating its federal insurance, 
or voluntarily liquidating, for up to one year if the Board determines 
that immediate repayment would jeopardize the NCUSIF.
    (k) Assessment of administrative fee and interest for delinquent 
payment. Each federally insured credit union must pay to the NCUA an 
administrative fee, the costs of collection, and interest on any 
delinquent payment of its capitalization deposit or insurance premium. A 
payment will be considered delinquent if it is postmarked or 
electronically posted later than the date stated in the invoice provided 
to the credit union. The NCUA may waive or abate charges or collection 
of interest, if circumstances warrant.
    (1) The administrative fee for a delinquent payment shall be an 
amount as fixed from time to time by the NCUA Board based upon the 
administrative costs of such delinquent payments to the NCUA in the 
preceding year.
    (2) The costs of collection shall be calculated as the actual hours 
expended by NCUA personnel multiplied by the average hourly cost of the 
salaries and benefits of such personnel.
    (3) The interest rate charged on any delinquent payment shall be the 
U.S. Department of the Treasury Tax and loan Rate in effect on the date 
when the loan payment is due as provided in 31 U.S.C. 3717.
    (4) The Act contains specific penalties and other consequences for 
delinquent payments, including, but not limited to:
    (i) Section 202(d)(2)(B) of the Act (12 U.S.C. 1782(d)(2)(B)) 
provides that the Board may assess and collect a penalty from an insured 
credit union, up to the amount specified in Sec. 747.1001 of this 
chapter, for each day the credit union fails or refuses to pay any 
deposit or premium due to the fund; and
    (ii) Section 202(d)(3) of the Act (12 U.S.C. 1782(d)(3)) provides, 
generally, that no insured credit union shall pay any dividends on its 
insured shares or distribute any of its assets while it remains in 
default in the payment of its deposit or any premium charge due to the 
fund. Section 202(d)(3) further provides that any director or officer of 
any insured credit union who knowingly participates in the declaration 
or payment of any such dividend or in any such distribution shall, upon 
conviction, be fined not more than $1,000 or imprisoned more than one 
year, or both.

[74 FR 63279, Jan. 4, 2010, as amended at 76 FR 60367, Sept. 29, 2011; 
80 FR 57288, Sept. 23, 2015]



Sec. 741.5  Notice of termination of excess insurance coverage.

    In the event of a credit union's termination of share insurance 
coverage other than that provided by the NCUSIF, the credit union must 
notify all members in writing of such termination at least thirty days 
prior to the effective date of termination.



Sec. 741.6  Financial and statistical and other reports.

    (a) Upon written notice from the NCUA Board, Regional Director, 
Director of the Office of Examination and Insurance, or Director of the 
Office of National Examinations and Supervision, insured credit unions 
must file financial and other reports in accordance with the 
instructions in the notice. Insured credit unions must use NCUA's 
information management system, or other electronic means specified by 
NCUA, to submit their data online.
    (1) Credit Union Profile. Insured credit unions must submit to NCUA 
a Credit Union Profile, NCUA Form 4501 or its equivalent, within 10 days 
after an election or appointment of senior management or volunteer 
officials or within 30 days of any change of the information in the 
profile.
    (2) Financial and statistical report. Natural person credit unions 
must file a Call Report with NCUA quarterly in accordance with the 
instructions in the NCUA Form 5300. Corporate credit unions must file a 
Corporate Credit Union Call Report with NCUA monthly in accordance with 
the instructions in the NCUA Form 5310. Credit unions must submit a 
corrected Call Report upon notification or the discovery of a need for 
correction.

[[Page 1062]]

    (b) Consistency with GAAP. The accounts of financial statements and 
reports required to be filed quarterly under paragraph (a) of this 
section must reflect GAAP if the credit union has total assets of $10 
million or greater, but may reflect regulatory accounting principles 
other than GAAP if the credit union has total assets of less than $10 
million (except that a Federally-insured State-chartered credit union 
may be required by its state credit union supervisor to follow GAAP 
regardless of asset size).
    (c) GAAP sources. GAAP means generally accepted accounting 
principles, as defined in Sec. 715.2(e) of this chapter. GAAP is 
distinct from GAAS, which means generally accepted auditing standards, 
as defined in Sec. 715.2(f) of this chapter. Authoritative sources of 
GAAP include, but are not limited to, pronouncements of the Financial 
Accounting Standards Board (FASB) and its predecessor organizations, the 
Accounting Standards Executive Committee (AcSEC) of the American 
Institute of Certified Public Accountants (AICPA), the FASB's Emerging 
Issues Task Force (EITF), and the applicable AICPA Audit and Accounting 
Guide.

[60 FR 58504, Nov. 28, 1995, as amended at 64 FR 41040, July 29, 1999; 
67 FR 12464, Mar. 19, 2002; 71 FR 4034, Jan. 25, 2006; 74 FR 35769, July 
21, 2009; 78 FR 32545, May 31, 2013; 78 FR 64885, Oct. 30, 2013]



Sec. 741.7  Conversion to a state-chartered credit union.

    Any federal credit union that petitions to convert to a state-
chartered federally insured credit union is required to apply to the 
Regional Director for continued insurance of its accounts and meet the 
requirements as stated in the Act and this part. If the application for 
continued insurance is not approved, such insurance will terminate 
subject to the conditions set forth in section 206(d) of the Act.



Sec. 741.8  Purchase of assets and assumption of liabilities.

    (a) Any credit union insured by the National Credit Union Share 
Insurance Fund (NCUSIF) must receive approval from the NCUA before 
purchasing loans or assuming an assignment of deposits, shares, or 
liabilities from:
    (1) Any credit union that is not insured by the NCUSIF;
    (2) Any other financial-type institution (including depository 
institutions, mortgage banks, consumer finance companies, insurance 
companies, loan brokers, and other loan sellers or liability traders); 
or
    (3) Any successor in interest to any institution identified in 
paragraph (a)(1) or (a)(2) of this section.
    (b) Approval is not required for:
    (1) Purchases of student loans or real estate secured loans to 
facilitate the packaging of a pool of loans to be sold or pledged on the 
secondary market under Sec. 701.23(b)(1)(iii) or (iv) of this chapter or 
comparable state law for state-chartered credit unions, or purchases of 
member loans under Sec. 701.23(b)(1)(i) of this chapter or comparable 
state law for state-chartered credit unions;
    (2) Assumption of deposits, shares or liabilities as rollovers or 
transfers of member retirement accounts or in which a federally-insured 
credit union perfects a security interest in connection with an 
extension of credit to any member.
    (3) Purchases of assets, including loans, or assumptions of 
deposits, shares, or liabilities by any credit union insured by the 
NCUSIF from another credit union insured by the NCUSIF, except a 
purchase or assumption as a part of a merger under part 708b; or
    (4) Purchases of loan participations as defined in and meeting the 
requirements of Sec. 701.22 of this chapter.
    (c) A credit union seeking approval under paragraph (a) of this 
section must submit a letter to the regional office with jurisdiction 
for the state where the credit union is headquartered. A corporate 
credit union seeking approval under paragraph (a) of this section must 
submit a letter to the Office of National Examinations and Supervision. 
The letter must request approval and state the nature of the transaction 
and include copies of relevant transaction documents. The NCUA will make 
a decision to approve or disapprove the request as soon as possible 
depending on the complexity of the proposed transaction. Credit unions 
should submit a request

[[Page 1063]]

for approval in sufficient time to close the transaction.

[70 FR 75725, Dec. 21, 2005, as amended at 75 FR 34622, June 18, 2010; 
78 FR 32545, May 31, 2013; 78 FR 37958, June 25, 2013]



Sec. 741.9  Uninsured membership shares.

    Any credit union that is insured pursuant to title II of the Act may 
not offer membership shares that, due to the terms and conditions of the 
account, are not eligible for insurance coverage. This prohibition does 
not apply to shares that are uninsured solely because the amount is in 
excess of the maximum insurance coverage provided pursuant to part 745 
of this chapter.



Sec. 741.10  Disclosure of share insurance.

    Any credit union which is insured pursuant to title II of the Act 
and is permitted by state law to accept nonmember shares or deposits 
from sources other than other credit unions and public units (or, for 
low-income designated credit unions, any nonmembers), shall identify 
such nonmember accounts as nonmember shares or deposits on any statement 
or report required by the NCUA Board for insurance purposes. Immediately 
after a state-chartered credit union receives notice from NCUA that its 
member accounts are federally insured, the credit union shall advise any 
present nonmember share and deposit holders by letter that their 
accounts are not insured by the NCUSIF. Also, future nonmember share and 
deposit fund holders will be so advised by letter as they open accounts.



Sec. 741.11  Foreign branching.

    (a) Application and prior NCUA approval required. Any credit union 
insured under title II of the Act must apply for and receive approval 
from the regional director before establishing a credit union branch 
outside the United States unless the foreign branch is located on a 
United States military instillation or embassy outside the United 
States. The regional director will have 60 days to approve or deny the 
request.
    (b) Contents of application. The application must include a business 
plan, written approval by the state supervisory agency if the applicant 
is a state-chartered credit union, and documentation evidencing written 
permission from the host country to establish the branch that explicitly 
recognizes NCUA's authority to examine and take any enforcement action, 
including conservatorship and liquidation actions.
    (c) Contents of business plan. The written business plan must 
address the following:
    (1) Analysis of market conditions in the area where the branch is to 
be established;
    (2) The credit union's plan for addressing foreign currency risk;
    (3) Operating facilities, including office space/equipment and 
supplies;
    (4) Safeguarding of assets, bond coverage, insurance coverage, and 
records preservation;
    (5) Written policies regarding the branch (shares, lending, capital, 
charge-offs, collections);
    (6) The field of membership or portion of the field of membership to 
be served through the foreign branch and the financial needs of the 
members to be served and services and products to be provided;
    (7) Detailed pro forma financial statements for branch operations 
(balance sheet and income and expense projections) for the first and 
second year including assumptions;
    (8) Internal controls including cash disbursal procedures for shares 
and loans at the branch;
    (9) Accounting procedures used to identify branch activity and 
performance; and
    (10) Foreign income taxation and employment law.
    (d) Revocation of approval. A state regulator that revokes approval 
of the branch office must notify NCUA of the action once it issues the 
notice of revocation. The regional director may revoke approval of the 
branch office for failure to follow the business plan in a material 
respect or for substantive and documented safety and soundness reasons. 
If the regional director revokes the approval, the credit union will 
have six months from the date of the revocation letter to terminate the 
operations of the branch. The credit union can appeal this revocation 
directly to the

[[Page 1064]]

NCUA Board within 30 days of the date of the revocation letter.
    (e) Insurance coverage. Accounts at foreign branches are insured by 
the NCUSIF only if denominated in U.S. dollars and only if payable, by 
the terms of the account agreement, at a U.S. office of the credit 
union. If the host country requires insurance from its own system, 
accounts will not be insured by the National Credit Union Share 
Insurance Fund.

[68 FR 23030, Apr. 30, 2003]



Sec. 741.12  Liquidity and contingency funding plans.

    (a) Any credit union insured pursuant to Title II of the Act that 
has assets of less than $50 million must maintain a basic written policy 
that provides a credit union board-approved framework for managing 
liquidity and a list of contingent liquidity sources that can be 
employed under adverse circumstances.
    (b) Any credit union insured pursuant to Title II of the Act that 
has assets of $50 million or more must establish and document a 
contingency funding plan (CFP) that meets the requirements of paragraph 
(d) of this section.
    (c) In addition to the requirement specified in paragraph (b) of 
this section to establish and maintain a CFP, any credit union insured 
pursuant to Title II of the Act that has assets of $250 million or more 
must establish and document access to at least one contingent federal 
liquidity source for use in times of financial emergency and distressed 
economic circumstances. These credit unions must conduct advance 
planning and periodic testing to ensure that contingent funding sources 
are readily available when needed. A credit union subject to this 
paragraph may demonstrate access to a contingent federal liquidity 
source by:
    (1) Maintaining regular membership in the Central Liquidity Facility 
(Facility), as described in part 725 of this chapter;
    (2) Maintaining membership in the Facility through an Agent, as 
described in part 725 of this chapter; or
    (3) Establishing borrowing access at the Federal Reserve Discount 
Window by filing the necessary lending agreements and corporate 
resolutions to obtain credit from a Federal Reserve Bank pursuant to 12 
CFR part 201.
    (d) Contingency Funding Plan: A credit union must have a written CFP 
commensurate with its complexity, risk profile, and scope of operations 
that sets out strategies for addressing liquidity shortfalls in 
emergency situations. The CFP may be a separate policy or may be 
incorporated into an existing policy such as an asset/liability policy, 
a funds management policy, or a business continuity policy. The CFP must 
address, at a minimum, the following:
    (1) The sufficiency of the institution's liquidity sources to meet 
normal operating requirements as well as contingent events;
    (2) The identification of contingent liquidity sources;
    (3) Policies to manage a range of stress environments, 
identification of some possible stress events, and identification of 
likely liquidity responses to such events;
    (4) Lines of responsibility within the institution to respond to 
liquidity events;
    (5) Management processes that include clear implementation and 
escalation procedures for liquidity events; and
    (6) The frequency that the institution will test and update the 
plan.
    (e) A credit union is subject to the requirements of paragraphs (b) 
or (c) of this section when two consecutive Call Reports show its assets 
to be at least $50 million or $250 million, respectively. A FICU then 
has 120 days from the effective date of that second Call Report to meet 
the greater requirements.

[78 FR 64883, Oct. 30, 2013]



   Subpart B_Regulations Codified Elsewhere in NCUA's Regulations as 
 Applying to Federal Credit Unions That Also Apply to Federally Insured 
                      State-Chartered Credit Unions



Sec. 741.201  Minimum fidelity bond requirements.

    (a) Any credit union which makes application for insurance of its 
accounts pursuant to title II of the Act must

[[Page 1065]]

possess the minimum fidelity bond coverage stated in part 713 of this 
chapter in order for its application for such insurance to be approved 
and for such insurance coverage to continue. A federally insured credit 
union whose fidelity bond coverage is terminated shall mail notice of 
such termination to the Regional Director not less than 35 days prior to 
the effective date of such termination.
    (b) Corporate credit unions must comply with Sec. 704.18 of this 
chapter in lieu of part 713 of this chapter.

[60 FR 58504, Nov. 28, 1995, as amended at 64 FR 28721, May 27, 1999; 70 
FR 61716, Oct. 26, 2005]



Sec. 741.202  Audit and verification requirements.

    (a) The supervisory committee of each credit union insured pursuant 
to title II of the Act shall make or cause to be made an audit of the 
credit union at least once every calendar year covering the period 
elapsed since the last audit. The audit must fully meet the applicable 
requirements set forth in part 715 of this chapter or applicable state 
law, whichever requirement is more stringent.
    (b) Each credit union which is insured pursuant to title II of the 
Act shall verify or cause to be verified, under controlled conditions, 
all passbooks and accounts with the records of the financial officer not 
less frequently than once every 2 years. The verification must fully 
meet the requirements set forth in Sec. 715.8 of this chapter.

[60 FR 58504, Nov. 28, 1995, as amended at 64 FR 41040, July 29, 1999]



Sec. 741.203  Minimum loan policy requirements.

    Any credit union which is insured pursuant to title II of the Act 
must:
    (a) Adhere to the requirements stated in part 723 of this chapter 
concerning commercial lending and member business loans, 
Sec. 701.21(c)(8) of this chapter concerning prohibited fees, and 
Sec. 701.21(d)(5) of this chapter concerning non-preferential loans. 
Federally insured state chartered credit unions in a given state are 
exempt from these requirements if the state supervisory authority for 
that state adopts substantially equivalent regulations as determined by 
the NCUA Board or, in the case of the commercial lending and member 
business loan requirements, if the state supervisory authority 
administers a state commercial and member business loan rule for use by 
federally insured credit unions chartered in that state that at least 
covers all the provisions in part 723 of this chapter and is no less 
restrictive, upon determination by NCUA. In nonexempt states, all 
required NCUA reviews and approvals will be handled in coordination with 
the state credit union supervisory authority; and
    (b) Adhere to the requirements stated in part 722 of this chapter 
concerning appraisals.
    (c) Adhere to the requirements stated in Sec. 701.21(h) of this 
chapter concerning third-party servicing of indirect vehicle loans. 
Before a state-chartered credit union applies to a regional director for 
a waiver under Sec. 701.21(h)(2), it must first notify its state 
supervisory authority. The regional director will not grant a waiver 
unless the appropriate state official concurs in the waiver. The 45-day 
period for the regional director to act on a waiver request, as 
described Sec. 701.21(h)(3), will not begin until the regional director 
has received the state official's concurrence and any other necessary 
information.

[60 FR 58504, Nov. 28, 1995, as amended at 63 FR 51802, Sept. 29, 1998; 
64 FR 28733, May 27, 1999; 71 FR 36667, June 28, 2006; 81 FR 13559, Mar. 
14, 2016]



Sec. 741.204  Maximum public unit and nonmember accounts, and low-
income designation.

    Any credit union that is insured, or that makes application for 
insurance, pursuant to title II of the Act must:
    (a) Adhere to the requirements of Sec. 701.32 of this chapter 
regarding public unit and nonmember accounts, provided it has the 
authority to accept such accounts. Requests by federally insured state-
chartered credit unions for an exemption from the limitation of 
Sec. 701.32 of this chapter will be made and reviewed on the same basis 
as that provided in Sec. 701.32 of this chapter for

[[Page 1066]]

federal credit unions, provided, however that NCUA will not grant an 
exemption without the concurrence of the appropriate state regulator.
    (b) Obtain a low-income designation in order to accept nonmember 
accounts, other than from public units or other credit unions, provided 
it has the authority to accept such accounts under state law. The state 
regulator shall make the low-income designation with the concurrence of 
NCUA. The designation will be made and reviewed by the state regulator 
on the same basis as that provided in Sec. 701.34(a) of this chapter for 
federal credit unions. Removal of the designation by the state regulator 
for such credit unions shall be with the concurrence of NCUA.
    (c) Receive secondary capital accounts only if the credit has a low-
income designation pursuant to paragraph (b) of this section, and then 
only in accordance with the terms and conditions authorized for Federal 
credit unions pursuant to Sec. 701.34(b)(1) of this chapter and to the 
extent not inconsistent with applicable state law and regulation. State 
chartered federally insured credit unions offering secondary capital 
accounts must submit the plan required by Sec. 701.34(b)(1) to both the 
state supervisory authority and the NCUA for approval. The state 
supervisory authority must approve or disapprove the plan with the 
concurrence of NCUA.
    (d) Redeem secondary capital accounts only in accordance with the 
terms and conditions authorized for federal credit unions pursuant to 
Sec. 701.34(d) of this chapter and to the extent not inconsistent with 
applicable state law and regulation. State chartered federally insured 
credit unions seeking to redeem secondary capital accounts must submit 
the request required by Sec. 701.34(d)(1) to both the state supervisory 
authority and the NCUA. The state supervisory authority must grant or 
deny the request with the concurrence of NCUA.

[60 FR 58504, Nov. 28, 1995, as amended at 61 FR 3792, Feb. 2, 1996; 71 
FR 4240, Jan. 26, 2006; 78 FR 4032, Jan. 18, 2013]



Sec. 741.205  Reporting requirements for credit unions that are newly
chartered or in troubled condition.

    Any federally insured credit union chartered for less than 2 years 
or any credit union defined to be in troubled condition as set forth in 
Sec. 701.14(b)(3) of this chapter must adhere to the requirements stated 
in Sec. 701.14(c) of this chapter concerning the prior notice and NCUA 
review. Federally insured state-chartered credit unions must submit 
required information to both the appropriate NCUA Regional Director and 
their state supervisor. NCUA will consult with the state supervisor 
before making its determination. NCUA will notify the state supervisor 
of its approval/disapproval no later than the time that it notifies the 
affected individual.

[60 FR 58504, Nov. 28, 1995, as amended at 78 FR 4029, Jan. 18, 2013]



Sec. 741.206  Corporate credit unions.

    Any corporate credit union insured pursuant to title II of the Act 
shall adhere to the requirements of part 704 of this chapter.



Sec. 741.207  Community development revolving loan program for credit
unions.

    Any credit union which is insured pursuant to title II of the Act 
and is a ``participating credit union,'' as defined in Sec. 705.2 of 
this chapter, shall adhere to the requirements stated in part 705 of 
this chapter.

[60 FR 58504, Nov. 28, 1995, as amended at 76 FR 67591, Nov. 2, 2011]



Sec. 741.208  Mergers of federally insured credit unions: voluntary 
termination or conversion of insured status.

    Any credit union which is insured pursuant to title II of the Act 
and which merges with another credit union or non-credit union 
institution, and any state-chartered credit union which voluntarily 
terminates its status as a federally-insured credit union, or converts 
from federal insurance to other insurance from a government or private 
source authorized to insure member accounts, shall adhere to the 
applicable requirements stated in section 206 of the Act and parts 708a 
and

[[Page 1067]]

708b of this chapter concerning mergers and voluntary termination or 
conversion of insured status.



Sec. 741.209  Management official interlocks.

    Any credit union which is insured pursuant to title II of the Act 
shall adhere to the requirements stated in part 711 of this chapter 
concerning management official interlocks, issued under the provisions 
of the Depository Institution Management Interlocks Act (12 U.S.C. 3201 
et seq.).



Sec. 741.210  Central liquidity facility.

    Any credit union which is insured pursuant to title II of the Act 
and is a member of the Central Liquidity Facility, shall adhere to the 
requirements stated in part 725 of this chapter.



Sec. 741.211  Advertising.

    Any credit union which is insured pursuant to title II of the Act 
shall adhere to the requirements prescribed by part 740 of this chapter.



Sec. 741.212  Share insurance.

    (a) Member share accounts received by any credit union which is 
insured pursuant to title II of the Act in its usual course of business, 
including regular shares, share certificates, and share draft accounts, 
are insured subject to the limitations and rules in subpart A of part 
745 of this chapter.
    (b) The payment of share insurance and the appeal process applicable 
to any credit union which is insured pursuant to title II of the Act are 
addressed in subpart B of part 745 of this chapter.



Sec. 741.213  Administrative actions, adjudicative hearings, rules of
practice and procedure.

    Any credit union which is insured pursuant to title II of the Act 
shall adhere to the applicable rules of practice and procedures for 
administrative actions and adjudicative hearings prescribed by part 747 
of this chapter. Subpart E of part 747 of this chapter applies only to 
federal credit unions.



Sec. 741.214  Report of crime or catastrophic act and Bank Secrecy
Act compliance.

    Any credit union which is insured pursuant to title II of the Act 
shall adhere to the requirements stated in part 748 of this chapter.



Sec. 741.215  Records preservation program.

    Any credit union which is insured pursuant to title II of the Act 
shall maintain a records preservation program as prescribed by part 749 
of this chapter.



Sec. 741.216  Flood insurance.

    Any credit union which is insured pursuant to title II of the Act 
shall adhere to the requirements stated in part 760 of this chapter.



Sec. 741.217  Truth in savings.

    Any credit union which is insured pursuant to title II of the Act 
shall adhere to the requirements stated in part 707 of this chapter.



Sec. 741.218  Involuntary liquidation and creditor claims.

    Any credit union which is insured pursuant to title II of the Act 
shall adhere to the applicable provisions in part 709 of this chapter. 
Section 709.3 of this chapter applies only to federal credit unions.



Sec. 741.219  Investment requirements.

    (a) Any credit union which is insured pursuant to title II of the 
Act must adhere to the requirements stated in part 703 of this chapter 
concerning transacting business with corporate credit unions.
    (b) Any credit union which is insured pursuant to title II of the 
Act must notify the applicable NCUA Regional Director or the Director of 
the Office of National Examinations and Supervision in writing at least 
30 days before it begins engaging in derivatives.

[79 FR 5247, Jan. 31, 2014]

[[Page 1068]]



Sec. 741.220  Privacy of consumer financial information.

    Any credit union which is insured pursuant to title II of the Act 
must adhere to the requirements stated in part 1016 of this title 
(Regulation P).

[65 FR 31750, May 18, 2000, as amended at 78 FR 32545, May 31, 2013]



Sec. 741.221  Suretyship and guaranty requirements.

    Any credit union, which is insured pursuant to title II of the Act, 
must adhere to the requirements in Sec. 701.20 of this chapter. State-
chartered, NCUSIF-insured credit unions may only enter into suretyship 
and guaranty agreements to the extent authorized under state law.

[69 FR 8548, Feb. 25, 2004]



Sec. 741.222  Credit union service organizations.

    (a) Any credit union that is insured pursuant to Title II of the Act 
must adhere to the requirements in Secs. 712.2(d)(2)(ii), 712.3(d), 
712.4 and 712.11(b) and (c) of this chapter concerning permissible 
investment limits for less than adequately capitalized credit unions, 
agreements between credit unions and their credit union service 
organizations (CUSOs), the requirement to maintain separate corporate 
identities, and investments and loans to CUSOs investing in other CUSOs. 
For purposes of this section, a CUSO is any entity in which a credit 
union has an ownership interest or to which a credit union has extended 
a loan, and that entity is engaged primarily in providing products or 
services to credit unions or credit union members, or, in the case of 
checking and currency services, including cashing checks and money 
orders for a fee, and selling negotiable checks, including travelers 
checks, money orders, and other similar money transfer instruments 
(including international and domestic electronic fund transfers and 
remittance transfers, as defined in section 919 of the Electronic Fund 
Transfer Act, 15 U.S.C. 1693o-1), to persons eligible for membership in 
any credit union having a loan, investment or contract with the entity. 
A CUSO also includes any entity in which a CUSO has an ownership 
interest of any amount, if that entity is engaged primarily in providing 
products or services to credit unions or credit union members.
    (b) This section shall have no preemptive effect with respect to the 
laws or rules of any state providing for access to CUSO books and 
records or CUSO examination by credit union regulatory authorities.

[78 FR 72550, Dec. 3, 2013]



Sec. 741.223  Registration of residential mortgage loan originators.

    Any credit union which is insured pursuant to title II of the Act 
must adhere to the requirements stated in part 1007 of this title 
(Regulation G).

[75 FR 44704, July 28, 2010, as amended at 78 FR 32545, May 31, 2013]



Sec. 741.224  Golden parachute and indemnification payments.

    Any credit union insured pursuant to title II of the Act must adhere 
to the requirements stated in part 750 of this chapter.

[76 FR 30517, May 26, 2011]



Sec. 741.225  Loan participations.

    Any credit union that is insured pursuant to Title II of the Act 
must adhere to the requirements stated in Sec. 701.22 of this chapter, 
except that federally insured, state-chartered credit unions are exempt 
from the requirement in Sec. 701.22(b)(4).

[78 FR 37958, June 25, 2013]



Sec. Appendix A to Part 741--Examples of Partial-Year NCUSIF Assessment 
             and Distribution Calculations Under Sec. 741.4

    The following examples illustrate the calculation of deposit and 
premium assessments under each circumstance addressed in paragraphs (i) 
and (j) of Sec. 741.4.
    A. Direct Conversion to NCUSIF Insurance
    1. Paragraph (i)(1)(i) provides that a credit union or other 
institution that converts to insurance coverage with the NCUSIF will 
immediately fund its one percent deposit based on the total of its 
insured shares as of the last day of the most recently ended reporting 
period prior to the date of conversion.
    i. The following hypothetical illustrates the application of this 
provision. Assume

[[Page 1069]]

Main Street Credit Union completes its conversion from nonfederal to 
federal insurance on May 15 of Year One. Assume further that Main Street 
credit union had 1,000 insured shares for the end of month in December 
of the previous year (Year zero), 1,100 insured shares for at the end of 
May, the month of conversion, and 1,200 insured shares at the end of 
June. This information is presented in this Table A:\1\
---------------------------------------------------------------------------

    \1\ Although Main Street Credit Union was not federally insured as 
of December 31 of Year Zero, proposed Sec. 741.4(b)(3) provides that 
``For a credit union or other entity that is not federally insured, 
`insured shares' means, for purposes of this section only, the amount of 
deposits or shares that would have been insured by the NCUSIF under part 
745 had the institution been federally insured on the date of 
measurement.''
---------------------------------------------------------------------------

      

      

                                                     Table A
----------------------------------------------------------------------------------------------------------------
                                                                                 End of month,
                                                                End of month,    May, year one
                                                                December, year       (month       End of month,
                                                                     zero          conversion     June, year one
                                                                                   completed)
----------------------------------------------------------------------------------------------------------------
Main Street Credit Union's Federally Insured Shares..........           1,000            1,100            1,200
----------------------------------------------------------------------------------------------------------------

    ii. Paragraph (i)(1)(i) requires that on the date of its conversion, 
Main Street fund its one percent deposit based on ``the total of its 
insured shares as of the last day of the most recently ended reporting 
period prior to the date of conversion.'' Since Main Street has less 
than $50,000,000 in assets, its reporting period is annual, and ends on 
December 31. 12 CFR 741.4(b)(6) (definition of ``reporting period''). 
Main Street had $1,000 in insured shares on that date, and one percent 
of that is $10, and so that is the amount Main Street must immediately 
remit to the NCUSIF to establish its one percent deposit.
    2. Paragraph (i)(1)(ii) provides that a credit union or other 
institution that converts to insurance coverage with the NCUSIF will, if 
the NCUSIF assesses a premium in the calendar year of conversion, pay a 
premium based on the institution's insured shares as of the last day of 
the most recently ended reporting period preceding the invoice date 
times the institution's premium/distribution ratio * * *.
    i. To illustrate the application of paragraph (i)(1)(ii), take the 
same facts in hypothetical A related to the conversion of Main Street 
from nonfederal to federal insurance. Now, further assume that on the 
previous March 15, NCUA had declared a premium assessment, and on 
September 15 following the conversion NCUA sent out the invoices for the 
March 15 assessment. Also assume that Main Street had grown to 1,300 
insured shares at the end of September, the month the invoices were sent 
to Main Street and other credit unions. This information is presented in 
this Table B:

                                                     Table B
----------------------------------------------------------------------------------------------------------------
                                                                End of month,
                                               End of month,    May, year one                     End of month,
                                               December, year       (month       End of month,   September, year
                                                    zero          conversion     June, year one     one (month
                                                                  completed)                      invoice sent)
----------------------------------------------------------------------------------------------------------------
Main Street Credit Union's Federally Insured           1,000            1,100            1,200            1,300
 Shares.....................................
----------------------------------------------------------------------------------------------------------------

    ii. Paragraph (i)(1)(ii) requires Main Street pay a premium based on 
the institution's ``insured shares as of the last day of the most 
recently ended reporting period preceding the invoice date times the 
institution's premium/distribution ratio.'' Again, because Main Street 
is under $50 million in assets, the most recently ended reporting period 
preceding the September 15 invoice date is all the way back to December 
of Year Zero, when Main Street had $1,000 in shares. Main Street's 
``premium/distribution ratio,'' as defined in Sec. 741.4(b)(5), is ``the 
number of full remaining months in the calendar year following the date 
of the institution's conversion or merger divided by 12.'' Since Main 
Street completed its conversion in May, there are seven full months 
remaining in the calendar year (June through December), and Main 
Street's premium/distribution ratio is seven divided by 12. Accordingly, 
Main Street's premium will be assessed on $1,000

[[Page 1070]]

times seven divided by 12, or about $583.\2\ Note that if Main Street's 
assets had exceeded $50 million as of June 30, it would have had 
semiannual reporting periods under Sec. 741.4(b)(6), and its ``insured 
shares as of the last day of the most recently ended reporting period 
preceding the invoice date'' would have been its insured shares as of 
June 30, Year One, and not as of December 31, Year Zero.
---------------------------------------------------------------------------

    \2\ Main Street's actual premium charge will be this $583 divided by 
the aggregate insured shares of all federally insured credit unions 
times the aggregate premium for all federally insured credit unions.
---------------------------------------------------------------------------

    3. Paragraphs (i)(1)(iii) and (iv) describe the responsibility of a 
credit union or other entity converting to federal insurance to 
replenish a depleted NCUSIF deposit, as follows: A credit union or other 
institution that converts to insurance coverage with the NCUSIF will, if 
the NCUSIF declares, in the calendar year of conversion but on or before 
the date of conversion, an assessment to replenish the one-percent 
deposit, pay nothing related to that assessment; if the NCUSIF declares, 
at any time after the date of conversion through the end of that 
calendar year, an assessment to replenish the one-percent deposit, pay a 
replenishment amount based on the institution's insured shares as of the 
last day of the most recently ended reporting period preceding the 
invoice date.
    i. Paragraph (i)(1)(iii) clarifies that a converting credit union 
has no responsibility to pay anything toward the replenishment of a 
depleted deposit that is declared on or before the date of conversion, 
even if NCUA sends out invoices related to the depletion after the date 
of conversion. Paragraph (i)(1)(iv) requires that a converting credit 
union replenish its deposit with regard to a depletion declared after 
the date of conversion through the end of the calendar year. Again, 
assume the same facts for Main Street as in Table B, but that the 
deposit depletion was announced in June, after Main Street converted, 
and that NCUA sent the invoices in September.

                                                     Table B
----------------------------------------------------------------------------------------------------------------
                                                                End of month,
                                               End of month,    May, year one                     End of month,
                                               December, year       (month       End of month,   September, year
                                                    zero          conversion     June, year one     one (month
                                                                  completed)                      invoice sent)
----------------------------------------------------------------------------------------------------------------
Main Street Credit Union's Federally Insured           1,000            1,100            1,200            1,300
 Shares.....................................
----------------------------------------------------------------------------------------------------------------

    ii. Main Street would receive an invoice amount ``based on the [Main 
Street's] insured shares as of the last day of the most recently ended 
reporting period preceding the invoice date.'' Since Main Street has 
less than $50 million in shares, the most recently ended reporting 
period preceding the September invoice date was December 31, Year Zero, 
and it would pay for the replenishment based on $1,000 in insured 
shares. If Main Street, however, had had $50 million or more in assets 
on June 30, its most recently ended reporting period preceding the 
invoice date would have been the semiannual period ending on June 30, 
and Main Street would have used its insured shares as of June 30 to 
calculate the replenishment amount due to the NCUSIF.
    4. Under the Federal Credit Union Act, distributions, if any, are 
declared once a year, early in the year, based on excess funds in the 
NCUSIF as of the prior December 31. Paragraph (i)(1)(v) describes the 
right of a credit union or other entity converting to federal insurance 
to receive a distribution from the NCUSIF, specifically: A credit union 
or other institution that converts to insurance coverage with the NCUSIF 
will, if the NCUSIF declares a distribution in the year following 
conversion based the NCUSIF's equity at the end of the year of 
conversion, receive a distribution based on the institution's insured 
shares as of the end of the year of conversion times the institution's 
premium/distribution ratio. With regard to distributions declared in the 
calendar year of conversion but based on the NCUSIF's equity at the end 
of the preceding year, the converting institution will receive no 
distribution.
    i. To illustrate how paragraph (i)(1)(v) works, assume that Main 
Street Credit Union converts to federal insurance in May of Year One, 
and that the NCUA declares a distribution in January of Year Two based 
on the NCUSIF equity as of December 31 of Year One. Then Main Street 
will be entitled to a pro rata portion of the distribution, calculated 
on its insured shares as of December 31 of Year One times its premium/
distribution ratio. Since it converted in May of Year One, and there 
were seven full months remaining in Year One at on the date of 
conversion, Main Street's premium/distribution ratio under 
Sec. 741.4(b)(6) equals seven divided by 12.

[[Page 1071]]

    ii. On the other hand, if the NCUA declared a distribution a year 
earlier, that is, in January of Year One based on the NCUSIF's equity 
ratio as of December 31 in Year Zero, then under paragraph (i)(1)(v) 
Main Street would receive no part of this distribution. Main Street is 
not entitled to any part of this distribution because Main Street, which 
completed its conversion in Year One, did not contribute in any way to 
the excess funds in the NCUSIF as of the end of Year Zero.
    B. Conversion to NCUSIF Coverage Through Merger with a Federally 
Insured Credit Union.
    Paragraph (i)(2) addresses the NCUSIF premiums, deposit 
replenishments, and distribution calculations when a nonfederally 
insured credit union or entity converts to NCUSIF coverage by merging 
with a federally insured credit union.
    1. Paragraph (i)(2)(i) provides that a federally-insured credit 
union that merges with a nonfederally-insured credit union or other non-
federally insured institution (the ``merging institution''), where the 
federally-insured credit union is the continuing institution, will 
immediately on the date of merger increase the amount of its NCUSIF 
deposit by an amount equal to one percent of the merging institution's 
insured shares as of the last day of the merging institution's most 
recently ended reporting period preceding the date of merger.
    i. To illustrate this provision, and the other provisions of 
paragraph (i)(2) related to mergers of nonfederally insured entities 
into federally-insured credit unions, consider the following 
hypothetical. Nonfederally-insured Credit Union A merges into federally-
insured Credit Union B on August 15 of Year One. The relevant insured 
shares of Credit Union A and Credit Union B at various dates before and 
after the merger are reflected in Table D:

                                                     Table D
----------------------------------------------------------------------------------------------------------------
                                                                                   End of month    End of Month
                                                   End of month                    August, year     September,
                                                  December, year   End of month     one (month       year one
                                                       zero       June, year one      merger      (month invoice
                                                                                    completed)         sent)
----------------------------------------------------------------------------------------------------------------
Credit Union A Insured shares...................           1,000           1,100             N/A             N/A
Credit Union B Insured shares...................           9,000           9,900          12,900          14,000
----------------------------------------------------------------------------------------------------------------

    ii. Paragraph (i)(2)(i) requires that Credit Union B, the continuing 
credit union, immediately increase the amount of its deposit with the 
NCUSIF in an amount ``equal to one percent of the merging institution's 
insured shares as of the last day of the merging institution's most 
recently ended reporting period preceding the date of merger.'' Since 
Credit Union A, the merging institution, has less than $50 million in 
assets, its reporting period is the calendar year, and its most recently 
ended reporting period preceding the August merger date is December 31 
in Year Zero. Credit Union A had $1,000 in insured shares on that date. 
Accordingly, Credit Union B, the continuing credit union, must 
immediately increase the amount of its deposit with the NCUSIF by one 
percent of $1,000, or $10. Note that if Credit Union A had been a larger 
credit union, with $50 million or more in assets on June 30 in Year One, 
then Credit Union B would have used Credit Union A's insured shares as 
of June 30 in this calculation.
    2. Paragraph (i)(2)(ii), relating to NCUSIF premium assessments, 
provides that the continuing institution will, with regard to any NCUSIF 
premiums assessed in the calendar year of merger, pay a two-part 
premium, with one part calculated on the merging institution's insured 
shares as described in subparagraph (1)(ii) above, and the other part 
calculated on the continuing institution's insured shares as of the last 
day of its most recently ended reporting period preceding the date of 
merger.
    i. Paragraph (i)(2)(ii) provides for a two-part calculation, with 
the first part relating to the merging credit union and the second part 
relating to the continuing credit union. Assuming the facts as in Table 
D, and assuming the premium is assessed sometime in Year One, calculate 
the insured shares of Credit Union A, the merging credit union, as in 
the example for paragraph (i)(1)(ii). Once again, because Credit Union A 
is under $50 million in assets, the most recently ended reporting period 
preceding the invoice date is December of Year Zero, when Credit Union A 
had $1,000 in shares. The merger was completed in August, leaving four 
full months in the calendar year, so the premium/distribution ratio is 
four divided by 12. Accordingly, this part of the premium will be 
assessed on $1,000 times four divided by 12, or about $333. Then 
calculate the insured shares of Credit Union B, the continuing credit 
union, ``as of the last day of its most recently ended reporting period 
preceding the merger date.'' Since Credit Union B is also under $50 
million in assets, ``the last day of the most recently ended reporting 
period'' is also December 31 of Year Zero. Credit Union B's insured 
shares on that date were $9,000, and so the combined insured shares for 
purposes of the premium assessment is $9,333. Note that

[[Page 1072]]

if Credit Union B had $50 million or more in assets on June 30 of Year 
One, then Credit Union B's ``most recently ended reporting period 
preceding the merger date'' would have been June 30 of Year One, and not 
December 31 of Year Zero. The Board is aware that the NCUA might declare 
a NCUSIF premium, invoice it, and receive the premiums in Year One from 
the continuing institution before the continuing institution consummates 
its merger. In that case, the Board would invoice the continuing credit 
union again after the merger, but only for the difference between the 
amount previously invoiced and the amount calculated under paragraph 
(i)(2)(ii).
    3. Paragraph (i)(2)(iii) prescribes the procedures for calculating 
the NCUSIF distribution when a nonfederally insured credit union or 
entity merges into a federally insured credit union. Paragraph 
(i)(2)(iii) provides that the federally insured credit union will, if 
the NCUSIF declares a distribution in the year following the merger 
based on the NCUSIF's equity at the end of the year of merger, receive a 
distribution based on the continuing institution's insured shares as of 
the end of the year of merger. With regard to distributions declared in 
the calendar year of merger but based on the NCUSIF's equity from the 
end of the preceding year, the institution will receive a distribution 
based on its insured shares as of the end of the preceding year.
    i. This formula recognizes that the merging institution did not 
contribute to the NCUSIF equity as of the end of the year preceding the 
merger and so no distribution is allotted against the merging 
institution's shares. As for distributions based on the NCUSIF equity at 
the end of the year of merger, this formula does not include any pro 
rata reduction for the merging institution's contribution. The Board 
determined that a pro rata reduction was unnecessary, given the 
generally small relative size of merging institutions to continuing 
institutions, and the fact that the Federal Credit Union Act does not 
require any sort of pro rata reduction or other pro rata calculation 
with regard to distributions.
    C. Conversion from, or termination of, Federal share insurance.
    Paragraph (j)(1) addresses direct insurance conversions and 
conversions by merger. Paragraph (j)(2) addresses liquidations and 
insurance termination.
    1. Paragraph (j)(1)(i) provides that a federally insured credit 
union whose insurance coverage with the NCUSIF terminates, including 
through a conversion to, or merger into, a nonfederally insured credit 
union or a noncredit union entity, will receive the full amount of its 
NCUSIF deposit paid, less any amounts applied to cover NCUSIF losses 
that exceed NCUSIF retained earnings, immediately after the final date 
on which any shares of the credit union are NCUSIF-insured.
    i. To illustrate the application of this paragraph (j)(1)(i), 
consider the following hypothetical. Assume Anytown Credit Union, a 
credit union with $30 million in assets, converts from federal to 
nonfederal insurance on November 15. Also assume Anytown Credit Union 
had $20 million in insured shares as of the previous December 31, the 
end of its most recent reporting period. 12 CFR 741.4(b)(5), (c). The 
NCUSIF would return one-percent of $20 million, or $200,000 to Anytown 
Credit Union immediately following the effective date of its conversion. 
Note that, if Anytown Credit Union had reported $50 million or more in 
assets on June 30, then June 30 would have been the end of its most 
recent reporting period. Now further assume that, on July 15 of that 
same year, the NCUSIF had announced an expense that reduced the equity 
ratio from 1.3 to .75, which would have included a write-off (depletion) 
of 25%, or 25 basis points, of the one-percent deposit. The amount of 
the deposit returned to Anytown would be reduced by 25%, from $200,000 
to $150,000. If the NCUSIF had announced expenses reducing the equity 
ratio to .75 after the November 15 conversion date, this announcement 
would have no effect on Anytown and it would still receive the full 
$200,000 from the NCUSIF.
    2. Paragraph (j)(1)(ii) provides that a federally insured credit 
union whose insurance coverage with the NCUSIF terminates, including 
through a conversion to, or merger into, a nonfederally insured credit 
union or a noncredit union entity, will, if the NCUSIF declares a 
distribution at the end of the calendar year of conversion, receive a 
distribution based on the institution's insured shares as of the last 
day of the most recently ended reporting period preceding the date of 
conversion times the institution's modified premium/distribution ratio.
    i. To illustrate the application of this paragraph (j)(1)(ii), again 
assume Anytown Credit Union converts to nonfederal insurance on November 
15, and in January of the following year, the NCUSIF declares a 
distribution based on the NCUSIF's equity ratio as of December 31. 
Anytown would receive a pro rata distribution calculated as its $20 
million in insured shares multiplied by the modified premium/
distribution ratio. Anytown's modified premium/distribution ratio, from 
the definition in Sec. 741.4(b)(5), is one minus Anytown's premium/
distribution ratio, which is one minus the ratio of the full number of 
months remaining in the year divided by twelve, which is one minus (one 
divided by twelve), which is eleven divided by twelve. So Anytown would 
receive a pro rata distribution based on $20 million of insured

[[Page 1073]]

shares times eleven-twelfths, or based on about $18.33 million in 
shares.\3\
---------------------------------------------------------------------------

    \3\ Anytown's actual distribution would be $18.33 million times the 
aggregate amount of the distribution divided by the aggregate amount of 
all insured shares at all federally insured credit unions.
---------------------------------------------------------------------------

    3. Paragraph (j)(1)(iii) provides that a federally insured credit 
union whose insurance coverage with the NCUSIF terminates, including 
through a conversion to, or merger into, a nonfederally insured credit 
union or a noncredit union entity, will, if the NCUSIF assesses a 
premium in the calendar year of conversion or merger on or before the 
day in which the conversion or merger is completed, pay a premium based 
on the institution's insured shares as of the last day of the most 
recently ended reporting period preceding the conversion or merger date 
times the institution's modified premium/distribution ratio. If the 
institution has previously paid a premium based on this same assessment 
that exceeds this amount, the institution will receive a refund of the 
difference following completion of the conversion or merger.
    i. To illustrate these premium provisions, again assume Anytown 
Credit Union is a credit union with $30 million in assets that converts 
from federal to nonfederal insurance on November 15 of Year One, and 
that Anytown Credit Union had $20 million in insured shares as of the 
previous December 31 (of Year Zero), the end of its most recent 
reporting period. Further assume that NCUA declares a premium on 
February 12 of Year One and invoices the premium on November 15. Since 
the premium was declared ``on or before the day in which [Anytown's] 
conversion [was] completed,'' Sec. 741.4(j)(1)(iii) applies. Anytown 
would then pay a premium based on $20 million (its ``insured shares as 
of the last day of the most recently ended reporting period preceding 
the conversion or merger date'') times eleven-twelfths (its ``modified 
premium/distribution ratio''), or based on about $18.33 million. Note 
that NCUA might have already have invoiced Anytown for the premium 
sometime between February 12 and Anytown's merger on November 15. If so, 
Anytown will likely receive a refund of some of this earlier premium, as 
provided in the last sentence of Sec. 741.1(j)(1)(iii), since it may 
have overpaid the earlier premium.

[74 FR 63281, Dec. 3, 2009]



 Sec. Appendix B to Part 741--Guidance for an Interest Rate Risk Policy 
                        and an Effective Program

                            Table of Contents

I. Introduction
    A. Complexity
    B. IRR Exposure
II. IRR Policy
III. IRR Oversight and Management
    A. Board of Directors Oversight
    B. Management Responsibilities
IV. IRR Measurement and Monitoring
    A. Risk Measurement Systems
    B. Risk Measurement Methods
    C. Components of IRR Measurement Methods
V. Internal Controls
VI. Decision-Making Informed by IRR Measurement Systems
VII. Guidelines for Adequacy of IRR Policy and Effectiveness of Program
VIII. Additional Guidance for Large Credit Unions With Complex or High 
          Risk Balance Sheets
IX. Definitions

                             I. Introduction

    This appendix provides guidance to FICUs in developing an interest 
rate risk (IRR) policy and program that addresses aspects of asset 
liability management in a single framework. An effective IRR management 
program identifies, measures, monitors, and controls IRR and is central 
to safe and sound credit union operations. Given the differences among 
credit unions, each credit union should use the guidance in this 
appendix to formulate a policy that embodies its own practices, metrics 
and benchmarks appropriate to its operations.
    These practices should be established in light of the nature of the 
credit union's operations and business, as well as its complexity, risk 
exposure, and size. As these elements increase, NCUA believes the IRR 
practices should be implemented with increasing degrees of rigor and 
diligence to maintain safe and sound operations in the area of IRR 
management. In particular, rigor and diligence are required to manage 
complexity and risk exposure. Complexity relates to the intricacy of 
financial instrument structure, and to the composition of assets and 
liabilities on the balance sheet. In the case of financial instruments, 
the structure can have numerous characteristics that act simultaneously 
to affect the behavior of the instrument. In the case of the balance 
sheet, which contains multiple instruments, assets and liabilities can 
act in ways that are compounding or can be offsetting because their 
impact on the IRR level may act in the same or opposite directions. High 
degrees of risk exposure require a credit union to be diligently aware 
of the potential earnings and net worth exposures under various interest 
rate and business environments because the margin for error is low.

[[Page 1074]]

                              A. Complexity

    In influencing the behavior of instruments and balance sheet 
composition, complexity is a function of the predictability of the cash 
flows. As cash flows become less predictable, the uncertainty of both 
instrument and balance sheet behavior increases. For example, a 
residential mortgage is subject to prepayments that will change at the 
option of the borrower. Mortgage borrowers may pay off their mortgage 
loans due to geographical relocation, or may increase the amount of 
their monthly payment above the minimum contractual schedule due to 
other changes in the borrower's circumstances. This cash flow 
unpredictability is also found in investments, such as collateralized 
mortgage obligations, because these contain mortgage loans. 
Additionally, cash flow unpredictability affects liabilities. For 
example, nonmaturity share balances vary at the discretion of the 
depositor making deposits and withdrawals, and this may be influenced by 
a credit union's pricing of its share accounts.

                             B. IRR Exposure

    Exposure to IRR is the vulnerability of a credit union's financial 
condition to adverse movements in market interest rates. Although some 
IRR exposure is a normal part of financial intermediation, a high degree 
of this exposure may negatively affect a credit union's earnings and net 
economic value. Changes in interest rates influence a credit union's 
earnings by altering interest-sensitive income and expenses (e.g. loan 
income and share dividends). Changes in interest rates also affect the 
economic value of a credit union's assets and liabilities, because the 
present value of future cash flows and, in some cases, the cash flows 
themselves may change when interest rates change. Consequently, the 
management of a credit union's pricing strategy is critical to the 
control of IRR exposure.
    All FICUs required to have an IRR policy and program should 
incorporate the following five elements into their IRR program:
    1. Board-approved IRR policy.
    2. Oversight by the board of directors and implementation by 
management.
    3. Risk measurement systems assessing the IRR sensitivity of 
earnings and/or asset and liability values.
    4. Internal controls to monitor adherence to IRR limits.
    5. Decision making that is informed and guided by IRR measures.

                             II. IRR Policy

    The board of directors is responsible for ensuring the adequacy of 
an IRR policy and its limits. The policy should be consistent with the 
credit union's business strategies and should reflect the board's risk 
tolerance, taking into account the credit union's financial condition 
and risk measurement systems and methods commensurate with the balance 
sheet structure. The policy should state actions and authorities 
required for exceptions to policy, limits, and authorizations.
    Credit unions have the option of either creating a separate IRR 
policy or incorporating it into investment, ALM, funds management, 
liquidity or other policies. Regardless of form, credit unions must 
clearly document their IRR policy in writing.
    The scope of the policy will vary depending on the complexity of the 
credit union's balance sheet. For example, a credit union that offers 
short-term loans, invests in non-complex or short-term bullet 
investments (i.e. a debt security that returns 100 percent of principal 
on the maturity date), and offers basic share products may not need to 
create an elaborate policy. The policy for these credit unions may limit 
the loan portfolio maturity, require a minimum amount of short-term 
funds, and restrict the types of permissible investments (e.g. 
Treasuries, bullet investments). More complex balance sheets, especially 
those containing mortgage loans and complex investments, may warrant a 
comprehensive IRR policy due to the uncertainty of cash flows.
    The policy should establish responsibilities and procedures for 
identifying, measuring, monitoring, controlling, and reporting IRR, and 
establish risk limits. A written policy should:
      Identify committees, persons or other parties responsible 
for review of the credit union's IRR exposure;
      Direct appropriate actions to ensure management takes 
steps to manage IRR so that IRR exposures are identified, measured, 
monitored, and controlled;
      State the frequency with which management will report on 
measurement results to the board to ensure routine review of information 
that is timely (e.g. current and at least quarterly) and in sufficient 
detail to assess the credit union's IRR profile;
      Set risk limits for IRR exposures based on selected 
measures (e.g. limits for changes in repricing or duration gaps, income 
simulation, asset valuation, or net economic value);
      Choose tests, such as interest rate shocks, that the 
credit union will perform using the selected measures;
      Provide for periodic review of material changes in IRR 
exposures and compliance with board approved policy and risk limits;
      Provide for assessment of the IRR impact of any new 
business activities prior to implementation (e.g. evaluate the IRR 
profile of introducing a new product or service); and
      Provide for at least an annual evaluation of policy to 
determine whether it is still commensurate with the size, complexity, 
and risk profile of the credit union.

[[Page 1075]]

    IRR policy limits should maintain risk exposures within prudent 
levels. Examples of limits are as follows:
    GAP: less than [I 10 percent change in any given period, or 
cumulatively over 12 months.
    Income Simulation: net interest income after shock change less than 
20 percent over any 12-month period.
    Asset Valuation: after shock change in book value of net worth less 
than 50 percent, or after shock net worth of 4 percent or greater.
    Net Economic Value: after shock change in net economic value less 
than 25 percent, or after shock net economic value of 6 percent or 
greater.
    NCUA emphasizes these are only for illustrative purposes, and 
management should establish its own limits that are reasonably 
supported. Where appropriate, management may also set IRR limits for 
individual portfolios, activities, and lines of business.

                    III. IRR Oversight and Management

                     A. Board of Directors Oversight

    The board of directors is responsible for oversight of their credit 
union and for approving policy, major strategies, and prudent limits 
regarding IRR. To meet this responsibility, understanding the level and 
nature of IRR taken by the credit union is essential. Accordingly, the 
board should ensure management executes an effective IRR program.
    Additionally, the board should annually assess if the IRR program 
sufficiently identifies, measures, monitors, and controls the IRR 
exposure of the credit union. Where necessary, the board may consider 
obtaining professional advice and training to enhance its understanding 
of IRR oversight.

                     B. Management Responsibilities

    Management is responsible for the daily management of activities and 
operations. In order to implement the board's IRR policy, management 
should:
      Develop and maintain adequate IRR measurement systems;
      Evaluate and understand IRR risk exposures;
      Establish an appropriate system of internal controls (e.g. 
separation between the risk taker and IRR measurement staff);
      Allocate sufficient resources for an effective IRR 
program. For example, a complex credit union with an elevated IRR risk 
profile will likely necessitate a greater allocation of resources to 
identify and focus on IRR exposures;
      Develop and support competent staff with technical 
expertise commensurate with the IRR program;
      Identify the procedures and assumptions involved in 
implementing the IRR measurement systems; and
      Establish clear lines of authority and responsibility for 
managing IRR; and
      Provide a sufficient set of reports to ensure compliance 
with board approved policies.
    Where delegation of management authority by the board occurs, this 
may be to designated committees such as an asset liability committee or 
other equivalent. In credit unions with limited staff, these 
responsibilities may reside with the board or management. Significant 
changes in assumptions, measurement methods, tests performed, or other 
aspects involved in the IRR process should be documented and brought to 
the attention of those responsible.

                   IV. IRR Measurement and Monitoring

                       A. Risk Measurement Systems

    Generally, credit unions should have IRR measurement systems that 
capture and measure all material and identified sources of IRR. An IRR 
measurement system quantifies the risk contained in the credit union's 
balance sheet and integrates the important sources of IRR faced by a 
credit union in order to facilitate management of its risk exposures. 
The selection and assessment of appropriate IRR measurement systems is 
the responsibility of credit union boards and management.
    Management should:
      Rely on assumptions that are reasonable and supportable;
      Document any changes to assumptions based on observed 
information;
      Monitor positions with uncertain maturities, rates and 
cash flows, such as nonmaturity shares, fixed rate mortgages where 
prepayments may vary, adjustable rate mortgages, and instruments with 
embedded options, such as calls; and
      Require any interest rate risk calculation techniques, 
measures and tests to be sufficiently rigorous to capture risk.

                       B. Risk Measurement Methods

    The following discussion is intended only as a general guide and 
should not be used by credit unions as an endorsement of a particular 
method. An IRR measurement system may rely on a variety of different 
methods. Common examples of methods available to credit unions are GAP 
analysis, income simulation, asset valuation, and net economic value. 
Any measurement method(s) used by a credit union to analyze IRR exposure 
should correspond with the complexity of the credit union's balance 
sheet so as to identify any material sources of IRR.

                              GAP Analysis

    GAP analysis is a simple IRR measurement method that reports the 
mismatch between rate sensitive assets and rate sensitive

[[Page 1076]]

liabilities over a given time period. GAP can only suffice for simple 
balance sheets that primarily consist of short-term bullet type 
investments and non mortgage-related assets. GAP analysis can be static, 
behavioral, or based on duration.

                            Income Simulation

    Income simulation is an IRR measurement method used to estimate 
earnings exposure to changes in interest rates. An income simulation 
analysis projects interest cash flows of all assets, liabilities, and 
off-balance sheet instruments in a credit union's portfolio to estimate 
future net interest income over a chosen timeframe. Generally, income 
simulations focus on short-term time horizons (e.g. one to three years). 
Forecasting income is assumption sensitive and more uncertain the longer 
the forecast period. Simulations typically include evaluations under a 
base-case scenario, and instantaneous parallel rate shocks, and may 
include alternate interest-rate scenarios. The alternate rate scenarios 
may involve ramped changes in rates, twisting of the yield curve, and/or 
stressed rate environments devised by the user or provided by the 
vendor.

                       NCUA Asset Valuation Tables

    For credit unions lacking advanced IRR methods that seek simple 
valuation measures, the NCUA Asset Valuation Tables are available and 
prepared quarterly by the NCUA. These are available on the NCUA Web site 
through www.ncua.gov.
    These measures provide an indication of a credit union's potential 
interest rate risk, based on the risk associated with the asset 
categories of greatest concern--(e.g., mortgage loans and investment 
securities).
    The tables provide a simple measure of the potential devaluation of 
a credit union's mortgage loans and investment securities that occur 
during [300 basis point parallel rate shocks, and report the resulting 
impact on net worth.

                        Net Economic Value (NEV)

    NEV measures the effect of interest rates on the market value of net 
worth by calculating the present value of assets minus the present value 
of liabilities. This calculation measures the long-term IRR in a credit 
union's balance sheet at a fixed point in time. By capturing the impact 
of interest rate changes on the value of all future cash flows, NEV 
provides a comprehensive measurement of IRR. Generally, NEV computations 
demonstrate the economic value of net worth under current interest rates 
and shocked interest rate scenarios.
    One NEV method is to discount cash flows by a single interest rate 
path. Credit unions with a significant exposure to assets or liabilities 
with embedded options should consider alternative measurement methods 
such as discounting along a yield curve (e.g. the U.S. Treasury curve, 
LIBOR curve) or using multiple interest rate paths. Credit unions should 
apply and document appropriate methods, based on available data (e.g. 
utilizing observed market values), when valuing individual or groups of 
assets and liabilities.

                C. Components of IRR Measurement Methods

    In the initial setup of IRR measurement, critical decisions are made 
regarding numerous variables in the method. These variables include but 
are not limited to the following.

                            Chart of Accounts

    Credit unions using an IRR measurement method should define a 
sufficient number of accounts to capture key IRR characteristics 
inherent within their product lines. For example, credit unions with 
significant holdings of adjustable-rate mortgages should differentiate 
balances by periodic and lifetime caps and floors, the reset frequency, 
and the rate index used for rate resets. Similarly, credit unions with 
significant holdings of fixed-rate mortgages should differentiate at 
least by original term, e.g., 30 or 15-year, and coupon level to reflect 
differences in prepayment behaviors.

                        Aggregation of Data Input

    As the credit union's complexity, risk exposure, and size increases, 
the degree of detail should be based on data that is increasingly 
disaggregated. Because imprecision in the measurement process can 
materially misstate risk levels, management should evaluate the 
potential loss of precision from any aggregation and simplification used 
in its measurement of IRR.

                           Account Attributes

    Account attributes define a product, including: Principal type, rate 
type, rate index, repricing interval, new volume maturity distribution, 
accounting accrual basis, prepayment driver, and discount rate.

                               Assumptions

    IRR measurement methods rely on assumptions made by management in 
order to identify IRR. The simplest example is of future interest rate 
scenarios. The management of IRR will require other assumptions such as: 
Projected balance sheet volumes; prepayment rates for loans and 
investment securities; repricing sensitivity, and decay rates of 
nonmaturity shares. Examples of these assumptions follow.

    Example 1. Credit unions should consider evaluating the balance 
sheet under flat (i.e. static) and/or planned growth scenarios to 
capture IRR exposures. Under a flat scenario, runoff amounts are 
reinvested in their

[[Page 1077]]

respective asset or liability account. Conducting planned growth 
scenarios allows management to assess the IRR impact of the projected 
change in volume and/or composition of the balance sheet.
    Example 2. Loans and mortgage related securities contain prepayment 
options that enable the borrower to prepay the obligation prior to 
maturity. This prepayment option makes it difficult to project the value 
and earnings stream from these assets because the future outstanding 
principal balance at any given time is unknown. A number of factors 
affect prepayments, including the refinancing incentive, seasonality 
(the particular time of year), seasoning (the age of the loan), member 
mobility, curtailments (additional principal payments), and burnout 
(borrowers who don't respond to changes in the level of rates, and pay 
as scheduled). Prepayment speeds may be estimated or derived from 
numerous national or vendor data sources.
    Example 3. In the process of IRR measurement, the credit union must 
estimate how each account will reprice in response to market rate 
fluctuations. For example, when rates rise 300 basis points, the credit 
union may raise its asset or liability rates in a like amount or not, 
and may choose to lag the timing of its pricing change.
    Example 4. Nonmaturity shares include those accounts with no defined 
maturity such as share drafts, regular shares, and money market 
accounts. Measuring the IRR associated with these accounts is difficult 
because the risk measurement calculations require the user to define the 
principal cash flows and maturity. Credit unions may assume that there 
is no value when measuring the associated IRR and carry these values at 
book value or par. Many credit unions adopt this approach because it 
keeps the measurement method simple.

    Alternatively, a credit union may attribute value to these shares 
(i.e. premium) on the basis that these shares tend to be lower cost 
funds that are core balances by virtue of being relatively insensitive 
to interest rates. This method generally results in nonmaturity shares 
priced/valued in a way that will produce an increased net economic 
value. Therefore, the underlying assumptions of the shares require 
scrutiny.
    Credit unions that forecast share behavior and incorporate those 
assumptions into their risk identification and measurement process 
should perform sensitivity analysis.

                          V. Internal Controls

    Internal controls are an essential part of a safe and sound IRR 
program. If possible, separation of those responsible for the risk 
taking and risk measuring functions should occur at the credit union.
    Staff responsible for maintaining controls should periodically 
assess the overall IRR program as well as compliance with policy. 
Internal audit staff would normally assume this role; however, if there 
is no internal auditor, management, or a supervisory committee that is 
independent of the IRR process, may perform this role. Where 
appropriate, management may also supplement the internal audit with 
outside expertise to assess the IRR program. This review should include 
policy compliance, timeliness, and accuracy of reports given to 
management and the board.
    Audit findings should be reported to the board or supervisory 
committee with recommended corrective actions and timeframes. The 
individuals responsible for maintaining internal controls should 
periodically examine adherence to the policy related to the IRR program.

         VI. Decision-Making Informed by IRR Measurement Systems

    Management should utilize the results of the credit union's IRR 
measurement systems in making operational decisions such as changing 
balance sheet structure, funding, pricing strategies, and business 
planning. This is particularly the case when measures show a high level 
of IRR or when measurement results approach board-approved limits.
    NCUA recognizes each credit union has its own individual risk 
profile and tolerance levels. However, when measures of fair value 
indicate net worth is low, declining, or even negative, or income 
simulations indicate reduced earnings, management should be prepared to 
identify steps, if necessary, to bring risk within acceptable levels. In 
any case, management should understand and use their IRR measurement 
results, whether generated internally or externally, in the normal 
course of business. Management should also use the results proactively 
as a tool to adjust asset liability management for changes in interest 
rate environments.

 VII. Guidelines for Adequacy of IRR Policy and Effectiveness of Program

    The following guidelines will assist credit unions in determining 
the adequacy of their IRR policy and the effectiveness of their program 
to manage IRR.

[[Page 1078]]

[GRAPHIC] [TIFF OMITTED] TR02FE12.012


[[Page 1079]]


[GRAPHIC] [TIFF OMITTED] TR02FE12.013

    NCUA acknowledges both the range of IRR exposures at credit unions, 
and the diverse means that they may use to accomplish an effective 
program to manage this risk. NCUA therefore does not stipulate specific 
quantitative standards or limits for the management of IRR applicable to 
all credit unions, and does not rely solely on the results of 
quantitative approaches to evaluate the effectiveness of IRR programs. 
Assumptions, measures and methods used by a credit union in light of its 
size, complexity and risk exposure determine the specific appropriate 
standard. However, NCUA strongly affirms the need for adequate practices 
for a program to effectively manage IRR. For example, policy limits on 
IRR exposure are not adequate if they allow a credit union to operate 
with an exposure that is unsafe or unsound, which means that the credit 
union may suffer material losses under plausible adverse circumstances 
as a result of this exposure. Credit unions that do not have a written 
IRR policy or that do not have an effective IRR program are out of 
compliance with Sec. 741.3 of NCUA's regulations.

 VIII. Additional Guidance for Large Credit Unions With Complex or High 
                           Risk Balance Sheets

    FICUs with assets of $500 million or greater must obtain an annual 
audit of their financial statements performed in accordance with 
generally accepted accounting standards. 12 CFR 715.5, 715.6, 741.202. 
For purposes of data collection, NCUA also uses $500 million and above 
as its largest credit union

[[Page 1080]]

asset range. In order to gather information and to monitor IRR exposure 
at larger credit unions as it relates to the share insurance fund, NCUA 
will use this as the criterion for definition of large credit unions for 
purposes of this section of the guidance. Given the increased exposure 
to the share insurance fund, NCUA encourages the responsible officials 
at large credit unions that are complex or high risk to fully understand 
all aspects of interest rate risk, including but not limited to the 
credit union's IRR assessment and potential directional changes in IRR 
exposures. For example, the credit union should consider the following:
      A policy which provides for the use of outside parties to 
validate the tests and limits commensurate with the risk exposure and 
complexity of the credit union;
      IRR measurement systems that report compliance with policy 
limits as shown both by risks to earnings and net economic value of 
equity under a variety of defined and reasonable interest rate 
scenarios;
      The effect of changes in assumptions on IRR exposure 
results (e.g. the impact of slower or faster prepayments on earnings and 
economic value); and,
      Enhanced levels of separation between risk taking and risk 
assessment (e.g. assignment of resources to separate the investments 
function from IRR measurement, and IRR monitoring and oversight).

                             IX. Definitions

    Basis risk: The risk to earnings and/or value due to a financial 
institution's holdings of multiple instruments, based on different 
indices that are imperfectly correlated.
    Interest rate risk: The risk that changes in market rates will 
adversely affect a credit union's net economic value and/or earnings. 
Interest rate risk generally arises from a mismatch between the timing 
of cash flows from fixed rate instruments, and interest rate resets of 
variable rate instruments, on either side of the balance sheet. Thus, as 
interest rates change, earnings or net economic value may decline.
    Option risk: The risk to earnings and/or value due to the effect on 
financial instruments of options associated with these instruments. 
Options are embedded when they are contractual within, or directly 
associated with, the instrument. An example of a contractual embedded 
option is a call option on an agency bond. An example of a behavioral 
embedded option is the right of a residential mortgage holder to vary 
prepayments on the mortgage through time, either by making additional 
premium payments, or by paying off the mortgage prior to maturity.
    Repricing risk: The repricing of assets or liabilities following 
market changes can occur in different amounts and/or at different times. 
This risk can cause returns to vary.
    Spread risk: The risk to earnings and/or value resulting from 
variations through time of the spread between assets or liabilities to 
an underlying index such as the Treasury curve.
    Yield curve risk: The risk to earnings and/or value due to changes 
in the level or slope of underlying yield curves. Financial instruments 
can be sensitive to different points on the curve. This can cause 
returns to vary as yield curves change.

[77 FR 5162, Feb. 2, 2012, as amended at 77 FR 57990, Sept. 19, 2012]



Sec. Appendix C to Part 741--Interpretive Ruling and Policy Statement on 
 Loan Workouts, Nonaccrual Policy, and Regulatory Reporting of Troubled 
                         Debt Restructured Loans

    This Interpretive Ruling and Policy Statement (IRPS) establishes 
requirements for the management of loan workout \1\ arrangements, loan 
nonaccrual, and regulatory reporting of troubled debt restructured loans 
(herein after referred to as TDR or TDRs).
---------------------------------------------------------------------------

    \1\ Terms defined in the Glossary will be italicized on their first 
use in the body of this guidance.
---------------------------------------------------------------------------

    This IRPS applies to all federally insured credit unions.
    Under this IRPS, TDR loans are as defined in generally accepted 
accounting principles (GAAP) and the Board does not intend through this 
policy to change the Financial Accounting Standards Board's (FASB) 
definition of TDR in any way. In addition to existing agency policy, 
this IRPS sets NCUA's supervisory expectations governing loan workout 
policies and practices and loan accruals.

       Written Loan Workout Policy and Monitoring Requirements \2\
---------------------------------------------------------------------------

    \2\ For additional guidance on member business lending extension, 
deferral, renewal, and rewrite policies, see Interagency Policy 
Statement on Prudent Commercial Real Estate Loan Workouts (October 30, 
2009) transmitted by Letter to Credit Unions No. 10-CU-07, and available 
at http://www.ncua.gov.
---------------------------------------------------------------------------

    For purposes of this policy statement, types of workout loans to 
borrowers in financial difficulties include re-agings, extensions, 
deferrals, renewals, or rewrites. See the Glossary entry on ``workouts'' 
for further descriptions of each term. Borrower retention programs or 
new loans are not encompassed within this policy nor considered by the 
Board to be workout loans.

[[Page 1081]]

    Loan workouts can be used to help borrowers overcome temporary 
financial difficulties, such as loss of job, medical emergency, or 
change in family circumstances like loss of a family member. Loan 
workout arrangements should consider and balance the best interests of 
both the borrower and the credit union.
    The lack of a sound written policy on workouts can mask the true 
performance and past due status of the loan portfolio. Accordingly, the 
credit union board and management must adopt and adhere to an explicit 
written policy and standards that control the use of loan workouts, and 
establish controls to ensure the policy is consistently applied. The 
loan workout policy and practices should be commensurate with each 
credit union's size and complexity, and must be in line with the credit 
union's broader risk mitigation strategies. The policy must define 
eligibility requirements (i.e., under what conditions the credit union 
will consider a loan workout), including establishing limits on the 
number of times an individual loan may be modified.\3\ The policy must 
also ensure credit unions make loan workout decisions based on the 
borrower's renewed willingness and ability to repay the loan. If a 
credit union engages in restructuring activity on a loan that results in 
restructuring the loan more often than once a year or twice in five 
years, examiners will have higher expectations for the documentation of 
the borrower's renewed willingness and ability to repay the loan. NCUA 
is concerned about restructuring activity that pushes existing losses 
into future reporting periods without improving the loan's 
collectability. One way a credit union can provide convincing evidence 
that multiple restructurings improve collectability is to perform 
validation of completed multiple restructurings that substantiate the 
claim. Examiners will ask for such validation documentation if the 
credit union engages in multiple restructurings of a loan.
---------------------------------------------------------------------------

    \3\ Broad based credit union programs commonly used as a member 
benefit and implemented in a safe and sound manner limited to only 
accounts in good standing, such as Skip-a-Pay programs, are not intended 
to count toward these limits.
---------------------------------------------------------------------------

    In addition, the policy must establish sound controls to ensure loan 
workout actions are appropriately structured.\4\ The policy must provide 
that in no event may the credit union authorize additional advances to 
finance unpaid interest and credit union fees. The credit union may, 
however, make advances to cover third-party fees, excluding credit union 
commissions, such as force-placed insurance or property taxes. For loan 
workouts granted, the credit union must document the determination that 
the borrower is willing and able to repay the loan.
---------------------------------------------------------------------------

    \4\ In developing a written policy, the credit union board and 
management may wish to consider similar parameters as those established 
in the FFIEC's ``Uniform Retail Credit Classification and Account 
Management Policy'' (FFIEC Policy). 65 FR 36903 (June 12, 2000). The 
FFIEC Policy sets forth specific limitations on the number of times a 
loan can be re-aged (for open-end accounts) or extended, deferred, 
renewed or rewritten (for closed-end accounts). Additionally, NCUA 
Letter to Credit Unions (LCU) 09-CU-19, ``Evaluating Residential Real 
Estate Mortgage Loan Modification Programs,'' outlines policy 
requirements for real estate modifications. Those requirements remain 
applicable to real estate loan modifications but could be adapted in 
part by the credit union in their written loan workout policy for other 
loans.
---------------------------------------------------------------------------

    Management must ensure that comprehensive and effective risk 
management and internal controls are established and maintained so that 
loan workouts can be adequately controlled and monitored by the credit 
union's board of directors and management, to provide for timely 
recognition of losses,\5\ and to permit review by examiners. The credit 
union's risk management framework must include thresholds based on 
aggregate volume of loan workout activity that trigger enhanced 
reporting to the board of directors. This reporting will enable the 
credit union's board of directors to evaluate the effectiveness of the 
credit union's loan workout program, any implications to the 
organization's financial condition, and to make any compensating 
adjustments to the overall business strategy. This information will also 
then be available to examiners upon request.
---------------------------------------------------------------------------

    \5\ Refer to NCUA guidance on charge-offs set forth in LCU 03-CU-01, 
``Loan Charge-off Guidance,'' dated January 2003. Examiners will require 
that a reasonable written charge-off policy is in place and that it is 
consistently applied. Additionally, credit unions need to adjust 
historical loss factors when calculating ALLL needs for pooled loans to 
account for any loans with protracted charge-off timeframes (e.g., 12 
months or greater). See discussions on the latter point in the 2006 
Interagency ALLL Policy Statement transmitted by Accounting Bulletin 06-
1 (December 2006).
---------------------------------------------------------------------------

    To be effective, management information systems need to track the 
principal reductions and charge-off history of loans in workout programs 
by type of program. Any decision to re-age, extend, defer, renew, or 
rewrite a loan, like any other revision to contractual terms, needs to 
be supported by the

[[Page 1082]]

credit union's management information systems. Sound management 
information systems are able to identify and document any loan that is 
re-aged, extended, deferred, renewed, or rewritten, including the 
frequency and extent such action has been taken. Documentation normally 
shows that the credit union's personnel communicated with the borrower, 
the borrower agreed to pay the loan in full under any new terms, and the 
borrower has the ability to repay the loan under any new terms.

   Regulatory Reporting of Workout Loans Including TDR Past Due Status

    The past due status of all loans will be calculated consistent with 
loan contract terms, including amendments made to loan terms through a 
formal restructure. Credit unions will report delinquency on the Call 
Report consistent with this policy.\6\
---------------------------------------------------------------------------

    \6\ Subsequent Call Reports and accompanying instructions will 
reflect this policy, including focusing data collection on loans meeting 
the definition of TDR under GAAP. In reporting TDRs on regulatory 
reports, the data collections will include all TDRs that meet the GAAP 
criteria for TDR reporting, without the application of materiality 
threshold exclusions based on scoping or reporting policy elections of 
credit union preparers or their auditors. Credit unions should also 
refer to the recently revised standard from the FASB, Accounting 
Standards Update No. 2011-02 (April 2011) to the FASB Accounting 
Standards Codification entitled, Receivables (Topic 310), ``A Creditor's 
Determination of Whether a Restructuring is a Troubled Debt 
Restructuring.'' This clarified the definition of a TDR, which has the 
practical effect in the current economic environment to broaden loan 
workouts that constitute a TDR. This standard is effective for annual 
periods ending on or after December 15, 2012.
---------------------------------------------------------------------------

                         Loan Nonaccrual Policy

    Credit unions must ensure appropriate income recognition by placing 
loans in nonaccrual status when conditions as specified below exist, 
reversing or charging-off previously accrued but uncollected interest, 
complying with the criteria under GAAP for Cash or Cost Recovery basis 
of income recognition, and following the specifications below regarding 
restoration of a nonaccrual loan to accrual status.\7\ This policy on 
loan accrual is consistent with longstanding credit union industry 
practice as implemented by the NCUA over the last several decades. The 
balance of the policy relates to member business loan workouts and is 
similar to the FFIEC policies adopted by the federal banking agencies 
\8\ as set forth in the FFIEC Call Report for banking institutions and 
its instructions.\9\
---------------------------------------------------------------------------

    \7\ Placing a loan in nonaccrual status does not change the loan 
agreement or the obligations between the borrower and the credit union. 
Only the parties can effect a restructuring of the original loan terms 
or otherwise settle the debt.
    \8\ The federal banking agencies are the Board of Governors of the 
Federal Reserve System, the Federal Deposit Insurance Corporation, and 
the Office of the Comptroller of the Currency.
    \9\ FFIEC Report of Condition and Income Forms and User Guides, 
Updated September 2011, http://www.fdic.gov.
---------------------------------------------------------------------------

                            Nonaccrual Status

    Credit unions may not accrue interest \10\ on any loan upon which 
principal or interest has been in default for a period of 90 days or 
more, unless the loan is both ``well secured'' and ``in the process of 
collection.'' \11\ Additionally, loans will be placed in nonaccrual 
status if maintained on a Cash (or Cost Recovery) basis because of 
deterioration in the financial condition of the borrower, or for which 
payment in full of principal or interest is not expected. For purposes 
of applying the ``well secured'' and ``in process of collection'' test 
for nonaccrual status listed above, the date on which a loan reaches 
nonaccrual status is determined by its contractual terms.
---------------------------------------------------------------------------

    \10\ Nonaccrual of interest also includes the amortization of 
deferred net loan fees or costs, or the accretion of discount. 
Nonaccrual of interest on loans past due 90 days or more is a 
longstanding agency policy and credit union practice.
    \11\ A purchased credit impaired loan asset need not be placed in 
nonaccrual status as long as the criteria for accrual of income under 
the interest method in GAAP is met. Also, the accrual of interest on 
workout loans is covered in a separate section of this IRPS later in the 
policy statement.
---------------------------------------------------------------------------

    While a loan is in nonaccrual status, some or all of the cash 
interest payments received may be treated as interest income on a cash 
basis as long as the remaining recorded investment in the loan (i.e., 
after charge-off of identified losses, if any) is deemed to be fully 
collectable. The reversal of previously accrued, but uncollected, 
interest applicable to any loan placed in nonaccrual status must be 
handled in accordance with GAAP.\12\ Where

[[Page 1083]]

assets are collectable over an extended period of time and, because of 
the terms of the transactions or other conditions, there is no 
reasonable basis for estimating the degree of collectability--when such 
circumstances exist, and as long as they exist--consistent with GAAP the 
Cost Recovery Method of accounting must be used.\13\ Use of the Cash or 
Cost Recovery basis for these loans and the statement on reversing 
previous accrued interest is the practical implementation of relevant 
accounting principles.
---------------------------------------------------------------------------

    \12\ Acceptable accounting treatment includes a reversal of all 
previously accrued, but uncollected, interest applicable to loans placed 
in a nonaccrual status against appropriate income and balance sheet 
accounts. For example, one acceptable method of accounting for such 
uncollected interest on a loan placed in nonaccrual status is: (1) To 
reverse all of the unpaid interest by crediting the ``accrued interest 
receivable'' account on the balance sheet, (2) to reverse the 
uncollected interest that has been accrued during the calendar year-to-
date by debiting the appropriate ``interest and fee income on loans'' 
account on the income statement, and (3) to reverse any uncollected 
interest that had been accrued during previous calendar years by 
debiting the ``allowance for loan and lease losses'' account on the 
balance sheet. The use of this method presumes that credit union 
management's additions to the allowance through charges to the 
``provision for loan and lease losses'' on the income statement have 
been based on an evaluation of the collectability of the loan and lease 
portfolios and the ``accrued interest receivable'' account.
    \13\ When a purchased impaired loan or debt security that is 
accounted for in accordance with ASC Subtopic 310-30, ``Receivables-
Loans and Debt Securities Acquired with Deteriorated Credit Quality,'' 
has been placed on nonaccrual status, the cost recovery method should be 
used, when appropriate.
---------------------------------------------------------------------------

Restoration to Accrual Status for All Loans except Member Business Loan 
                                Workouts

    A nonaccrual loan may be restored to accrual status when:
      Its past due status is less than 90 days, GAAP does not 
require it to be maintained on the Cash or Cost Recovery basis, and the 
credit union is plausibly assured of repayment of the remaining 
contractual principal and interest within a reasonable period;
      When it otherwise becomes both well secured and in the 
process of collection; or
      The asset is a purchased impaired loan and it meets the 
criteria under GAAP for accrual of income under the interest method 
specified therein.
    In restoring all loans to accrual status, if any interest payments 
received while the loan was in nonaccrual status were applied to reduce 
the recorded investment in the loan the application of these payments to 
the loan's recorded investment must not be reversed (and interest income 
must not be credited). Likewise, accrued but uncollected interest 
reversed or charged-off at the point the loan was placed on nonaccrual 
status cannot be restored to accrual; it can only be recognized as 
income if collected in cash or cash equivalents from the member.

   Restoration to Accrual Status on Member Business Loan Workouts \14\
---------------------------------------------------------------------------

    \14\ This policy is derived from the ``Interagency Policy Statement 
on Prudent Commercial Real Estate Loan Workouts'' NCUA and the other 
financial regulators issued on October 30, 2009.
---------------------------------------------------------------------------

    A formally restructured member business loan workout need not be 
maintained in nonaccrual status, provided the restructuring and any 
charge-off taken on the loan are supported by a current, well documented 
credit evaluation of the borrower's financial condition and prospects 
for repayment under the revised terms. Otherwise, the restructured loan 
must remain in nonaccrual status. The evaluation must include 
consideration of the borrower's sustained historical repayment 
performance for a reasonable period prior to the date on which the loan 
is returned to accrual status. A sustained period of repayment 
performance would be a minimum of six consecutive payments and would 
involve timely payments under the restructured loan's terms of principal 
and interest in cash or cash equivalents. In returning the member 
business workout loan to accrual status, sustained historical repayment 
performance for a reasonable time prior to the restructuring may be 
taken into account. Such a restructuring must improve the collectability 
of the loan in accordance with a reasonable repayment schedule and does 
not relieve the credit union from the responsibility to promptly charge 
off all identified losses.
    The graph below provides an example of a schedule of repayment 
performance to demonstrate a determination of six consecutive payments. 
If the original loan terms required a monthly payment of $1,500, and the 
credit union lowered the borrower's payment to $1,000 through formal 
member business loan restructure, then based on the first row of the 
graph, the ``sustained historical repayment performance for a reasonable 
time prior to the restructuring'' would encompass five of the pre-
workout consecutive payments that were at least $1,000 (Months 1 through 
5); so, in total, the six consecutive repayment burden would be met by 
the first month post workout (Month 6). In the second row, only one of 
the pre-workout payments would count toward the six consecutive 
repayment requirement (Month 5), because it is the first month in which 
the borrower made a payment of at least $1,000, after failing to pay at 
least that amount. The loan, therefore, would remain on nonaccrual for 
at least five post-workout consecutive payments (Months 6 through 10) 
provided the borrower continues to make

[[Page 1084]]

payments consistent with the restructured terms.

----------------------------------------------------------------------------------------------------------------
                       Pre-workout                                              Post-workout
----------------------------------------------------------------------------------------------------------------
  Month 1     Month 2     Month 3     Month 4    Month 5    Month 6    Month 7    Month 8    Month 9    Month 10
----------------------------------------------------------------------------------------------------------------
    $1,500      $1,200      $1,200      $1,000     $1,000     $1,000     $1,000     $1,000     $1,000     $1,000
     1,500       1,200         900         875      1,000      1,000      1,000      1,000      1,000      1,000
----------------------------------------------------------------------------------------------------------------

    After a formal restructure of a member business loan, if the 
restructured loan has been returned to accrual status, the loan 
otherwise remains subject to the nonaccrual standards of this policy. If 
any interest payments received while the member business loan was in 
nonaccrual status were applied to reduce the recorded investment in the 
loan the application of these payments to the loan's recorded investment 
must not be reversed (and interest income must not be credited). 
Likewise, accrued but uncollected interest reversed or charged-off at 
the point the member business workout loan was placed on nonaccrual 
status cannot be restored to accrual; it can only be recognized as 
income if collected in cash or cash equivalents from the member.
    The following tables summarize nonaccrual and restoration to accrual 
requirements previously discussed:

                      Table 1--Nonaccrual Criteria
------------------------------------------------------------------------
                                                         Additional
           Action             Condition identified      consideration
------------------------------------------------------------------------
Nonaccrual on All Loans.....  90 days or more past  See Glossary
                               due unless loan is    descriptors for
                               both well secured     ``well secured''
                               and in the process    and ``in the
                               of collection; or     process of
                              If the loan must be    collection.''
                               maintained on the    Consult GAAP for
                               Cash or Cost          Cash or Cost
                               Recovery basis        Recovery basis
                               because there is a    income recognition
                               deterioration in      guidance. See also
                               the financial         Glossary
                               condition of the      Descriptors.
                               borrower, or for
                               which payment in
                               full of principal
                               or interest is not
                               expected.
Nonaccrual on Member          Continue on           See Table 2--Restore
 Business Loan Workouts.       nonaccrual at         to Accrual.
                               workout point and
                               until restore to
                               accrual criteria
                               are met.
------------------------------------------------------------------------


                       Table 2--Restore to Accrual
------------------------------------------------------------------------
                                                         Additional
           Action             Condition identified      consideration
------------------------------------------------------------------------
Restore to Accrual on All     When the loan is      See Glossary
 Loans except Member           past due less than    descriptors for
 Business Loan Workouts.       90 days, GAAP does    ``well secured''
                               not require it to     and ``in the
                               be maintained on      process of
                               the Cash or Cost      collection.''
                               Recovery basis, and  Interest payments
                               the credit union is   received while the
                               plausibly assured     loan was in
                               of repayment of the   nonaccrual status
                               remaining             and applied to
                               contractual           reduce the recorded
                               principal and         investment in the
                               interest within a     loan must not be
                               reasonable period.    reversed and income
                              When it otherwise      credited. Likewise,
                               becomes both ``well   accrued but
                               secured'' and ``in    uncollected
                               the process of        interest reversed
                               collection''; or.     or charged-off at
                              The asset is a         the point the loan
                               purchased impaired    was placed on
                               loan and it meets     nonaccrual status
                               the criteria under    cannot be restored
                               GAAP for accrual of   to accrual.
                               income under the
                               interest method.
Restore to Accrual on Member  Formal restructure    The evaluation must
 Business Loan Workouts.       with a current,       include
                               well documented       consideration of
                               credit evaluation     the borrower's
                               of the borrower's     sustained
                               financial condition   historical
                               and prospects for     repayment
                               repayment under the   performance for a
                               revised terms.        minimum of six
                                                     timely consecutive
                                                     payments comprised
                                                     of principal and
                                                     interest. In
                                                     returning the loan
                                                     to accrual status,
                                                     sustained
                                                     historical
                                                     repayment
                                                     performance for a
                                                     reasonable time
                                                     prior to the
                                                     restructuring may
                                                     be taken into
                                                     account.
                                                    Interest payments
                                                     received while the
                                                     member business
                                                     loan was in
                                                     nonaccrual status
                                                     and applied to
                                                     reduce the recorded
                                                     investment in the
                                                     loan must not be
                                                     reversed and income
                                                     credited. Likewise,
                                                     accrued but
                                                     uncollected
                                                     interest reversed
                                                     or charged-off at
                                                     the point the
                                                     member business
                                                     loan was placed on
                                                     nonaccrual status
                                                     cannot be restored
                                                     to accrual.
------------------------------------------------------------------------


[[Page 1085]]

                              Glossary \15\
---------------------------------------------------------------------------

    \15\ Terms defined in the Glossary will be italicized on their first 
use in the body of this guidance.
---------------------------------------------------------------------------

    ``Cash Basis'' method of income recognition is set forth in GAAP and 
means while a loan is in nonaccrual status, some or all of the cash 
interest payments received may be treated as interest income on a cash 
basis as long as the remaining recorded investment in the loan (i.e., 
after charge-off of identified losses, if any) is deemed to be fully 
collectible.\16\
---------------------------------------------------------------------------

    \16\ Acceptable accounting practices include: (1) Allocating 
contractual interest payments among interest income, reduction of the 
recorded investment in the asset, and recovery of prior charge-offs. If 
this method is used, the amount of income that is recognized would be 
equal to that which would have been accrued on the loan's remaining 
recorded investment at the contractual rate; and, (2) accounting for the 
contractual interest in its entirety either as income, reduction of the 
recorded investment in the asset, or recovery of prior charge-offs, 
depending on the condition of the asset, consistent with its accounting 
policies for other financial reporting purposes.
---------------------------------------------------------------------------

    ``Charge-off'' means a direct reduction (credit) to the carrying 
amount of a loan carried at amortized cost resulting from 
uncollectability with a corresponding reduction (debit) of the ALLL. 
Recoveries of loans previously charged off should be recorded when 
received.
    ``Cost Recovery'' method of income recognition means equal amounts 
of revenue and expense are recognized as collections are made until all 
costs have been recovered, postponing any recognition of profit until 
that time.\17\
---------------------------------------------------------------------------

    \17\ FASB Accounting Standards Codification (ASC) 605-10-25-4, 
``Revenue Recognition, Cost Recovery.''
---------------------------------------------------------------------------

    ``Generally accepted accounting principles (GAAP)'' means official 
pronouncements of the FASB as memorialized in the FASB Accounting 
Standards Codification[supreg] as the source of authoritative principles 
and standards recognized to be applied in the preparation of financial 
statements by federally-insured credit unions in the United States with 
assets of $10 million or more.
    ``In the process of collection'' means collection of the loan is 
proceeding in due course either: (1) Through legal action, including 
judgment enforcement procedures, or (2) in appropriate circumstances, 
through collection efforts not involving legal action which are 
reasonably expected to result in repayment of the debt or in its 
restoration to a current status in the near future, i.e., generally 
within the next 90 days.
    ``Member Business Loan'' is defined consistent with Section 723.1 of 
NCUA's Member Business Loan Rule, 12 CFR 723.1.
    ``New Loan'' means the terms of the revised loan are at least as 
favorable to the credit union (i.e., terms are market-based, and profit 
driven) as the terms for comparable loans to other customers with 
similar collection risks who are not refinancing or restructuring a loan 
with the credit union, and the revisions to the original debt are more 
than minor.
    ``Past Due'' means a loan is determined to be delinquent in relation 
to its contractual repayment terms including formal restructures, and 
must consider the time value of money. Credit unions may use the 
following method to recognize partial payments on ``consumer credit,'' 
i.e., credit extended to individuals for household, family, and other 
personal expenditures, including credit cards, and loans to individuals 
secured by their personal residence, including home equity and home 
improvement loans. A payment equivalent to 90 percent or more of the 
contractual payment may be considered a full payment in computing past 
due status.
    ``Recorded Investment in a Loan'' means the loan balance adjusted 
for any unamortized premium or discount and unamortized loan fees or 
costs, less any amount previously charged off, plus recorded accrued 
interest.
    ``Troubled Debt Restructuring'' is as defined in GAAP and means a 
restructuring in which a credit union, for economic or legal reasons 
related to a member borrower's financial difficulties, grants a 
concession to the borrower that it would not otherwise consider.\18\ The 
restructuring of a loan may include, but is not necessarily limited to: 
(1) The transfer from the borrower to the credit union of real estate, 
receivables from third parties, other assets, or an equity interest in 
the borrower in full or partial satisfaction of the loan, (2) a 
modification of the loan terms, such as a reduction of the stated 
interest rate, principal, or accrued interest or an extension of the 
maturity date at a stated interest rate lower than the current market 
rate for new debt with similar risk, or (3) a combination of the above. 
A loan extended or renewed at a stated interest rate equal to the 
current market interest rate for new debt with similar risk is not to be 
reported as a restructured troubled loan.
---------------------------------------------------------------------------

    \18\ FASB ASC 310-40, ``Troubled Debt Restructuring by Creditors.''
---------------------------------------------------------------------------

    ``Well secured'' means the loan is collateralized by: (1) A 
perfected security interest in, or pledges of, real or personal 
property, including securities with an estimable value, less cost to 
sell, sufficient to recover the recorded investment in the loan, as well 
as a reasonable return on that amount, or (2)

[[Page 1086]]

by the guarantee of a financially responsible party.
    ``Workout Loan'' means a loan to a borrower in financial difficulty 
that has been formally restructured so as to be reasonably assured of 
repayment (of principal and interest) and of performance according to 
its restructured terms. A workout loan typically involves a re-aging, 
extension, deferral, renewal, or rewrite of a loan.\19\ For purposes of 
this policy statement, workouts do not include loans made to market 
rates and terms such as refinances, borrower retention actions, or new 
loans.\20\
---------------------------------------------------------------------------

    \19\ ``Re-Age'' means returning a past due account to current status 
without collecting the total amount of principal, interest, and fees 
that are contractually due.
    ``Extension'' means extending monthly payments on a closed-end loan 
and rolling back the maturity by the number of months extended. The 
account is shown current upon granting the extension. If extension fees 
are assessed, they should be collected at the time of the extension and 
not added to the balance of the loan.
    ``Deferral'' means deferring a contractually due payment on a 
closed-end loan without affecting the other terms, including maturity, 
of the loan. The account is shown current upon granting the deferral.
    ``Renewal'' means underwriting a matured, closed-end loan generally 
at its outstanding principal amount and on similar terms.
    ``Rewrite'' means significantly changing the terms of an existing 
loan, including payment amounts, interest rates, amortization schedules, 
or its final maturity.
    \20\ There may be instances where a workout loan is not a TDR even 
though the borrower is experiencing financial hardship. For example, a 
workout loan would not be a TDR if the fair value of cash or other 
assets accepted by a credit union from a borrower in full satisfaction 
of its receivable is at least equal to the credit union's recorded 
investment in the loan, e.g., due to charge-offs.

[77 FR 31993, May 31, 2012]



PART 745_SHARE INSURANCE AND APPENDIX--Table of Contents



  Subpart A_Clarification and Definition of Account Insurance Coverage

Sec.
745.0  Scope.
745.1  Definitions.
745.2  General principles applicable in determining insurance of 
          accounts.
745.3  Single ownership accounts.
745.4  Revocable trust accounts.
745.5  Accounts held by executors or administrators.
745.6  Accounts held by a corporation, partnership, or unincorporated 
          association.
745.7  Shares accepted in a foreign currency.
745.8  Joint ownership accounts.
745.9-1  Trust accounts.
745.9-2  Retirement and other employee benefit plan accounts.
745.10  Accounts held by government depositors.
745.11  Accounts evidenced by negotiable instruments.
745.12  Account obligations for payment of items forwarded for 
          collection by depository institution acting as agent.
745.13  Notification to members/shareholders.
745.14  Interest on lawyers trust accounts and other similar escrow 
          accounts.

            Subpart B_Payment of Share Insurance and Appeals

745.200  General.
745.201  Processing of insurance claims.
745.202  Appeal.
745.203  Judicial review.

Appendix to Part 745--Examples of Insurance Coverage Afforded Accounts 
          in Credit Unions Insured by the National Credit Union Share 
          Insurance Fund

    Authority: 12 U.S.C. 1752(5), 1757, 1765, 1766, 1781, 1782, 1787, 
1789; title V, Pub. L. 109-351;120 Stat. 1966.

    Source: 51 FR 37560, Oct. 23, 1986, unless otherwise noted.



  Subpart A_Clarification and Definition of Account Insurance Coverage



Sec. 745.0  Scope.

    The regulation and appendix contained in this part describe the 
insurance coverage of various types of member accounts. In general, all 
types of member share accounts received by the credit union in its usual 
course of business, including regular shares, share certificates, and 
share draft accounts, represent equity and are insured. For the purposes 
of applying the rules in this part, it is presumed that the owner of 
funds in an account is an insured credit union member or otherwise 
eligible to maintain an insured account in a credit union. These rules 
do not extend insurance coverage to persons not entitled to maintain an 
insured account or to account relationships that have not been approved 
by the Board as an insured account. Where there are multiple owners of a 
single account,

[[Page 1087]]

generally only that part which is allocable to the member(s) is insured.



Sec. 745.1  Definitions.

    (a) The terms account or accounts as used in this part mean share, 
share certificate or share draft accounts (or their equivalent under 
state law, as determined by the Board in the case of insured state 
credit unions) of a member (which includes other credit unions, public 
units and nonmembers where permitted under the Act) in a credit union of 
a type approved by the Board which evidences money or its equivalent 
received or held by a credit union in the usual course of business and 
for which it has given or is obligated to give credit to the account of 
the member.
    (b) The terms member or members as used in this part mean those 
persons enumerated in the credit union's field of membership who have 
been elected to membership in accordance with the Act or state law in 
the case of state credit unions. It also includes those nonmembers 
permitted under the Act to maintain accounts in an insured credit union, 
including nonmember credit unions and nonmember public units and 
political subdivisions.
    (c) The term public unit means the United States, any state of the 
United States, the District of Columbia, the Commonwealth of Puerto 
Rico, the Panama Canal Zone, any territory or possession of the United 
States, any county, municipality, or political subdivision thereof, or 
any Indian tribe as defined in section 3(c) of the Indian Financing Act 
of 1974.
    (d) The term political subdivision includes any subdivision of a 
public unit, as defined in paragraph (c) of this section, or any 
principal department of such public unit, (1) the creation of which 
subdivision or department has been expressly authorized by state 
statute, (2) to which some functions of government have been delegated 
by state statute, and (3) to which funds have been allocated by statute 
or ordinance for its exclusive use and control. It also includes 
drainage, irrigation, navigation improvement, levee, sanitary, school or 
power districts and bridge or port authorities, and other special 
districts created by state statute or compacts between the states. 
Excluded from the term are subordinate or nonautonomous divisions, 
agencies, or boards within principal departments.
    (e) The term ``standard maximum share insurance amount,'' referred 
to as the ``SMSIA'' hereafter, means $250,000 adjusted pursuant to 
subparagraph (F) of section 11(a)(1) of the Federal Deposit Insurance 
Act (12 U.S.C. 1821(a)(1)(F)).

[51 FR 37560, Oct. 23, 1986, as amended at 71 FR 14635, Mar. 23, 2006; 
73 FR 62858, Oct. 22, 2008; 74 FR 55749, Oct. 29, 2009; 75 FR 53843, 
Sept. 2, 2010; 76 FR 30253, May 25, 2011; 78 FR 32545, May 31, 2013]



Sec. 745.2  General principles applicable in determining insurance
of accounts.

    (a) General. This part provides for determination by the Board of 
the amount of members' insured accounts. The rules for determining the 
insurance coverage of accounts maintained by members in the same or 
different rights and capacities in the same insured credit union are set 
forth in the following provisions of this part. The appendix provides 
examples of the application of these rules to various factual 
situations. While the provisions of this part govern in determining 
share insurance coverage, to the extent local law enters into a share 
insurance determination, the local law of the jurisdiction in which the 
insured credit union's principal office is located will control over the 
local law of other jurisdictions where the insured credit union has 
offices or service facilities.
    (b) The regulations in this part in no way are to be interpreted to 
authorize any type of account that is not authorized by Federal law or 
regulation or State law or regulation or by the bylaws of a particular 
credit union. The purpose is to be as inclusive as possible of all 
situations.
    (c) Records. (1) The account records of the insured credit union 
shall be conclusive as to the existence of any relationship pursuant to 
which the funds in the account are deposited and on which a claim for 
insurance coverage is founded. Examples would be trustee, agent, 
custodian, or executor. No claim

[[Page 1088]]

for insurance based on such a relationship will be recognized in the 
absence of such disclosure.
    (2) If the account records of an insured credit union disclose the 
existence of a relationship which may provide a basis for additional 
insurance, the details of the relationship and the interest of other 
parties in the account must be ascertainable either from the records of 
the credit union or the records of the member maintained in good faith 
and in the regular course of business.
    (3) The account records of an insured credit union in connection 
with a trust account shall disclose the name of both the settlor 
(grantor) and the trustee of the trust and shall contain an account 
signature card executed by the trustee.
    (4) The interests of the co-owners of a joint account shall be 
deemed equal, unless otherwise stated on the insured credit union's 
records in the case of a tenancy in common.
    (d) Valuation of trust interests. (1) Trust interests in the same 
trust deposited in the same account will be separately insured if the 
value of the trust interest is capable of determination, without 
evaluation of contingencies, except for those covered by the present 
worth tables and rules of calculation for their use set forth in 
Sec. 20.2031-7 of the Federal Estate Tax Regulations (26 CFR 20.2031-7).
    (2) In connection with any trust in which certain trust interests 
are not capable of evaluation in accordance with the foregoing rule, 
payment by the Board to the trustee with respect to all such trust 
interests shall not exceed the SMSIA.
    (3) Each trust interest in any trust established by two or more 
settlors shall be deemed to be derived from each settlor pro rata to his 
contribution to the trust.
    (4) The term ``trust interest'' means the interest of a beneficiary 
in an irrevocable express trust, whether created by trust instrument or 
statute, but does not include any interest retained by the settlor.
    (e) Continuation of insurance coverage following the death of a 
member. The death of a member will not affect the member's share 
insurance coverage for a period of six months following death unless the 
member's share accounts are restructured in that time period. If the 
accounts are restructured during the six-month grace period, or upon the 
expiration of the six months if not restructured, the share insurance 
coverage will be provided on the basis of actual ownership of the 
accounts in accordance with the provisions of this part. The operation 
of this grace period, however, will not result in a reduction of 
coverage.
    (f) Continuation of separate share insurance coverage after merger 
of insured credit unions. Whenever the liability to pay the member 
accounts of one or more insured credit unions is assumed by another 
insured credit union, whether by merger, consolidation, other statutory 
assumption or contract: The insured status of the credit unions whose 
member account liability has been assumed terminates, for purposes of 
this section, on the date of receipt by NCUA of satisfactory evidence of 
the assumption; and the separate insurance of member accounts assumed 
continues for six months from the date the assumption takes effect or, 
in the case of a share certificate, the earliest maturity date after the 
six-month period. In the case of a share certificate that matures within 
the six-month grace period that is renewed at the same dollar amount, 
either with or without accrued dividends having been added to the 
principal amount, and for the same term as the original share 
certificate, the separate insurance applies to the renewed share 
certificate until the first maturity date after the six-month period. A 
share certificate that matures within the six-month grace period that is 
renewed on any other basis, or that is not renewed, is separately 
insured only until the end of the six-month grace period.

[51 FR 37560, Oct. 23, 1986, as amended at 65 FR 34924, June 1, 2000; 68 
FR 75114, Dec. 30, 2003; 71 FR 14635, Mar. 23, 2006]



Sec. 745.3  Single ownership accounts.

    (a) Funds owned by an individual and deposited in the manner set 
forth below shall be added together and insured up to the SMSIA in the 
aggregate.
    (1) Individual accounts. Funds owned by an individual (or by the 
husband-

[[Page 1089]]

wife community of which the individual is a member) and deposited in one 
or more accounts in the individual's own name shall be insured up to the 
SMSIA in the aggregate.
    (2) Accounts held by agents or nominees. Funds owned by a principal 
and deposited in one or more accounts in the name or names of agents or 
nominees shall be added to any individual account of the principal and 
insured up to the SMSIA in the aggregate. This applies to interests 
created in qualified tuition savings programs established in connection 
with section 529 of the Internal Revenue Code (26 U.S.C. 529).
    (3) Mortgage servicing accounts. Accounts maintained by a mortgage 
servicer, in a custodial or other fiduciary capacity, which are 
comprised of payments by mortgagors of principal and interest, shall be 
insured for the cumulative balance paid into the account by the 
mortgagors, up to the limit of the SMSIA per mortgagor. Accounts 
maintained by a mortgage servicer, in a custodial or other fiduciary 
capacity, which are comprised of payments by mortgagors of taxes and 
insurance premiums shall be added together and insured in accordance 
with paragraph (a)(2) of this section for the ownership interest of each 
mortgagor in such accounts. This provision is effective as of October 
22, 2008, for all existing and future mortgage servicing accounts.
    (b) Funds held by a guardian, custodian, or conservator for the 
benefit of his ward or for the benefit of a minor under a Uniform Gifts 
to Minors Act and deposited in one or more accounts in the name of the 
guardian, custodian, or conservator are insured up to the SMSIA in the 
aggregate, separately from any other accounts of the guardian, 
custodian, conservator, ward, or minor.

[51 FR 37560, Oct. 23, 1986, as amended at 71 FR 14635, Mar. 23, 2006; 
73 FR 62858, Oct. 22, 2008; 74 FR 55749, Oct. 29, 2009]



Sec. 745.4  Revocable trust accounts.

    (a) General rule. Except as provided in paragraph (e) of this 
section, the funds owned by an individual and deposited into one or more 
accounts with respect to which the owner evidences an intention that 
upon his or her death the funds shall belong to one or more 
beneficiaries shall be separately insured (from other types of accounts 
the owner has at the same insured credit union) in an amount equal to 
the total number of different beneficiaries named in the account(s) 
multiplied by the SMSIA. This section applies to all accounts held in 
connection with informal and formal testamentary revocable trusts. Such 
informal trusts are commonly referred to as payable-on-death accounts, 
in-trust-for accounts or Totten Trust accounts, and such formal trusts 
are commonly referred to as living trusts or family trusts. (Example 1: 
Account Owner ``A'' has a living trust account with four different 
beneficiaries named in the trust. A has no other revocable trust 
accounts at the same NCUA-insured credit union. The maximum insurance 
coverage would be $1,000,000, determined by multiplying 4 times $250,000 
(the number of beneficiaries times the SMSIA). (Example 2: Account Owner 
``A'' has a payable-on-death account naming his niece and cousin as 
beneficiaries, and A also has, at the same NCUA-insured credit union, 
another payable-on-death account naming the same niece and a friend as 
beneficiaries. The maximum coverage available to the account owner would 
be $750,000. This is because the account owner has named only three 
different beneficiaries in the revocable trust accounts--his niece and 
cousin in the first, and the same niece and a friend in the second. The 
naming of the same beneficiary in more than one revocable trust account, 
whether it be a payable-on-death account or living trust account, does 
not increase the total coverage amount.) (Example 3: Account Owner ``A'' 
establishes a living trust account with a balance of $300,000, naming 
his two children ``B'' and ``C'' as beneficiaries. A also establishes, 
at the same NCUA-insured credit union, a payable-on-death account, with 
a balance of $300,000, also naming his children B and C as 
beneficiaries. The maximum coverage available to A is $500,000, 
determined by multiplying 2 times $250,000 (the number of different 
beneficiaries times the SMSIA). A is uninsured in the amount of 
$100,000. This is because all funds that an owner holds in both living 
trust accounts and

[[Page 1090]]

payable-on-death accounts, at the same NCUA-insured credit union and 
naming the same beneficiaries, are aggregated for insurance purposes and 
insured to the applicable coverage limits.)
    (b) Required intention and naming of beneficiaries. The required 
intention in paragraph (a) of this section that upon the owner's death 
the funds shall belong to one or more beneficiaries must be manifested 
in the title of the account or elsewhere in the account records of the 
credit union using commonly accepted terms such as, but not limited to, 
in trust for, as trustee for, payable-on-death to, or any acronym 
therefore, or by listing one or more beneficiaries in the account 
records of the credit union. In addition, for informal revocable trust 
accounts, the beneficiaries must be specifically named in the account 
records of the insured credit union. The settlor of a revocable trust 
shall be presumed to own the funds deposited into the account.
    (c) Definition of beneficiary. For purposes of this section, a 
beneficiary includes a natural person as well as a charitable 
organization and other non-profit entity recognized as such under the 
Internal Revenue Code of 1986, as amended.
    (d) Interests of beneficiaries outside the definition of beneficiary 
in this section. If a beneficiary named in a trust covered by this 
section does not meet the definition of beneficiary in paragraph (c) of 
this section, the funds corresponding to that beneficiary shall be 
treated as the individually owned (single ownership) funds of the 
owner(s). As such, they shall be aggregated with any other single 
ownership accounts of such owner(s) and insured up to the SMSIA per 
owner. (Example: Account Owner ``A'' establishes a payable-on-death 
account naming a pet as beneficiary with a balance of $100,000. A also 
has an individual account at the same NCUA-insured credit union with a 
balance of $175,000. Because the pet is not a ``beneficiary,'' the two 
accounts are aggregated and treated as a single ownership account. As a 
result, A is insured in the amount of $250,000, but is uninsured for the 
remaining $25,000.)
    (e) Revocable trust accounts with aggregate balances exceeding five 
times the SMSIA and naming more than five different beneficiaries. 
Notwithstanding the general coverage provisions in paragraph (a) of this 
section, for funds owned by an individual in one or more revocable trust 
accounts naming more than five different beneficiaries and whose 
aggregate balance is more than five times the SMSIA, the maximum 
revocable trust account coverage for the account owner shall be the 
greater of either: five times the SMSIA or the aggregate amount of the 
interests of each different beneficiary named in the trusts, to a limit 
of the SMSIA per different beneficiary. (Example 1: Account Owner ``A'' 
has a living trust with a balance of $1 million and names two friends, 
``B'' and ``C'' as beneficiaries. At the same NCUA-insured credit union, 
A establishes a payable-on-death account, with a balance of $1 million 
naming his two cousins, ``D'' and ``E'' as beneficiaries. Coverage is 
determined under the general coverage provisions in paragraph (a) of 
this section, and not this paragraph (e). This is because all funds that 
A holds in both living trust accounts and payable-on-death accounts, at 
the same NCUA-insured credit union, are aggregated for insurance 
purposes. Although A's aggregated balance of $2 million is more than 
five times the SMDIA, A names only four different beneficiaries, and 
coverage under this paragraph (e) applies only if there are more than 
five different beneficiaries. A is insured in the amount of $1 million 
(4 beneficiaries times the SMSIA), and uninsured for the remaining $1 
million.) (Example 2: Account Owner ``A'' has a living trust account 
with a balance of $1,500,000. Under the terms of the trust, upon A's 
death, A's three children are each entitled to $125,000, A's friend is 
entitled to $15,000, and a designated charity is entitled to $175,000. 
The trust also provides that the remainder of the trust assets shall 
belong to A's spouse. In this case, because the balance of the account 
exceeds $1,250,000 (5 times the SMSIA) and there are more than five 
different beneficiaries named in the trust, the maximum coverage 
available to A would be the greater of: $1,250,000 or the aggregate of 
each different beneficiary's interest to a limit of $250,000

[[Page 1091]]

per beneficiary. The beneficial interests in the trust for purposes of 
determining coverage are: $125,000 for each of the children (totaling 
$375,000), $15,000 for the friend, $175,000 for the charity, and 
$250,000 for the spouse (because the spouse's $935,000 is subject to the 
$250,000 per-beneficiary limitation). The aggregate beneficial interests 
total $815,000. Thus, the maximum coverage afforded to the account owner 
would be $1,250,000, the greater of $1,250,000 or $815,000.)
    (f) Co-owned revocable trust accounts. (1) Where an account 
described in paragraph (a) of this section is established by more than 
one owner, the respective interest of each account owner (which shall be 
deemed equal) shall be insured separately, per different beneficiary, up 
to the SMSIA, subject to the limitation imposed in paragraph (e) of this 
section. (Example 1: A and B, two individuals, establish a payable-on-
death account naming their three nieces as beneficiaries. Neither A nor 
B has any other revocable trust accounts at the same NCUA-insured credit 
union. The maximum coverage afforded to A and B would be $1,500,000, 
determined by multiplying the number of owners (2) times the SMSIA 
($250,000) times the number of different beneficiaries (3). In this 
example, A would be entitled to revocable trust coverage of $750,000 and 
B would be entitled to revocable trust coverage of $750,000.) (Example 
2: A and B, two individuals, establish a payable-on-death account naming 
their two children, two cousins, and a charity as beneficiaries. The 
balance in the account is $1,750,000. Neither A nor B has any other 
revocable trust accounts at the same NCUA-insured credit union. The 
maximum coverage would be determined under paragraph (a) of this section 
by multiplying the number of account owners (2) times the number of 
different beneficiaries (5) times $250,000, totaling $2,500,000. Because 
the account balance ($1,750,000) is less than the maximum coverage 
amount ($2,500,000), the account would be fully insured.) (Example 3: A 
and B, two individuals, establish a living trust account with a balance 
of $3.75 million. Under the terms of the trust, upon the death of both A 
and B, each of their three children is entitled to $600,000, B's cousin 
is entitled to $380,000, A's friend is entitled to $70,000, and the 
remaining amount ($1,500,000) goes to a charity. Under paragraph (e) of 
this section, the maximum coverage, as to each co-owned account owner, 
would be the greater of $1,250,000 or the aggregate amount (as to each 
co-owner) of the interest of each different beneficiary named in the 
trust, to a limit of $250,000 per account owner per beneficiary. The 
beneficial interests in the trust considered for purposes of determining 
coverage for account owner A are: $750,000 for the children (each 
child's interest attributable to A, $300,000, is subject to the 
$250,000-per-beneficiary limitation), $190,000 for the cousin, $35,000 
for the friend, and $250,000 for the charity (the charity's interest 
attributable to A, $750,000, is subject to the $250,000 per-beneficiary 
limitation). As to A, the aggregate amount of the beneficial interests 
eligible for deposit insurance coverage totals $1,225,000. Thus, the 
maximum coverage afforded to account co-owner A would be $1,250,000, 
which is the greater of $1,250,000 or the aggregate of all the 
beneficial interests attributable to A (limited to $250,000 per 
beneficiary), which totaled slightly less at $1,225,000. Because B has 
equal ownership interest in the trust, the same analysis and coverage 
determination also would apply to B. Thus, of the total account balance 
of $3.75 million, $2.5 million would be insured and $1.25 million would 
be uninsured.)
    (2) Notwithstanding paragraph (f)(1) of this section, where the 
owners of a co-owned revocable trust account are themselves the sole 
beneficiaries of the corresponding trust, the account shall be insured 
as a joint account under section 745.8 and shall not be insured under 
the provisions of this section. (Example: If A and B establish a 
payable-on-death account naming themselves as the sole beneficiaries of 
the account, the account will be insured as a joint account because the 
account does not satisfy the intent requirement (under paragraph (a) of 
this section) that the funds in the account belong to the named 
beneficiaries upon the owners' death. The beneficiaries are in fact the 
actual owners of the funds during the account owners' lifetimes.)

[[Page 1092]]

    (g) For deposit accounts held in connection with a living trust that 
provides for a life estate interest for designated beneficiaries, NCUA 
shall value each such life estate interest as the SMSIA for purposes of 
determining the insurance coverage available to the account owner under 
paragraph (e) of this section. (Example: Account Owner ``A'' has a 
living trust account with a balance of $1,500,000. Under the terms of 
the trust, A provides a life estate interest for his spouse. Moreover, 
A's three children are each entitled to $275,000, A's friend is entitled 
to $15,000, and a designated charity is entitled to $175,000. The trust 
also provides that the remainder of the trust assets shall belong to A's 
granddaughter. In this case, because the balance of the account exceeds 
$1,250,000 (5 five times the SMSIA) and there are more than five 
different beneficiaries named in the trust, the maximum coverage 
available to A would be the greater of: $1,250,000 or the aggregate of 
each different beneficiary's interest to a limit of $250,000 per 
beneficiary. The beneficial interests in the trust considered for 
purposes of determining coverage are: $250,000 for the spouse's life 
estate, $750,000 for the children (because each child's $275,000 is 
subject to the $250,000 per-beneficiary limitation), $15,000 for the 
friend, $175,000 for the charity, and $250,000 for the granddaughter 
(because the granddaughter's $310,000 remainder is limited by the 
$250,000 per-beneficiary limitation). The aggregate beneficial interests 
total $1,440,000. Thus, the maximum coverage afforded to the account 
owner would be $1,440,000, the greater of $1,250,000 or $1,440,000.)
    (h) Revocable trusts that become irrevocable trusts. Notwithstanding 
the provisions in section 745.9-1 on the insurance coverage of 
irrevocable trust accounts, if a revocable trust account converts in 
part or entirely to an irrevocable trust upon the death of one or more 
of the trust's owners, the trust account shall continue to be insured 
under the provisions of this section. (Example: Assume A and B have a 
trust account in connection with a living trust, of which they are joint 
grantors. If upon the death of either A or B the trust transforms into 
an irrevocable trust as to the deceased grantor's ownership in the 
trust, the account will continue to be insured under the provisions of 
this section.)
    (i) This section shall apply to all existing and future revocable 
trust accounts and all existing and future irrevocable trust accounts 
resulting from formal revocable trust accounts.

[74 FR 55749, Oct. 29, 2009]



Sec. 745.5  Accounts held by executors or administrators.

    Funds of a decedent held in the name of the decedent or in the name 
of the executor or administrator of the decedent's estate and deposited 
in one or more accounts shall be insured up to the SMSIA in the 
aggregate for all such accounts, separately from the individual accounts 
of the beneficiaries of the estate or of the executor or administrator.

[51 FR 37560, Oct. 23, 1986, as amended at 71 FR 14635, Mar. 23, 2006]



Sec. 745.6  Accounts held by a corporation, partnership, or 
unincorporated association.

    Accounts of a corporation, partnership, or unincorporated 
association engaged in any independent activity shall be insured up to 
the SMSIA in the aggregate. The account of a corporation, partnership, 
or unincorporated association not engaged in an independent activity 
shall be deemed to be owned by the person or persons owning such 
corporation or comprising such partnership or unincorporated association 
and, for account insurance purposes, the interest of each person in such 
an account shall be added to any other account individually owned by 
such person and insured up to the SMSIA in the aggregate. For purposes 
of this section, ``independent activity'' means an activity other than 
one directed solely at increasing insurance coverage.

[51 FR 37560, Oct. 23, 1986, as amended at 71 FR 14635, Mar. 23, 2006]



Sec. 745.7  Shares accepted in a foreign currency.

    An insured credit union may accept shares denominated in a foreign 
currency. Shares denominated in a foreign currency will be insured in 
accordance with this part to the same extent as

[[Page 1093]]

shares denominated in U.S. dollars. Insurance for shares denominated in 
foreign currency will be determined and paid in the amount of United 
States dollars that is equivalent in value to the amount of the shares 
denominated in the foreign currency as of close of business on the date 
of default of the insured credit union. The exchange rates to be used 
for such conversions are the 12 p.m. rates (the ``noon buying rates for 
cable transfers'') quoted for major currencies by the Federal Reserve 
Bank of New York on the date of default of the insured credit union, 
unless the share agreement provides that some other widely recognized 
exchange rates are to be used for all purposes under that agreement.

[71 FR 14635, Mar. 23, 2006]



Sec. 745.8  Joint ownership accounts.

    (a) Separate insurance coverage. Qualifying joint accounts, whether 
owned as joint tenants with right of survivorship, as tenants by the 
entireties, as tenants in common, or by husband and wife as community 
property, shall be insured separately from accounts individually owned 
by any of the co-owners. The interest of a co-owner in all qualifying 
joint accounts shall be added together and the total for that co-owner 
shall be insured up to the SMSIA.
    (b) Determination of insurance coverage. The interests of each co-
owner in all qualifying joint accounts shall be added together and the 
total shall be insured up to the SMSIA. (Example: ``A&B'' have a 
qualifying joint account with a balance of $150,000; ``A&C'' have a 
qualifying joint account with a balance of $200,000; and ``A&B&C'' have 
a qualifying joint account with a balance of $375,000. A's combined 
ownership interest in all qualifying joint accounts would be $300,000 
($75,000 plus $100,000 plus $125,000); therefore, A's interest would be 
insured in the amount of $250,000 and uninsured in the amount of 
$50,000. B's combined ownership interest in all qualifying joint 
accounts would be $200,000 ($75,000 plus $125,000); therefore, B's 
interest would be fully insured. C's combined ownership interest in all 
qualifying joint accounts would be $225,000 ($100,000 plus $125,000); 
therefore, C's interest would be fully insured.
    (c) Qualifying joint accounts. A joint account is a qualifying joint 
account if each of the co-owners has personally signed a membership or 
account signature card and has a right of withdrawal on the same basis 
as the other co-owners. The signature requirement does not apply to 
share certificates, or to any accounts maintained by an agent, nominee, 
guardian, custodian or conservator on behalf of two or more persons if 
the records of the credit union properly reflect that the account is so 
maintained.
    (d) Failure to qualify. A joint account that does not meet the 
requirements for a qualifying joint account shall be treated as owned by 
the named persons as individuals and the actual ownership interest of 
each such person in such account shall be added to any other accounts 
individually owned by such person and insured up to the SMSIA in the 
aggregate. An account will not fail to qualify as a joint account if a 
joint owner is a minor and applicable state law limits or restricts a 
minor's withdrawal rights.
    (e) Nonmember joint owners. A nonmember may become a joint owner 
with a member on a joint account with right of survivorship. The 
nonmember's interest in such accounts will be insured in the same manner 
as the member joint-owner's interest.

[64 FR 19687, Apr. 22, 1999, as amended at 71 FR 14636, Mar. 23, 2006; 
74 FR 55751, Oct. 29, 2009]



Sec. 745.9-1  Trust accounts.

    (a) For purposes of this section, ``trust'' refers to an irrevocable 
trust.
    (b) All trust interests (as defined in Sec. 745.2(d)(4)), for the 
same beneficiary, deposited in an account and established pursuant to 
valid trust agreements created by the same settlor (grantor) shall be 
added together and insured up to the SMSIA in the aggregate, separately 
from other accounts of the trustee of such trust funds or the settlor or 
beneficiary of such trust arrangements.
    (c) This section applies to trust interests created in Coverdell 
Education Savings Accounts, formerly Education IRAs, established in 
connection with

[[Page 1094]]

section 530 of the Internal Revenue Code (26 U.S.C. 530).

[51 FR 37560, Oct. 23, 1986, as amended at 65 FR 34924, June 1, 2000; 68 
FR 75114, Dec. 30, 2003; 71 FR 14636, Mar. 23, 2006]



Sec. 745.9-2  Retirement and other employee benefit plan accounts.

    (a) Pass-through share insurance. Any shares of an employee benefit 
plan in an insured credit union shall be insured on a ``pass-through'' 
basis, in the amount of up to the SMSIA for the non-contingent interest 
of each plan participant, in accordance with Sec. 745.2 of this part. An 
insured credit union that is not ``well capitalized'' or ``adequately 
capitalized,'' as those terms are defined in 12 U.S.C. 1790d(c), may not 
accept employee benefit plan deposits. The terms ``employee benefit 
plan'' and ``pass-through share insurance'' are given the same meaning 
in this section as in 12 U.S.C. 1787(k)(4).
    (b) Treatment of contingent interests. In the event that 
participants' interests in an employee benefit plan are not capable of 
evaluation in accordance with the provisions of this section, or an 
account established for any such plan includes amounts for future 
participants in the plan, payment by the NCUA with respect to all such 
interests shall not exceed the SMSIA in the aggregate.
    (c)(1) Certain retirement accounts. Shares in an insured credit 
union made in connection with the following types of retirement plans 
shall be aggregated and insured in the amount of up to $250,000 (which 
amount shall be subject to inflation adjustments as provided under 
section 11(a)(1)(F) of the Federal Deposit Insurance Act, except that 
$250,000 shall be substituted for $100,000 wherever such term appears in 
such section) per account:
    (i) Any individual retirement account described in section 408(a) 
(IRA) of the Internal Revenue Code (26 U.S.C. 408(a)) or similar 
provisions of law applicable to a U.S. territory or possession;
    (ii) Any individual retirement account described in section 408A 
(Roth IRA) of the Internal Revenue Code (26 U.S.C. 408A) or similar 
provisions of law applicable to a U.S. territory or possession; and
    (iii) Any plan described in section 401(d) (Keogh account) of the 
Internal Revenue Code (26 U.S.C. 401(d)) or similar provisions of law 
applicable to a U.S. territory or possession.
    (2) Insurance coverage for the accounts enumerated in paragraph 
(c)(1) of this section is based on the present vested ascertainable 
interest of a participant or designated beneficiary. For insurance 
purposes, IRA and Roth IRA accounts will be combined together and 
insured in the aggregate up to $250,000 (which amount shall be subject 
to inflation adjustments as provided under section 11(a)(1)(F) of the 
Federal Deposit Insurance Act, except that $250,000 shall be substituted 
for $100,000 wherever such term appears in such section). A Keogh 
account will be separately insured from an IRA account, Roth IRA account 
or, where applicable, aggregated IRA and Roth IRA accounts.

[71 FR 14636, Mar. 23, 2006, as amended at 75 FR 34622, June 18, 2010]



Sec. 745.10  Accounts held by government depositors.

    (a) Public funds invested in Federal credit unions and federally-
insured state credit unions authorized to accept such investments shall 
be insured as follows:
    (1) Each official custodian of funds of the United States lawfully 
investing the same in a federally-insured credit union will be 
separately insured in the amount of:
    (i) Up to the SMSIA in the aggregate for all share draft accounts; 
and
    (ii) Up to the SMSIA in the aggregate for all share certificate and 
regular share accounts;
    (2) Each official custodian of funds of any state of the United 
States or any county, municipality, or political subdivision thereof 
lawfully investing the same in a federally-insured credit union in the 
same state will be separately insured in the amount of:
    (i) Up to the SMSIA in the aggregate for all share draft accounts; 
and
    (ii) Up to the SMSIA in the aggregate for all share certificate and 
regular share accounts;
    (3) Each official custodian of funds of the District of Columbia 
lawfully investing the same in a federally-insured

[[Page 1095]]

credit union in the District of Columbia will be separately insured in 
the amount of:
    (i) Up to the SMSIA in the aggregate for all share draft accounts; 
and
    (ii) Up to the SMSIA in the aggregate for all share certificate and 
regular share accounts;
    (4) Each official custodian of funds of the Commonwealth of Puerto 
Rico, the Panama Canal Zone, or any territory or possession of the 
United States, or any county, municipality, or political subdivision 
thereof lawfully investing the same in a federally-insured credit union 
in Puerto Rico, the Panama Canal Zone, or any such territory or 
possession, respectively, will be separately insured in the amount of:
    (i) Up to the SMSIA in the aggregate for all share draft accounts; 
and
    (ii) Up to the SMSIA in the aggregate for all share certificate and 
regular share accounts;
    (5) Each official custodian of tribal funds of any Indian tribe (as 
defined in section 3(c) of the Indian Financing Act of 1974) or agency 
thereof lawfully investing the same in a federally-insured credit union 
will be separately insured in the amount of:
    (i) Up to the SMSIA in the aggregate for all share draft accounts; 
and
    (ii) Up to the SMSIA in the aggregate for all share certificate and 
regular share accounts;
    (b) Each official custodian referred to in paragraphs (a)(2), (3), 
and (4) of this section lawfully investing such funds in share accounts 
in a federally-insured credit union outside of their respective 
jurisdictions shall be separately insured up to the SMSIA in the 
aggregate for all such accounts regardless of whether they are share 
draft, share certificate or regular share accounts.
    (c) For purposes of this section, if the same person is an official 
custodian of more than one public unit, he shall be separately insured 
with respect to the public funds held by him for each such unit, but he 
shall not be separately insured with respect to all public funds of the 
same public unit by virtue of holding different offices in such unit or 
by holding such funds for different purposes. Where an officer, agent or 
employee of a public unit has custody of certain funds which by law or 
under a bond indenture are required to be set aside to discharge a debt 
owed to the holders of notes or bonds issued by the public unit, any 
investment of such funds in an account in a federally-insured credit 
union will be deemed to be a share account established by a trustee of 
trust funds of which the noteholders or bondholders are pro rata 
beneficiaries, and the beneficial interest of each noteholder or 
bondholder in the share account will be separately insured up to the 
SMSIA.
    (d) For purposes of this section, ``lawfully investing'' means 
pursuant to the statutory or regulatory authority of the custodian or 
public unit.

[51 FR 37560, Oct. 23, 1986, as amended at 65 FR 34925, June 1, 2000; 71 
FR 14636, Mar. 23, 2006]



Sec. 745.11  Accounts evidenced by negotiable instruments.

    If any insured account obligation of a credit union is evidenced by 
a negotiable certificate account, negotiable draft, negotiable cashier's 
or officer's check, negotiable certified check, or negotiable traveler's 
check or letter of credit, the owner of such account obligation will be 
recognized for all purposes of a claim for insured accounts to the same 
extent as if his name and interest were disclosed on the records of the 
credit union provided the instrument was in fact negotiated to such 
owner prior to the date of the closing of the credit union. Affirmative 
proof of such negotiation must be offered in all cases to substantiate 
the claim.



Sec. 745.12  Account obligations for payment of items forwarded for
collection by depository institution acting as agent.

    Where a closed credit union has become obligated for the payment of 
items forwarded for collection by a depository institution acting solely 
as agent, the owner of such items will be recognized for all purposes of 
a claim for insured accounts to the same extent as if his name and 
interest were disclosed on the records of the credit union when such 
claim for insured accounts, if otherwise payable, has been established 
by the execution and delivery of prescribed forms. Such depository 
institution forwarding such items

[[Page 1096]]

for the owners thereof will be recognized as agent for such owners for 
the purpose of making an assignment of the rights of such owners against 
the closed insured credit union to the Board and for the purpose of 
receiving payment on behalf of such owners.



Sec. 745.13  Notification to members/shareholders.

    Each insured credit union shall provide notice to its members 
concerning NCUA insurance coverage of member accounts. This may be 
accomplished by placing either a copy of part 745 of these rules, the 
appendix, or one or more copies of the NCUA brochure ``Your Insured 
Funds'' in each branch office and main office of the credit union. 
Copies of these materials shall also be made available to members upon 
request. For purposes of this section, an automated teller machine or 
point of sale terminal is not a branch office.



Sec. 745.14  Interest on lawyers trust accounts and other similar
escrow accounts.

    (a)(1) Pass-through share insurance. The deposits or shares of any 
interest on lawyers trust account (IOLTA) or other similar escrow 
account in an insured credit union are insured on a ``pass-through'' 
basis, in the amount of up to the SMSIA for each client and principal on 
whose behalf funds are held in such accounts by either the attorney 
administering the IOLTA or the escrow agent administering a similar 
escrow account, in accordance with the other share insurance provisions 
of this part.
    (2) Pass-through coverage will only be available if the 
recordkeeping requirements of Sec. 745.2(c)(1) of this part and the 
relationship disclosure requirements of Sec. 745.2(c)(2) of this part 
are satisfied. In the event those requirements are satisfied, funds 
attributable to each client and principal will be insured on a pass-
through basis in whatever right and capacity the client or principal 
owns the funds. For example, an IOLTA or other similar escrow account 
must be titled as such and the underlying account records of the insured 
credit union must sufficiently indicate the existence of the 
relationship on which a claim for insurance is founded. The details of 
the relationship between the attorney or escrow agent and their clients 
and principals must be ascertainable from the records of the insured 
credit union or from records maintained, in good faith and in the 
regular course of business, by the attorney or the escrow agent 
administering the account. NCUA will determine, in its sole discretion, 
the sufficiency of these records for an IOLTA or other similar escrow 
account.
    (b) Membership requirements and treatment of IOLTAs. For share 
insurance purposes, IOLTAs are treated as escrow accounts. IOLTAs and 
other similar escrow accounts are considered member accounts and 
eligible for pass-through share insurance if the attorney administering 
the IOLTA or the escrow agent administering the escrow account is a 
member of the insured credit union in which the funds are held. In this 
circumstance, the membership status of the clients or the principals is 
irrelevant.
    (c) Definitions. (1) For purposes of this section:
    (i) Interest on lawyers trust account and IOLTA mean a system in 
which lawyers place certain client funds in interest-bearing or 
dividend-bearing accounts, with the interest or dividends then used to 
fund programs such as legal service organizations who provide services 
to clients in need.
    (ii) Other similar escrow account means an account where a licensed 
professional or other individual serving in a fiduciary capacity holds 
funds for the benefit of a client or principal as part of a transaction 
or business relationship. Examples of such accounts include, but are not 
limited to, real estate escrow accounts and prepaid funeral accounts.
    (iii) Pass-through share insurance means, with respect to IOLTAs and 
other similar escrow accounts, insurance coverage based on the interest 
of each person on whose behalf funds are held in such accounts by the 
attorney administering the IOLTA or the escrow agent administering a 
similar escrow account.
    (2) The terms ``interest on lawyers trust account'', ``IOLTA'', and 
``pass-through share insurance'' are given the

[[Page 1097]]

same meaning in this section as in 12 U.S.C. 1787(k)(5).

[80 FR 80642, Dec. 28, 2015]



            Subpart B_Payment of Share Insurance and Appeals

    Source: 55 FR 5586, Feb. 16, 1990, unless otherwise noted.



Sec. 745.200  General.

    (a) Payment. In the event of the liquidation of an insured credit 
union, the Board will promptly determine the insured accountholders 
thereof and the amount of the insured account or accounts of each such 
accountholder. Payment may be in cash, or its equivalent, or may be made 
by making available to each accountholder a transferred account in a new 
federally-insured credit union in the same community or in another 
federally-insured credit union or institution in an amount equal to the 
accountholder's insured account. Notwithstanding the foregoing, the 
Board may withhold payment of such portion of the insured account of any 
member as may be required to provide for payment of any direct or 
indirect liability to the closed credit union or the liquidating agent, 
which is not offset against a claim due from such credit union, pending 
the determination and payment of such liability by the member of or any 
person liable therefor.
    (b) Amount of insurance. The amount of insurance on an insured 
account shall be determined in accordance with the provisions of Subpart 
A of this part and the Federal Credit Union Act. For the purpose of 
determining insurance coverage, dividends earned in the ordinary course 
of business and posted to share accounts for any prior accounting or 
dividend period shall be deemed to be principal under this part. 
Dividends earned or accrued in the ordinary course of business, but not 
posted to share accounts, may be paid at the discretion of the 
liquidating agent. In making such determination, the liquidating agent 
will take into consideration whether the failure to post dividends 
earned or accrued was due to the fraud, embezzlement or accounting 
errors of credit union personnel. The liquidating agent may require an 
accountholder to submit documentation supporting any claim for unposted 
dividends not otherwise evidenced in the credit union records. However, 
in no event will dividend amounts be considered as principal for 
insurance purposes pursuant to this section if not consistent with the 
amounts paid on similar classes of shares.
    (c) Multiple accounts. In the event an insured member holds more 
than one insured account in the same capacity, and the aggregate amount 
of such accounts (including share draft accounts held in such capacity) 
exceeds the amount of insurance afforded thereon, the insurance coverage 
will be prorated among the member's interest in all accounts held in the 
same capacity. In the case of individual accounts, the insurance 
proceeds shall be paid to the holder of the account, whether or not the 
holder is the beneficial owner. In the case of accounts which are owned 
jointly, the insurance proceeds shall be paid to the owners jointly. In 
the case of trust estates, the insurance proceeds shall be paid to the 
indicated trustee unless otherwise provided for in the trust instrument 
or under state law. In the case of corporations, partnerships and 
unincorporated associations engaged in an independent activity, the 
insurance proceeds shall be paid to the indicated holder of the account. 
Where insurance payment is in the form of a transferred account to 
another insured institution, the same rules shall be applied.
    (d) Computing time. In computing any period of time prescribed by 
this subpart, the provisions of Sec. 747.12(a) shall apply.

[55 FR 5586, Feb. 16, 1990, as amended at 61 FR 60186, Nov. 27, 1996]



Sec. 745.201  Processing of insurance claims.

    (a) Delegations of authority. The Agent for the Liquidating Agent 
(``Liquidating Agent'') or his or her designee is authorized to make 
initial determinations with respect to insurance claims pursuant to the 
principles set forth in this part, and to act on requests for 
reconsideration of the initial determination.

[[Page 1098]]

    (b) Initial determination. In the event the Liquidating Agent 
determines that all or a portion of an accountholder's account is 
uninsured, the Liquidating Agent shall so notify the accountholder in 
writing, stating the reason(s) for such initial determination, and shall 
provide the accountholder with a certificate of claim in liquidation in 
the amount of the uninsured account from the Board in its capacity as 
Liquidating Agent for the insured credit union to enable the 
accountholder to share in the proceeds of the liquidation of the credit 
union, if any, up to the amount of the uninsured account.
    (c) Request for reconsideration. An accountholder may, at his or her 
option, request reconsideration from the Liquidating Agent of the 
initial determination within 30 days of the date of the initial 
determination, or directly appeal the initial determination to the Board 
pursuant to Sec. 745.202 of this subpart. The Liquidating Agent shall 
act on the request for reconsideration within 30 days from its receipt.



Sec. 745.202  Appeal.

    (a) Time for filing. Within 60 days after issuance of an initial 
determination, or of the determination on a request for reconsideration 
by the liquidating agent, the accountholder may appeal by filing with 
the Board a written request for appeal. The appeal may be filed with the 
Secretary of the Board, National Credit Union Administration, 1775 Duke 
Street, Alexandria, VA 22314-3428.
    (b) Content of request. Any appeal must include:
    (1) A statement of the facts on which the claim for insurance is 
based;
    (2) A statement of the basis for the initial determination or 
determination on the request for reconsideration to which the 
accountholder objects and the alleged error in such determination, 
including citations to applicable statutes and regulations;
    (3) Any other evidence relied upon by the accountholder which was 
not previously provided to the Liquidating Agent.
    (c) Procedures for review of request. (1) Within 60 days of the date 
of the Board's receipt of an appeal, the Board may request in writing 
that the accountholder submit additional facts and records in support of 
its request. The accountholder shall have 45 days from the date of 
issuance of such written request to provide such additional information. 
Failure by the accountholder to provide additional information may, as 
determined solely by the Board, result in denial of the accountholder's 
appeal.
    (2) Within 60 days from the date of the Board's receipt of an 
appeal, the accountholder may amend or supplement the request in 
writing. In the event that the accountholder does amend or supplement 
the request, the provisons of paragraph (c)(1) of this section with 
respect to requests for additional information and responses to such 
requests shall apply with equal force to any such amendment or 
supplement to a request.
    (d) Determination on appeal. (1) Within 180 days from the date of 
the receipt of an appeal by the Board, the Board shall issue a decision 
determining the extent of the accountholder's insurance pursuant to the 
rules of this part.
    (2) The determination by the Board on appeal shall be provided to 
the accountholder in writing, stating the reason(s) for the 
determination, and shall constitute a final Agency order regarding the 
accountholder's claim for insurance.
    (3) If the Board determines that the accountholder is entitled to 
the amount of insurance claimed or a portion thereof, upon payment of 
such insurance the accountholder shall promptly surrender to the Board 
the certificate of claim in liquidation provided in connection with the 
initial determination. In the event that the Board determines that the 
accountholder is only entitled to a portion of the amount of insurance 
claimed, upon the accountholder's surrender of such certificate a new 
certificate of claim in liquidation will be provided which reflects the 
revised amount of the uninsured account.
    (4) Failure by the Board to issue a determination on appeal of the 
accountholder's claim for insurance within the 180-day period provided 
for under paragraph (d)(1) of this section, shall be deemed to be a 
denial of such

[[Page 1099]]

claim for purposes of Sec. 745.203 of this subpart.

[55 FR 5586, Feb. 16, 1990, as amended at 59 FR 36041, July 15, 1994]



Sec. 745.203  Judicial review.

    (a) For purposes of seeking judicial review of actions taken 
pursuant to this subpart, only a determination on appeal issued by the 
Board pursuant to Sec. 745.202 of this subpart shall constitute a final 
determination regarding an accountholder's claim for insurance.
    (b) Failure to file an appeal with regard to an initial 
determination, or a decision rendered on a request for reconsideration 
with the applicable time periods shall constitute a failure by the 
accountholder to exhaust available administrative remedies and, due to 
such failure, any objections to the initial determination or request for 
reconsideration shall be deemed to be waived and such determination 
shall be deemed to have been accepted by, and binding upon, the 
accountholder.
    (c) Final determination by the Board is reviewable in accordance 
with the provisions of chapter 7, title 5, United States Code, by the 
United States district court for the Federal judicial district where the 
credit union's principal place of business is located. Such action must 
be filed not later than 60 days after such final determination is 
ordered.

[51 FR 37560, Oct. 23, 1986, as amended at 71 FR 67440, Nov. 22, 2006]



   Sec. Appendix to Part 745--Examples of Insurance Coverage Afforded 
  Accounts in Credit Unions Insured by the National Credit Union Share 
                             Insurance Fund

                  What Is the Purpose of This Appendix?

    The following examples illustrate insurance coverage on accounts 
maintained in the same federally-insured credit union. They are intended 
to cover various types of ownership interests and combinations of 
accounts which may occur in connection with funds invested in insured 
credit unions. These examples interpret the rules for insurance of 
accounts contained in 12 CFR part 745 and focus on those accounts for 
which examples are not provided in the regulatory text.
    The examples, as well as the rules which they interpret, are 
predicated upon the assumption that: (1) Invested funds are actually 
owned in the manner indicated on the credit union's records and (2) the 
owner of funds in an account is a credit union member or otherwise 
eligible to maintain an insured account in a credit union. If available 
evidence shows that ownership is different from that on the 
institution's records, the National Credit Union Share Insurance Fund 
may pay claims for insured accounts on the basis of actual rather than 
ostensible ownership. Further, the examples and the rules which they 
interpret do not extend insurance coverage to persons otherwise not 
entitled to maintain an insured account or to account relationships that 
have not been approved by the NCUA Board as an insured account.

              A. How Are Single Ownership Accounts Insured?

    All funds owned by an individual member (or, in a community property 
state, by the husband-wife community of which the individual is a 
member) and invested in one or more individual accounts are added 
together and insured to the $250,000 maximum. This is true whether the 
accounts are maintained in the name of the individual member owning the 
funds or in the name of the member's agent or nominee. (Sec. 745.3(a)(1) 
and (2).) All such accounts are added together and insured as one 
individual account. Funds held in one or more accounts in the name of a 
guardian, custodian, or conservator for the benefit of a ward or minor 
are added together and insured up to $250,000. However, such an account 
or accounts will not be added to any other individual accounts of the 
guardian, custodian, conservator, ward, or minor for purposes of 
determining insurance coverage. (Sec. 745.3(b).) A mortgage servicing 
account maintained by a mortgage servicer, in a custodial or other 
fiduciary capacity, comprised of payments by a mortgagor of principal 
and interest is insured for the cumulative balance paid into the account 
by the mortgagor, up to $250,000 for the mortgagor separately from other 
individual accounts of the mortgagor. A mortgage servicing account 
maintained by a mortgage servicer, in a custodial or other fiduciary 
capacity, comprised of payments by a mortgagor of taxes and insurance 
premiums shall be added together with the mortgagor's other individual 
accounts and insured up to $250,000. (Sec. 745.3(a)(3).)

    Example 1. Question: Members A and B, husband and wife, each 
maintain an individual account containing $250,000. What is the 
insurance coverage?

    Answer: Each account is separately insured up to $250,000, for a 
total coverage of $500,000. The coverage would be the same whether the 
individual accounts contain funds owned as community property or as 
individual property of the spouses (Sec. 745.3(a)(1)).


[[Page 1100]]


    Example 2. Question: Members H and W, husband and wife, reside in a 
community property state. H maintains a $250,000 account consisting of 
his separately-owned funds and invests $250,000 of community property 
funds in another account, both of which are in his name alone. What is 
the insurance coverage?

    Answer: The two accounts are added together and insured to a total 
of $250,000. $250,000 is uninsured (Sec. 745.3(a)(1)).

    Example 3. Question: Member A has $192,500 invested in an individual 
account, and his agent, Member B, invests $125,000 of A's funds in a 
properly designated agency account. B also holds a $250,000 individual 
account. What is the insurance coverage?

    Answer: A's individual account and the agency account are added 
together and insured to the $250,000 maximum, leaving $67,500 uninsured. 
The investment of funds through an agent does not result in additional 
insurance coverage for the principal (Sec. 745.3(a)(2)). B's individual 
account is insured separately from the agency account 
(Sec. 745.3(a)(1)). However, if the account records of the credit union 
do not show the agency relationship under which the funds in the 
$125,000 account are held, the $250,000 in B's name could, at the option 
of the NCUSIF, be added to his individual account and insured to 
$250,000 in the aggregate, leaving $125,000 uninsured (Sec. 745.2(c)).

    Example 4. Question: Member A holds a $250,000 individual account. 
Member B holds two accounts in his own name, the first containing 
$125,000 and the second containing $192,500. In processing the claims 
for payment of insurance on these accounts, the NCUSIF discovers that 
the funds in the $125,000 account actually belong to A and that B had 
invested these funds as agent for A, his undisclosed principal. What is 
the insurance coverage?

    Answer: Since the available evidence shows that A is the actual 
owner of the funds in the $125,000 account, those funds would be added 
to the $250,000 individual account held by A (rather than to B's 
$192,500 account) and insured to the $250,000 maximum, leaving $125,000 
uninsured. (Sec. 745.3(a)(2).) B's $192,500 individual account would be 
separately insured.

    Example 5. Question: Member C, a minor, maintains an individual 
account of $750. C's grandfather makes a gift to him of $250,000, which 
is invested in another account by C's father, designated on the credit 
union's records as custodian under a Uniform Gift to Minors Act. C's 
father, also a member, maintains an individual account of $250,000. What 
is the insurance coverage?

    Answer: C's individual account and the custodian account held for 
him by his father are each separately insured: The $250,000 maximum on 
the custodian account, and $750 on his individual account. The 
individual account held by C's father is also separately insured to the 
$250,000 maximum. (Sec. 745.3 (a)(1) and (b).)

    Example 6. Question: Member G, a court-appointed guardian, invests 
in a properly designated account $250,000 of funds in his custody which 
belong to member W, his ward. W and G each maintain $25,000 individual 
accounts. What is the insurance coverage?

    Answer: W's individual account and the guardianship account in G's 
name are each insured to $250,000 providing W with $275,000 in insured 
funds. G's individual account is also separately insured. (Sec. 745.3 
(a)(1) and (b).)

    Example 7. Question: Member A has three individual accounts at the 
same NCUA-insured credit union. Account 1 is a $250,000 individual 
account. Account 2 is a mortgage servicing account maintained by a 
mortgage servicer, in a custodial or other fiduciary capacity, comprised 
of payments by Member A of principal and interest in the amount of 
$3,000. Account 3 is a mortgage servicing account maintained by a 
mortgage servicer, in a custodial or other fiduciary capacity, comprised 
of payments by Member A of taxes and insurance premiums in the amount of 
$1,500. What is the insurance coverage?

    Answer: Accounts  1 and 3 are added together and insured up to 
$250,000, leaving $1,500 uninsured. Account 2 is separately insured up 
to $250,000.

    B. How Are Accounts Held by Executors or Administrators Insured?

    All funds belonging to a decedent and invested in one or more 
accounts, whether held in the name of the decedent or in the name of his 
executor or administrator, are added together and insured to the 
$250,000 maximum. Such funds are insured separately from the individual 
accounts of any of the beneficiaries of the estate or of the executor or 
administrator.

    Example 1. Question: Member A, administrator of Member D's estate, 
sells D's automobile and invests the proceeds of $12,500 in an account 
entitled ``A Administrator of the estate of D.'' A has an individual 
account in that same credit union containing $250,000. Prior to his 
death, D had opened an individual account of $250,000. What is the 
insurance coverage?

    Answer: The $12,500 is added to D's individual account and insured 
to $250,000, leaving $12,500 uninsured. A's individual account is 
separately insured for $250,000 (Sec. 745.5).

[[Page 1101]]

C. How Are Accounts Held by a Corporation, Partnership or Unincorporated 
                          Association Insured?

    All funds invested in an account or accounts by a corporation, a 
partnership or an unincorporated association engaged in any independent 
activity are added together and insured to the $250,000 maximum. The 
term ``independent activity'' means any activity other than the one 
directed solely at increasing coverage. If the corporation, partnership 
or unincorporated association is not engaged in an independent activity, 
any account held by the entity is insured as if owned by the persons 
owning or comprising the entity, and the imputed interest of each such 
person is added for insurance purposes to any individual account which 
he maintains.

    Example 1. Question: Member X Corporation maintains a $250,000 
account. The stock of the corporation is owned by members A, B, C, and D 
in equal shares. Each of these stockholders also maintains an individual 
account of $250,000 with the same credit union. What is the insurance 
coverage?
    Answer: Each of the five accounts would be separately insured to 
$250,000 if the corporation is engaged in an independent activity and 
has not been established merely for the purpose of increasing insurance 
coverage. The same would be true if the business were operated as a bona 
fide partnership instead of as a corporation (Sec. 745.6). However, if X 
corporation was not engaged in an independent activity, then $62,500 
(\1/4\ interest) would be added to each account of A, B, C, and D. The 
accounts of A, B, C, and D would then each be insured to $250,000, 
leaving $62,500 in each account uninsured.
    Example 2. Question: Member C College maintains three separate 
accounts with the same credit union under the titles: ``General 
Operating Fund,'' ``Teachers Salaries,'' and ``Building Fund.'' What is 
the insurance coverage?
    Answer: Since all of the funds are the property of the college, the 
three accounts are added together and insured only to the $250,000 
maximum (Sec. 745.6).
    Example 3. Question: The men's club of X Church carries on various 
social activities in addition to holding several fund-raising campaigns 
for the church each year. The club is supported by membership dues. Both 
the club and X Church maintain member accounts in the same credit union. 
What is the insurance coverage?
    Answer: The men's club is an unincorporated association engaged in 
an independent activity. If the club funds are, in fact, legally owned 
by the club itself and not the church, each account is separately 
insured to the $250,000 maximum (Sec. 745.6).
    Example 4. Question: The PQR Union, a member of the ABC Federal 
Credit Union, has three locals in a certain city. Each of the locals 
maintains an account containing funds belonging to the parent 
organization. All three accounts are in the same insured credit union. 
What is the insurance coverage?
    Answer: The three accounts are added together and insured up to the 
$250,000 maximum (Sec. 745.6).

       D. How Are Accounts Held by Government Depositors Insured?

    For insurance purposes, the official custodian of funds belonging to 
a public unit, rather than the public unit itself, is insured as the 
account holder. All funds belonging to a public unit and invested by the 
same custodian in a federally-insured credit union are categorized as 
either share draft accounts or share certificate and regular share 
accounts. If these accounts are invested in a federally-insured credit 
union located in the jurisdiction from which the official custodian 
derives his authority, then the share draft accounts will be insured 
separately from the share certificate and regular share accounts. Under 
this circumstance, all share draft accounts are added together and 
insured to the $250,000 maximum and all share certificate and regular 
share accounts are also added together and separately insured up to the 
$250,000 maximum. If, however, these accounts are invested in a 
federally-insured credit union located outside of the jurisdiction from 
which the official custodian derives his authority, then insurance 
coverage is limited to $250,000 for all accounts regardless of whether 
they are share draft, share certificate or regular share accounts. If 
there is more than one official custodian for the same public unit, the 
funds invested by each custodian are separately insured. If the same 
person is custodian of funds for more than one public unit, he is 
separately insured with respect to the funds of each unit held by him in 
properly designated accounts.
    For insurance purposes, a ``political subdivision'' is entitled to 
the same insurance coverage as any other public unit. ``Political 
subdivision'' includes any subdivision of a public unit or any principal 
department of such unit: (1) The creation of which has been expressly 
authorized by state statute, (2) to which some functions of government 
have been allocated by state statute, and (3) to which funds have been 
allocated by statute or ordinance for its exclusive use and control.

    Example 1. Question: As Comptroller of Y Consolidated School 
District, A maintains a $275,000 account in the credit union containing 
school district funds. He also maintains his own $250,000 member account 
in the same credit union. What is the insurance coverage?

    Answer: The two accounts will be separately insured, assuming the 
credit union's

[[Page 1102]]

records indicate that the account containing the school district funds 
is held by A in a fiduciary capacity. Thus, $250,000 of the school's 
funds and the entire $250,000 in A's personal account will be insured 
(Secs. 745.10(a)(2) and 754.3).

    Example 2. Question: A, as city treasurer, and B, as chief of the 
city police department, each have $250,000 in city funds invested in 
custodial accounts. What is the insurance coverage?

    Answer: Assuming that both A and B have official custody of the city 
funds, each account is separately insured to the $250,000 maximum 
(Sec. 745.10(a)(2)).

    Example 3. Question: A is Treasurer of X County and collects certain 
tax assessments, a portion of which must be paid to the state under 
statutory requirement. A maintains an account for general funds of the 
county and establishes a separate account for the funds which belong to 
the State Treasurer. The credit union's records indicate that the 
separate account contains funds held for the State. What is the 
insurance coverage?

    Answer: Since two public units own the funds held by A, the accounts 
would each be separately insured to the $250,000 maximum 
(Sec. 745.10(a)(2)).

    Example 4. Question: A city treasurer invests city funds in each of 
the following accounts: ``General Operating Account,'' ``School 
Transportation Fund,'' ``Local Maintenance Fund,'' and ``Payroll Fund.'' 
Each account is available to the custodian upon demand. By 
administrative direction, the city treasurer has allocated the funds for 
the use of and control by separate departments of the city. What is the 
insurance coverage?

    Answer: All of the accounts are added together and insured in the 
aggregate to $250,000. Because the allocation of the city's funds is not 
by statute or ordinance for the specific use of and control by separate 
departments of the city, separate insurance coverage to the maximum of 
$250,000 is not afforded to each account (Secs. 745.1(d) and 
745.10(a)(2)).

    Example 5. Question: A, the custodian of retirement funds of a 
military exchange, invests $2,500,000 in an account in an insured credit 
union. The military exchange, a non-appropriated fund instrumentality of 
the United States, is deemed to be a public unit. The employees of the 
exchange are the beneficiaries of the retirement funds but are not 
members of the credit union. What is the insurance coverage?

    Answer: Because A invested the funds on behalf of a public unit, in 
his capacity as custodian, those funds qualify for $250,000 share 
insurance even though A and the public unit are not within the credit 
union's field of membership. Since the beneficiaries are neither public 
units nor members of the credit union they are not entitled to separate 
share insurance. Therefore, $2,250,000 is uninsured (Sec. 745.10(a)(1)).

    Example 6. Question: A is the custodian of the County's employee 
retirement funds. He deposits $2,500,000 in retirement funds in an 
account in an insured credit union. The ``beneficiaries'' of the 
retirement fund are not themselves public units nor are they within the 
credit union's field of membership. What is the insurance coverage?

    Answer: Because A invested the funds on behalf of a public unit, in 
his capacity as custodian, those funds qualify for $250,000 share 
insurance even though A and the public unit are not within the credit 
union's field of membership. Since the beneficiaries are neither public 
units nor members of the credit union they are not entitled to separate 
share insurance. Therefore, $2,250,000 is uninsured (Sec. 745.10(a)(2)).

    Example 7. Question: A county treasurer establishes the following 
share draft accounts in an insured credit union each with $250,000:
``General Operating Fund''
``County Roads Department Fund''
``County Water District Fund''
``County Public Improvement District Fund''
``County Emergency Fund''
What is the insurance coverage?

    Answer: The ``County Roads Department,'' ``County Water District'' 
and ``County Public Improvement District'' accounts would each be 
separately insured to $250,000 if the funds in each such account have 
been allocated by law for the exclusive use of a separate county 
department or subdivision expressly authorized by State statute. Funds 
in the ``General Operating'' and ``Emergency Fund'' accounts would be 
added together and insured in the aggregate to $250,000, if such funds 
are for countywide use and not for the exclusive use of any subdivision 
or principal department of the county, expressly authorized by State 
statute (Secs. 745.1(d) and 745.10(a)(2)).

    Example 8. Question: A, the custodian of Indian tribal funds, 
lawfully invests $2,500,000 in an account in an insured credit union on 
behalf of 15 different tribes; the records of the credit union show that 
no tribe's interest exceeds $250,000. A, as official custodian, also 
invests $2,500,000 in the same credit union on behalf of 100 individual 
Indians, who are not members; each Indian's interest is $10,000. What is 
the insurance coverage?

    Answer: Because each tribe is considered a separate public unit, the 
custodian of each tribe, even though the same person, is entitled to 
separate insurance for each tribe (Sec. 745.10(a)(5)). Since the credit 
union's records indicate no tribe has more than $250,000 in the account, 
the $2,500,000 would

[[Page 1103]]

be fully insured as 15 separate tribal accounts. If anyone tribe had 
more than a $250,000 interest in the funds, it would be insured only to 
$250,000 and any excess would be uninsured.
    However, the $2,500,000 invested on behalf of the individual Indians 
would not be insured since the individual Indians are neither public 
units nor, in the example, members of the credit union. If A is the 
custodian of the funds in his capacity as an official of a governmental 
body that qualified as a public unit, then the account would be insured 
for $250,000, leaving $2,250,000 uninsured.

    Example 9. Question: A, an official custodian of funds of a state of 
the United States, lawfully invests $500,000 of state funds in a 
federally-insured credit union located in the state from which he 
derives his authority as an official custodian. What is the insurance 
coverage?

    Answer: If A invested the entire $500,000 in a share draft account, 
then $250,000 would be insured and $250,000 would be uninsured. If A 
invested $250,000 in share draft accounts and another $250,000 in share 
certificate and regular share accounts, then A would be insured for 
$250,000 for the share draft accounts and $250,000 for the share 
certificate and regular share accounts leaving nothing uninsured 
(Sec. 745.10(a)(2)). If A had invested the $500,000 in a federally-
insured credit union located outside the state from which he derives his 
authority as an official custodian, then $250,000 would be insured for 
all accounts regardless of whether they were share draft, share 
certificate or regular share accounts, leaving $250,000 uninsured 
(Sec. 745.10(b)).

       E. How Are Trust Accounts and Retirement Accounts Insured?

    A trust estate is the interest of a beneficiary in an irrevocable 
express trust, whether created by trust instrument or statute, which is 
valid under state law. Thus, funds invested in an account by a trustee 
under an irrevocable express trust are insured on the basis of the 
beneficial interests under such trust. The interest of each beneficiary 
in an account (or accounts) established under such a trust arrangement 
is insured to $250,000 separately from other accounts held by the 
trustee, the settlor (grantor), or the beneficiary. However, in cases 
where a beneficiary has an interest in more than one trust arrangement 
created by the same settlor, the interests of the beneficiary in all 
accounts established under such trusts are added together for insurance 
purposes, and the beneficiary's aggregate interest derived from the same 
settlor is separately insured to the $250,000 maximum.
    A beneficiary's interest in an account established pursuant to an 
irrevocable express trust arrangement is insured separately from other 
beneficial interests (trust estates) invested in the same account if the 
value of the beneficiary's interest (trust estate) can be determined (as 
of the date of a credit union's insolvency) without evaluation of 
contingencies except for those covered by the present worth tables and 
rules of calculation for their use set forth in Sec. 20.2031-10 of the 
Federal Estate Tax Regulations (26 CFR 20.2031-10). If any trust estates 
in such an account cannot be so determined, the insurance with respect 
to all such trust estates together shall not exceed $250,000.
    In order for insurance coverage of trust accounts to be effective in 
accordance with the foregoing rules, certain recordkeeping requirements 
must be met. In connection with each trust account, the credit union's 
records must indicate the name of both the settlor and the trustee of 
the trust and must contain an account signature card executed by the 
trustee indicating the fiduciary capacity of the trustee. In addition, 
the interests of the beneficiaries under the trust must be ascertainable 
from the records of either the credit union or the trustee, and the 
settlor or beneficiary must be a member of the credit union. If there 
are two or more settlors or beneficiaries, then either all the settlors 
or all the beneficiaries must be members of the credit union.
    Although each ascertainable trust estate is separately insured, it 
should be noted that in short-term trusts the insurable interest or 
interests may be very small, since the interests are computed only for 
the duration of the trust. Thus, if a trust is made irrevocable for a 
specified period of time, the beneficial interest will be calculated in 
terms of the length of time stated. A reversionary interest retained by 
the settlor is treated in the same manner as an individual account of 
the settlor.
    As stated, the trust must be valid under local law. A trust which 
does not meet local requirements, such as one imposing no duties on the 
trustee or conveying no interest to the beneficiary, is of no effect for 
insurance purposes. An account in which such funds are invested is 
considered to be an individual account.
    IRA and Keogh accounts are separately insured, each up to $250,000. 
Although credit unions may serve as trustees or custodians for self-
directed IRA, Roth IRA and Keogh accounts, once the funds in those 
accounts are taken out of the credit union, they are no longer insured.
    In the case of an employee retirement fund where only a portion of 
the fund is placed in a credit union account, the amount of insurance 
available to an individual participant on his interest in the account 
will be in proportion to his interest in the entire employee retirement 
fund. If, for example, the member's interest represents 10% of the 
entire plan funds, then he is presumed to have

[[Page 1104]]

only a 10% interest in the plan account. Said another way, if a member 
has a vested interest of $10,000 in a municipal employees retirement 
plan and the trustee invests 25% of the total plan funds in a credit 
union, the member would be insured for only $2,500 on that credit union 
account. There is an exception, however. The member would be insured for 
$10,000 if the trustee can document, through records maintained in the 
ordinary course of business, that individual beneficiary's interests are 
segregated and the total vested interest of the member was, in fact, 
invested in that account.

    Example 1. Question: Member S invests $250,000 in trust for B, the 
beneficiary. S also has an individual account containing $250,000 in the 
same credit union. What is the insurance coverage?

    Answer: Both accounts are fully insured. The trust account is 
separately insured from the individual account of S (Secs. 745.3(a)(1) 
and 745.9-1).
    Example 2. Question: S invests funds in trust for A, B, C, D, and E. 
A, B, and C are members of the credit union, D, E and S are not. What is 
the insurance coverage?

    Answer: This is an uninsurable account. Where there is more than one 
settlor or more than one beneficiary, all the settlors or all the 
beneficiaries must be members to establish this type of account. Since 
D, E and S are not members, this account cannot legally be established 
or insured.

    Example 3(a). Question: Member T invests $5,000,000 in trust for ABC 
Employees Retirement Fund. Some of the participants are members and some 
are not. What is the insurance coverage?

    Answer: The account is insured as to the determinable interests of 
each participant to a maximum of $250,000 per participant regardless of 
credit union member status. T's member status is also irrelevant. 
Participant interests not capable of evaluation shall be added together 
and insured to a maximum of $250,000 in the aggregate (Sec. 745.9-2).

    Example 3(b). Question: T is trustee for the ABC Employees 
Retirement Fund containing $1,000,000. Fund participant A has a 
determinable interest of $90,000 in the Fund (9% of the total). T 
invests $500,000 of the Fund in an insured credit union and the 
remaining $500,000 elsewhere. Some of the participants of the Fund are 
members of the credit union and some are not. T does not segregate each 
participant's interest in the Fund. What is the insurance coverage?

    Answer: The account is insured as to the determinable interest of 
each participant, adjusted in proportion to the Fund's investment in the 
credit union, regardless of the membership status of the participants or 
trustee. A's insured interest in the account is $45,000, or 9% of 
$500,000. This reflects the fact that only 50% of the Fund is in the 
account and A's interest in the account is in the same proportion as his 
interest in the overall plan. All other participants would be similarly 
insured. Participants' interests not capable of evaluation are added 
together and insured to a maximum of $250,000 in the aggregate 
(Sec. 745.9-2).

    Example 4. Question: Member A has an individual account of $250,000 
and establishes an IRA account and accumulates $250,000 in that account. 
Subsequently, A becomes self-employed and establishes a Keogh account in 
the same credit union and accumulates $250,000 in that account. What is 
the insurance coverage?

    Answer: Each of A's accounts would be separately insured as follows: 
the individual account for $250,000, the maximum for that type of 
account; the IRA account for $250,000, the maximum for that type of 
account; and the Keogh account for $250,000, the maximum for that type 
of account. (Secs. 745.3(a)(1) and 745.9-2).

    Example 5. Question: Member A has a self-directed IRA account with 
$70,000 in it. The FCU is the trustee of the account. Member transfers 
$40,000 into a blue chip stock; $30,000 remains in the FCU. What is the 
insurance coverage?

    Answer: Originally, the full $70,000 in A's IRA account is insured. 
The $40,000 is no longer insured once it is moved out of the FCU. The 
$30,000 remaining in the FCU is insured (Sec. 745.9-2).

[74 FR 55751, Oct. 29, 2009, as amended at 75 FR 34622, June 18, 2010]



PART 747_ADMINISTRATIVE ACTIONS, ADJUDICATIVE HEARINGS, RULES OF 
PRACTICE AND PROCEDURE, AND INVESTIGATIONS--Table of Contents



Sec.
747.0  Scope of part 747.

            Subpart A_Uniform Rules of Practice and Procedure

747.1  Scope.
747.2  Rules of construction.
747.3  Definitions.
747.4  Authority of NCUA Board.
747.5  Authority of the administrative law judge.
747.6  Appearance and practice in adjudicatory proceedings.
747.7  Good faith certification.
747.8  Conflicts of interest.
747.9  Ex parte communications.
747.10  Filing of papers.

[[Page 1105]]

747.11  Service of papers.
747.12  Construction of time limits.
747.13  Change of time limits.
747.14  Witness fees and expenses.
747.15  Opportunity for informal settlement.
747.16  NCUA's right to conduct examination.
747.17  Collateral attacks on adjudicatory proceeding.
747.18  Commencement of proceeding and contents of notice.
747.19  Answer.
747.20  Amended pleadings.
747.21  Failure to appear.
747.22  Consolidation and severance of actions.
747.23  Motions.
747.24  Scope of document discovery.
747.25  Request for document discovery from parties.
747.26  Document subpoenas to nonparties.
747.27  Deposition of witness unavailable for hearing.
747.28  Interlocutory review.
747.29  Summary disposition.
747.30  Partial summary disposition.
747.31  Scheduling and prehearing conferences.
747.32  Prehearing submissions.
747.33  Public hearings.
747.34  Hearing subpoenas.
747.35  Conduct of hearings.
747.36  Evidence.
747.37  Post-hearing filings.
747.38  Recommended decision and filing of record.
747.39  Exceptions to recommended decision.
747.40  Review by the NCUA Board.
747.41  Stays pending judicial review.

             Subpart B_Local Rules of Practice and Procedure

747.100  Discovery limitations.

 Subpart C_Local Rules and Procedures Applicable to Proceedings for the 
                Involuntary Termination of Insured Status

747.201  Scope.
747.202  Grounds for termination of insurance.
747.203  Notice of charges.
747.204  Notice of intention to terminate insured status.
747.205  Order terminating insured status.
747.206  Consent to termination of insured status.
747.207  Notice of termination of insured status.
747.208  Duties after termination.

   Subpart D_Local Rules and Procedures Applicable to Suspensions and 
                    Prohibitions Where Felony Charged

747.301  Scope.
747.302  Rules of practice; remainder of board of directors.
747.303  Notice of suspension or prohibition.
747.304  Removal or permanent prohibition.
747.305  Effectiveness of suspension or removal until completion of 
          hearing.
747.306  Notice of opportunity for hearing.
747.307  Hearing.
747.308  Waiver of hearing; failure to request hearing or review based 
          on written submissions; failure to appear.
747.309  Decision of the NCUA Board.
747.310  Reconsideration by the NCUA Board.
747.311  Relevant considerations.

Subpart E_Local Rules and Procedures Applicable to Proceedings Relating 
     to the Suspension or Revocation of Charters and to Involuntary 
                       Liquidations Under Title I

747.401  Scope.
747.402  Grounds for suspension or revocation of charter and for 
          involuntary liquidation.
747.403  Notice of intent to suspend or revoke charter; notice of 
          suspension.
747.404  Notice of hearing.
747.405  Issuance of order.
747.406  Cancellation of charter.

Subpart F--Local Rules and Procedures Applicable to Proceedings Relating to 
the Termination of Membership in the Central Liquidity Facility [Reserved]

Subpart G_Local Rules and Procedures Applicable to Recovery of Attorneys 
 Fees and Other Expenses Under the Equal Access to Justice Act in NCUA 
                           Board Adjudications

747.601  Purpose and scope.
747.602  Eligibility of applicants.
747.603  Prevailing party.
747.604  Standards for award.
747.605  Allowable fees and expenses.
747.606  Contents of application.
747.607  Statement of net worth.
747.608  Documentation of fees and expenses.
747.609  Filing and service of applications.
747.610  Answer to application.
747.611  Comments by other parties.
747.612  Settlement.
747.613  Further proceedings.
747.614  Recommended decision.
747.615  Decision of the NCUA Board.
747.616  Payment of award.

    Subpart H_Local Rules and Procedures Applicable to Investigations

747.701  Applicability.
747.702  Information obtained in investigations.
747.703  Authority to conduct investigations.

[[Page 1106]]

  Subpart I_Local Rules Applicable to Formal Investigative Proceedings

747.801  Applicability.
747.802  Non-public formal investigative proceedings.
747.803  Subpoenas.
747.804  Oath; false statements.
747.805  Self-incrimination; immunity.
747.806  Transcripts.
747.807  Rights of witnesses.

   Subpart J_Local Procedures and Standards Applicable to a Notice of 
  Change in Senior Executive Officers, Directors or Committee Members 
                   Pursuant to Section 212 of the Act

747.901  Scope.
747.902  Grounds for disapproval of notice.
747.903  Procedures where notice of disapproval issued; reconsideration.
747.904  Appeal.
747.905  Judicial review.

       Subpart K_Inflation Adjustment of Civil Monetary Penalties

747.1001  Adjustment of civil monetary penalties by the rate of 
          inflation.

  Subpart L_Issuance, Review and Enforcement of Orders Imposing Prompt 
                            Corrective Action

747.2001  Scope.
747.2002  Review of order imposing discretionary supervisory action.
747.2003  Review of order reclassifying a credit union on safety and 
          soundness criteria.
747.2004  Review of order to dismiss a director or senior executive 
          officer.
747.2005  Enforcement of orders.

  Subpart M_Issuance, Review and Enforcement of Orders Imposing Prompt 
              Corrective Action on Corporate Credit Unions

747.3001  Scope.
747.3002  Review of orders imposing discretionary supervisory action.
747.3003  Review of order reclassifying a corporate credit union on 
          safety and soundness criteria.
747.3004  Review of order to dismiss a director or senior executive 
          officer.
747.3005  Enforcement of directives.
747.3006  Conservatorship or liquidation of critically undercapitalized 
          corporate credit union.

    Authority: 12 U.S.C. 1766, 1782, 1784, 1785, 1786, 1787, 1790a, 
1790d; 15 U.S.C. 1639e; 42 U.S.C. 4012a; Pub. L. 101-410; Pub. L. 104-
134; Pub. L. 109-351; Pub. L. 114-74.

    Source: 56 FR 37767, Aug. 8, 1991, unless otherwise noted.



Sec. 747.0  Scope of part 747.

    (a) This part describes the various formal and informal adjudicative 
actions and non-adjudicative proceedings available to the National 
Credit Union Administration Board (``NCUA Board''), the grounds for 
those actions and proceedings, and the procedures used in formal and 
informal hearings related to each available action. As mandated by 
section 916 of the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 (``FIRREA'') (12 U.S.C. 1818 note), this part 
incorporates uniform rules of practice and procedure governing formal 
adjudications generally, as well as proceedings involving cease-and-
desist actions, assessment of civil money penalties, and removal, 
prohibition and suspension actions. In addition, the Uniform Rules are 
incorporated in other subparts of this part which provide for formal 
adjudications. The administrative actions and proceedings described 
herein, as well as the grounds and hearing procedures for each, are 
controlled by sections 120(b) (except where the Federal credit union is 
closed due to insolvency), 202(a)(3) and 206 of the Federal Credit Union 
Act (``the Act''), 12 U.S.C. 1766(b), 1782(a)(3), 1786. Should any 
provision of this part be inconsistent with these or any other 
provisions of the Act, as amended, the Act shall control. Judicial 
enforcement of any action or order described in this part, as well as 
judicial review thereof, shall be as prescribed under the Act (12 U.S.C. 
1751 et seq.) and the Administrative Procedure Act (5 U.S.C. 500 et 
seq.).
    (b) As used in this part, the term insured credit union means any 
Federal credit union or any state chartered credit union insured under 
subchapter II of the Act unless the context indicates otherwise.

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992]



            Subpart A_Uniform Rules of Practice and Procedure



Sec. 747.1  Scope.

    This subpart prescribes uniform rules of practice and procedure 
applicable to

[[Page 1107]]

adjudicatory proceedings required to be conducted on the record after 
opportunity for a hearing under the following statutory provisions:
    (a) Cease-and-desist proceedings under section 206(e) of the Act (12 
U.S.C. 1786(e));
    (b) Removal and prohibition proceedings under section 206(g) of the 
Act (12 U.S.C. 1786(g));
    (c) Assessment of civil money penalties by the NCUA Board against 
institutions and institution-affiliated parties for any violation of:
    (1) Section 202 of the Act (12 U.S.C. 1782);
    (2) Section 1120 of FIRREA (12 U.S.C. 3349), or any order or 
regulation issued thereunder;
    (3) The terms of any final or temporary order issued under section 
206 of the Act or any written agreement executed by the National Credit 
Union Administration (``NCUA''), any condition imposed in writing by the 
NCUA in connection with any action on any application, notice, or other 
request by the credit union or institution-affiliated party, certain 
unsafe or unsound practices or breaches of fiduciary duty, or any law or 
regulation not otherwise provided herein, pursuant to 12 U.S.C. 1786(k); 
and
    (4) Any provision of law referenced in section 102(f) of the Flood 
Disaster Protection Act of 1973 (42 U.S.C. 4012a(f)) or any order or 
regulation issued thereunder;
    (d) Remedial action under section 102(g) of the Flood Disaster 
Protection Act of 1973 (42 U.S.C. 4012a(g)); and
    (e) This subpart also applies to all other adjudications required by 
statute to be determined on the record after opportunity for an agency 
hearing, unless otherwise specifically provided for in subparts B 
through J of this part.

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992, as amended at 61 FR 
28025, June 4, 1996; 71 FR 67440, Nov. 22, 2006]



Sec. 747.2  Rules of construction.

    For purposes of this subpart:
    (a) Any term in the singular includes the plural, and the plural 
includes the singular, if such use would be appropriate;
    (b) Any use of a masculine, feminine, or neuter gender encompasses 
all three, if such use would be appropriate;
    (c) The term counsel includes a non-attorney representative; and
    (d) Unless the context requires otherwise, a party's counsel of 
record, if any, may, on behalf of that party, take any action required 
to be taken by the party.



Sec. 747.3  Definitions.

    For purposes of this subpart, unless explicitly stated to the 
contrary:
    (a) Administrative law judge means one who presides at an 
administrative hearing under authority set forth at 5 U.S.C. 556.
    (b) Adjudicatory proceeding means a proceeding conducted pursuant to 
this subpart and leading to the formulation of a final order other than 
a regulation.
    (c) Decisional employee means any member of the NCUA's or 
administrative law judge's staff who has not engaged in an investigative 
or prosecutorial role in a proceeding and who may assist the Agency or 
the administrative law judge, respectively, in preparing orders, 
recommended decisions, decisions, and other documents under the Uniform 
Rules.
    (d) Enforcement Counsel means any individual who files a notice of 
appearance as counsel on behalf of the NCUA in an adjudicatory 
proceeding.
    (e) Final order means an order issued by the NCUA with or without 
the consent of the affected institution or the institution-affiliated 
party, that has become final, without regard to the pendency of any 
petition for reconsideration or review.
    (f) Institution includes: (1) Any Federal credit union as that term 
is defined in section 101(1) of the Act (12 U.S.C. 1752(1)); and
    (2) Any insured state credit union as that term is defined in 
section 101(7) of the FCUA (12 U.S.C. 1752(7)).
    (g) Institution-affiliated party means any institution-affiliated 
party as that term is defined in section 206(r) of the Act (12 U.S.C. 
1786(r)).
    (h) Local Rules means those rules promulgated by the NCUA in the 
subparts of this part other than subpart A of this part.

[[Page 1108]]

    (i) OFIA means the Office of Financial Institution Adjudication, 
which is the executive body charged with overseeing the administration 
of administrative enforcement proceedings for the NCUA, the Office of 
the Comptroller of the Currency (``OCC''), the Board of Governors of the 
Federal Reserve System (``Board''), the Federal Deposit Insurance 
Corporation (``FDIC''), and the Office of Thrift Supervision (``OTS'').
    (j) Party means the NCUA and any person named as a party in any 
notice.
    (k) Person means an individual, sole proprietor, partnership, 
corporation, unincorporated association, trust, joint venture, pool, 
syndicate, agency or other entity or organization, including an 
institution as defined in paragraph (f) of this section.
    (l) Respondent means any party other than the NCUA.
    (m) Uniform Rules means those rules in subpart A of this part that 
are common to the NCUA, the OCC, the Board, the FDIC and the OTS.
    (n) Violation includes any action (alone or with another or others) 
for or toward causing, bringing about, participating in, counseling, or 
aiding or abetting a violation.

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992]



Sec. 747.4  Authority of the NCUA Board.

    The NCUA Board may, at any time during the pendency of a proceeding 
perform, direct the performance of, or waive performance of, any act 
which could be done or ordered by the administrative law judge.



Sec. 747.5  Authority of the administrative law judge.

    (a) General rule. All proceedings governed by this part shall be 
conducted in accordance with the provisions of chapter 5 of title 5 of 
the United States Code. The administrative law judge shall have all 
powers necessary to conduct a proceeding in a fair and impartial manner 
and to avoid unnecessary delay.
    (b) Powers. The administrative law judge shall have all powers 
necessary to conduct the proceeding in accordance with paragraph (a) of 
this section, including the following powers:
    (1) To administer oaths and affirmations;
    (2) To issue subpoenas, subpoenas duces tecum, and protective 
orders, as authorized by this part, and to quash or modify any such 
subpoenas and orders;
    (3) To receive relevant evidence and to rule upon the admission of 
evidence and offers of proof;
    (4) To take or cause depositions to be taken as authorized by this 
subpart;
    (5) To regulate the course of the hearing and the conduct of the 
parties and their counsel;
    (6) To hold scheduling and/or pre-hearing conferences as set forth 
in Sec. 747.31;
    (7) To consider and rule upon all procedural and other motions 
appropriate in an adjudicatory proceeding, provided that only the NCUA 
Board shall have the power to grant any motion to dismiss the proceeding 
or to decide any other motion that results in a final determination of 
the merits of the proceeding;
    (8) To prepare and present to the NCUA Board a recommended decision 
as provided herein;
    (9) To recuse himself or herself by motion made by a party or on his 
or her own motion;
    (10) To establish time, place and manner limitations on the 
attendance of the public and the media for any public hearing; and
    (11) To do all other things necessary and appropriate to discharge 
the duties of a presiding officer.



Sec. 747.6  Appearance and practice in adjudicatory proceedings.

    (a) Appearance before the NCUA or an administrative law judge--(1) 
By attorneys. Any member in good standing of the bar of the highest 
court of any state, commonwealth, possession, territory of the United 
States, or the District of Columbia may represent others before the NCUA 
if such attorney is not currently suspended or debarred from practice 
before the NCUA.
    (2) By non-attorneys. An individual may appear on his or her own 
behalf; a member of a partnership may represent

[[Page 1109]]

the partnership; a duly authorized officer, director, or employee of any 
government unit, agency, institution, corporation or authority may 
represent that unit, agency, institution, corporation or authority if 
such officer, director, or employee is not currently suspended or 
debarred from practice before the NCUA.
    (3) Notice of appearance. Any individual acting as counsel on behalf 
of a party, including the NCUA Board, shall file a notice of appearance 
with OFIA at or before the time that the individual submits papers or 
otherwise appears on behalf of a party in the adjudicatory proceeding. 
The notice of appearance must include a written declaration that the 
individual is currently qualified as provided in paragraph (a)(1) or 
(a)(2) of this section and is authorized to represent the particular 
party. By filing a notice of appearance on behalf of a party in an 
adjudicatory proceeding, the counsel agrees and represents that he or 
she is authorized to accept service on behalf of the represented party 
and that, in the event of withdrawal from representation, he or she 
will, if required by the administrative law judge, continue to accept 
service until new counsel has filed a notice of appearance or until the 
represented party indicates that he or she will proceed on a pro se 
basis.
    (b) Sanctions. Dilatory, obstructionist, egregious, contemptuous or 
contumacious conduct at any phase of any adjudicatory proceeding may be 
grounds for exclusion or suspension of counsel from the proceeding.

[56 FR 37767, Aug. 8, 1991, as amended at 61 FR 28025, June 4, 1996]



Sec. 747.7  Good faith certification.

    (a) General requirement. Every filing or submission of record 
following the issuance of a notice shall be signed by at least one 
counsel of record in his or her individual name and shall state that 
counsel's address and telephone number. A party who acts as his or her 
own counsel shall sign his or her individual name and state his or her 
address and telephone number on every filing or submission of record.
    (b) Effect of signature. (1) The signature of counsel or a party 
shall constitute a certification that: the counsel or party has read the 
filing or submission of record; to the best of his or her knowledge, 
information, and belief formed after reasonable inquiry, the filing or 
submission of record is well-grounded in fact and is warranted by 
existing law or a good faith argument for the extension, modification, 
or reversal of existing law; and the filing or submission of record is 
not made for any improper purpose, such as to harass or to cause 
unnecessary delay or needless increase in the cost of litigation.
    (2) If a filing or submission of record is not signed, the 
administrative law judge shall strike the filing or submission of 
record, unless it is signed promptly after the omission is called to the 
attention of the pleader or movant.
    (c) Effect of making oral motion or argument. The act of making any 
oral motion or oral argument by any counsel or party constitutes a 
certification that to the best of his or her knowledge, information, and 
belief formed after reasonable inquiry, his or her statements are well-
grounded in fact and are warranted by existing law or a good faith 
argument for the extension, modification, or reversal of existing law, 
and are not made for any improper purpose, such as to harass or to cause 
unnecessary delay or needless increase in the cost of litigation.

[56 FR 37767, Aug. 8, 1991, as amended at 75 FR 34622, June 18, 2010]



Sec. 747.8  Conflicts of interest.

    (a) Conflict of interest in representation. No person shall appear 
as counsel for another person in an adjudicatory proceeding if it 
reasonably appears that such representation may be materially limited by 
that counsel's responsibilities to a third person or by the counsel's 
own interests. The administrative law judge may take corrective measures 
at any stage of a proceeding to cure a conflict of interest in 
representation, including the issuance of an order limiting the scope of 
representation or disqualifying an individual from appearing in a 
representative capacity for the duration of the proceeding.
    (b) Certification and waiver. If any person appearing as counsel 
represents

[[Page 1110]]

two or more parties to an adjudicatory proceeding or also represents a 
non-party on a matter relevant to an issue in the proceeding, counsel 
must certify in writing at the time of filing the notice of appearance 
required by Sec. 747.6(a):
    (1) That the counsel has personally and fully discussed the 
possibility of conflicts of interest with each such party and non-party; 
and
    (2) That each such party and non-party waives any right it might 
otherwise have had to assert any known conflicts of interest or to 
assert any non-material conflicts of interest during the course of the 
proceeding.

[56 FR 37767, Aug. 8, 1991, as amended at 61 FR 28025, June 4, 1996]



Sec. 747.9  Ex parte communications.

    (a) Definition--(1) Ex parte communication means any material oral 
or written communication relevant to the merits of an adjudicatory 
proceeding that was neither on the record nor on reasonable prior notice 
to all parties that takes place between--
    (i) An interested person outside the NCUA (including such person's 
counsel); and
    (ii) The administrative law judge handling that proceeding, the NCUA 
Board, or a decisional employee.
    (2) Exception. A request for status of the proceeding does not 
constitute an ex parte communication.
    (b) Prohibition of ex parte communications. From the time the notice 
is issued by the NCUA Board until the date that the NCUA Board issues 
its final decision pursuant to Sec. 747.40(c):
    (1) No interested person outside the NCUA shall make or knowingly 
cause to be made an ex parte communication to any member of the NCUA 
Board, the administrative law judge, or a decisional employee; and
    (2) No member of the NCUA Board, administrative law judge, or 
decisional employee shall make or knowingly cause to be made to any 
interested person outside the NCUA any ex parte communication.
    (c) Procedure upon occurrence of ex parte communication. If an ex 
parte communication is received by the administrative law judge, a 
member of the NCUA Board or any other person identified in paragraph (a) 
of this section, that person shall cause all such written communications 
(or, if the communication is oral, a memorandum stating the substance of 
the communication) to be placed on the record of the proceeding and 
served on all parties. All other parties to the proceeding shall have an 
opportunity, within ten days of receipt of service of the ex parte 
communication, to file responses thereto and to recommend any sanctions, 
in accordance with paragraph (d) of this section, that they believe to 
be appropriate under the circumstances.
    (d) Sanctions. Any party or his or her counsel who makes a 
prohibited ex parte communication, or who encourages or solicits another 
to make any such communication, may be subject to any appropriate 
sanction or sanctions imposed by the NCUA Board or the administrative 
law judge including, but not limited to, exclusion from the proceedings 
and an adverse ruling on the issue which is the subject of the 
prohibited communication.
    (e) Separation of functions. Except to the extent required for the 
disposition of ex parte matters as authorized by law, the administrative 
law judge may not consult a person or party on any matter relevant to 
the merits of the adjudication, unless on notice and opportunity for all 
parties to participate. An employee or agent engaged in the performance 
of investigative or prosecuting functions for the NCUA in a case may 
not, in that or a factually related case, participate or advise in the 
decision, recommended decision, or agency review of the recommended 
decision under section 747.40, except as witness or counsel in public 
proceedings.

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992, as amended at 61 FR 
28025, June 4, 1996]



Sec. 747.10  Filing of papers.

    (a) Filing. Any papers required to be filed, excluding documents 
produced in response to a discovery request pursuant to Secs. 747.25 and 
747.26, shall be filed with the OFIA, except as otherwise provided.
    (b) Manner of filing. Unless otherwise specified by the NCUA Board 
or the administrative law judge, filing may be accomplished by:
    (1) Personal service;

[[Page 1111]]

    (2) Delivering the papers to a reliable commercial courier service, 
overnight delivery service, or to the U.S. Post Office for Express Mail 
delivery;
    (3) Mailing the papers by first class, registered, or certified 
mail; or
    (4) Transmission by electronic media, only if expressly authorized, 
and upon any conditions specified, by the NCUA Board or the 
administative law judge. All papers filed by electronic media shall also 
concurrently be filed in accordance with paragraph (c) of this section.
    (c) Formal requirements as to papers filed--(1) Form. All papers 
filed must set forth the name, address, and telephone number of the 
counsel or party making the filing and must be accompanied by a 
certification setting forth when and how service has been made on all 
other parties. All papers filed must be double-spaced and printed or 
typewritten on 8\1/2\  x  11 inch paper, and must be clear and legible.
    (2) Signature. All papers must be dated and signed as provided in 
Sec. 747.7.
    (3) Caption. All papers filed must include at the head thereof, or 
on a title page, the name of the NCUA and of the filing party, the title 
and docket number of the proceeding, and the subject of the particular 
paper.
    (4) Number of copies. Unless otherwise specified by the NCUA Board, 
or the administrative law judge, an original and one copy of all 
documents and papers shall be filed, except that only one copy of 
transcripts of testimony and exhibits shall be filed.

[56 FR 37767, Aug. 8, 1991, as amended at 75 FR 34622, June 18, 2010]



Sec. 747.11  Service of papers.

    (a) By the parties. Except as otherwise provided, a party filing 
papers shall serve a copy upon the counsel of record for all other 
parties to the proceeding so represented, and upon any party not so 
represented.
    (b) Method of service. Except as provided in paragraphs (c)(2) and 
(d) of this section, a serving party shall use one or more of the 
following methods of service:
    (1) Personal service;
    (2) Delivering the papers to a reliable commercial courier service, 
overnight delivery service, or to the U.S. Post Office for Express Mail 
delivery;
    (3) Mailing the papers by first class, registered, or certified 
mail; or
    (4) Transmission by electronic media, only if the parties mutually 
agree. Any papers served by electronic media shall also concurrently be 
served in accordance with the requirements of Sec. 747.10(c).
    (c) By the NCUA Board or the administrative law judge. (1) All 
papers required to be served by the NCUA Board or the administrative law 
judge upon a party who has appeared in the proceeding in accordance with 
Sec. 747.6, shall be served by any means specified in paragraph (b) of 
this section.
    (2) If a party has not appeared in the proceeding in accordance with 
Sec. 747.6, the NCUA Board or the administrative law judge shall make 
service by any of the following methods:
    (i) By personal service;
    (ii) If the person to be served is an individual, by delivery to a 
person of suitable age and discretion at the physical location where the 
individual resides or works;
    (iii) If the person to be served is a corporation or other 
association, by delivery to an officer, managing or general agent, or to 
any other agent authorized by appointment or by law to receive service 
and, if the agent is one authorized by statute to receive service and 
the statute so requires, by also mailing a copy to the party;
    (iv) By registered or certified mail addressed to the person's last 
known address; or
    (v) By any other method reasonably calculated to give actual notice.
    (d) Subpoenas. Service of a subpoena may be made:
    (1) By personal service;
    (2) If the person to be served is an individual, by delivery to a 
person of suitable age and discretion at the physical location where the 
individual resides or works;
    (3) By delivery to an agent, which, in the case of a corporation or 
other association, is delivery to an officer, managing or general agent, 
or to any other agent authorized by appointment or by law to receive 
service and, if the agent is one authorized by statute to receive

[[Page 1112]]

service and the statute so requires, by also mailing a copy to the 
party;
    (4) By registered or certified mail addressed to the person's last 
known address; or
    (5) By any other method reasonably calculated to give actual notice.
    (e) Area of service. Service in any state, territory, possession of 
the United States, or the District of Columbia, on any person or company 
doing business in any state, territory, possession of the United States, 
or the District of Columbia, or on any person as otherwise provided by 
law, is effective without regard to the place where the hearing is held, 
provided that if service is made on a foreign bank in connection with an 
action or proceeding involving one or more of its branches or agencies 
located in any state, territory, possession of the United States, or the 
District of Columbia, service shall be made on at least one branch or 
agency so involved.

[56 FR 37767, Aug. 8, 1991, as amended at 61 FR 28025, June 4, 1996]



Sec. 747.12  Construction of time limits.

    (a) General rule. In computing any period of time prescribed by this 
subpart, the date of the act or event that commences the designated 
period of time is not included. The last day so computed is included 
unless it is a Saturday, Sunday, or Federal holiday. When the last day 
is a Saturday, Sunday, or Federal holiday, the period runs until the end 
of the next day that is not a Saturday, Sunday, or Federal holiday. 
Intermediate Saturdays, Sundays, and Federal holidays are included in 
the computation of time. However, when the time period within which an 
act is to be performed is ten days or less, not including any additional 
time allowed for in Sec. 747.12(c), intermediate Saturdays, Sundays, and 
Federal holidays are not included.
    (b) When papers are deemed to be filed or served. (1) Filing and 
service are deemed to be effective:
    (i) In the case of personal service or same day commercial courier 
delivery, upon actual service;
    (ii) In the case of overnight commercial delivery service, U.S. 
Express Mail delivery, or first class, registered, or certified mail, 
upon deposit in or delivery to an appropriate point of collection;
    (iii) In the case of transmission by electronic media, as specified 
by the authority receiving the filing, in the case of filing, and as 
agreed among the parties, in the case of service.
    (2) The effective filing and service dates specified in paragraph 
(b)(1) of this section may be modified by the NCUA Board or 
administrative law judge in the case of filing or by agreement of the 
parties in the case of service.
    (c) Calculation of time for service and filing of responsive papers. 
Whenever a time limit is measured by a prescribed period from the 
service of any notice or paper, the applicable time limits are 
calculated as follows:
    (1) If service is made by first class, registered, or certified 
mail, add three calendar days to the prescribed period;
    (2) If service is made by express mail or overnight delivery 
service, add one calendar day to the prescribed period; or
    (3) If service is made by electronic media transmission, add one 
calendar day to the prescribed period, unless otherwise determined by 
the NCUA Board or the administrative law judge in the case of filing, or 
by agreement among the parties in the case of service.

[56 FR 37767, Aug. 8, 1991, as amended at 61 FR 28026, June 4, 1996]



Sec. 747.13  Change of time limits.

    Except as otherwise provided by law, the administrative law judge 
may, for good cause shown, extend the time limits prescribed by the 
Uniform Rules or by any notice or order issued in the proceedings. After 
the referral of the case to the NCUA Board pursuant to Sec. 747.38, the 
NCUA Board may grant extensions of the time limits for good cause shown. 
Extensions may be granted upon the motion of a party after notice and 
opportunity to respond is afforded all non-moving parties, or upon the 
NCUA Board's or the administrative law judge's own motion.



Sec. 747.14  Witness fees and expenses.

    Witnesses subpoenaed for testimony or depositions shall be paid the 
same fees for attendance and mileage as are

[[Page 1113]]

paid in the United States district courts in proceedings in which the 
United States is a party, provided that, in the case of a discovery 
subpoena addressed to a party, no witness fees or mileage need be paid. 
Fees for witnesses shall be tendered in advance by the party requesting 
the subpoena, except that fees and mileage need not be tendered in 
advance where the NCUA is the party requesting the subpoena. The NCUA 
shall not be required to pay any fees to, or expenses of, any witness 
not subpoenaed by the NCUA.



Sec. 747.15  Opportunity for informal settlement.

    Any respondent may, at any time in the proceeding, unilaterally 
submit to Enforcement Counsel written offers or proposals for settlement 
of a proceeding, without prejudice to the rights of any of the parties. 
No such offer or proposal shall be made to any NCUA representative other 
than Enforcement Counsel. Submission of a written settlement offer does 
not provide a basis for adjourning or otherwise delaying all or any 
portion of a proceeding under this part. No settlement offer or 
proposal, or any subsequent negotiation or resolution, is admissible as 
evidence in any proceeding.



Sec. 747.16  NCUA's right to conduct examination.

    Nothing contained in this subpart limits in any manner the right of 
the NCUA to conduct any examination, inspection, or visitation of any 
institution or institution-affiliated party, or the right of the NCUA to 
conduct or continue any form of investigation authorized by law.

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992]



Sec. 747.17  Collateral attacks on adjudicatory proceeding.

    If an interlocutory appeal or collateral attack is brought in any 
court concerning all or any part of an adjudicatory proceeding, the 
challenged adjudicatory proceeding shall continue without regard to the 
pendency of that court proceeding. No default or other failure to act as 
directed in the adjudicatory proceeding within the times prescribed in 
this subpart shall be excused based on the pendency before any court of 
any interlocutory appeal or collateral attack.



Sec. 747.18  Commencement of proceeding and contents of notice.

    (a) Commencement of proceeding. (1) A proceeding governed by this 
subpart is commenced by issuance of a notice by the NCUA Board.
    (2) The notice must be served by the NCUA Board upon the respondent 
and given to any other appropriate financial institution supervisory 
authority where required by law.
    (3) The notice must be filed with the OFIA.
    (b) Contents of notice. The notice must set forth:
    (1) The legal authority for the proceeding and for the NCUA's 
jurisdiction over the proceeding;
    (2) A statement of the matters of fact or law showing that the NCUA 
is entitled to relief;
    (3) A proposed order or prayer for an order granting the requested 
relief;
    (4) The time, place, and nature of the hearing as required by law or 
regulation;
    (5) The time within which to file an answer as required by law or 
regulation;
    (6) The time within which to request a hearing as required by law or 
regulation; and
    (7) That the answer and/or request for a hearing shall be filed with 
OFIA.



Sec. 747.19  Answer.

    (a) When. Within 20 days of service of the notice, respondent shall 
file an answer as designated in the notice. In a civil money penalty 
proceeding, respondent shall also file a request for a hearing within 20 
days of service of the notice.
    (b) Content of answer. An answer must specifically respond to each 
paragraph or allegation of fact contained in the notice and must admit, 
deny, or state that the party lacks sufficient information to admit or 
deny each allegation of fact. A statement of lack of information has the 
effect of a denial. Denials must fairly meet the substance of each 
allegation of fact denied; general denials are not permitted. When a 
respondent denies part of an allegation, that

[[Page 1114]]

part must be denied and the remainder specifically admitted. Any 
allegation of fact in the notice which is not denied in the answer must 
be deemed admitted for purposes of the proceeding. A respondent is not 
required to respond to the portion of a notice that constitutes the 
prayer for relief or proposed order. The answer must set forth 
affirmative defenses, if any, asserted by the respondent.
    (c) Default--(1) Effect of failure to answer. Failure of a 
respondent to file an answer required by this section within the time 
provided constitutes a waiver of his or her right to appear and contest 
the allegations in the notice. If no timely answer is filed, the 
administrative law judge, upon motion of the Enforcement Counsel, shall 
file with the NCUA Board a recommended decision containing the findings 
and the relief sought in the notice. Any final order issued by the NCUA 
Board based upon a respondent's failure to answer is deemed to be an 
order issued upon consent.
    (2) Effect of failure to request a hearing in civil money penalty 
proceedings. If respondent fails to request a hearing as required by law 
within the time provided, the notice of assessment constitutes a final 
and unappealable order.



Sec. 747.20  Amended pleadings.

    (a) Amendments. The notice or answer may be amended or supplemented 
at any stage of the proceeding. The respondent must answer an amended 
notice within the time remaining for the respondent's answer to the 
original notice, or within ten days after service of the amended notice, 
whichever period is longer, unless the NCUA Board or administrative law 
judge orders otherwise for good cause.
    (b) Amendments to conform to the evidence. When issues not raised in 
the notice or answer are tried at the hearing by express or implied 
consent of the parties, they will be treated in all respects as if they 
had been raised in the notice or answer, and no formal amendments are 
required. If evidence is objected to at the hearing on the ground that 
it is not within the issues raised by the notice or answer, the 
administrative law judge may admit the evidence when admission is likely 
to assist in adjudicating the merits of the action and the objecting 
party fails to satisfy the administrative law judge that the admission 
of such evidence would unfairly prejudice that party's action or defense 
upon the merits. The administrative law judge may grant a continuance to 
enable the objecting party to meet such evidence.

[61 FR 28026, June 4, 1996]



Sec. 747.21  Failure to appear.

    Failure of a respondent to appear in person at the hearing or by a 
duly authorized counsel constitutes a waiver of respondent's right to a 
hearing and is deemed an admission of the facts as alleged and consent 
to the relief sought in the notice. Without further proceedings or 
notice to the respondent, the administrative law judge shall file with 
the NCUA Board a recommended decision containing the findings and the 
relief sought in the notice.



Sec. 747.22  Consolidation and severance of actions.

    (a) Consolidation. (1) On the motion of any party, or on the 
administrative law judge's own motion, the administrative law judge may 
consolidate, for some or all purposes, any two or more proceedings, if 
each such proceeding involves or arises out of the same transaction, 
occurrence or series of transactions or occurrences, or involves at 
least one common respondent or a material common question of law or 
fact, unless such consolidation would cause unreasonable delay or 
injustice.
    (2) In the event of consolidation under paragraph (a)(1) of this 
section, appropriate adjustment to the prehearing schedule must be made 
to avoid unnecessary expense, inconvenience, or delay.
    (b) Severance. The administrative law judge may, upon the motion of 
any party, sever the proceeding for separate resolution of the matter as 
to any respondent only if the administrative law judge finds that:
    (1) Undue prejudice or injustice to the moving party would result 
from not severing the proceeding; and
    (2) Such undue prejudice or injustice would outweigh the interests 
of judicial economy and expedition in the

[[Page 1115]]

complete and final resolution of the proceeding.



Sec. 747.23  Motions.

    (a) In writing. (1) Except as otherwise provided herein, an 
application or request for an order or ruling must be made by written 
motion.
    (2) All written motions must state with particularity the relief 
sought and must be accompanied by a proposed order.
    (3) No oral argument may be held on written motions except as 
otherwise directed by the administrative law judge. Written memorandum, 
briefs, affidavits or other relevant material or documents may be filed 
in support of or in opposition to a motion.
    (b) Oral motions. A motion may be made orally on the record unless 
the administrative law judge directs that such motion be reduced to 
writing.
    (c) Filing of motions. Motions must be filed with the administrative 
law judge, except that upon the filing of the recommended decision, 
motions must be filed with the NCUA Board.
    (d) Responses. (1) Except as otherwise provided herein, within ten 
days after service of any written motion, or within such other period of 
time as may be established by the administrative law judge or the NCUA 
Board, any party may file a written response to a motion. The 
administrative law judge shall not rule on any oral or written motion 
before each party has had an opportunity to file a response.
    (2) The failure of a party to oppose a written motion or an oral 
motion made on the record is deemed a consent by that party to the entry 
of an order substantially in the form of the order accompanying the 
motion.
    (e) Dilatory motions. Frivolous, dilatory or repetitive motions are 
prohibited. The filing of such motions may form the basis for sanctions.
    (f) Dispositive motions. Dispositive motions are governed by 
Secs. 747.29 and 747.30.



Sec. 747.24  Scope of document discovery.

    (a) Limits on discovery. (1) Subject to the limitations set out in 
paragraphs (b), (c), and (d) of this section, a party to a proceeding 
under this subpart may obtain document discovery by serving a written 
request to produce documents. For purposes of a request to produce 
documents, the term ``documents'' may be defined to include drawings, 
graphs, charts, photographs, recordings, data stored in electronic form, 
and other data compilations from which information can be obtained, or 
translated, if necessary, by the parties through detection devices into 
reasonably usable form, as well as written material of all kinds.
    (2) Discovery by use of deposition is governed by subpart I of this 
part.
    (3) Discovery by use of interrogatories is not permitted.
    (b) Relevance. A party may obtain document discovery regarding any 
matter, not privileged, that has material relevance to the merits of the 
pending action. Any request to produce documents that calls for 
irrelevant material, that is unreasonable, oppressive, excessive in 
scope, unduly burdensome, or repetitive of previous requests, or that 
seeks to obtain privileged documents will be denied or modified. A 
request is unreasonable, oppressive, excessive in scope, or unduly 
burdensome if, among other things, it fails to include justifiable 
limitations on the time period covered and the geographic locations to 
be searched, the time provided to respond in the request is inadequate, 
or the request calls for copies of documents to be delivered to the 
requesting party and fails to include the requester's written agreement 
to pay in advance for the copying, in accordance with Sec. 747.25.
    (c) Privileged matter. Privileged documents are not discoverable. 
Privileges include the attorney-client privilege, work-product 
privilege, any government's or government agency's deliberative-process 
privilege, and any other privileges the Constitution, any applicable act 
of Congress, or the principles of common law provide.
    (d) Time limits. All discovery, including all responses to discovery 
requests, shall be completed at least 20 days prior to the date 
scheduled for the commencement of the hearing, except as provided in the 
Local Rules. No exceptions to this time limit shall be permitted, unless 
the administrative law judge finds on the record that good

[[Page 1116]]

cause exists for waiving the requirements of this paragraph.

[56 FR 37767, Aug. 8, 1991, as amended at 61 FR 28026, June 4, 1996]



Sec. 747.25  Request for document discovery from parties.

    (a) General rule. Any party may serve on any other party a request 
to produce for inspection any discoverable documents that are in the 
possession, custody, or control of the party upon whom the request is 
served. The request must identify the documents to be produced either by 
individual item or by category, and must describe each item and category 
with reasonable particularity. Documents must be produced as they are 
kept in the usual course of business or must be organized to correspond 
with the categories in the request.
    (b) Production or copying. The request must specify a reasonable 
time, place, and manner for production and performing any related acts. 
In lieu of inspecting the documents, the requesting party may specify 
that all or some of the responsive documents be copied and the copies 
delivered to the requesting party. If copying of fewer than 250 pages is 
requested, the party to whom the request is addressed shall bear the 
cost of copying and shipping charges. If a party requests 250 pages or 
more of copying, the requesting party shall pay for the copying and 
shipping charges. Copying charges are the current per-page copying rate 
imposed by 12 CFR 792.5(b) implementing the Freedom of Information Act 
(5 U.S.C. 552). The party to whom the request is addressed may require 
payment in advance before producing the documents.
    (c) Obligation to update responses. A party who has responded to a 
discovery request with a response that was complete when made is not 
required to supplement the response to include documents thereafter 
acquired, unless the responding party learns that:
    (1) The response was materially incorrect when made; or
    (2) The response, though correct when made, is no longer true and a 
failure to amend the response is, in substance, a knowing concealment.
    (d) Motions to limit discovery. (1) Any party that objects to a 
discovery request may, within ten days of being served with such 
request, file a motion in accordance with the provisions of Sec. 747.23 
to strike or otherwise limit the request. If an objection is made to 
only a portion of an item or category in a request, the portion objected 
to shall be specified. Any objections not made in accordance with this 
paragraph and Sec. 747.23 are waived.
    (2) The party who served the request that is the subject of a motion 
to strike or limit may file a written response within five days of 
service of the motion. No other party may file a response.
    (e) Privilege. At the time other documents are produced, the 
producing party must reasonably identify all documents withheld on the 
grounds of privilege and must produce a statement of the basis for the 
assertion of privilege. When similar documents that are protected by 
deliberative process, attorney work-product, or attorney-client 
privilege are voluminous, these documents may be identified by category 
instead of by individual document. The administrative law judge retains 
discretion to determine when the identification by category is 
insufficient.
    (f) Motions to compel production. (1) If a party withholds any 
documents as privileged or fails to comply fully with a discovery 
request, the requesting party may, within ten days of the assertion of 
privilege or of the time the failure to comply becomes known to the 
requesting party, file a motion in accordance with the provisions of 
Sec. 747.23 for the issuance of a subpoena compelling production.
    (2) The party who asserted the privilege or failed to comply with 
the request may file a written response to a motion to compel within 
five days of service of the motion. No other party may file a response.
    (g) Ruling on motions. After the time for filing responses pursuant 
to this section has expired, the administrative law judge shall rule 
promptly on all motions filed pursuant to this section. If the 
administrative law judge determines that a discovery request, or any of 
its terms, calls for irrelevant material, is unreasonable, oppressive, 
excessive in scope, unduly burdensome, or

[[Page 1117]]

repetitive of previous requests, or seeks to obtain privileged 
documents, he or she may deny or modify the request, and may issue 
appropriate protective orders, upon such conditions as justice may 
require. The pendency of a motion to strike or limit discovery or to 
compel production is not a basis for staying or continuing the 
proceeding, unless otherwise ordered by the administrative law judge. 
Notwithstanding any other provision in this part, the administrative law 
judge may not release, or order a party to produce, documents withheld 
on grounds of privilege if the party has stated to the administrative 
law judge its intention to file a timely motion for interlocutory review 
of the administrative law judge's order to produce the documents, and 
until the motion for interlocutory review has been decided.
    (h) Enforcing discovery subpoenas. If the administrative law judge 
issues a subpoena compelling production of documents by a party, the 
subpoenaing party may, in the event of noncompliance and to the extent 
authorized by applicable law, apply to any appropriate United States 
district court for an order requiring compliance with the subpoena. A 
party's right to seek court enforcement of a subpoena shall not in any 
manner limit the sanctions that may be imposed by the administrative law 
judge against a party who fails to produce subpoenaed documents.

[56 FR 37767, Aug. 8, 1991, as amended at 61 FR 28026, June 4, 1996; 61 
FR 45876, Aug. 30, 1996]



Sec. 747.26  Document subpoenas to nonparties.

    (a) General rules. (1) Any party may apply to the administrative law 
judge for the issuance of a document discovery subpoena addressed to any 
person who is not a party to the proceeding. The application must 
contain a proposed document subpoena and a brief statement showing the 
general relevance and reasonableness of the scope of documents sought. 
The subpoenaing party shall specify a reasonable time, place, and manner 
for making production in response to the document subpoena.
    (2) A party shall only apply for a document subpoena under this 
section within the time period during which such party could serve a 
discovery request under Sec. 747.24(d). The party obtaining the document 
subpoena is responsible for serving it on the subpoenaed person and for 
serving copies on all parties. Document subpoenas may be served in any 
state, territory, or possession of the United States, the District of 
Columbia, or as otherwise provided by law.
    (3) The administrative law judge shall promptly issue any document 
subpoena requested pursuant to this section. If the administrative law 
judge determines that the application does not set forth a valid basis 
for the issuance of the subpoena, or that any of its terms are 
unreasonable, oppressive, excessive in scope, or unduly burdensome, he 
or she may refuse to issue the subpoena or may issue it in a modified 
form upon such conditions as may be consistent with the Uniform Rules.
    (b) Motion to quash or modify. (1) Any person to whom a document 
subpoena is directed may file a motion to quash or modify such subpoena, 
accompanied by a statement of the basis for quashing or modifying the 
subpoena. The movant shall serve the motion on all parties, and any 
party may respond to such motion within ten days of service of the 
motion.
    (2) Any motion to quash or modify a document subpoena must be filed 
on the same basis, including the assertion of privilege, upon which a 
party could object to a discovery request under Sec. 747.25(d), and 
during the same time limits during which such an objection could be 
filed.
    (c) Enforcing document subpoenas. If a subpoenaed person fails to 
comply with any subpoena issued pursuant to this section or any order of 
the administrative law judge which directs compliance with all or any 
portion of a document subpoena, the subpoenaing party or any other 
aggrieved party may, to the extent authorized by applicable law, apply 
to an appropriate United States district court for an order requiring 
compliance with so much of the document subpoena as the administrative 
law judge has not quashed or modified. A party's right to seek court 
enforcement of a document subpoena shall in no way limit the sanctions

[[Page 1118]]

that may be imposed by the administrative law judge on a party who 
induces a failure to comply with subpoenas issued under this section.



Sec. 747.27  Deposition of witness unavailable for hearing.

    (a) General rules. (1) If a witness will not be available for the 
hearing, a party desiring that witness' testimony for the record may 
apply in accordance with the procedures set forth in paragraph (a)(2) of 
this section, to the administrative law judge for the issuance of a 
subpoena, including a subpoena duces tecum, requiring the attendance of 
the witness at a deposition. The administrative law judge may issue a 
deposition subpoena under this section upon showing that:
    (i) The witness will be unable to attend or may be prevented from 
attending the hearing because of age, sickness or infirmity, or will 
otherwise be unavailable;
    (ii) The witness' unavailability was not procured or caused by the 
subpoenaing party;
    (iii) The testimony is reasonably expected to be material; and
    (iv) Taking the deposition will not result in any undue burden to 
any other party and will not cause undue delay of the proceeding.
    (2) The application must contain a proposed deposition subpoena and 
a brief statement of the reasons for the issuance of the subpoena. The 
subpoena must name the witness whose deposition is to be taken and 
specify the time and place for taking the deposition. A deposition 
subpoena may require the witness to be deposed at any place within the 
country in which that witness resides or has a regular place of 
employment or such other convenient place as the administrative law 
judge shall fix.
    (3) Any requested subpoena that sets forth a valid basis for its 
issuance must be promptly issued, unless the administrative law judge on 
his or her own motion, requires a written response or requires 
attendance at a conference concerning whether the requested subpoena 
should be issued.
    (4) The party obtaining a deposition subpoena is responsible for 
serving it on the witness and for serving copies on all parties. Unless 
the administrative law judge orders otherwise, no deposition under this 
section shall be taken on fewer than ten days' notice to the witness and 
all parties. Deposition subpoenas may be served in any state, territory, 
possession of the United States, or the District of Columbia, on any 
person or company doing business in any state, territory, possession of 
the United States, or the District of Columbia, or as otherwise 
permitted by law.
    (b) Objections to deposition subpoenas. (1) The witness and any 
party who has not had an opportunity to oppose a deposition subpoena 
issued under this section may file a motion with the administrative law 
judge to quash or modify the subpoena prior to the time for compliance 
specified in the subpoena, but not more than ten days after service of 
the subpoena.
    (2) A statement of the basis for the motion to quash or modify a 
subpoena issued under this section must accompany the motion. The motion 
must be served on all parties.
    (c) Procedure upon deposition. (1) Each witness testifying pursuant 
to a deposition subpoena must be duly sworn, and each party shall have 
the right to examine the witness. Objections to questions or documents 
must be in short form, stating the grounds for the objection. Failure to 
object to questions or documents is not deemed a waiver except where the 
ground for the objection might have been avoided if the objection had 
been timely presented. All questions, answers, and objections must be 
recorded.
    (2) Any party may move before the administrative law judge for an 
order compelling the witness to answer any questions the witness has 
refused to answer or submit any evidence the witness has refused to 
submit during the deposition.
    (3) The deposition must be subscribed by the witness, unless the 
parties and the witness, by stipulation, have waived the signing, or the 
witness is ill, cannot be found, or has refused to sign. If the 
deposition is not subscribed by the witness, the court reporter taking 
the deposition shall certify that the transcript is a true and complete 
transcript of the deposition.

[[Page 1119]]

    (d) Enforcing subpoenas. If a subpoenaed person fails to comply with 
any order of the administrative law judge which directs compliance with 
all or any portion of a deposition subpoena under paragraph (b) or 
(c)(3) of this section, the subpoenaing party or other aggrieved party 
may, to the extent authorized by applicable law, apply to an appropriate 
United States district court for an order requiring compliance with the 
portions of the subpoena that the administrative law judge has ordered 
enforced. A party's right to seek court enforcement of a deposition 
subpoena in no way limits the sanctions that may be imposed by the 
administrative law judge on a party who fails to comply with, or 
procures a failure to comply with, a subpoena issued under this section.



Sec. 747.28  Interlocutory review.

    (a) General rule. The NCUA Board may review a ruling of the 
administrative law judge prior to the certification of the record to the 
NCUA Board only in accordance with the procedures set forth in this 
section and Sec. 747.23.
    (b) Scope of review. The NCUA Board may exercise interlocutory 
review of a ruling of the administrative law judge if the NCUA Board 
finds that:
    (1) The ruling involves a controlling question of law or policy as 
to which substantial grounds exist for a difference of opinion;
    (2) Immediate review of the ruling may materially advance the 
ultimate termination of the proceeding;
    (3) Subsequent modification of the ruling at the conclusion of the 
proceeding would be an inadequate remedy; or
    (4) Subsequent modification of the ruling would cause unusual delay 
or expense.
    (c) Procedure. Any request for interlocutory review shall be filed 
by a party with the administrative law judge within ten days of his or 
her ruling and shall otherwise comply with Sec. 747.23. Any party may 
file a response to a request for interlocutory review in accordance with 
Sec. 747.23(d). Upon the expiration of the time for filing all 
responses, the administrative law judge shall refer the matter to the 
NCUA Board for final disposition.
    (d) Suspension of proceeding. Neither a request for interlocutory 
review nor any disposition of such a request by the NCUA Board under 
this section suspends or stays the proceeding unless otherwise ordered 
by the administrative law judge or the NCUA Board.



Sec. 747.29  Summary disposition.

    (a) In general. The administrative law judge shall recommend that 
the NCUA Board issue a final order granting a motion for summary 
disposition if the undisputed pleaded facts, admissions, affidavits, 
stipulations, documentary evidence, matters as to which official notice 
may be taken, and any other evidentiary materials properly submitted in 
connection with a motion for summary disposition show that:
    (1) There is no genuine issue as to any material fact; and
    (2) The moving part is entitled to a decision in its favor as a 
matter of law.
    (b) Filing of motions and responses. (1) Any party who believes that 
there is no genuine issue of material fact to be determined and that he 
or she is entitled to a decision as a matter of law may move at any time 
for summary disposition in its favor of all or any part of the 
proceeding. Any party, within 20 days after service of such a motion, or 
within such time period as allowed by the administrative law judge, may 
file a response to such motion.
    (2) A motion for summary disposition must be accompanied by a 
statement of the material facts as to which the moving party contends 
there is no genuine issue. Such motion must be supported by documentary 
evidence, which may take the form of admissions in pleadings, 
stipulations, depositions, investigatory depositions, transcripts, 
affidavits and any other evidentiary materials that the moving party 
contends support his or her position. The motion must also be 
accompanied by a brief containing the points and authorities in support 
of the contention of the moving party. Any party opposing a motion for 
summary disposition must file a statement setting forth those material 
facts as to which he or she contends a genuine dispute exists. Such 
opposition must be supported by evidence of the same type as that 
submitted with the motion for summary

[[Page 1120]]

disposition and a brief containing the points and authorities in support 
of the contention that summary disposition would be inappropriate.
    (c) Hearing on motion. At the request of any party or on his or her 
own motion, the administrative law judge may hear oral argument on the 
motion for summary disposition.
    (d) Decision on motion. Following receipt of a motion for summary 
disposition and all responses thereto, the administrative law judge 
shall determine whether the moving party is entitled to summary 
disposition. If the administrative law judge determines that summary 
disposition is warranted, the administrative law judge shall submit a 
recommended decision to that effect to the NCUA Board. If the 
administrative law judge finds that no party is entitled to summary 
disposition, he or she shall make a ruling denying the motion.



Sec. 747.30  Partial summary disposition.

    If the administrative law judge determines that a party is entitled 
to summary disposition as to certain claims only, he or she shall defer 
submitting a recommended decision as to those claims. A hearing on the 
remaining issues must be ordered. Those claims for which the 
administrative law judge has determined that summary disposition is 
warranted will be addressed in the recommended decision filed at the 
conclusion of the hearing.



Sec. 747.31  Scheduling and prehearing conferences.

    (a) Scheduling conference. Within 30 days of service of the notice 
or order commencing a proceeding or such other time as parties may 
agree, the administrative law judge shall direct counsel for all parties 
to meet with him or her in person at a specified time and place prior to 
the hearing or to confer by telephone for the purpose of scheduling the 
recourse and conduct of the proceeding. This meeting or telephone 
conference is called a ``scheduling conference.'' The identification of 
potential witnesses, the time for and manner of discovery, and the 
exchange of any prehearing materials including witness lists, statements 
of issues, stipulations, exhibits and any other materials may also be 
determined at the scheduling conference.
    (b) Prehearing conferences. The administrative law judge may, in 
addition to the scheduling conference, on his or her own motion or at 
the request of any party, direct counsel for the parties to meet with 
him or her (in person or by telephone) at a prehearing conference to 
address any or all of the following:
    (1) Simplification and clarification of the issues;
    (2) Stipulations, admissions of fact, and the contents, authenticity 
and admissibility into evidence of documents;
    (3) Matters of which official notice may be taken;
    (4) Limitation of the number of witnesses;
    (5) Summary disposition of any or all issues;
    (6) Resolution of discovery issues or disputes;
    (7) Amendments to pleadings; and
    (8) Such other matters as may aid in the orderly disposition of the 
proceeding.
    (c) Transcript. The administrative law judge, in his or her 
discretion, may require that a scheduling or prehearing conference be 
recorded by a court reporter. A transcript of the conference and any 
materials filed, including orders, becomes part of the record of the 
proceeding. A party may obtain a copy of the transcript at its expense.
    (d) Scheduling or prehearing orders. At or within a reasonable time 
following the conclusion of the scheduling conference or any prehearing 
conference, the administrative law judge shall serve on each party an 
order setting forth any agreements reached and any procedural 
determinations made.

[56 FR 37767, Aug. 8, 1991, as amended at 75 FR 34622, June 18, 2010]



Sec. 747.32  Prehearing submissions.

    (a) Within the time set by the administrative law judge, but in no 
case later than 14 days before the start of the hearing, each party 
shall serve on every other party, his or her:
    (1) Prehearing statement;
    (2) Final list of witnesses to be called to testify at the hearing, 
including name and address of each witness and a

[[Page 1121]]

short summary of the expected testimony of each witness;
    (3) List of the exhibits to be introduced at the hearing along with 
a copy of each exhibit; and
    (4) Stipulations of fact, if any.
    (b) Effect of failure to comply. No witness may testify and no 
exhibits may be introduced at the hearing if such witness or exhibit is 
not listed in the prehearing submissions pursuant to paragraph (a) of 
this section, except for good cause shown.



Sec. 747.33  Public hearings.

    (a) General rule. All hearings shall be open to the public, unless 
the NCUA Board, in its discretion, determines that holding an open 
hearing would be contrary to the public interest. Within 20 days of 
service of the notice, any respondent may file with the NCUA Board a 
request for a private hearing, and any party may file a reply to such a 
request. A party must serve on the administrative law judge a copy of 
any request or reply the party files with the NCUA Board. The form of, 
and procedure for, these requests and replies are governed by 
Sec. 747.23. A party's failure to file a request or a reply constitutes 
a waiver of any objections regarding whether the hearing will be public 
or private.
    (b) Filing document under seal. Enforcement Counsel, in his or her 
discretion, may file any document or part of a document under seal if 
disclosure of the document would be contrary to the public interest. The 
administrative law judge shall take all appropriate steps to preserve 
the confidentiality of such documents or parts thereof, including 
closing portions of the hearing to the public.

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992, as amended at 61 FR 
28027, June 4, 1996]



Sec. 747.34  Hearing subpoenas.

    (a) Issuance. (1) Upon application of a party showing general 
relevance and reasonableness of scope of the testimony or other evidence 
sought, the administrative law judge may issue a subpoena or a subpoena 
duces tecum requiring the attendance of a witness at the hearing or the 
production of documentary or physical evidence at the hearing. The 
application for a hearing subpoena must also contain a proposed subpoena 
specifying the attendance of a witness or the production of evidence 
from any state, territory, or possession of the United States, the 
District of Columbia, or as otherwise provided by law at any designated 
place where the hearing is being conducted. The party making the 
application shall serve a copy of the application and the proposed 
subpoena on every other party.
    (2) A party may apply for a hearing subpoena at any time before the 
commencement of a hearing. During a hearing, a party may make an 
application for a subpoena orally on the record before the 
administrative law judge.
    (3) The administrative law judge shall promptly issue any hearing 
subpoena requested pursuant to this section. If the administrative law 
judge determines that the application does not set forth a valid basis 
for the issuance of the subpoena, or that any of its terms are 
unreasonable, oppressive, excessive in scope, or unduly burdensome, he 
or she may refuse to issue the subpoena or may issue it in a modified 
form upon any conditions consistent with this subpart. Upon issuance by 
the administrative law judge, the party making the application shall 
serve the subpoena on the person named in the subpoena and on each 
party.
    (b) Motion to quash or modify. (1) Any person to whom a hearing 
subpoena is directed or any party may file a motion to quash or modify 
the subpoena, accompanied by a statement of the basis for quashing or 
modifying the subpoena. The movant must serve the motion on each party 
and on the person named in the subpoena. Any party may respond to the 
motion within ten days of service of the motion.
    (2) Any motion to quash or modify a hearing subpoena must be filed 
prior to the time specified in the subpoena for compliance, but not more 
than ten days after the date of service of the subpoena upon the movant.
    (c) Enforcing subpoenas. If a subpoenaed person fails to comply with 
any subpoena issued pursuant to this section or any order of the 
administrative law judge which directs compliance with all or any 
portion of a document

[[Page 1122]]

subpoena, the subpoenaing party or any other aggrieved party may seek 
enforcement of the subpoena pursuant to Sec. 747.26(c).

[56 FR 37767, Aug. 8, 1991, as amended at 61 FR 28027, June 4, 1996]



Sec. 747.35  Conduct of hearings.

    (a) General rules. (1) Hearings shall be conducted so as to provide 
a fair and expeditious presentation of the relevant disputed issues. 
Each party has the right to present its case or defense by oral and 
documentary evidence and to conduct such cross examination as may be 
required for full disclosure of the facts.
    (2) Order of hearing. Enforcement Counsel shall present its case-in-
chief first, unless otherwise ordered by the administrative law judge, 
or unless otherwise expressly specified by law or regulation. 
Enforcement Counsel shall be the first party to present an opening 
statement and a closing statement, and may make a rebuttal statement 
after the respondent's closing statement. If there are multiple 
respondents, respondents may agree among themselves as to their order of 
presentation of their cases, but if they do not agree the administrative 
law judge shall fix the order.
    (3) Examination of witnesses. Only one counsel for each party may 
conduct an examination of a witness, except that in the case of 
extensive direct examination, the administrative law judge may permit 
more than one counsel for the party presenting the witness to conduct 
the examination. A party may have one counsel conduct the direct 
examination and another counsel conduct re-direct examination of a 
witness, or may have one counsel conduct the cross examination of a 
witness and another counsel conduct the re-cross examination of a 
witness.
    (4) Stipulations. Unless the administrative law judge directs 
otherwise, all stipulations of fact and law previously agreed upon by 
the parties, and all documents, the admissibility of which have been 
previously stipulated, will be admitted into evidence upon commencement 
of the hearing.
    (b) Transcript. The hearing must be recorded and transcribed. The 
reporter will make the transcript available to any party upon payment by 
that party to the reporter of the cost of the transcript. The 
administrative law judge may order the record corrected, either upon 
motion to correct, upon stipulation of the parties, or following notice 
to the parties upon the administrative law judge's own motion.

[56 FR 37767, Aug. 8, 1991, as amended at 61 FR 28027, June 4, 1996]



Sec. 747.36  Evidence.

    (a) Admissibility. (1) Except as is otherwise set forth in this 
section, relevant, material, and reliable evidence that is not unduly 
repetitive is admissible to the fullest extent authorized by the 
Administrative Procedure Act and other applicable law.
    (2) Evidence that would be admissible under the Federal Rules of 
Evidence is admissible in a proceeding conducted pursuant to this 
subpart.
    (3) Evidence that would be inadmissible under the Federal Rules of 
Evidence may not be deemed or ruled to be inadmissible in a proceeding 
conducted pursuant to this subpart if such evidence is relevant, 
material, reliable and not unduly repetitive.
    (b) Official notice. (1) Official notice may be taken of any 
material fact which may be judicially noticed by a United States 
district court and any material information in the official public 
records of any Federal or state government agency.
    (2) All matters officially noticed by the administrative law judge 
or NCUA Board shall appear on the record.
    (3) If official notice is requested or taken of any material fact, 
the parties, upon timely request, shall be afforded an opportunity to 
object.
    (c) Documents. (1) A duplicate copy of a document is admissible to 
the same extent as the original, unless a genuine issue is raised as to 
whether the copy is in some material respect not a true and legible copy 
of the original.
    (2) Subject to the requirements of paragraph (a) of this section, 
any document, including a report of examination, supervisory activity, 
inspection or visitation, prepared by an appropriate Federal financial 
institution regulatory agency or by a state regulatory agency, is 
admissible either with or without a sponsoring witness.

[[Page 1123]]

    (3) Witnesses may use existing or newly created charts, exhibits, 
calendars, calculations, outlines or other graphic material to 
summarize, illustrate, or simplify the presentation of testimony. Such 
materials may, subject to the administrative law judge's discretion, be 
used with or without being admitted into evidence.
    (d) Objections. (1) Objections to the admissibility of evidence must 
be timely made and rulings on all objections must appear on the record.
    (2) When an objection to a question or line of questioning 
propounded to a witness is sustained, the examining counsel may make a 
specific proffer on the record of what he or she expected to prove by 
the expected testimony of the witness, either by representation of 
counsel or by direct interrogation of the witness.
    (3) The administrative law judge shall retain rejected exhibits, 
adequately marked for identification, for the record, and transmit such 
exhibits to the NCUA Board.
    (4) Failure to object to admission of evidence or to any ruling 
constitutes a waiver of the objection.
    (e) Stipulations. The parties may stipulate as to any relevant 
matters of fact or the authentication of any relevant documents. Such 
stipulations must be received in evidence at a hearing, and are binding 
on the parties with respect to the matters therein stipulated.
    (f) Depositions of unavailable witnesses. (1) If a witness is 
unavailable to testify at a hearing, and that witness has testified in a 
deposition to which all parties in a proceeding had notice and an 
opportunity to participate, a party may offer as evidence all or any 
part of the transcript of the deposition, including deposition exhibits, 
if any.
    (2) Such deposition transcript is admissible to the same extent that 
testimony would have been admissible had that person testified at the 
hearing, provided that if a witness refused to answer proper questions 
during the depositions, the administrative law judge may, on that basis, 
limit the admissibility of the deposition in any manner that justice 
requires.
    (3) Only those portions of a deposition received in evidence at the 
hearing constitute a part of the record.



Sec. 747.37  Post-hearing filings.

    (a) Proposed findings and conclusions and supporting briefs. (1) 
Using the same method of service for each party, the administrative law 
judge shall serve notice upon each party that the certified transcript, 
together with all hearing exhibits and exhibits introduced but not 
admitted into evidence at the hearing, has been filed. Any party may 
file with the administrative law judge proposed findings of fact, 
proposed conclusions of law, and a proposed order within 30 days 
following service of this notice by the administrative law judge or 
within such longer period as may be ordered by the administrative law 
judge.
    (2) Proposed findings and conclusions must be supported by citation 
to any relevant portions of the record. A post-hearing brief may be 
filed in support of proposed findings and conclusions, either as part of 
the same document or in a separate document. Any party who fails to file 
timely with the administrative law judge any proposed finding or 
conclusion is deemed to have waived the right to raise in any subsequent 
filing or submission any issue not addressed in such party's proposed 
finding or conclusion.
    (b) Reply briefs. Reply briefs may be filed within 15 days after the 
date on which the parties' proposed findings, conclusions, and order are 
due. Reply briefs must be strictly limited to responding to new matters, 
issues, or arguments raised in another party's papers. A party who has 
not filed proposed findings of fact and conclusions of law or a post-
hearing brief may not file a reply brief.
    (c) Simultaneous filing required. The administrative law judge shall 
not order the filing by any party of any brief or reply brief in advance 
of the other party's filing of its brief.

[56 FR 37767, Aug. 8, 1991, as amended at 61 FR 28027, June 4, 1996]



Sec. 747.38  Recommended decision and filing of record.

    (a) Filing of recommended decision and record. Within 45 days after 
expiration of the time allowed for filing reply

[[Page 1124]]

briefs under Sec. 747.37(b), the administrative law judge shall file 
with and certify to the NCUA Board, for decision, the record of the 
proceeding. The record must include the administrative law judge's 
recommended decision, recommended findings of fact, recommended 
conclusions of law, and proposed order; all prehearing and hearing 
transcripts, exhibits, and rulings; and the motions, briefs, memoranda, 
and other supporting papers filed in connection with the hearing. The 
administrative law judge shall serve upon each party the recommended 
decision, findings, conclusions, and proposed order.
    (b) Filing of index. At the same time the administrative law judge 
files with and certifies to the NCUA Board for final determination the 
record of the proceeding, the administrative law judge shall furnish to 
the NCUA Board a certified index of the entire record of the proceeding. 
The certified index shall include, at a minimum, an entry for each 
paper, document or motion filed with the administrative law judge in the 
proceeding, the date of the filing, and the identity of the filer. The 
certified index shall also include an exhibit index containing, at a 
minimum, an entry consisting of exhibit number and title or description 
for: Each exhibit introduced and admitted into evidence at the hearing; 
each exhibit introduced but not admitted into evidence at the hearing; 
each exhibit introduced and admitted into evidence after the completion 
of the hearing; and each exhibit introduced but not admitted into 
evidence after the completion of the hearing.

[61 FR 28027, June 4, 1996]



Sec. 747.39  Exceptions to recommended decision.

    (a) Filing exceptions. Within 30 days after service of the 
recommended decision, findings, conclusions, and proposed order under 
Sec. 747.38, a party may file with the NCUA Board written exceptions to 
the administrative law judge's recommended decision, findings, 
conclusions or proposed order, to the admission or exclusion of 
evidence, or to the failure of the administrative law judge to make a 
ruling proposed by a party. A supporting brief may be filed at the time 
the exceptions are filed, either as part of the same document or in a 
separate document.
    (b) Effect of failure to file or raise exceptions. (1) Failure of a 
party to file exceptions to those matters specified in paragraph (a) of 
this section within the time prescribed is deemed a waiver of objection 
thereto.
    (2) No exception need be considered by the NCUA Board if the party 
taking exception had an opportunity to raise the same objection, issue, 
or argument before the administrative law judge and failed to do so.
    (c) Contents. (1) All exceptions and briefs in support of such 
exceptions must be confined to the particular matters in, or omissions 
from, the administrative law judge's recommendations to which that party 
takes exception.
    (2) All exceptions and briefs in support of exceptions must set 
forth page or paragraph references to the specific parts of the 
administrative law judge's recommendations to which exception is taken, 
the page or paragraph references to those portions of the record relied 
upon to support each exception, and the legal authority relied upon to 
support each exception.

[56 FR 37767, Aug. 8, 1991, as amended at 75 FR 34622, June 18, 2010]



Sec. 747.40  Review by the NCUA Board.

    (a) Notice of submission to NCUA Board. When the NCUA Board 
determines that the record in the proceeding is complete, the NCUA Board 
shall serve notice upon the parties that the proceeding has been 
submitted to the NCUA Board for final decision.
    (b) Oral argument before NCUA Board. Upon the initiative of the NCUA 
Board or on the written request of any party filed with the NCUA Board 
within the time for filing exceptions, the NCUA Board may order and hear 
oral argument on the recommended findings, conclusions, decision, and 
order of the administrative law judge. A written request by a party must 
show good cause for oral argument and state reasons why arguments cannot 
be presented adequately in writing. A denial of a request for oral 
argument may be set forth in the NCUA Board's final decision. Oral 
argument before the NCUA Board must be on the record.

[[Page 1125]]

    (c) Final Decision of NCUA Board. (1) Decisional employees may 
advise and assist the NCUA Board in the consideration and disposition of 
the case. The final decision of the NCUA Board will be based upon review 
of the entire record of the proceeding, except that the NCUA Board may 
limit the issues to be reviewed to those findings and conclusions to 
which opposing arguments or exceptions have been filed by the parties.
    (2) The NCUA Board shall render a final decision within 90 days 
after notification of the parties that the case has been submitted for 
final decision, or 90 days after oral argument, whichever is later, 
unless the NCUA Board orders that the action or any aspect thereof be 
remanded to the administrative law judge for further proceedings. Copies 
of the final decision and order of the NCUA Board shall be served upon 
each party to the proceeding, upon other persons required by statute, 
and, if directed by the NCUA Board or required by statute, upon any 
appropriate state or Federal supervisory authority.

[56 FR 37767, Aug. 8, 1991, as amended at 75 FR 34622, June 18, 2010]



Sec. 747.41  Stays pending judicial review.

    The commencement of proceedings for judicial review of a final 
decision and order of the NCUA Board may not, unless specifically 
ordered by the NCUA Board or a reviewing court, operate as a stay of any 
order issued by the NCUA Board. The NCUA Board may, in its discretion, 
and on such terms as it finds just, stay the effectiveness of all or any 
part of its order pending a final decision on a petition for review of 
that order.



             Subpart B_Local Rules of Practice and Procedure



Sec. 747.100  Discovery limitations.

    (a) Parties to a proceeding set forth either at Sec. 747.1 of 
subpart A or in subpart C, E or G of this part may obtain discovery only 
through the production of documents. No other form of discovery shall be 
allowed.
    (b) In the event that a person producing documents pursuant to a 
document subpoena is permitted to be deposed, all questioning shall be 
strictly limited to the identification of documents produced by that 
person and a reasonable examination to determine whether the subpoenaed 
person made an adequate search for, and has produced, all subpoenaed 
documents.



 Subpart C_Local Rules and Procedures Applicable to Proceedings for the 
                Involuntary Termination of Insured Status



Sec. 747.201  Scope.

    Under the authority of section 206(b) of the Act (12 U.S.C. 
1786(b)), the NCUA Board may terminate the insured status of an insured 
credit union upon the grounds set forth therein and enumerated in 
Sec. 747.202. The procedure for terminating the insured status of an 
insured credit union as therein prescribed will be followed and hearings 
required thereunder will be conducted in accordance with the rules and 
procedures set forth in this subpart and subpart A of this part. To the 
extent any rule or procedure of subpart A is inconsistent with a rule or 
procedure prescribed in this subpart C, subpart C shall control.

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992]



Sec. 747.202  Grounds for termination of insurance.

    The NCUA Board may institute proceedings to terminate the insured 
status of an insured credit union whenever it determines that an insured 
credit union is:
    (a) Engaging or has engaged in unsafe or unsound practices in 
conducting its business;
    (b) In unsafe or unsound condition to continue as an insured credit 
union; or
    (c) Violating or has violated any applicable law, rule, regulation, 
order, written condition imposed by the NCUA Board in response to any 
action on any application, notice, or other request by the credit union 
or institution-affiliated party, or any written agreement entered into 
with the NCUA Board.

[56 FR 37767, Aug. 8, 1991, as amended at 71 FR 67440, Nov. 22, 2006]

[[Page 1126]]



Sec. 747.203  Notice of charges.

    (a) Whenever the NCUA Board determines that grounds for termination 
of insured status exists, it will, for the purpose of securing 
correction of errant or illegal conditions, serve a Notice of Charges 
upon the concerned credit union. This notice will contain a statement 
describing the unsafe or unsound practices, condition or the relevant 
violations.
    (b) In the case of an insured State-chartered credit union, the NCUA 
Board shall send a copy of the Notice of Charges to the appropriate 
State authority, if any, having supervision over the credit union.

[56 FR 37767, Aug. 8, 1991, as amended at 75 FR 34622, June 18, 2010]



Sec. 747.204  Notice of intention to terminate insured status.

    Unless correction of the practices, condition, or violations set 
forth in the Notice of Charges is made within 120 days after service of 
such statement, or within a shorter period of not less than 20 days 
after such service as the NCUA Board may require in any case where it 
determines that the insurance risk with respect to such credit union 
could be unduly jeopardized by further delay or as the appropriate State 
supervisory authority shall require in the case of an insured State-
chartered credit union, the Board, if it determines to proceed further, 
shall give to the credit union not less than 30 days written notice of 
its intent to terminate the status of the credit union as an insured 
credit union. The notice shall contain a statement of the facts 
constituting the alleged unsafe or unsound practices or conditions or 
violations on which a hearing will be held. Such hearing shall commence 
not earlier than 30 days nor later than 60 days after the date of 
service of such notice upon the credit union, unless an earlier or later 
date is set by the NCUA Board at the request of the credit union.



Sec. 747.205  Order terminating insured status.

    If, upon the record of the hearing held pursuant to Sec. 747.204, 
the NCUA Board finds that any unsafe or unsound practice or condition or 
violation specified in the notice has been established and has not been 
corrected within the time prescribed under Sec. 747.204, the NCUA Board 
may issue and serve upon the credit union an order terminating its 
status as an insured credit union on a date subsequent to the date of 
such finding and subsequent to the expiration of the time specified in 
the Notice.



Sec. 747.206  Consent to termination of insured status.

    Unless the credit union appears at the hearing designated in the 
notice of hearing by a duly authorized representative, it will be deemed 
to have consented to the termination of its status as an insured credit 
union. In the event the credit union fails to so appear at such hearing, 
the administrative law judge shall forthwith report the matter to the 
NCUA Board and the NCUA Board may thereupon issue an order terminating 
the credit union's insured status.



Sec. 747.207  Notice of termination of insured status.

    Prior to the effective date of the termination of the insured status 
of an insured credit union under section 206(b) of the Act (12 U.S.C. 
1786(b)) and at such time as the Board shall specify, the credit union 
shall mail to each member at his or her last address of record on the 
books of the credit union, and publish in not less than two issues of a 
local newspaper of general circulation, notices of the termination of 
its insured status, and the credit union shall furnish the NCUA Board 
with proof of publication of such notice. The notice shall be as 
follows:

                                 NOTICE

(Date)

    1. The status of the ___ as an insured credit union under the 
provisions of the Federal Credit Union Act, will terminate as of the 
close of business on the __ day of __;
    2. Any deposits made by you after that date, either new deposits or 
additions to existing accounts, will not be insured by the National 
Credit Union Administration;
    3. Accounts in the credit union on the __ day of __, __ up to a 
maximum of $100,000 for each member, will continue to be insured, as 
provided by the Federal Credit Union Act, for one (1) year after the 
close of business on the __ day of __, __: Provided, however,

[[Page 1127]]

That any withdrawals after the close of business on the day of __, __; 
will reduce the insurance coverage by the amount of such withdrawals.

(Name of Credit Union)

(Address)

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992, as amended at 75 FR 
34622, June 18, 2010]



Sec. 747.208  Duties after termination.

    (a) After the termination of the insured status of any credit union 
under section 206(b) of the Act (12 U.S.C. 1786(b)), insurance of its 
member accounts to the extent they were insured on the effective date of 
such termination, less any amounts thereafter withdrawn which reduce the 
accounts below the amount covered by insurance on the effective date of 
such termination, shall continue for a period of one year, but no shares 
issued by the credit union or deposits made after the date of such 
termination shall be insured by the NCUA Board.
    (b) The credit union shall continue to pay premiums to the NCUA 
Board during such period and the Board shall have the right to examine 
the credit union from time to time during the period. The credit union 
shall, in all other respects, be subject to the duties and obligations 
of an insured credit union during the one year period. If the credit 
union is closed for liquidation within this period, the Board shall have 
the same powers and rights with respect to such credit union as in the 
case of an insured credit union.

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992]



   Subpart D_Local Rules and Procedures Applicable to Suspensions and 
                    Prohibitions Where Felony Charged



Sec. 747.301  Scope.

    The rules and procedures set forth in this subpart are applicable to 
informal proceedings conducted by the NCUA Board, or a Presiding Officer 
designated by the Board, pursuant to section 206(i) of the Act (12 
U.S.C. 1786(i)), to suspend, remove and/or prohibit from office or from 
further participation any institution-affiliated party of an insured 
credit union who:
    (a) Is charged in a state, Federal or territorial information or 
indictment or complaint with committing or participating in a crime 
involving dishonesty or breach of trust, which crime is punishable by 
imprisonment for a term exceeding one year under state or Federal law; 
or
    (b) Enters a pretrial diversion or other similar program as result 
of being charged in such information or indictment or complaint with 
participating or committing such crime; or
    (c) Is convicted of such crime.

Subpart A of this part does not apply to proceedings under this subpart.

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992]



Sec. 747.302  Rules of practice; remainder of board of directors.

    Except as otherwise specifically provided in this subpart, the 
following provisions shall apply to proceedings conducted under this 
subpart:
    (a)(1) Power of attorney and notice of appearance. Any person who is 
a member in good standing of the bar of the highest court of any State, 
possession, territory, Commonwealth, or the District of Columbia may 
represent others before the NCUA Board or Presiding Officer designated 
by the NCUA Board upon filing with the NCUA Board a written declaration 
that he or she is currently qualified as provided by this paragraph, and 
is authorized to represent the particular party on whose behalf he acts. 
Any other person desiring to appear before or transact business with the 
NCUA Board in a representative capacity may be required to file with the 
NCUA Board a power of attorney showing his or her authority to act in 
such capacity, and he or she may be required to show to the satisfaction 
of the NCUA Board that he or she has the requisite qualifications. 
Attorneys and representatives of parties to proceedings shall file a 
written notice of appearance with the NCUA Board or with the Presiding 
Officer designated by the NCUA Board.
    (2) Summary suspension. Contemptuous conduct by any person at an 
argument before the NCUA Board or at the hearing before a Presiding 
Officer

[[Page 1128]]

shall be grounds for exclusion therefrom and suspension for the duration 
of the argument or hearing.
    (b)(1) Notice of hearing. Whenever a hearing within the scope of 
this subpart is ordered by the NCUA Board, a notice of hearing shall be 
given by the NCUA Board to the party afforded the hearing and to any 
appropriate state supervisory authority. The notice shall state the 
time, place, and nature of the hearing and the legal authority and 
jurisdiction under which the hearing is to be held, and shall contain a 
statement of the matters of fact or law constituting the grounds for the 
hearing. It shall be delivered by personal service, by registered or 
certified mail to the last known address, or by other appropriate means, 
not later than 30 nor earlier than 60 days before the hearing.
    (2) Party. The term ``party'' means a person or agency named or 
admitted as a party, or any person or agency who has filed a written 
request and is entitled as of right to be admitted as a party; but a 
person or agency may be admitted for a limited purpose.
    (c)(1) Computation of time. In computing any period of time 
prescribed or allowed by this subpart, the date of the act, event or 
default from which the designated period of time begins to run is not to 
be included. The last day so computed shall be included, unless it is a 
Saturday, Sunday or legal holiday in the District of Columbia, in which 
event the period shall run until the end of the next day which is 
neither a Saturday, Sunday, nor such legal holiday. Intermediate 
Saturdays, Sundays, and legal holidays shall be included in the 
computation unless the time within which the act is to be performed is 
ten days or less in which event Saturdays, Sundays, and legal holidays 
shall not be included.
    (2) Service by mail. Whenever any party has the right or is required 
to do some act or take some proceeding, within a period of time 
prescribed in this subpart, after the service upon him of any document 
or other paper of any kind, and such service is made by mail, three days 
shall be added to the prescribed period from the date when the matter 
served is deposited in the U.S. mail.
    (d) Nonpublication of submissions. Unless and until otherwise 
ordered by the NCUA Board, the notice of hearing, the transcript, 
written materials submitted during the hearing, the Presiding Officer's 
recommendation to the NCUA Board and any other papers filed in 
connection with a hearing under this subpart, shall not be made public, 
and shall be for the confidential use only of the NCUA Board, the 
Presiding Officer, the parties and appropriate authorities.
    (e) Remainder of board of directors. (1) If at any time, because of 
the suspension of one or more directors pursuant to this subpart, there 
shall be on the board of directors of an insured credit union less than 
a quorum of directors not so suspended, all powers and functions vested 
in or exercisable by such board shall vest in and be exercisable by the 
director or directors on the board not so suspended, until such time as 
there shall be a quorum on the board of directors.
    (2) In the event all of the directors of an insured credit union are 
suspended pursuant to this subpart, the NCUA Board shall appoint persons 
to serve temporarily as directors in their place pending the termination 
of such suspensions, or until such time as those who have been suspended 
cease to be directors of the credit union and their respective 
successors have been elected by the members at an annual or special 
meeting and have taken office.
    (3) Directors appointed temporarily by the NCUA Board pursuant to 
paragraph (e)(2) of this section, shall, within 30 days following their 
appointment, call a special meeting for the election of new directors, 
unless during such 30-day period--
    (i) The regular annual meeting is convened; or
    (ii) The suspensions giving rise to the appointment of temporary 
directors are terminated.

[56 FR 37767, Aug. 8, 1991, as amended at 75 FR 34622, June 18, 2010]



Sec. 747.303  Notice of suspension or prohibition.

    Whenever an institution-affiliated party of an insured credit union 
is charged in any state, Federal or territorial information or 
indictment or

[[Page 1129]]

complaint with the commission of or participation in a crime involving 
dishonesty or breach of trust, which crime is punishable by imprisonment 
for a term exceeding one year under state or Federal law, the NCUA Board 
may, if continued service or participation by the concerned party may 
pose a threat to the interests of any credit union's members or may 
threaten to impair public confidence in any credit union, by written 
notice served upon such party, suspend him or her from office, or 
prohibit him or her from further participation in any manner in the 
affairs of any credit union, or both. A copy of the notice of suspension 
or prohibition shall also be served upon the credit union of which the 
subject of the order is, or most recently was, an institution-affiliated 
party.

[71 FR 67440, Nov. 22, 2006]



Sec. 747.304  Removal or permanent prohibition.

    (a) In the event that a judgment of conviction or an agreement to 
enter a pretrial diversion or other similar program is entered against 
the institution-affiliated party, and at such time as the judgment, if 
any, is not subject to further appellate review, the NCUA Board may, if 
continued service or participation by such party may pose a threat to 
the interests of any credit union's members or may threaten to impair 
public confidence in any credit union, issue and serve upon the 
individual an order removing him or her from office or prohibiting him 
or her from further participation in any manner in the conduct of the 
affairs of any credit union except with the consent of the NCUA Board. A 
copy of such order will also be served upon the credit union of which 
the subject of the order is, or most recently was, an institution-
affiliated party.
    (b) The NCUA Board may issue such order with respect to an 
individual who is an institution-affiliated party at a credit union at 
the time of the offense without regard to whether such individual is an 
institution-affiliated party at any credit union at the time the order 
is considered or issued by the Board or whether the credit union at 
which the individual was an institution-affiliated party at the time of 
the offense remains in existence at the time the order is considered or 
issued by the board.
    (c) A finding of not guilty or other disposition of the charge will 
not preclude the Board from thereafter instituting proceedings, pursuant 
to the provisions of section 206(g) of the Act (12 U.S.C. 1786(g)) and 
subpart A of this part, to remove such director, committee member, 
officer, or other person from office or to prohibit his or her further 
participation in the affairs of the credit union.

[71 FR 67441, Nov. 22, 2006]



Sec. 747.305  Effectiveness of suspension or removal until completion
of hearing.

    Any notice of suspension or prohibition issued under Sec. 747.303 
and any order of removal or prohibition issued under Sec. 747.304 will 
be effective upon service on the concerned party and will remain 
effective and outstanding until the completion of any hearing or appeal 
authorized under section 206(i) of the Act (12 U.S.C. 1786(i)) and this 
subpart, unless such notice of suspension or order of removal is 
terminated by the NCUA Board.

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992]



Sec. 747.306  Notice of opportunity for hearing.

    (a) Any notice of suspension or prohibition issued pursuant to 
Sec. 747.303, and any order of removal or prohibition issued pursuant to 
Sec. 747.304, shall be accompanied by a further notice to the concerned 
individual that he or she may, within 30 days of service of such notice, 
request in writing an informal hearing at which he or she may present 
evidence and argument that his or her continued service to or 
participation in the conduct of the affairs of the credit union does 
not, or is not likely to, pose a threat to the interests of the credit 
union's members or threaten to impair confidence in the credit union. 
Any notice of the opportunity for such a hearing shall be accompanied by 
a description of the hearing procedure and the criteria to be 
considered.
    (b) A request for a hearing filed pursuant to paragraph (a) of this 
section

[[Page 1130]]

shall state with state with particularity the relief desired, the 
grounds thereof, and shall include, when available, supporting evidence. 
The request and supporting evidence shall be filed in writing with the 
Secretary of the Board, National Credit Union Administration, 1775 Duke 
Street, Alexandria, VA 22314-3428.

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992, as amended at 59 FR 
36041, July 15, 1994; 75 FR 34622, June 18, 2010]



Sec. 747.307  Hearing.

    (a) Upon receipt of a request for a hearing which complies with 
Sec. 747.306, the NCUA Board will order an informal hearing to commence 
within the following 30 days in the Washington, DC metropolitan area or 
at such other place as the NCUA Board designates before a Presiding 
Officer designated by the NCUA Board to conduct the hearing. At the 
request of the concerned party, the NCUA Board may order the hearing to 
commence at a time more than 30 days after the receipt of the request 
for such hearing.
    (b) The notice of hearing shall be served by the NCUA Board upon the 
party or parties afforded the hearing and shall set forth the time and 
place of the hearing and the name and address of the Presiding Officer.
    (c) The subject individual may appear at the hearing personally, 
through counsel, or personally with counsel. The individual shall have 
the right to introduce relevant and material written materials (or, at 
the discretion of the NCUA Board, oral testimony), and to present an 
oral argument before the Presiding Officer. A member of the enforcement 
staff of the Office of General Counsel of the NCUA may attend the 
hearing and may participate as a party. Neither the formal rules of 
evidence nor the adjudicative procedures of the Administrative Procedure 
Act (5 U.S.C. 554-557), nor subpart A of this part shall apply to the 
hearing. The proceedings shall be recorded and a transcript furnished to 
the individual upon request and after the payment of the cost thereof. 
The NCUA Board shall have the discretion to permit the presentation of 
witnesses, within specified time limits, so long as a list of such 
witnesses is furnished to the Presiding Officer at least ten days prior 
to the hearing. Witnesses shall not be sworn, unless specifically 
requested by either party or directed by the Presiding Officer. The 
Presiding Officer may examine any witnesses and each party shall have 
the opportunity to cross-examine any witness presented by an opposing 
party. Upon the request of either the subject individual or the 
representative of the Office of General Counsel, the record shall remain 
open for a period of five business days following the hearing, during 
which time the parties may make any additional submissions to the 
record. Thereafter, the record shall be closed.
    (d) In the course of or in connection with any proceeding under this 
subpart, the NCUA Board and the Presiding Officer will have the power to 
administer oaths and affirmations, to take or cause depositions to be 
taken, and to issue, revoke, quash, or modify subpoenas and subpoenas 
duces tecum. If the NCUA Board permits the presentation of witnesses, 
the NCUA Board or the Presiding Officer may require the attendance of 
witnesses from any place in any state or in any territory or other place 
subject to the jurisdiction of the United States at any designated place 
where such proceeding is being conducted. Witnesses subpoenaed shall be 
paid the same fees and mileage as are paid witnesses in the District 
Courts of the United States. The NCUA Board or the Presiding Officer may 
require the production of documents from any place in any such state, 
territory, or other place.
    (e) The Presiding Officer will make his or her recommendations to 
the Board, where possible, within ten business days following the close 
of the record.

[56 FR 37767, Aug. 8, 1991, as amended at 59 FR 36042, July 15, 1994]



Sec. 747.308  Waiver of hearing; failure to request hearing or review
based on written submissions; failure to appear.

    (a) The subject individual may, in writing, waive an oral hearing 
and instead elect to have the matter determined by the NCUA Board on the 
basis of written submissions alone.

[[Page 1131]]

    (b) Should any concerned party fail to request in writing an oral 
hearing or consideration based on written submissions alone within 30 
days of service of the notice described in Sec. 747.306, he or she will 
be deemed to have consented to the NCUA Board's action.
    (c) Unless the concerned party appears at the hearing personally or 
by duly appointed representative, he or she will be deemed to have 
consented to the NCUA Board's action.



Sec. 747.309  Decision of the NCUA Board.

    Within 60 days following the hearing, or receipt of the subject 
individual's written submissions where hearing has been waived pursuant 
to Sec. 747.308, the NCUA Board shall notify the institution-affiliated 
party whether the suspension or prohibition will be continued, 
terminated, or otherwise modified, or whether the order of removal or 
prohibition will be rescinded or otherwise modified. Such notification 
shall contain a statement of the basis for the decision of the NCUA 
Board, if that decision is adverse to the respondent party. In the case 
of a decision favorable to the respondent on the subject of a prior 
order of removal or prohibition, the NCUA Board shall take prompt action 
to rescind or otherwise modify the order of removal or prohibition.



Sec. 747.310  Reconsideration by the NCUA Board.

    (a) The subject individual shall have ten business days following 
receipt of the decision of the NCUA Board in which to petition the NCUA 
Board for initial reconsideration.
    (b) The subject individual also shall be entitled to petition the 
NCUA Board for reconsideration of its decision any time after the 
expiration of a 12-month period from the date of the NCUA Board's 
decision, but no petition for reconsideration may be made within 12 
months of a previous petition.
    (c) Any petition shall state with particularity the basis for 
reconsideration, the relief sought, and any exceptions the individual 
has to the NCUA Board's findings. An individual's petition may be 
accompanied by a memorandum of points and authorities in support of his 
or her petition and any supporting documentation the individual may wish 
to have considered.
    (d) No hearing need be granted on such petition for reconsideration. 
Promptly following receipt of the petition, the Board shall render its 
decision.



Sec. 747.311  Relevant considerations.

    In deciding the question of suspension, prohibition, or removal 
under this subpart, the NCUA Board will consider the following:
    (a) Whether the alleged offense is a crime which is punishable by 
imprisonment for a term exceeding one year under state or Federal law, 
and which involves dishonesty or breach of trust;
    (b) Whether the continued presence of the subject individual in his 
or her position may pose a threat to the interests of the credit union's 
members because of the nature and extent of the individual's 
participation in the affairs of the insured credit union and/or the 
nature of the offense with the commission of or participation in which 
the individual has been charged;
    (c) Whether there is cause to believe that there may be an erosion 
of public confidence in the integrity, safety, or soundness of a 
particular credit union (either generally or in the particular locality 
in which the credit union is situated) if the subject individual is 
permitted to remain in his or her position in an insured credit union;
    (d) Whether the individual is covered by the credit union's fidelity 
bond and, if so, whether the bond is likely to be revoked, or whether 
coverage under the bond will be affected adversely as a result of the 
information, indictment, complaint, judgment of conviction or entry into 
a pretrial diversion or other similar program; and
    (e) The NCUA Board may consider any other factors which, in the 
specific case, appear relevant to the decision to continue in effect, 
rescind, terminate, or modify a suspension, prohibition, or removal 
order, except that it shall not consider the ultimate question of the 
guilt or innocence of the subject individual with regard to the crime 
with which he or she has been charged.

[[Page 1132]]



Subpart E_Local Rules and Procedures Applicable to Proceedings Relating 
     to the Suspension or Revocation of Charters and to Involuntary 
                       Liquidations Under Title I



Sec. 747.401  Scope.

    The rules and procedures set forth in this subpart and subpart A of 
this part are applicable to proceedings by the NCUA Board pursuant to 
section 120(b)(1) of the Act (12 U.S.C. 1766(b)(1)) to suspend or revoke 
the charter of a solvent Federal credit union, and to place a solvent 
Federal credit union into involuntary liquidation. To the extent a rule 
or procedure set forth in subpart A of this part is inconsistent with a 
rule or procedure set forth in this subpart E, subpart E shall control.

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992]



Sec. 747.402  Grounds for suspension or revocation of charter and for
involuntary liquidation.

    (a) Grounds in general. The NCUA Board may suspend or revoke the 
charter of any Federal credit union, and place such credit union into 
involuntary liquidation and appoint a liquidating agent therefor, upon 
its finding that the credit union has violated any provision of its 
charter or bylaws or of the FCUA or regulations issued thereunder.
    (b) Immediate suspension. In any case where the Board determines 
that the grounds set forth in paragraph (a) of this section exist and 
that immediate action is necessary in order to prevent further 
dissipation or credit union assets or earnings, or further weakening of 
the credit union's condition, or to otherwise protect the interest of 
the credit union's insured members or the National Credit Union Share 
Insurance Fund, it may order without prior notice the immediate 
suspension of the charter of such credit union, and if the circumstances 
so warrant, may take possession of all books, records, assets, and 
property of every description of such credit union.



Sec. 747.403  Notice of intent to suspend or revoke charter; notice
of suspension.

    (a) Upon its determination that one or more of the grounds listed in 
Sec. 747.402(a) exists, or that because of conditions described in 
Sec. 747.402(b) immediate suspension of charter is necessary, the NCUA 
Board shall cause to be served upon that credit union a notice of intent 
to suspend or revoke charter and of intent to place into involuntary 
liquidation, or a notice of suspension. Such notice shall contain a 
statement of the facts which constitute the grounds for this action, a 
recitation of the options available to the credit union under paragraph 
(b) of this section, and an explanation of the results that will occur 
if the credit union fails to exercise said options.
    (b) Not later than 40 days after the receipt of the notice provided 
for in paragraph (a) of this section, the Federal credit union may file 
with the NCUA Board a statement in writing setting forth the grounds and 
reasons why its charter should not be suspended or revoked and why it 
should not be placed into involuntary liquidation; or in lieu of a 
written statement, request an oral hearing which shall be conducted in 
accordance with the procedures set forth in this subpart. This statement 
or request shall be accompanied by a certified copy of a resolution of 
the board of directors of the Federal credit union concerned authorizing 
such statement or request, such certification to be made by the 
president and secretary of the board of directors.
    (c) If the Federal credit union concerned does not exercise either 
alternative available in paragraph (b) of this section within the time 
required, it shall be deemed to have admitted the facts alleged in the 
notice and may be deemed to have consented to the relief sought.



Sec. 747.404  Notice of hearing.

    (a) Upon receipt of a request for hearing which complies with 
Sec. 747.403(b), the NCUA Board shall transmit the request to the Office 
of Financial Institution Adjudication (``OFIA''). Such hearing shall 
commence no earlier than 30 days nor later than 60 days after the date

[[Page 1133]]

the OFIA receives the request for a hearing, unless an earlier or later 
date is requested by the Federal credit union concerned and is granted 
by the NCUA Board in its discretion.
    (b) Except as provided in Sec. 747.405(b), the procedures of the 
Administrative Procedure Act (5 U.S.C. 554-557) and subpart A of this 
part will apply to the hearing.
    (c) Unless the Federal credit union shall appear at such hearing by 
a duly authorized representative it shall be deemed to have consented to 
the suspension or revocation of its charter and to the placing of said 
credit union into involuntary liquidation.



Sec. 747.405  Issuance of order.

    (a) In the event of such consent as referred to in Sec. 747.403(c) 
or Sec. 747.404(c), or if upon the record made at any such hearing as 
referred to in Sec. 747.403(b), the NCUA Board finds that the charter of 
the Federal credit union concerned should be suspended or revoked and 
the credit union closed and placed into involuntary liquidation, it 
shall cause to be served on such credit union an order directing the 
suspension or revocation of its charter and directing that it be closed 
and placed into involuntary liquidation. Such order shall contain a 
statement of the findings upon which the order is based. Additionally, 
the NCUA Board shall appoint a liquidating agent or agents.
    (b) The NCUA Board shall render its decision and cause such order to 
be served not later than 45 days after receipt of consent, or written 
submissions as the case may be, or in the case of a formal hearing after 
service or the notice of submission referred to in Sec. 747.40(a).
    (c) Upon the receipt of a copy of the order which provides that the 
Federal credit union concerned be placed into involuntary liquidation, 
the officers and directors of that Federal credit union shall 
immediately deliver to the agent for the liquidating agent possession 
and control of all books, records, assets, and property of every 
description of the Federal credit union, and the agent for the 
liquidating agent shall proceed to convert said assets to cash, collect 
all debts due to said Federal credit union and to wind up its affairs in 
accordance with the provisions of the Act.

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992]



Sec. 747.406  Cancellation of charter.

    Upon the completion of the liquidation and certification by the 
agent for the liquidating agent that the distribution of the assets of 
the Federal credit union has been completed, the NCUA Board shall cancel 
the charter of the Federal credit union concerned.

Subpart F--Local Rules and Procedures Applicable to Proceedings Relating to 
the Termination of Membership in the Central Liquidity Facility [Reserved]



Subpart G_Local Rules and Procedures Applicable to Recovery of Attorneys 
 Fees and Other Expenses Under the Equal Access to Justice Act in NCUA 
                           Board Adjudications



Sec. 747.601  Purpose and scope.

    This subpart contains the regulations of the NCUA implementing the 
Equal Access to Justice Act (5 U.S.C. 504), as amended (``EAJA''). The 
EAJA provides for the award of attorneys fees and other expenses to 
eligible individuals and entities who are parties to proceedings 
conducted under this part. An eligible party may receive an award when 
it prevails over NCUA in a proceeding, or in a significant and discrete 
substantive portion of the proceeding, unless the position of the NCUA 
was substantially justified or special circumstances make an award 
unjust. The rules in this subpart describe the parties eligible for fee 
awards, explain how to apply for awards and the procedures and standards 
that NCUA will use to make them. To the extent a rule or procedure set 
forth in subpart A of this part is inconsistent with a rule or procedure 
set forth in this subpart G, subpart G will control.



Sec. 747.602  Eligibility of applicants.

    (a) To be eligible for an award of attorneys fees and expenses, an 
applicant

[[Page 1134]]

must be a prevailing party in the proceeding for which it seeks an award 
and must be:
    (1) An individual with a net worth of not more than $2 million;
    (2) The sole owner of an unincorporated business who has a net worth 
of not more than $7 million, including both personal and business 
interests and not more than 500 employees at the time the proceeding was 
commenced (an applicant who owns an unincorporated business will be 
considered as an ``individual'' rather than a ``sole owner of an 
unincorporated business'' if the issues on which the applicant prevails 
are related primarily to personal interests rather than to business 
interests);
    (3) A charitable or other tax-exempt organization described in 
section 501(c)(3) of the Internal Revenue Code (26 U.S.C. 501(c)(3)) 
with not more than 500 employees;
    (4) A cooperative association as defined in section 15(a) of the 
Agricultural Marketing Act (12 U.S.C. 1141j(a)) with not more than 500 
employees; or
    (5) Any other partnership, corporation, association, or public or 
private organization with a net worth of not more than $7 million and 
not more than 500 employees.
    (b) For the purpose of determining eligibility, the net worth of an 
applicant and the number of employees of an applicant shall be 
determined as of the date the proceeding was initiated.
    (c) The applicant's net worth includes the value of any assets 
disposed of for the purpose of meeting an eligibility standard and 
excludes any obligations incurred for this purpose. Transfers of assets 
or obligations incurred for less than reasonably equivalent value will 
be presumed to have been made for this purpose.
    (d) The employees of an applicant include all persons who regularly 
perform services for remuneration for the applicant, under the 
applicant's direction and control; part-time employees shall be included 
on a proportional basis.
    (e) The net worth and number of employees of the applicant and all 
of its affiliates shall be aggregated to determine eligibility. Any 
individual, corporation or other entity that directly or indirectly 
controls or owns a majority of the voting shares or other interest of 
the applicant, or any corporation or other entity of which the applicant 
directly or indirectly owns or controls a majority of the voting shares 
or other interest, will be considered an affiliate for purposes of this 
subpart, unless the NCUA Board determines that such treatment would be 
unjust and contrary to the purposes of the EAJA in light of the actual 
relationship between the affiliated entities. In addition, the NCUA 
Board may determine that financial relationships of the applicant other 
than those described in this paragraph constitute special circumstances 
that would make an award unjust.
    (f) An applicant that participates in a proceeding primarily on 
behalf of one or more other persons or entities that would be ineligible 
is not itself eligible for an award.

[56 FR 37767, Aug. 8, 1991, as amended at 75 FR 34622, June 18, 2010]



Sec. 747.603  Prevailing party.

    An eligible applicant may be a ``prevailing party'' if the applicant 
wins an action after a full hearing or trial on the merits, if a 
settlement of the proceeding was effected on terms favorable to it, or 
if the proceeding against it has been dismissed. In appropriate 
situations an applicant may also have prevailed if the outcome of the 
proceeding has substantially vindicated the applicant's position on the 
significant substantive matters at issue, even though the applicant has 
not totally avoided adverse final action.



Sec. 747.604  Standards for award.

    (a) A prevailing party may receive an award for fees and expenses 
incurred in connection with a proceeding, or in a significant and 
discrete substantive portion of the proceeding, by or against NCUA 
unless the position of NCUA during the proceeding was substantially 
justified. The burden of proving that an award should not be made is on 
counsel for NCUA. To avoid an award, counsel for NCUA must show that its 
position was reasonable in law and in fact.
    (b) An award will be reduced or denied if the applicant has unduly 
or unreasonably protracted the proceeding

[[Page 1135]]

or if special circumstances make the award sought unjust.
    (c) Where an applicant has prevailed on one or more discrete 
substantive issues in a proceeding, even though all the issues were not 
resolved in its favor, any award shall be based on the fees and expenses 
incurred in connection with the discrete significant substantive issue 
or issues on which the applicant's position has been upheld. If such 
segregation of costs is not practicable, the award may be based on a 
fair proration of those fees and expenses incurred in the entire 
proceeding which would be recoverable under this section if proration 
were not performed.
    (d) Whether separate or prorated treatment under the preceding 
paragraph, including the applicable proration percentage, is appropriate 
shall be determined on the facts of the particular case. Attention shall 
be given to the significance and nature of the respective issues and 
their separability and interrelationship.



Sec. 747.605  Allowable fees and expenses.

    (a) Except as provided by Sec. 747.604(b), awards will be based on 
rates customarily charged by persons engaged in the business of acting 
as attorneys, agents and expert witnesses, even if the services were 
made available without charge or at a reduced rate.
    (b) No award under this subpart for the fee of an attorney or agent 
may exceed $75.00 per hour. No award to compensate an expert witness may 
exceed the highest rate at which NCUA is permitted to pay expert 
witnesses. However, an award may also include the reasonable expenses of 
the attorney, agent or witness as a separate item, if the attorney, 
agent or witness ordinarily charges clients separately for such 
expenses.
    (c) In determining the reasonableness of the fee sought for an 
attorney, agent, or expert witness, the NCUA Board shall consider the 
following:
    (1) If the attorney, agent, or expert witness is in private 
practice, his or her customary fee for like services, or, if he or she 
is an employee of the applicant, the fully allocated cost of the 
services;
    (2) The prevailing rate for similar services in the community in 
which the attorney, agent, or expert witness ordinarily performs 
services;
    (3) The time actually spent in the representation of the applicant; 
and
    (4) Such other factors as may bear on the value of the services 
provided.
    (d) The reasonable cost of any study, analysis, report, test, 
project, or similar matter prepared on behalf of the party may be 
awarded to the extent that the charge for the service does not exceed 
the prevailing rate for similar services, and the study or other matter 
was necessary for preparation of the applicant's case.

[56 FR 37767, Aug. 8, 1991, as amended at 75 FR 34622, June 18, 2010]



Sec. 747.606  Contents of application.

    (a) A prevailing eligible party, as defined in Secs. 747.602, 
747.603, and 747.604, seeking an award under this section, must file an 
application for an award of fees and expenses with the Secretary of the 
NCUA Board. The application shall include the following information:
    (1) The identity of the applicant and the proceeding for which an 
award is sought;
    (2) A showing that the applicant has prevailed and an identification 
of the issues in the proceeding on which the applicant believes that the 
position of NCUA was not substantially justified;
    (3) A statement, with supporting documentation, that the applicant 
is an eligible party, as defined by Sec. 747.602. If the applicant is an 
individual, he or she must state that his or her net worth does not 
exceed $2 million. If the applicant is not an individual, it shall state 
the number of its employees and that its net worth does not exceed $7 
million as of the date the proceeding was initiated. However, an 
applicant may omit a statement of net worth if:
    (i) It attaches a copy of a ruling by the Internal Revenue Service 
that it qualifies as an organization described in section 501(c)(3) of 
the Internal Revenue Code (26 U.S.C. 501(c)(3)) or, in the case of a 
tax-exempt organization not required to obtain a ruling from the 
Internal Revenue Service on its exempt status, a statement that 
describes the basis for the applicant's belief that it qualifies under 
such section; or

[[Page 1136]]

    (ii) It states that it is a cooperative association as defined in 
section 15(a) of the Agricultural Marketing Act (12 U.S.C. 1141j(a)).
    (4) A Statement of the amount of fees and expenses for which an 
award is sought; and
    (5) Any other matters that the applicant believes may assist or 
wishes the NCUA Board to consider in determining whether and in what 
amount an award should be made.
    (b) The application shall be signed by the applicant or an 
authorized officer or attorney of the applicant. It shall also contain 
or be accompanied by a written verification under oath or under penalty 
of perjury that the information provided in the application is true and 
correct.
    (c) The application and documentation requirements of this subpart 
are required by law as a prerequisite to obtaining a benefit under the 
EAJA and this subpart.

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992, as amended at 75 FR 
34622, June 18, 2010]



Sec. 747.607  Statement of net worth.

    (a) Each applicant (other than a qualified tax-exempt organization 
or cooperative association) must provide a detailed statement showing 
the net worth of the applicant and any affiliates, as defined in 
Sec. 747.602(a), when the proceeding was initiated. The exhibit may be 
in any form convenient to the applicant that provides full disclosure of 
the applicant's and its affiliates' assets and liabilities and is 
sufficient to determine whether the applicant is an eligible party. The 
administrative law judge or the NCUA Board may require additional 
information from the applicant to determine eligibility. Unless 
otherwise ordered by the Board or required by law, the statement shall 
be kept confidential and used by the NCUA Board only in making its 
determination of an award.
    (b) If the applicant or any of its affiliates is a Federal credit 
union, the portion of the statement of net worth which relates to the 
Federal credit union shall consist of a copy of the Federal credit 
union's last Statement of Financial Condition filed before the 
initiation of the underlying proceeding.
    (c) All statements of net worth shall describe any transfers of 
assets from or obligations incurred by the applicant or any affiliate, 
occurring in the six-month period prior to the date on which the 
proceeding was initiated, which reduced the net worth of the applicant 
and its affiliates below the applicable net-worth ceiling. If there were 
none, the applicant shall so state.

[56 FR 37767, Aug. 8, 1991, as amended at 75 FR 34622, June 18, 2010]



Sec. 747.608  Documentation of fees and expenses.

    The application shall be accompanied by full documentation of the 
fees and expenses, including the cost of any study, analysis, audit, 
test, project or similar matter, for which an award is sought. A 
separate itemized statement shall be submitted for each professional 
firm or individual whose services are covered by the application, 
showing hours spent in connection with the proceeding by each 
individual, a description of the specific services performed, the rate 
at which each fee has been computed, any expenses for which 
reimbursement is sought, the total amount claimed, and the total amount 
paid or payable by the applicant or by any other person or entity for 
the services provided. The administrative law judge or the NCUA Board 
may require the applicant to provide vouchers, receipts, or other 
substantiation for any expenses claimed.



Sec. 747.609  Filing and service of applications.

    (a) An application may be filed whenever the applicant has prevailed 
in the proceeding or in a significant and discrete substantive portion 
of the proceeding, but in no case later than 30 days after the Board's 
final disposition of the proceeding.
    (b) If review or reconsideration is sought or taken of a decision on 
which an applicant believes it has prevailed, proceedings for the award 
of fees shall be stayed pending final disposition of the underlying 
controversy.
    (c) As used in this subpart, final disposition means the issuance of 
a final order or any other final resolution of a proceeding, such as a 
settlement or voluntary dismissal.

[[Page 1137]]

    (d) Any application for an award of fees and expenses shall be filed 
with the Secretary of the Board, National Credit Union Administration, 
1775 Duke Street, Alexandria, VA 22314-3428. Any application for an 
award and any other pleading or document related to an application, 
shall be filed and served on all parties to the proceeding in the same 
manner as other pleadings in the proceeding, except as provided in 
Sec. 747.607(a) for statements of net worth.

[56 FR 37767, Aug. 8, 1991, as amended at 59 FR 36041, July 15, 1994]



Sec. 747.610  Answer to application.

    (a) Within 30 days after service of an application, counsel for NCUA 
may file an answer to the application. Unless counsel for NCUA requests 
and is granted an extension of time for filing or files a statement of 
intent to negotiate under paragraph (b) of this section, failure to file 
an answer within the 30-day period will be treated as a consent to the 
award requested.
    (b) If counsel for NCUA and the applicant believe that the issues in 
the fee application can be settled, they may jointly file a statement of 
their intent to negotiate a settlement. The filing of this statement 
shall extend the time for filing an answer for an additional 30 days, 
and further extensions may be granted by the NCUA Board upon the joint 
request of counsel for NCUA and the applicant.
    (c) The answer shall explain in detail any objections to the award 
requested and identify the facts relied on in support of counsel's 
position. If the answer is based on any alleged facts not already in the 
record of the proceeding, counsel shall include with the answer a 
request for further proceedings under Sec. 747.613.
    (d)(1) The applicant may file a reply if counsel for NCUA has 
addressed in his or her answer any of the following issues:
    (i) That the position of NCUA in the proceeding was substantially 
justified;
    (ii) That the applicant unduly protracted the proceedings; or
    (iii) That special circumstances make an award unjust.
    (2) The reply shall be filed within 15 days after service of the 
answer. If the reply is based on any alleged facts not already in the 
record of the proceeding, the applicant shall include with the reply a 
request for further proceedings under Sec. 747.613.



Sec. 747.611  Comments by other parties.

    Any party to a proceeding other than the applicant and counsel for 
NCUA may file comments on an application within 30 days after service of 
the application or on an answer within 15 days after service of the 
answer. A commenting party may not participate further in proceedings on 
the application unless the administrative law judge or the NCUA Board 
determines that the public interest requires such participation in order 
to permit full exploration of matters raised in the comments.

[56 FR 37767, Aug. 8, 1991, as amended at 75 FR 34622, June 18, 2010]



Sec. 747.612  Settlement.

    The applicant and counsel for NCUA may agree on a proposed 
settlement of the award before final action on the application, either 
in connection with a settlement of the underlying proceeding, or after 
the underlying proceeding has been concluded, in accordance with NCUA's 
standard settlement procedure. If a prevailing party and counsel for 
NCUA agree on a proposed settlement of an award before an application 
has been filed, the application shall be filed with the proposed 
settlement.



Sec. 747.613  Further proceedings.

    (a) After the expiration of the time allowed for the filing of all 
documents necessary for the determination of a recommended fee award, 
the NCUA Board shall transmit the entire record to the administrative 
law judge who presided at the underlying proceeding. Ordinarily, the 
determination of an award will be made on the basis of the written 
record. However, on request of either the applicant or counsel for NCUA, 
or on its own initiative, the administrative law judge or the NCUA Board 
may order further proceedings, such as an informal conference, oral 
argument, additional written submissions or an evidentiary hearing. Such 
further proceedings shall be held only

[[Page 1138]]

when necessary for full and fair resolution of the issues arising from 
the application, and shall be conducted as promptly as possible.
    (b) A request that the administrative law judge or the NCUA Board 
order further proceedings under this section shall specifically identify 
the information sought or the disputed issues and shall explain why the 
additional proceedings are necessary to resolve the issues.



Sec. 747.614  Recommended decision.

    The administrative law judge shall file a recommended decision on 
the application with the NCUA Board within 60 days after completion of 
the proceedings on the application. The recommended decision shall 
include written findings and conclusions on the applicant's eligibility 
and status as a prevailing party, and an explanation of the reasons for 
any difference between the amount requested and the amount awarded. The 
recommended decision shall also include, if at issue, findings on 
whether NCUA's position was substantially justified, whether the 
applicant unduly protracted the proceedings, or whether special 
circumstances make an award unjust. If the applicant has sought an award 
against more than one agency, the recommended decision shall allocate 
responsibility for payment of any award made among the agencies, and 
shall explain the reasons for the allocation made. The administrative 
law judge shall file with and certify to the NCUA Board the record of 
the proceeding on the fee application, the recommended decision and 
proposed order. Promptly upon such filing, the NCUA Board shall serve 
upon each party to the proceeding a copy of the administrative law 
judge's recommended decision, findings, conclusions and proposed order. 
The provisions of this section and Sec. 747.613 shall not apply, 
however, in any case where the hearing was held before the NCUA Board.



Sec. 747.615  Decision of the NCUA Board.

    Within 15 days after service of the recommended decision, findings, 
conclusions, and proposed order, the applicant or counsel for NCUA may 
file with the NCUA Board written exceptions thereto. A supporting brief 
may also be filed. The NCUA Board shall render its decision within 60 
days after the matter is submitted to it. The NCUA Board shall furnish 
copies of its decision and order to the parties. Judicial review of the 
NCUA Board's final decision and order may be obtained as provided in 5 
U.S.C. 504(c)(2).



Sec. 747.616  Payment of award.

    An applicant seeking payment of an award granted by the NCUA Board 
shall submit to the NCUA's Office of Chief Financial Officer a copy of 
the NCUA Board's Final Decision and Order granting the award, 
accompanied by a statement that it will not seek review of the decision 
and order in the United States court. All submissions shall be addressed 
to the Office of Chief Financial Officer, National Credit Union 
Administration, 1775 Duke Street, Alexandria, VA 22314-3428. The NCUA 
will pay the amount awarded within 60 days after receiving the 
applicant's statement, unless judicial review of the award or of the 
underlying decision of the adversary adjudication has been sought by the 
applicant or any other party to the proceeding.

[56 FR 37767, Aug. 8, 1991, as amended at 59 FR 36041, July 15, 1994; 75 
FR 34622, June 18, 2010]



    Subpart H_Local Rules and Procedures Applicable to Investigations



Sec. 747.701  Applicability.

    The rules in this subpart apply only to informal and formal 
investigations conducted by the NCUA Board itself or its delegates. They 
do not apply to adjudicative or rulemaking proceedings or to routine, 
periodic or special examinations conducted by the NCUA Board's staff.



Sec. 747.702  Information obtained in investigations.

    Information and documents obtained by the Board in the course of any 
investigation, unless made a matter of public record by the NCUA Board, 
shall be deemed non-public, but the NCUA Board approves the practice 
whereby the General Counsel may engage in,

[[Page 1139]]

and may authorize any person acting on his or her behalf or at his or 
her direction to engage in, discussions with representatives of domestic 
or foreign governmental authorities, self-regulatory organizations, and 
with receivers, trustees, masters and special counsels or special agents 
appointed by and subject to the supervision of the courts of the United 
States, concerning information obtained in individual investigations, 
including investigations conducted pursuant to any order entered by the 
NCUA Board or its General Counsel pursuant to delegated authority.



Sec. 747.703  Authority to conduct investigations.

    (a) The General Counsel and persons acting on his or her behalf and 
at his or her direction may conduct such investigations into the affairs 
of any insured credit union or institution-affiliated parties as deemed 
appropriate to determine whether such credit union or party has 
violated, is violating or is about to violate any provision of the Act, 
the NCUA Board's regulations or other relevant statutes or regulations 
that may bear on a party's fitness to participate in the affairs of a 
credit union. The General Counsel and persons acting on his or her 
behalf may investigate whether any party is unfit to participate in the 
affairs of a credit union, whether formal enforcement proceedings are 
warranted, or such other matters as the General Counsel or his or her 
designee, in his or her discretion, shall deem appropriate. Such 
investigations may be conducted either informally or formally.
    (b) Formal investigations involve the exercise of the NCUA Board's 
subpoena power and are referred to here as formal investigative 
proceedings. In formal investigative proceedings, the General Counsel 
and those to whom he or she delegates authority to act on his or her 
behalf and at his or her direction have augmented investigatory powers 
and need not rely on the powers available to them in informal 
investigations, and they may gather evidence through the issuance of 
subpoenas compelling the production of documents or testimony as well. 
In informal investigations evidence may be gathered ordinarily through 
the use of investigatory procedures or credit union examinations and 
through voluntary statements and submissions.
    (c) The NCUA Board has delegated authority to the General Counsel, 
or designee thereof, to institute formal investigative proceedings by 
the entry of an order indicating the purpose of the investigation and 
the designation of persons to conduct that investigation on his or her 
behalf and at his or her direction. This delegation also extends to the 
NCUA Board's role as liquidator and conservator of insured credit 
unions. The power to issue a subpoena may not be delegated outside the 
agency. The General Counsel may amend such order as he deems 
appropriate.

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992]



  Subpart I_Local Rules Applicable to Formal Investigative Proceedings



Sec. 747.801  Applicability.

    The rules in this subpart are applicable to a witness who is sworn 
in a formal investigative proceeding. Formal investigative proceedings 
may be held before the NCUA Board, before one or more of its members, or 
before any officer designated by the NCUA Board or its General Counsel, 
as described in subpart H of this part, and with or without the 
assistance of such other counsel as the NCUA Board deems appropriate, 
for the purpose of taking testimony of witnesses, conducting an 
investigation and receiving other evidence. The term ``officer 
conducting the investigation'' shall mean any of the foregoing.



Sec. 747.802  Non-public formal investigative proceedings.

    Unless otherwise ordered by the NCUA Board, all formal investigative 
proceedings shall be non-public.



Sec. 747.803  Subpoenas.

    (a) Issuance. In the course of a formal investigative proceeding the 
officer conducting the investigation may issue a subpoena directing the 
party named therein to appear before the officer

[[Page 1140]]

conducting the investigation at a specified time and place to testify or 
to produce documentary evidence, or both, relating to any matter under 
investigation.
    (b) Service. Service of subpoenas shall be effected in the following 
manner:
    (1) Service upon a natural party. Delivery of a copy of a subpoena 
to a natural person may be effected by--
    (i) Handing it to the person;
    (ii) Leaving it at his or her office with the person in charge 
thereof or, if there is no one in charge, by leaving it at a conspicuous 
place there;
    (iii) Leaving it at his or her dwelling place or usual place of 
abode with some person of suitable age and discretion who is found 
there; or
    (iv) Mailing it by registered or certified mail to him or her at his 
or her last known address. In the event that personal service as 
described in this paragraph is impracticable, any other method whereby 
actual notice is given to the respondent may be employed.
    (2) Service upon other persons. When the person to be served is not 
a natural person, delivery of a copy of the subpoena may be effected 
by--
    (i) Handing it to a registered agent for service, or to any officer, 
director, or agent in charge of any office of such person;
    (ii) Mailing it by registered or certified mail to any such 
representative at his or her last known address; or
    (iii) Any other method whereby actual notice is given to any such 
representative.
    (c) Witness fees and mileage. Witnesses appearing pursuant to 
subpoena shall be paid the same fees and mileage that are paid to 
witnesses in the United States district courts. Any such fees and 
mileage payments need be paid only upon submission of a properly 
completed application for reimbursement and in no event need they be 
paid sooner than 30 days after the appearance of the witness pursuant to 
subpoena.
    (d) Enforcement. Whenever it appears to the General Counsel that any 
person upon whom a subpoena was properly served pursuant to these Rules 
is refusing to fully comply with the terms of that subpoena, then the 
General Counsel, in his or her discretion, may apply to the courts of 
the United States for enforcement of such subpoena.

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992; June 18, 2010]



Sec. 747.804  Oath; false statements.

    At the discretion of the officer conducting the investigation, 
testimony of a witness may be taken under oath and administered by the 
officer. Any person making false statements under oath during the course 
of a formal investigative proceeding is subject to the criminal 
penalties for perjury in 18 U.S.C. 1621. Any person who knowingly and 
willfully makes false and fraudulent statements, whether under oath or 
otherwise, or who falsifies, conceals or covers up any material fact, or 
submits any false, fictitious or fraudulent information in connection 
with such a proceeding, is subject to the criminal penalties set forth 
in 18 U.S.C. 1001.



Sec. 747.805  Self-incrimination; immunity.

    (a) Self-incrimination. Except as provided in paragraph (b) of this 
section, a witness testifying or otherwise giving information in a 
formal investigative proceeding may refuse to answer questions on the 
basis of his or her right against self-incrimination granted by the 
Fifth Amendment of the Constitution of the United States.
    (b) Immunity. (1) No officer conducting any formal investigative 
proceeding (or any other informal investigation or examination) shall 
have the power to grant or promise any party any immunity from criminal 
prosecution under the laws of the United States or of any other 
jurisdiction.
    (2) If the NCUA Board believes that the testimony or other 
information sought to be obtained from any party may be necessary to the 
public interest and that party has refused or is likely to refuse to 
testify or provide other information on the basis of his or her 
privilege against self-incrimination, the NCUA Board, with the approval 
of the Attorney General, may issue an order requiring the party to give 
testimony or provide other information that he or she has previously 
refused to provide on the basis of self-incrimination.
    (3) Whenever a witness refuses, on the basis of his privilege 
against self-

[[Page 1141]]

incrimination, to testify or provide other information in a formal 
investigative proceeding, and the officer conducting the investigation 
communicates to that person an order of the NCUA Board requiring him or 
her to testify or provide other information, the witness may not refuse 
to comply with the order on the basis of his or her privilege against 
self-incrimination; but no testimony or other information compelled 
under the order (or any information directly or indirectly derived from 
such testimony or other information) may be used against the witness in 
any criminal case, except a prosecution for perjury, giving a false 
statement, or otherwise failing to comply with the order.



Sec. 747.806  Transcripts.

    Transcripts, if any, of formal investigative proceedings shall be 
recorded solely by the official reporter, or by any other person or 
means designated by the officer conducting the investigation. A party 
who has submitted documentary evidence or testimony in a formal 
investigative proceeding shall be entitled, upon written request, to 
procure a copy of his or her documentary evidence or a transcript of his 
or her testimony on payment of the appropriate fees; provided, however, 
that in a non-public formal investigative proceeding the NCUA Board may 
for good cause deny such request or the NCUA Board may place reasonable 
limitations upon the use of the documentary evidence and transcript. In 
any event, any witness, upon proper identification, shall have the right 
to inspect the official transcript of the witness's own testimony.



Sec. 747.807  Rights of witnesses.

    (a) In the event that a formal investigative proceeding is conducted 
pursuant to a specific order entered by the NCUA Board or by its General 
Counsel, then any party who is compelled or requested to provide 
documentary evidence or testimony as part of such proceeding shall, upon 
request, be shown a copy of the NCUA Board's or its delegate's order. 
Copies of such orders shall not be provided for their retention to such 
persons requesting same except in the sole discretion of the General 
Counsel or his designee.
    (b) Any party compelled to appear, or who appears by request or 
permission of the officer conducting the investigation, in person at a 
formal investigative proceeding may be accompanied, represented and 
advised by counsel who is a member of the bar of the highest court of 
any state; provided however, that all witnesses in such proceeding shall 
be sequestered, and unless permitted in the discretion of the officer 
conducting the investigation, no witness or the counsel accompanying any 
such witness shall be permitted to be present during the examination of 
any other witness called in such proceeding.
    (c)(1) The right of a witness to be accompanied, represented and 
advised by counsel shall mean the right to have an attorney present 
during any formal investigative proceeding and to have the attorney--
    (i) Advise such person before, during and after such testimony;
    (ii) Question such person briefly at the conclusion of his testimony 
to clarify any answers such person has given; and
    (iii) Make summary notes during such testimony solely for the use of 
such person.
    (2) From time to time, in the discretion of the officer, it shall be 
necessary for persons other than the witness and his or her counsel to 
attend non-public investigative proceedings. For example, the officer 
may deem it appropriate that outside counsel to the NCUA Board attend 
and advise him or her concerning the proceeding including the 
examination of a particular witness. In these circumstances, outside 
counsel would not be an officer as that term is used. In other 
circumstances, it may be appropriate that a technical expert (such as an 
accountant) accompany the witness and his or her counsel in order to 
assist counsel in understanding technical issues. These latter 
circumstances should be rare, are left to the discretion of the officer 
conducting the investigation, and shall not in any event be allowed to 
serve as a ruse to coordinate testimony between witnesses, to oversee or 
supervise the testimony of any witnesses, or

[[Page 1142]]

otherwise defeat the beneficial effects of the witness sequestration 
rule.
    (d) The officer conducting the investigation may report to the NCUA 
Board any instances where any witness or counsel has been guilty of 
dilatory, obstructionist or contumacious conduct during the course of a 
formal investigative proceeding or any other instance of violations of 
these rules. The NCUA Board will thereupon take such further action as 
the circumstance may warrant including barring the offending person from 
further participation in the particular formal investigative proceeding 
or even from further practice before the Board.



   Subpart J_Local Procedures and Standards Applicable to a Notice of 
  Change in Senior Executive Officers, Directors or Committee Members 
                   Pursuant to Section 212 of the Act



Sec. 747.901  Scope.

    The rules and procedures set forth in this subpart shall apply to 
the notice filed by a credit union pursuant to section 212 of the Act 
(12 U.S.C. 1790a) and Sec. 700.2 of this chapter, for the consent of the 
NCUA to add to or replace an individual on the board of directors or 
supervisory or credit committee, or to employ any individual as a senior 
executive officer or change the responsibilities of any individual to a 
position of senior executive officer where the credit union either has 
been chartered less than 2 years; or is in ``troubled condition,'' as 
defined in Sec. 701.14 of this chapter. Subpart A of this part shall not 
apply to any proceeding under this subpart.

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992, as amended at 60 FR 
31911, June 19, 1995; 78 FR 4029, Jan. 18, 2013]



Sec. 747.902  Grounds for disapproval of notice.

    The NCUA Board or its designee may issue a notice of disapproval 
with respect to a notice submitted by a credit union pursuant to section 
212 of the Act (12 U.S.C. 1790a) and Sec. 701.14 of this chapter, where 
the competence, experience, character, or integrity of the individual 
with respect to whom such notice is submitted indicates that it would 
not be in the best interest of the members of the credit union or the 
public to permit the individual to be employed by or associated with, 
such credit union.

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992, as amended at 60 FR 
31911, June 19, 1995; 75 FR 34623, June 18, 2010]



Sec. 747.903  Procedures where notice of disapproval issued;
reconsideration.

    (a) The notice of disapproval shall be served upon the federally 
insured credit union and the candidate for director, committee member or 
senior executive officer. The notice of disapproval shall:
    (1) Summarize or cite the relevant consideration specified in 
Sec. 747.902;
    (2) Inform the individual and the credit union that, within 15 days 
of receipt of the notice of disapproval, they can request 
reconsideration by the Regional Director of the initial determination, 
or can appeal the determination directly to the NCUA Board;
    (3) Specify what additional information, if any, must be considered 
in the reconsideration.
    (b) The request for reconsideration by the Regional Director must be 
filed at the appropriate Regional Office.
    (c) The Regional Director shall act on a request for reconsideration 
within 30 days of its receipt.

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992]



Sec. 747.904  Appeal.

    (a) Time for filing. Within 15 days after issuance of a Notice of 
Disapproval or a determination on a request for reconsideration by the 
Regional Director, the individual or credit union (henceforth 
petitioner) may appeal by filing with the NCUA Board a written request 
for appeal.
    (b) Contents of request. Any appeal must be in writing and include:
    (1) The reasons why the NCUA Board should review the disapproval; 
and
    (2) Relevant, substantive and material facts that for good cause 
were not previously set forth in the notice required to be filed 
pursuant to section 212 of the Act (12 U.S.C. 1790a) and Sec. 701.14 of 
this chapter.

[[Page 1143]]

    (c) Procedures for review of request. Within 30 days of the NCUA 
Board's receipt of an appeal, the NCUA Board may request in writing that 
the petitioner submit additional facts and records to support the 
appeal. The petitioner shall have 15 days from the date of issuance of 
such written request to provide such additional information. Failure by 
the petitioner to provide additional information may, as determined 
solely by the NCUA Board or its designee, result in denial of the 
petitioner's appeal.
    (d) Determination on appeal by NCUA Board or its designee. (1) 
Within 90 days from the date of the receipt of an appeal by the NCUA 
Board or its designee or of its receipt of additional information 
requested under paragraph (c) of this section, the NCUA Board or its 
designee shall notify the petitioner whether the disapproval will be 
continued, terminated, or otherwise modified. The NCUA Board or its 
designee shall promptly rescind or modify the notice of disapproval 
where the decision is favorable to the petitioner.
    (2) The determination by the NCUA Board on the appeal shall be 
provided to the petitioner in writing, stating the basis for any 
decision of the NCUA Board or its designee that is adverse to the 
petitioner, and shall constitute a final order of the NCUA Board.
    (3) Failure by the NCUA Board to issue a determination on the 
petitioner's appeal within the 90-day period prescribed under paragraph 
(d)(1) of this section shall be deemed a denial of the appeal for 
purpose of Sec. 747.905.

[56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992, as amended at 60 FR 
31911, June 19, 1995]



Sec. 747.905  Judicial review.

    (a) Failure to file an appeal within the applicable time periods, 
either to the initial determination or to the decision on a request for 
reconsideration, shall constitute a failure by the petitioner to exhaust 
available administrative remedies and, due to such failure, any 
objections to the initial determination or request for reconsideration 
shall be deemed to be waived and such determination shall be deemed to 
have been accepted by, and shall be binding upon, the petitioner.
    (b) For purposes of seeking judicial review of actions taken 
pursuant to this section, suit may be filed in the United States 
District Court for the district where the requester resides, for the 
district where the credit union's principal place of business is 
located, or for the District of Columbia.

[56 FR 37767, Aug. 8, 1991; 57 FR 524, Jan. 7, 1992]



       Subpart K_Inflation Adjustment of Civil Monetary Penalties



Sec. 747.1001  Adjustment of civil monetary penalties by the rate
of inflation.

    (a) NCUA is required by the Federal Civil Penalties Inflation 
Adjustment Act of 1990 (Pub. L. 101-410, 104 Stat. 890, as amended (28 
U.S.C. 2461 note)) to adjust the maximum amount of each civil monetary 
penalty within its jurisdiction by the rate of inflation. The following 
chart displays those adjusted amounts, as calculated pursuant to the 
statute:

------------------------------------------------------------------------
     U.S. Code citation          CMP Description     New maximum amount
------------------------------------------------------------------------
(1) 12 U.S.C. 1782(a)(3)....  Inadvertent failure   $3,787.
                               to submit a report
                               or the inadvertent
                               submission of a
                               false or misleading
                               report.
(2) 12 U.S.C. 1782(a)(3)....  Non-inadvertent       37,872.
                               failure to submit a
                               report or the non-
                               inadvertent
                               submission of a
                               false or misleading
                               report.
(3) 12 U.S.C. 1782(a)(3)....  Failure to submit a   1,893,610 or 1
                               report or the         percent of the
                               submission of a       total assets of the
                               false or misleading   credit union,
                               report done           whichever is less.
                               knowingly or with
                               reckless disregard.
(4) 12 U.S.C. 1782(d)(2)(A).  Tier 1 CMP for        3,462.
                               inadvertent failure
                               to submit certified
                               statement of
                               insured shares and
                               charges due to
                               NCUSIF, or
                               inadvertent
                               submission of false
                               or misleading
                               statement.

[[Page 1144]]

 
(5) 12 U.S.C. 1782(d)(2)(B).  Tier 2 CMP for non-   34,620.
                               inadvertent failure
                               to submit certified
                               statement or
                               submission of false
                               or misleading
                               statement.
(6) 12 U.S.C. 1782(d)(2)(C).  Tier 3 CMP for        1,730,990 or 1
                               failure to submit a   percent of the
                               certified statement   total assets of the
                               or the submission     credit union,
                               of a false or         whichever is less.
                               misleading
                               statement done
                               knowingly or with
                               reckless disregard.
(7) 12 U.S.C. 1785(a)(3)....  Non-compliance with   118.
                               insurance logo
                               requirements.
(8) 12 U.S.C. 1785(e) (3)...  Non-compliance with   275.
                               NCUA security
                               requirements.
(9) 12 U.S.C. 1786(k)(2)(A).  Tier 1 CMP for        9,468.
                               violations of law,
                               regulation, and
                               other orders or
                               agreements.
(10) 12 U.S.C. 1786(k)(2)(A)  Tier 2 CMP for        47,340.
                               violations of law,
                               regulation, and
                               other orders or
                               agreements and for
                               recklessly engaging
                               in unsafe or
                               unsound practices
                               or breaches of
                               fiduciary duty.
(11) 12 U.S.C. 1786(k)(2)(A)  Tier 3 CMP for        For a person other
                               knowingly             than an insured
                               committing the        credit union:
                               violations under      $1,893,610;
                               Tier 1 or 2          For an insured
                               (natural person).     credit union:
                                                     $1,893,610 or 1
                                                     percent of the
                                                     total assets of the
                                                     credit union,
                                                     whichever is less.
(12) 12 U.S.C.                Non-compliance with   311,470.
 1786(w)(5)(ii).               senior examiner
                               post-employment
                               restrictions.
(13) 15 U.S.C. 1639e(k).....  Non-compliance with   First violation:
                               appraisal             $10,875
                               independence         Subsequent
                               requirements.         violations:
                                                     $21,749.
(14) 42 U.S.C. 4012a(f)(5)..  Non-compliance with   2,056.
                               flood insurance
                               requirements.
------------------------------------------------------------------------

    (b) The adjusted amounts displayed in paragraph (a) of this section 
apply to civil monetary penalties that are assessed after the date the 
increase takes effect, including those whose associated violation or 
violations predate the increase.

[81 FR 40157, June 21, 2016]



  Subpart L_Issuance, Review and Enforcement of Orders Imposing Prompt 
                            Corrective Action

    Source: 65 FR 8594, Feb. 18, 2000, unless otherwise noted.



Sec. 747.2001  Scope.

    (a) Independent review process. The rules and procedures set forth 
in this subpart apply to federally-insured credit unions, whether 
federally- or state-chartered (other than corporate credit unions), 
which are subject to discretionary supervisory actions under part 702 of 
this chapter, and to reclassification under Secs. 702.102(b) and 
702.302(d) of this chapter, to facilitate prompt corrective action under 
section 216 of the Federal Credit Union Act, 12 U.S.C. 1790d; and to 
senior executive officers and directors of such credit unions who are 
dismissed pursuant to a discretionary supervisory action imposed under 
part 702. NCUA staff decisions to impose discretionary supervisory 
actions under part 702 shall be considered material supervisory 
determinations for purposes of 12 U.S.C. 1790d(k). Section 747.2002 of 
this subpart provides an independent appellate process to challenge such 
decisions.
    (b) Notice to State officials. With respect to a federally-insured 
State-chartered credit union under Secs. 747.2002, 747.2003 and 747.2004 
of this subpart, notices, directives and decisions on appeal served upon 
a credit union, or a dismissed director or officer thereof, by the NCUA 
Board shall also be served upon the appropriate State official. 
Responses, requests for a hearing and to present witnesses, requests to 
modify or rescind a discretionary supervisory action and requests for 
reinstatement served upon the NCUA Board by a credit union, or dismissed 
director or officer thereof, shall also be served upon the appropriate 
State official.

    Effective Date Note: At 80 FR 66723, Oct. 29, 2015, Sec. 747.2001 
was amended in paragraph (a) by removing the citation ``702.302(d)'' and 
adding in its place the citation ``702.202(d)'', effective Jan. 1, 2019.

[[Page 1145]]



Sec. 747.2002  Review of orders imposing discretionary supervisory
action.

    (a) Notice of intent to issue directive--(1) Generally. Whenever the 
NCUA Board intends to issue a directive imposing a discretionary 
supervisory action under Secs. 702.202(b), 702.203(b) and 702.204(b) of 
this chapter on a credit union classified ``undercapitalized'' or lower, 
or under Sec. 702.304(b) or Sec. 702.305(b) of this chapter on a new 
credit union classified ``moderately capitalized'' or lower, it must 
give the credit union prior notice of the proposed action and an 
opportunity to respond.
    (2) Immediate issuance of directive without notice. The NCUA Board 
may issue a directive to take effect immediately under paragraph (a)(1) 
of this section without notice to the credit union if the NCUA Board 
finds it necessary in order to carry out the purposes of part 702 of 
this chapter. A credit union that is subject to a directive which takes 
effect immediately may appeal the directive in writing to the NCUA 
Board. Such an appeal must be received by the NCUA Board within 14 
calendar days after the directive was issued, unless the NCUA Board 
permits a longer period. Unless ordered by the NCUA Board, the directive 
shall remain in effect pending a decision on the appeal. The NCUA Board 
shall consider any such appeal, if timely filed, within 60 calendar days 
of receiving it.
    (b) Contents of notice. The NCUA Board's notice to a credit union of 
its intention to issue a directive imposing a discretionary supervisory 
action must state:
    (1) The credit union's net worth ratio and net worth category 
classification;
    (2) The specific restrictions or requirements that the NCUA Board 
intends to impose, and the reasons therefor;
    (3) The proposed date when the discretionary supervisory action 
would take effect and the proposed date for completing the required 
action or terminating the action; and
    (4) That a credit union must file a written response to a notice 
within 14 calendar days from the date of the notice, or within such 
shorter period as the NCUA Board determines is appropriate in light of 
the financial condition of the credit union or other relevant 
circumstances.
    (c) Contents of response to notice. A credit union's response to a 
notice under paragraph (b) of this section must:
    (1) Explain why it contends that the proposed discretionary 
supervisory action is not an appropriate exercise of discretion under 
this part;
    (2) Request the NCUA Board to modify or to not issue the proposed 
directive;
    (3) Include other relevant information, mitigating circumstances, 
documentation, or other evidence in support of the credit union's 
position regarding the proposed directive; and
    (4) If desired, request the recommendation of NCUA's ombudsman 
pursuant to paragraph (g) of this section.
    (d) NCUA Board consideration of response. The NCUA Board, or an 
independent person designated by the NCUA Board to act on its behalf, 
after considering a response under paragraph (c) of this section, may:
    (1) Issue the directive as originally proposed or as modified;
    (2) Determine not to issue the directive and to so notify the credit 
union; or
    (3) Seek additional information or clarification from the credit 
union or any other relevant source.
    (e) Failure to file response. A credit union which fails to file a 
written response to a notice of the NCUA Board's intention to issue a 
directive imposing a discretionary supervisory action, within the 
specified time period, shall be deemed to have waived the opportunity to 
respond, and to have consented to the issuance of the directive.
    (f) Request to modify or rescind directive. A credit union that is 
subject to an existing directive imposing a discretionary supervisory 
action may request in writing that the NCUA Board reconsider the terms 
of the directive, or rescind or modify it, due to changed circumstances. 
Unless otherwise ordered by the NCUA Board, the directive shall remain 
in effect while such request is pending. A request under this paragraph 
which remains pending 60 days following receipt by the NCUA Board is 
deemed granted.

[[Page 1146]]

    (g) Ombudsman. A credit union may request in writing the 
recommendation of NCUA's ombudsman to modify or to not issue a proposed 
directive under paragraph (b) of this section, or to modify or rescind 
an existing directive due to changed circumstances under paragraph (f) 
of this section. A credit union which fails to request the ombudsman's 
recommendation in a response under paragraph (c) of this section, or in 
a request under paragraph (f) of this section, shall be deemed to have 
waived the opportunity to do so. The ombudsman shall promptly notify the 
credit union and the NCUA Board of his or her recommendation.

    Effective Date Note: At 80 FR 66723, Oct. 29, 2015, Sec. 747.2002 
was amended in paragraph (a) by removing the words ``Secs. 702.202(b), 
702.203(b) and 702.204(b)'' and adding in their place the words 
``Secs. 702.107 (b), 702.108(b) or 702.109(b)'', and by removing the 
words ``Sec. 702.304(b) or Sec. 702.305(b)'' and adding in their place 
the words ``Sec. 702.204(b) or Sec. 702.205(b)'', effective Jan. 1, 
2019.



Sec. 747.2003  Review of order reclassifying a credit union on safety 
and soundness criteria.

    (a) Notice of proposed reclassification based on unsafe or unsound 
condition or practice. When the NCUA Board proposes to reclassify a 
credit union or subject it to the supervisory actions applicable to the 
next lower net worth category pursuant to Secs. 702.102(b) and 
702.302(d) of this chapter (each such action hereinafter referred to as 
``reclassification''), the NCUA Board shall issue and serve on the 
credit union reasonable prior notice of the proposed reclassification.
    (b) Contents of notice. A notice of intention to reclassify a credit 
union based on unsafe or unsound condition or practice shall state:
    (1) The credit union's net worth ratio, current net worth category 
classification, and the net worth category to which the credit union 
would be reclassified;
    (2) The unsafe or unsound practice(s) and/or condition(s) justifying 
reasons for reclassification of the credit union;
    (3) The date by which the credit union must file a written response 
to the notice (including a request for a hearing), which date shall be 
no less than 14 calendar days from the date of service of the notice 
unless the NCUA Board determines that a shorter period is appropriate in 
light of the financial condition of the credit union or other relevant 
circumstances; and
    (4) That a credit union which fails to--
    (i) File a written response to the notice of reclassification, 
within the specified time period, shall be deemed to have waived the 
opportunity to respond, and to have consented to reclassification;
    (ii) Request a hearing shall be deemed to have waived any right to a 
hearing; and
    (iii) Request the opportunity to present witness testimony shall be 
deemed to have waived any right to present such testimony.
    (c) Contents of response to notice. A credit union's response to a 
notice under paragraph (b) of this section must:
    (1) Explain why it contends that the credit union should not be 
reclassified;
    (2) Include any relevant information, mitigating circumstances, 
documentation, or other evidence in support of the credit union's 
position;
    (3) If desired, request an informal hearing before the NCUA Board 
under this section; and
    (4) If a hearing is requested, identify any witness whose testimony 
the credit union wishes to present and the general nature of each 
witness's expected testimony.
    (d) Order to hold informal hearing. Upon timely receipt of a written 
response that includes a request for a hearing, the NCUA Board shall 
issue an order commencing an informal hearing no later than 30 days 
after receipt of the request, unless the credit union requests a later 
date. The hearing shall be held in Alexandria, Virginia, or at such 
other place as may be designated by the NCUA Board, before a presiding 
officer designated by the NCUA Board to conduct the hearing and to 
recommend a decision.
    (e) Procedures for informal hearing. (1) The credit union may appear 
at the hearing through a representative or through counsel. The credit 
union shall have the right to introduce relevant documents and to 
present oral argument at the hearing. The credit union

[[Page 1147]]

may introduce witness testimony only if expressly authorized by the NCUA 
Board or the presiding officer. Neither the provisions of the 
Administrative Procedure Act (5 U.S.C. 554-557) governing adjudications 
required by statute to be determined on the record nor the Uniform Rules 
of Practice and Procedure (12 CFR part 747) shall apply to an informal 
hearing under this section unless the NCUA Board orders otherwise.
    (2) The informal hearing shall be recorded, and a transcript shall 
be furnished to the credit union upon request and payment of the cost 
thereof. Witnesses need not be sworn, unless specifically requested by a 
party or by the presiding officer. The presiding officer may ask 
questions of any witness.
    (3) The presiding officer may order that the hearing be continued 
for a reasonable period following completion of witness testimony or 
oral argument to allow additional written submissions to the hearing 
record.
    (4) Within 20 calendar days following the closing of the hearing and 
the record, the presiding officer shall make a recommendation to the 
NCUA Board on the proposed reclassification.
    (f) Time for final decision. Not later than 60 calendar days after 
the date the record is closed, or the date of receipt of the credit 
union's response in a case where no hearing was requested, the NCUA 
Board will decide whether to reclassify the credit union, and will 
notify the credit union of its decision. The decision of the NCUA Board 
shall be final.
    (g) Request to rescind reclassification. Any credit union that has 
been reclassified under this section may file a written request to the 
NCUA Board to reconsider or rescind the reclassification, or to modify, 
rescind or remove any directives issued as a result of the 
reclassification. Unless otherwise ordered by the NCUA Board, the credit 
union shall remain reclassified, and subject to any directives issued as 
a result, while such request is pending.
    (h) Non-delegation. The NCUA Board may not delegate its authority to 
reclassify a credit union into a lower net worth category or to treat a 
credit union as if it were in a lower net worth category pursuant to 
Sec. 702.102(b) or Sec. 702.302(d) of this chapter.

[65 FR 8594, Feb. 18, 2000, as amended at 75 FR 34623, June 18, 2010]

    Effective Date Note: At 80 FR 66723, Oct. 29, 2015, Sec. 747.2003 
was amended in paragraph (a) by removing the citation ``702.302(d)'' and 
adding in its place the citation ``702.202(d)'', effective Jan. 1, 2019.



Sec. 747.2004  Review of order to dismiss a director or senior
executive officer.

    (a) Service of directive to dismiss and notice. When the NCUA Board 
issues and serves a directive on a credit union requiring it to dismiss 
from office any director or senior executive officer under 
Sec. 702.202(b)(7), Sec. 702.203(b)(8), Sec. 702.204(b)(8), 
Sec. 702.304(b) or Sec. 702.305(b) of this chapter, the NCUA Board shall 
also serve upon the person the credit union is directed to dismiss 
(Respondent) a copy of the directive (or the relevant portions, where 
appropriate) and notice of the Respondent's right to seek reinstatement.
    (b) Contents of notice of right to seek reinstatement. A notice of a 
Respondent's right to seek reinstatement shall state:
    (1) That a request for reinstatement (including a request for a 
hearing) shall be filed with the NCUA Board within 14 calendar days 
after the Respondent receives the directive and notice under paragraph 
(a) of this section, unless the NCUA Board grants the Respondent's 
request for further time;
    (2) The reasons for dismissal of the Respondent; and
    (3) That the Respondent's failure to--
    (i) Request reinstatement shall be deemed a waiver of any right to 
seek reinstatement;
    (ii) Request a hearing shall be deemed a waiver of any right to a 
hearing; and
    (iii) Request the opportunity to present witness testimony shall be 
deemed a waiver of the right to present such testimony.
    (c) Contents of request for reinstatement. A request for 
reinstatement in response to a notice under paragraph (b) of this 
section must:
    (1) Explain why the Respondent should be reinstated;

[[Page 1148]]

    (2) Include any relevant information, mitigating circumstances, 
documentation, or other evidence in support of the Respondent's 
position;
    (3) If desired, request an informal hearing before the NCUA Board 
under this section; and
    (4) If a hearing is requested, identify any witness whose testimony 
the Respondent wishes to present and the general nature of each 
witness's expected testimony.
    (d) Order to hold informal hearing. Upon receipt of a timely written 
request from a Respondent for an informal hearing on the portion of a 
directive requiring a credit union to dismiss from office any director 
or senior executive officer, the NCUA Board shall issue an order 
directing an informal hearing to commence no later than 30 days after 
receipt of the request, unless the Respondent requests a later date. The 
hearing shall be held in Alexandria, Virginia, or at such other place as 
may be designated by the NCUA Board, before a presiding officer 
designated by the NCUA Board to conduct the hearing and recommend a 
decision.
    (e) Procedures for informal hearing. (1) A Respondent may appear at 
the hearing personally or through counsel. A Respondent shall have the 
right to introduce relevant documents and to present oral argument at 
the hearing. A Respondent may introduce witness testimony only if 
expressly authorized by the NCUA Board or by the presiding officer. 
Neither the provisions of the Administrative Procedure Act (5 U.S.C. 
554-557) governing adjudications required by statute to be determined on 
the record nor the Uniform Rules of Practice and Procedure (12 CFR part 
747) apply to an informal hearing under this section unless the NCUA 
Board orders otherwise.
    (2) The informal hearing shall be recorded, and a transcript shall 
be furnished to the Respondent upon request and payment of the cost 
thereof. Witnesses need not be sworn, unless specifically requested by a 
party or the presiding officer. The presiding officer may ask questions 
of any witness.
    (3) The presiding officer may order that the hearing be continued 
for a reasonable period following completion of witness testimony or 
oral argument to allow additional written submissions to the hearing 
record.
    (4) A Respondent shall bear the burden of demonstrating that his or 
her continued employment by or service with the credit union would 
materially strengthen the credit union's ability to--
    (i) Become ``adequately capitalized,'' to the extent that the 
directive was issued as a result of the credit union's net worth 
category classification or its failure to submit or implement a net 
worth restoration plan or revised business plan; and
    (ii) Correct the unsafe or unsound condition or unsafe or unsound 
practice, to the extent that the directive was issued as a result of 
reclassification of the credit union pursuant to Secs. 702.102(b) and 
702.302(d) of this chapter.
    (5) Within 20 calendar days following the date of closing of the 
hearing and the record, the presiding officer shall make a 
recommendation to the NCUA Board concerning the Respondent's request for 
reinstatement with the credit union.
    (f) Time for final decision. Not later than 60 calendar days after 
the date the record is closed, or the date of the response in a case 
where no hearing was requested, the NCUA Board shall grant or deny the 
request for reinstatement and shall notify the Respondent of its 
decision. If the NCUA Board denies the request for reinstatement, it 
shall set forth in the notification the reasons for its decision. The 
decision of the NCUA Board shall be final.
    (g) Effective date. Unless otherwise ordered by the NCUA Board, the 
Respondent's dismissal shall take and remain in effect pending a final 
decision on the request for reinstatement.



Sec. 747.2005  Enforcement of orders.

    (a) Judicial remedies. Whenever a credit union fails to comply with 
a directive imposing a discretionary supervisory action, or enforcing a 
mandatory supervisory action under part 702 of this chapter, the NCUA 
Board may seek enforcement of the directive in the appropriate United 
States District Court pursuant to 12 U.S.C. 1786(k)(1).
    (b) Administrative remedies--(1) Failure to comply with directive. 
Pursuant to 12

[[Page 1149]]

U.S.C. 1786(k)(2)(A), the NCUA Board may assess a civil money penalty 
against any credit union that violates or otherwise fails to comply with 
any final directive issued under part 702 of this chapter, or against 
any institution-affiliated party of a credit union (per 12 U.S.C. 
1786(r)) who participates in such violation or noncompliance.
    (2) Failure to implement plan. Pursuant to 12 U.S.C. 1786(k)(2)(A), 
the NCUA Board may assess a civil money penalty against a credit union 
which fails to implement a net worth restoration plan under subpart B of 
part 702 of this chapter or a revised business plan under subpart C of 
part 702, regardless whether the plan was published.
    (c) Other enforcement action. In addition to the actions described 
in paragraphs (a) and (b) of this section, the NCUA Board may seek 
enforcement of the directives issued under part 702 of this chapter 
through any other judicial or administrative proceeding authorized by 
law.

[65 FR 8594, Feb. 18, 2000, as amended at 67 FR 71094, Nov. 29, 2002]



  Subpart M_Issuance, Review and Enforcement of Orders Imposing Prompt 
              Corrective Action on Corporate Credit Unions

    Source: 75 FR 64860, Oct. 20, 2010, unless otherwise noted.



Sec. 747.3001  Scope.

    (a) Independent review process. The rules and procedures set forth 
in this subpart apply to corporate credit unions which are subject to 
discretionary supervisory actions under Sec. 704.4 of this chapter and 
to reclassification under Sec. 704.4(d)(3) of this chapter to facilitate 
prompt corrective action, and to senior executive officers and directors 
of such corporate credit unions who are dismissed pursuant to a 
discretionary supervisory action imposed under Sec. 704.4 of this 
chapter. Section 747.3002 of this subpart provides an independent 
appellate process to challenge such decisions.
    (b) Notice to State officials. With respect to a State-chartered 
corporate credit union under Secs. 747.3002, 747.3003 and 747.3004 of 
this subpart, any notices, directives and decisions on appeal served 
upon a corporate credit union, or a dismissed director or officer 
thereof, by the NCUA will also be served upon the appropriate State 
official. Responses, requests for a hearing and to present witnesses, 
requests to modify or rescind a discretionary supervisory action and 
requests for reinstatement served upon the NCUA by a corporate credit 
union, or any dismissed director or officer of a corporate credit union, 
will also be served upon the appropriate State official.



Sec. 747.3002  Review of orders imposing discretionary supervisory
action.

    (a) Notice of intent to issue directive--(1) Generally. Whenever the 
NCUA intends to issue a directive imposing a discretionary supervisory 
action under Secs. 704.4(k)(2)(v) and 704.4(k)(3) of this chapter on a 
corporate credit union classified ``undercapitalized'' or lower, the 
NCUA will give the corporate credit union prior notice of the proposed 
action and an opportunity to respond.
    (2) Immediate issuance of directive without notice. The NCUA may 
issue a directive to take effect immediately under paragraph (a)(1) of 
this section without notice to the corporate credit union if the NCUA 
finds it necessary in order to carry out the purposes of Sec. 704.4 of 
this chapter. A corporate credit union that is subject to a directive 
which takes effect immediately may appeal the directive in writing to 
the NCUA Board (Board). Such an appeal must be received by the Board 
within 14 calendar days after the directive was issued, unless the Board 
permits a longer period. Unless ordered by the NCUA, the directive will 
remain in effect pending a decision on the appeal. The Board will 
consider any such appeal, if timely filed, within 60 calendar days of 
receiving it.
    (b) Contents of notice. The NCUA's notice to a corporate credit 
union of its intention to issue a directive imposing a discretionary 
supervisory action will state:
    (1) The corporate credit union's capital measures and capital 
category classification;
    (2) The specific restrictions or requirements that the Board intends 
to impose, and the reasons therefore;

[[Page 1150]]

    (3) The proposed date when the discretionary supervisory action 
would take effect and the proposed date for completing the required 
action or terminating the action; and
    (4) That a corporate credit union must file a written response to a 
notice within 14 calendar days from the date of the notice, or within 
such shorter period as the Board determines is appropriate in light of 
the financial condition of the corporate credit union or other relevant 
circumstances.
    (c) Contents of response to notice. A corporate credit union's 
response to a notice under paragraph (b) of this section must:
    (1) Explain why it contends that the proposed discretionary 
supervisory action is not an appropriate exercise of discretion under 
this section;
    (2) Request the Board to modify or to not issue the proposed 
directive; and
    (3) Include other relevant information, mitigating circumstances, 
documentation, or other evidence in support of the corporate credit 
union's position regarding the proposed directive.
    (d) NCUA Board consideration of response. The Board, or an 
independent person designated by the Board to act on the Board's behalf, 
after considering a response under paragraph (c) of this section, may:
    (1) Issue the directive as originally proposed or as modified;
    (2) Determine not to issue the directive and to so notify the 
corporate credit union; or
    (3) Seek additional information or clarification from the corporate 
credit union or any other relevant source.
    (e) Failure to file response. A corporate credit union which fails 
to file a written response to a notice of the Board's intention to issue 
a directive imposing a discretionary supervisory action, within the 
specified time period, will be deemed to have waived the opportunity to 
respond, and to have consented to the issuance of the directive.
    (f) Request to modify or rescind directive. A corporate credit union 
that is subject to an existing directive imposing a discretionary 
supervisory action may request in writing that the Board reconsider the 
terms of the directive, or rescind or modify it, due to changed 
circumstances. Unless otherwise ordered by the Board, the directive will 
remain in effect while such request is pending. A request under this 
paragraph which remains pending 60 days following receipt by the Board 
is deemed granted.



Sec. 747.3003  Review of order reclassifying a corporate credit union
on safety and soundness criteria.

    (a) Notice of proposed reclassification based on unsafe or unsound 
condition or practice. When the Board proposes to reclassify a corporate 
credit union or subject it to the supervisory actions applicable to the 
next lower capitalization category pursuant to Sec. 704.4(d)(3) of this 
chapter (such action hereinafter referred to as ``reclassification''), 
the Board will issue and serve on the corporate credit union reasonable 
prior notice of the proposed reclassification.
    (b) Contents of notice. A notice of intention to reclassify a 
corporate credit union based on unsafe or unsound condition or practice 
will state:
    (1) The corporate credit union's current capital ratios and the 
capital category to which the corporate credit union would be 
reclassified;
    (2) The unsafe or unsound practice(s) and/or condition(s) justifying 
reasons for reclassification of the corporate credit union;
    (3) The date by which the corporate credit union must file a written 
response to the notice (including a request for a hearing), which date 
will be no less than 14 calendar days from the date of service of the 
notice unless the Board determines that a shorter period is appropriate 
in light of the financial condition of the corporate credit union or 
other relevant circumstances; and
    (4) That a corporate credit union which fails to --
    (i) File a written response to the notice of reclassification, 
within the specified time period, will be deemed to have waived the 
opportunity to respond, and to have consented to reclassification;
    (ii) Request a hearing will be deemed to have waived any right to a 
hearing; and
    (iii) Request the opportunity to present witness testimony will be 
deemed to have waived any right to present such testimony.

[[Page 1151]]

    (c) Contents of response to notice. A corporate credit union's 
response to a notice under paragraph (b) of this section must:
    (1) Explain why it contends that the corporate credit union should 
not be reclassified;
    (2) Include any relevant information, mitigating circumstances, 
documentation, or other evidence in support of the corporate credit 
union's position;
    (3) If desired, request an informal hearing before the Board under 
this section; and
    (4) If a hearing is requested, identify any witness whose testimony 
the corporate credit union wishes to present and the general nature of 
each witness's expected testimony.
    (d) Order to hold informal hearing. Upon timely receipt of a written 
response that includes a request for a hearing, the Board will issue an 
order commencing an informal hearing no later than 30 days after receipt 
of the request, unless the corporate credit union requests a later date. 
The hearing will be held in Alexandria, Virginia, or at such other place 
as may be designated by the Board, before a presiding officer designated 
by the Board to conduct the hearing and to recommend a decision.
    (e) Procedures for informal hearing. (1) The corporate credit union 
may appear at the hearing through a representative or through counsel. 
The corporate credit union will have the right to introduce relevant 
documents and to present oral argument at the hearing. The corporate 
credit union may introduce witness testimony only if expressly 
authorized by the Board or the presiding officer. Neither the provisions 
of the Administrative Procedure Act (5 U.S.C. 554-557) governing 
adjudications required by statute to be determined on the record nor the 
Uniform Rules of Practice and Procedure (12 CFR part 747) will apply to 
an informal hearing under this section unless the Board orders 
otherwise.
    (2) The informal hearing will be recorded, and a transcript will be 
furnished to the corporate credit union upon request and payment of the 
cost thereof. Witnesses need not be sworn, unless specifically requested 
by a party or by the presiding officer. The presiding officer may ask 
questions of any witness.
    (3) The presiding officer may order that the hearing be continued 
for a reasonable period following completion of witness testimony or 
oral argument to allow additional written submissions to the hearing 
record.
    (4) Within 20 calendar days following the closing of the hearing and 
the record, the presiding officer will make a recommendation to the 
Board on the proposed reclassification.
    (f) Time for final decision. Not later than 60 calendar days after 
the date the record is closed, or the date of receipt of the corporate 
credit union's response in a case where no hearing was requested, the 
Board will decide whether to reclassify the corporate credit union, and 
will notify the corporate credit union of its decision. The decision of 
the Board will be final.
    (g) Request to rescind reclassification. Any corporate credit union 
that has been reclassified under this section may file a written request 
to the Board to reconsider or rescind the reclassification, or to 
modify, rescind or remove any directives issued as a result of the 
reclassification. Unless otherwise ordered by the Board, the corporate 
credit union will remain reclassified, and subject to any directives 
issued as a result, while such request is pending.



Sec. 747.3004  Review of order to dismiss a director or senior 
executive officer.

    (a) Service of directive to dismiss and notice. When the Board 
issues and serves a directive on a corporate credit union requiring it 
to dismiss from office any director or senior executive officer under 
Secs. 704.4(g) and 704.4(k)(3) of this chapter, the Board will also 
serve upon the person the corporate credit union is directed to dismiss 
(Respondent) a copy of the directive (or the relevant portions, where 
appropriate) and notice of the Respondent's right to seek reinstatement.
    (b) Contents of notice of right to seek reinstatement. A notice of a 
Respondent's right to seek reinstatement will state:
    (1) That a request for reinstatement (including a request for a 
hearing) must be filed with the Board within 14

[[Page 1152]]

calendar days after the Respondent receives the directive and notice 
under paragraph (a) of this section, unless the Board grants the 
Respondent's request for further time;
    (2) The reasons for dismissal of the Respondent; and
    (3) That the Respondent's failure to--
    (i) Request reinstatement will be deemed a waiver of any right to 
seek reinstatement;
    (ii) Request a hearing will be deemed a waiver of any right to a 
hearing; and
    (iii) Request the opportunity to present witness testimony will be 
deemed a waiver of the right to present such testimony.
    (c) Contents of request for reinstatement. A request for 
reinstatement in response to a notice under paragraph (b) of this 
section must:
    (1) Explain why the Respondent should be reinstated;
    (2) Include any relevant information, mitigating circumstances, 
documentation, or other evidence in support of the Respondent's 
position;
    (3) If desired, request an informal hearing before the Board under 
this section; and
    (4) If a hearing is requested, identify any witness whose testimony 
the Respondent wishes to present and the general nature of each 
witness's expected testimony.
    (d) Order to hold informal hearing. Upon receipt of a timely written 
request from a Respondent for an informal hearing on the portion of a 
directive requiring a corporate credit union to dismiss from office any 
director or senior executive officer, the Board will issue an order 
directing an informal hearing to commence no later than 30 days after 
receipt of the request, unless the Respondent requests a later date. The 
hearing will be held in Alexandria, Virginia, or at such other place as 
may be designated by the Board, before a presiding officer designated by 
the Board to conduct the hearing and recommend a decision.
    (e) Procedures for informal hearing. (1) A Respondent may appear at 
the hearing personally or through counsel. A Respondent will have the 
right to introduce relevant documents and to present oral argument at 
the hearing. A Respondent may introduce witness testimony only if 
expressly authorized by the Board or by the presiding officer. Neither 
the provisions of the Administrative Procedure Act (5 U.S.C. 554-557) 
governing adjudications required by statute to be determined on the 
record nor the Uniform Rules of Practice and Procedure (12 CFR part 747) 
apply to an informal hearing under this section unless the Board orders 
otherwise.
    (2) The informal hearing will be recorded, and a transcript will be 
furnished to the Respondent upon request and payment of the cost 
thereof. Witnesses need not be sworn, unless specifically requested by a 
party or the presiding officer. The presiding officer may ask questions 
of any witness.
    (3) The presiding officer may order that the hearing be continued 
for a reasonable period following completion of witness testimony or 
oral argument to allow additional written submissions to the hearing 
record.
    (4) A Respondent will bear the burden of demonstrating that his or 
her continued employment by or service with the corporate credit union 
would materially strengthen the corporate credit union's ability to --
    (i) Become ``adequately capitalized,'' to the extent that the 
directive was issued as a result of the corporate credit union's capital 
classification category or its failure to submit or implement a capital 
restoration plan; and
    (ii) Correct the unsafe or unsound condition or unsafe or unsound 
practice, to the extent that the directive was issued as a result of 
reclassification of the corporate credit union pursuant to 
Sec. 704.4(d)(3) of this chapter.
    (5) Within 20 calendar days following the date of closing of the 
hearing and the record, the presiding officer will make a recommendation 
to the Board concerning the Respondent's request for reinstatement with 
the corporate credit union.
    (f) Time for final decision. Not later than 60 calendar days after 
the date the record is closed, or the date of the response in a case 
where no hearing was requested, the Board will grant or deny the request 
for reinstatement and will notify the Respondent of its decision. If the 
Board denies the request for reinstatement, it will set forth in the

[[Page 1153]]

notification the reasons for its decision. The decision of the Board 
will be final.
    (g) Effective date. Unless otherwise ordered by the Board, the 
Respondent's dismissal will take and remain in effect pending a final 
decision on the request for reinstatement.



Sec. 747.3005  Enforcement of directives.

    (a) Judicial remedies. Whenever a corporate credit union fails to 
comply with a directive imposing a discretionary supervisory action, or 
enforcing a mandatory supervisory action under Sec. 704.4 of this 
chapter, the Board may seek enforcement of the directive in the 
appropriate United States District Court pursuant to 12 U.S.C. 
1786(k)(1).
    (b) Administrative remedies--(1) Failure to comply with directive. 
Pursuant to 12 U.S.C. 1786(k)(2)(A), the Board may assess a civil money 
penalty against any corporate credit union that violates or otherwise 
fails to comply with any final directive issued under Sec. 704.4 of this 
chapter, or against any institution-affiliated party of a corporate 
credit union (per 12 U.S.C. 1786(r)) who participates in such violation 
or noncompliance.
    (2) Failure to implement plan. Pursuant to 12 U.S.C. 1786(k)(2)(A), 
the Board may assess a civil money penalty against a corporate credit 
union which fails to implement a capital restoration plan under 
Sec. 704.4(e) of this chapter, regardless whether the plan was 
published.
    (c) Other enforcement action. In addition to the actions described 
in paragraphs (a) and (b) of this section, the Board may seek 
enforcement of the directives issued under Section 704.4 of this chapter 
through any other judicial or administrative proceeding authorized by 
law.



Sec. 747.3006  Conservatorship or liquidation of critically 
undercapitalized corporate credit union.

    Notwithstanding any other provision of this title, the NCUA may, 
without any administrative due process, immediately place into 
conservatorship or liquidation any corporate credit union that has been 
categorized as critically undercapitalized.



PART 748_SECURITY PROGRAM, REPORT OF SUSPECTED CRIMES, SUSPICIOUS
TRANSACTIONS, CATASTROPHIC ACTS AND BANK SECRECY ACT COMPLIANCE--
Table of Contents



Sec.
748.0  Security program.
748.1  Filing of reports.
748.2  Procedures for monitoring Bank Secrecy Act (BSA) compliance.

Appendix A to Part 748--Guidelines for Safeguarding Member Information
Appendix B to Part 748--Guidance on Response Programs for Unauthorized 
          Access to Member Information and Member Notice

    Authority: 12 U.S.C. 1766(a), 1786(q); 15 U.S.C. 6801-6809; 31 
U.S.C. 5311 and 5318.



Sec. 748.0  Security program.

    (a) Each federally insured credit union will develop a written 
security program within 90 days of the effective date of insurance.
    (b) The security program will be designed to:
    (1) Protect each credit union office from robberies, burglaries, 
larcenies, and embezzlement;
    (2) Ensure the security and confidentiality of member records, 
protect against the anticipated threats or hazards to the security or 
integrity of such records, and protect against unauthorized access to or 
use of such records that could result in substantial harm or serious 
inconvenience to a member;
    (3) Respond to incidents of unauthorized access to or use of member 
information that could result in substantial harm or serious 
inconvenience to a member;
    (4) Assist in the identification of persons who commit or attempt 
such actions and crimes, and
    (5) Prevent destruction of vital records, as defined in 12 CFR part 
749.
    (c) Each Federal credit union, as part of its information security 
program, must properly dispose of any consumer information the Federal 
credit union maintains or otherwise possesses, as required under 
Sec. 717.83 of this chapter.

[50 FR 53295, Dec. 31, 1985, as amended at 53 FR 4845, Feb. 18, 1988; 66 
FR 8161, Jan. 30, 2001; 69 FR 69274, Nov. 29, 2004; 70 FR 22778, May 2, 
2005]

[[Page 1154]]



Sec. 748.1  Filing of reports.

    (a) The president or managing official of each federally insured 
credit union must certify compliance with the requirements of this part 
in its Credit Union Profile annually through NCUA's online information 
management system.
    (b) Catastrophic act report. Each federally insured credit union 
will notify the regional director within 5 business days of any 
catastrophic act that occurs at its office(s). A catastrophic act is any 
disaster, natural or otherwise, resulting in physical destruction or 
damage to the credit union or causing an interruption in vital member 
services, as defined in Sec. 749.1 of this chapter, projected to last 
more than two consecutive business days. Within a reasonable time after 
a catastrophic act occurs, the credit union shall ensure that a record 
of the incident is prepared and filed at its main office. In the 
preparation of such record, the credit union should include information 
sufficient to indicate the office where the catastrophic act occurred; 
when it took place; the amount of the loss, if any; whether any 
operational or mechanical deficiency(ies) might have contributed to the 
catastrophic act; and what has been done or is planned to be done to 
correct the deficiency(ies).
    (c) Suspicious Activity Report. A credit union must file a report if 
it knows, suspects, or has reason to suspect that any crime or any 
suspicious transaction related to money laundering activity or a 
violation of the Bank Secrecy Act has occurred. For the purposes of this 
paragraph (c) credit union means a federally-insured credit union and 
official means any member of the board of directors or a volunteer 
committee.
    (1) Reportable activity. Transaction for purposes of this paragraph 
means a deposit, withdrawal, transfer between accounts, exchange of 
currency, loan, extension of credit, purchase or sale of any stock, 
bond, share certificate, or other monetary instrument or investment 
security, or any other payment, transfer, or delivery by, through, or to 
a financial institution, by whatever means effected. A credit union must 
report any known or suspected crime or any suspicious transaction 
related to money laundering or other illegal activity, for example, 
terrorism financing, loan fraud, or embezzlement, or a violation of the 
Bank Secrecy Act by sending a completed suspicious activity report (SAR) 
to the Financial Crimes Enforcement Network (FinCEN) in the following 
circumstances:
    (i) Insider abuse involving any amount. Whenever the credit union 
detects any known or suspected Federal criminal violations, or pattern 
of criminal violations, committed or attempted against the credit union 
or involving a transaction or transactions conducted through the credit 
union, where the credit union believes it was either an actual or 
potential victim of a criminal violation, or series of criminal 
violations, or that the credit union was used to facilitate a criminal 
transaction, and the credit union has a substantial basis for 
identifying one of the credit union's officials, employees, or agents as 
having committed or aided in the commission of the criminal violation, 
regardless of the amount involved in the violation;
    (ii) Transactions aggregating $5,000 or more where a suspect can be 
identified. Whenever the credit union detects any known or suspected 
Federal criminal violation, or pattern of criminal violations, committed 
or attempted against the credit union or involving a transaction or 
transactions conducted through the credit union, and involving or 
aggregating $5,000 or more in funds or other assets, where the credit 
union believes it was either an actual or potential victim of a criminal 
violation, or series of criminal violations, or that the credit union 
was used to facilitate a criminal transaction, and the credit union has 
a substantial basis for identifying a possible suspect or group of 
suspects. If it is determined before filing this report that the 
identified suspect or group of suspects has used an alias, then 
information regarding the true identity of the suspect or group of 
suspects, as well as alias identifiers, such as drivers' licenses or 
social security numbers, addresses and telephone numbers, must be 
reported;
    (iii) Transactions aggregating $25,000 or more regardless of 
potential suspects.

[[Page 1155]]

Whenever the credit union detects any known or suspected Federal 
criminal violation, or pattern of criminal violations, committed or 
attempted against the credit union or involving a transaction or 
transactions conducted through the credit union, involving or 
aggregating $25,000 or more in funds or other assets, where the credit 
union believes it was either an actual or potential victim of a criminal 
violation, or series of criminal violations, or that the credit union 
was used to facilitate a criminal transaction, even though the credit 
union has no substantial basis for identifying a possible suspect or 
group of suspects; or
    (iv) Transactions aggregating $5,000 or more that involve potential 
money laundering or violations of the Bank Secrecy Act. Any transaction 
conducted or attempted by, at or through the credit union and involving 
or aggregating $5,000 or more in funds or other assets, if the credit 
union knows, suspects, or has reason to suspect:
    (A) The transaction involves funds derived from illegal activities 
or is intended or conducted in order to hide or disguise funds or assets 
derived from illegal activities (including, without limitation, the 
ownership, nature, source, location, or control of such funds or assets) 
as part of a plan to violate or evade any Federal law or regulation or 
to avoid any transaction reporting requirement under Federal law;
    (B) The transaction is designed to evade any regulations promulgated 
under the Bank Secrecy Act; or
    (C) The transaction has no business or apparent lawful purpose or is 
not the sort of transaction in which the particular member would 
normally be expected to engage, and the credit union knows of no 
reasonable explanation for the transaction after examining the available 
facts, including the background and possible purpose of the transaction.
    (v) Exceptions. A credit union is not required to file a SAR for a 
robbery or burglary committed or attempted that is reported to 
appropriate law enforcement authorities, or for lost, missing, 
counterfeit, or stolen securities and the credit union files a report 
pursuant to the reporting requirements of 17 CFR 240.17f-1.
    (2) Filing procedures--(i) Timing. A credit union must file a SAR 
with FinCEN no later than 30 calendar days from the date the suspicious 
activity is initially detected, unless there is no identified suspect on 
the date of detection. If no suspect is identified on the date of 
detection, a credit union may use an additional 30 calendar days to 
identify a suspect before filing a SAR. In no case may a credit union 
take more than 60 days from the date it initially detects a reportable 
transaction to file a SAR. In situations involving violations requiring 
immediate attention, such as ongoing money laundering schemes, a credit 
union must immediately notify, by telephone, an appropriate law 
enforcement authority and its supervisory authority, in addition to 
filing a SAR.
    (ii) Content. A credit union must complete, fully and accurately, 
SAR form TDF 90-22.47, Suspicious Activity Report (also known as NCUA 
Form 2362) in accordance with the form's instructions and 31 CFR 
1020.320. A copy of the SAR form may be obtained from the credit union 
resources section of NCUA's Web site, http://www.ncua.gov, or the 
regulatory section of FinCEN's Web site, http://www.fincen.gov. These 
sites include other useful guidance on SARs, for example, forms and 
filing instructions, Frequently Asked Questions, and the FFIEC Bank 
Secrecy Act/Anti-Money Laundering Examination Manual.
    (iii) Compliance. Failure to file a SAR as required by the form's 
instructions and 31 CFR 1020.320 may subject the credit union, its 
officials, employees, and agents to the assessment of civil money 
penalties or other administrative actions.
    (3) Retention of Records. A credit union must maintain a copy of any 
SAR that it files and the original or business record equivalent of all 
supporting documentation to the report for a period of five years from 
the date of the report. Supporting documentation must be identified and 
maintained by the credit union as such. Supporting documentation is 
considered a part of the filed report even though it should not be 
actually filed with the submitted report. A credit union must make all 
supporting documentation

[[Page 1156]]

available to appropriate law enforcement authorities and its regulatory 
supervisory authority upon request.
    (4) Notification to board of directors--(i) Generally. The 
management of the credit union must promptly notify its board of 
directors, or a committee designated by the board of directors to 
receive such notice, of any SAR filed.
    (ii) Suspect is a director or committee member. If a credit union 
files a SAR and the suspect is a director or member of a committee 
designated by the board of directors to receive notice of SAR filings, 
the credit union may not notify the suspect, pursuant to 31 U.S.C. 
5318(g)(2), but must notify the remaining directors, or designated 
committee members, who are not suspects.
    (5) Confidentiality of reports. SARs are confidential. Any credit 
union, including its officials, employees, and agents, subpoenaed or 
otherwise requested to disclose a SAR or the information in a SAR must 
decline to produce the SAR or to provide any information that would 
disclose that a SAR was prepared or filed, citing this part, applicable 
law, for example, 31 U.S.C. 5318(g), or both, and notify NCUA of the 
request. A credit union must make the filed report and all supporting 
documentation available to appropriate law enforcement authorities and 
its regulatory supervisory authority upon request.
    (6) Safe Harbor. Any credit union, including its officials, 
employees, and agents, that makes a report of suspected or known 
criminal violations and suspicious activities to law enforcement and 
financial institution supervisory authorities, including supporting 
documentation, are protected from liability for any disclosure in the 
report, or for failure to disclose the existence of the report, or both, 
to the full extent provided by 31 U.S.C. 5318(g)(3). This protection 
applies if the report is filed pursuant to this part or is filed on a 
voluntary basis.

[50 FR 53295, Dec. 31, 1985, as amended at 53 FR 26232, July 12, 1988; 
58 FR 17492, Apr. 5, 1993; 61 FR 11527, Mar. 21, 1996; 71 FR 62878, Oct. 
27, 2006; 72 FR 42273, Aug. 2, 2007; 74 FR 35769, July 21, 2009; 76 FR 
18366, Apr. 4, 2011; 78 FR 64885, Oct. 30, 2013]



Sec. 748.2  Procedures for monitoring Bank Secrecy Act (BSA)
compliance.

    (a) Purpose. This section is issued to ensure that all federally 
insured credit unions establish and maintain procedures reasonably 
designed to assure and monitor compliance with the requirements of 
subchapter II of chapter 53 of title 31, United States Code, the 
Financial Recordkeeping and Reporting of Currency and Foreign 
Transactions Act, and the implementing regulations promulgated under it 
by the Department of Treasury, 31 CFR chapter X.
    (b) Establishment of a BSA compliance program--(1) Program 
requirement. Each federally insured credit union shall develop and 
provide for the continued administration of a program reasonably 
designed to assure and monitor compliance with the recordkeeping and 
recording requirements in subchapter II of chapter 53 of title 31, 
United States Code and implementing regulations issued by the Department 
of Treasury at 31 CFR chapter X. The compliance program must be written, 
approved by the credit union's board of directors, and reflected in the 
credit union's minutes.
    (2) Customer identification program. Each federally insured credit 
union is subject to the requirements of 31 U.S.C. 5318(l) and the 
implementing regulation jointly promulgated by the NCUA and Department 
of the Treasury at 31 CFR 1020.220, which require a customer 
identification program to be implemented as part of the BSA compliance 
program required under this section.
    (c) Contents of compliance program. Such compliance program shall at 
a minimum--
    (1) Provide for a system of internal controls to assure ongoing 
compliance;
    (2) Provide for independent testing for compliance to be conducted 
by credit union personnel or outside parties;
    (3) Designate an individual responsible for coordinating and 
monitoring day-to-day compliance; and

[[Page 1157]]

    (4) Provide training for appropriate personnel.

(Approved by the Office of Management and Budget under control number 
3133-0094)

[52 FR 2861, Jan. 27, 1987, as amended at 52 FR 8062, Mar. 16, 1987; 68 
FR 25112, May 9, 2003; 76 FR 18366, Apr. 4, 2011]



    Sec. Appendix A to Part 748--Guidelines for Safeguarding Member 
                               Information

                            Table of Contents

I. Introduction
    A. Scope
    B. Definitions
II. Guidelines for Safeguarding Member Information
    A. Information Security Program
    B. Objectives
III. Development and Implementation of Member Information Security 
Program
    A. Involve the Board of Directors
    B. Assess Risk
    C. Manage and Control Risk
    D. Oversee Service Provider Arrangements
    E. Adjust the Program
    F. Report to the Board
    G. Implement the Standards

                             I. Introduction

    The Guidelines for Safeguarding Member Information (Guidelines) set 
forth standards pursuant to sections 501 and 505(b), codified at 15 
U.S.C. 6801 and 6805(b), of the Gramm-Leach-Bliley Act. These Guidelines 
provide guidance standards for developing and implementing 
administrative, technical, and physical safeguards to protect the 
security, confidentiality, and integrity of member information. These 
Guidelines also address standards with respect to the proper disposal of 
consumer information pursuant to sections 621(b) and 628 of the Fair 
Credit Reporting Act (15 U.S.C. 1681s(b) and 1681w).
    A. Scope. The Guidelines apply to member information maintained by 
or on behalf of federally-insured credit unions. Such entities are 
referred to in this appendix as ``the credit union.'' These Guidelines 
also apply to the proper disposal of consumer information by such 
entities.
    B. Definitions. 1. In general. Except as modified in the Guidelines 
or unless the context otherwise requires, the terms used in these 
Guidelines have the same meanings as set forth in 12 CFR part 1016.
    2. For purposes of the Guidelines, the following definitions apply:
    a. Consumer information means any record about an individual, 
whether in paper, electronic, or other form, that is a consumer report 
or is derived from a consumer report and that is maintained or otherwise 
possessed by or on behalf of the credit union for a business purpose. 
Consumer information also means a compilation of such records. The term 
does not include any record that does not identify an individual.
    b. Consumer report has the same meaning as set forth in the Fair 
Credit Reporting Act, 15 U.S.C. 1681a(d). The meaning of consumer report 
is broad and subject to various definitions, conditions and exceptions 
in the Fair Credit Reporting Act. It includes written or oral 
communications from a consumer reporting agency to a third party of 
information used or collected for use in establishing eligibility for 
credit or insurance used primarily for personal, family or household 
purposes, and eligibility for employment purposes. Examples include 
credit reports, bad check lists, and tenant screening reports.
    c. Member means any member of the credit union as defined in 12 CFR 
1016.3(n).
    d. Member information means any records containing nonpublic 
personal information, as defined in 12 CFR 1016.3(p), about a member, 
whether in paper, electronic, or other form, that is maintained by or on 
behalf of the credit union.
    e. Member information system means any method used to access, 
collect, store, use, transmit, protect, or dispose of member 
information.
    f. Service provider means any person or entity that maintains, 
processes, or otherwise is permitted access to member information 
through its provision of services directly to the credit union.

            II. Standards for Safeguarding Member Information

    A. Information Security Program. A comprehensive written information 
security program includes administrative, technical, and physical 
safeguards appropriate to the size and complexity of the credit union 
and the nature and scope of its activities. While all parts of the 
credit union are not required to implement a uniform set of policies, 
all elements of the information security program must be coordinated.
    B. Objectives. A credit union's information security program should 
be designed to: ensure the security and confidentiality of member 
information; protect against any anticipated threats or hazards to the 
security or integrity of such information; protect against unauthorized 
access to or use of such information that could result in substantial 
harm or inconvenience to any member; and ensure the proper disposal of 
member information and consumer information. Protecting confidentiality 
includes honoring members' requests to opt out of disclosures to 
nonaffiliated third parties, as described in 12 CFR 1016.1(a)(3).

[[Page 1158]]

   III. Development and Implementation of Member Information Security 
                                 Program

    A. Involve the Board of Directors. The board of directors or an 
appropriate committee of the board of each credit union should:
    1. Approve the credit union's written information security policy 
and program; and
    2. Oversee the development, implementation, and maintenance of the 
credit union's information security program, including assigning 
specific responsibility for its implementation and reviewing reports 
from management.
    B. Assess Risk. Each credit union should:
    1. Identify reasonably foreseeable internal and external threats 
that could result in unauthorized disclosure, misuse, alteration, or 
destruction of member information or member information systems;
    2. Assess the likelihood and potential damage of these threats, 
taking into consideration the sensitivity of member information; and
    3. Assess the sufficiency of policies, procedures, member 
information systems, and other arrangements in place to control risks.
    C. Manage and Control Risk. Each credit union should:
    1. Design its information security program to control the identified 
risks, commensurate with the sensitivity of the information as well as 
the complexity and scope of the credit union's activities. Each credit 
union must consider whether the following security measures are 
appropriate for the credit union and, if so, adopt those measures the 
credit union concludes are appropriate:
    a. Access controls on member information systems, including controls 
to authenticate and permit access only to authorized individuals and 
controls to prevent employees from providing member information to 
unauthorized individuals who may seek to obtain this information through 
fraudulent means;
    b. Access restrictions at physical locations containing member 
information, such as buildings, computer facilities, and records storage 
facilities to permit access only to authorized individuals;
    c. Encryption of electronic member information, including while in 
transit or in storage on networks or systems to which unauthorized 
individuals may have access;
    d. Procedures designed to ensure that member information system 
modifications are consistent with the credit union's information 
security program;
    e. Dual controls procedures, segregation of duties, and employee 
background checks for employees with responsibilities for or access to 
member information;
    f. Monitoring systems and procedures to detect actual and attempted 
attacks on or intrusions into member information systems;
    g. Response programs that specify actions to be taken when the 
credit union suspects or detects that unauthorized individuals have 
gained access to member information systems, including appropriate 
reports to regulatory and law enforcement agencies; and
    h. Measures to protect against destruction, loss, or damage of 
member information due to potential environmental hazards, such as fire 
and water damage or technical failures.
    2. Train staff to implement the credit union's information security 
program.
    3. Regularly test the key controls, systems and procedures of the 
information security program. The frequency and nature of such tests 
should be determined by the credit union's risk assessment. Tests should 
be conducted or reviewed by independent third parties or staff 
independent of those that develop or maintain the security programs.
    4. Develop, implement, and maintain, as part of its information 
security program, appropriate measures to properly dispose of member 
information and consumer information in accordance with the provisions 
in paragraph III.
    D. Oversee Service Provider Arrangements. Each credit union should:
    1. Exercise appropriate due diligence in selecting its service 
providers;
    2. Require its service providers by contract to implement 
appropriate measures designed to meet the objectives of these 
guidelines; and
    3. Where indicated by the credit union's risk assessment, monitor 
its service providers to confirm that they have satisfied their 
obligations as required by paragraph D.2. As part of this monitoring, a 
credit union should review audits, summaries of test results, or other 
equivalent evaluations of its service providers.
    E. Adjust the Program. Each credit union should monitor, evaluate, 
and adjust, as appropriate, the information security program in light of 
any relevant changes in technology, the sensitivity of its member 
information, internal or external threats to information, and the credit 
union's own changing business arrangements, such as mergers and 
acquisitions, alliances and joint ventures, outsourcing arrangements, 
and changes to member information systems.
    F. Report to the Board. Each credit union should report to its board 
or an appropriate committee of the board at least annually. This report 
should describe the overall status of the information security program 
and the credit union's compliance with these guidelines. The report 
should discuss material matters related to its program, addressing 
issues such as: risk assessment; risk management and control decisions; 
service provider arrangements; results of testing; security breaches or 
violations and management's responses; and recommendations for

[[Page 1159]]

changes in the information security program.

[66 FR 8161, Jan. 30, 2001, as amended at 69 FR 69274, Nov. 29, 2004; 77 
FR 71085, Nov. 29, 2012; 78 FR 32545, May 31, 2013]



     Sec. Appendix B to Part 748--Guidance on Response Programs for 
       Unauthorized Access to Member Information and Member Notice

                              I. Background

    This Guidance in the form of appendix B to NCUA's Security Program, 
Report of Crime and Catastrophic Act and Bank Secrecy Act Compliance 
regulation, \29\ interprets section 501(b) of the Gramm-Leach-Bliley Act 
(``GLBA'') and describes response programs, including member 
notification procedures, that a federally insured credit union should 
develop and implement to address unauthorized access to or use of member 
information that could result in substantial harm or inconvenience to a 
member. The scope of, and definitions of terms used in, this Guidance 
are identical to those of appendix A to Part 748 (appendix A). For 
example, the term ``member information'' is the same term used in 
appendix A, and means any record containing nonpublic personal 
information about a member, whether in paper, electronic, or other form, 
maintained by or on behalf of the credit union.
---------------------------------------------------------------------------

    \29\ 12 CFR Part 748.
---------------------------------------------------------------------------

                         A. Security Guidelines

    Section 501(b) of the GLBA required the NCUA to establish 
appropriate standards for credit unions subject to its jurisdiction that 
include administrative, technical, and physical safeguards to protect 
the security and confidentiality of member information. Accordingly, the 
NCUA amended Part 748 of its rules to require credit unions to develop 
appropriate security programs, and issued appendix A, reflecting its 
expectation that every federally insured credit union would develop an 
information security program designed to:
    1. Ensure the security and confidentiality of member information;
    2. Protect against any anticipated threats or hazards to the 
security or integrity of such information; and
    3. Protect against unauthorized access to or use of such information 
that could result in substantial harm or inconvenience to any member.

                     B. Risk Assessment and Controls

    1. Appendix A directs every credit union to assess the following 
risks, among others, when developing its information security program:
    a. Reasonably foreseeable internal and external threats that could 
result in unauthorized disclosure, misuse, alteration, or destruction of 
member information or member information systems;
    b. The likelihood and potential damage of threats, taking into 
consideration the sensitivity of member information; and
    c. The sufficiency of policies, procedures, member information 
systems, and other arrangements in place to control risks. \30\
---------------------------------------------------------------------------

    \30\ See 12 CFR Part 748, appendix A, Paragraph III.B.
---------------------------------------------------------------------------

    2. Following the assessment of these risks, appendix A directs a 
credit union to design a program to address the identified risks. The 
particular security measures a credit union should adopt will depend 
upon the risks presented by the complexity and scope of its business. At 
a minimum, the credit union should consider the specific security 
measures enumerated in appendix A, \31\ and adopt those that are 
appropriate for the credit union, including:
---------------------------------------------------------------------------

    \31\ See appendix A, paragraph III.C.
---------------------------------------------------------------------------

    a. Access controls on member information systems, including controls 
to authenticate and permit access only to authorized individuals and 
controls to prevent employees from providing member information to 
unauthorized individuals who may seek to obtain this information through 
fraudulent means;
    b. Background checks for employees with responsibilities for access 
to member information; and
    c. Response programs that specify actions to be taken when the 
credit union suspects or detects that unauthorized individuals have 
gained access to member information systems, including appropriate 
reports to regulatory and law enforcement agencies. \32\
---------------------------------------------------------------------------

    \32\ See appendix A, Paragraph III.C.
---------------------------------------------------------------------------

                          C. Service Providers

    Appendix A advises every credit union to require its service 
providers by contract to implement appropriate measures designed to 
protect against unauthorized access to or use of member information that 
could result in substantial harm or inconvenience to any member. \33\
---------------------------------------------------------------------------

    \33\ See appendix A, Paragraph III.B. and III.D. Further, the NCUA 
notes that, in addition to contractual obligations to a credit union, a 
service provider may be required to implement its own comprehensive 
information security program in accordance with the Safeguards Rule 
promulgated by the Federal Trade Commission (``FTC''), 12 CFR Part 314.
---------------------------------------------------------------------------

                          II. Response Program

    i. Millions of Americans, throughout the country, have been victims 
of identity

[[Page 1160]]

theft. \34\ Identity thieves misuse personal information they obtain 
from a number of sources, including credit unions, to perpetrate 
identity theft. Therefore, credit unions should take preventative 
measures to safeguard member information against such attempts to gain 
unauthorized access to the information. For example, credit unions 
should place access controls on member information systems and conduct 
background checks for employees who are authorized to access member 
information. \35\ However, every credit union should also develop and 
implement a risk-based response program to address incidents of 
unauthorized access to member information in member information systems 
that occur nonetheless. \36\ A response program should be a key part of 
a credit union's information security program. \37\ The program should 
be appropriate to the size and complexity of the credit union and the 
nature and scope of its activities.
---------------------------------------------------------------------------

    \34\ The FTC estimates that nearly 10 million Americans discovered 
they were victims of some form of identify theft in 2002. See The 
Federal Trade Commission, Identity Theft Survey Report, (September 
2003), available at http://www.ftc.gov/os/2003 /09synovatereport.pdf.
    \35\ Credit unions should also conduct background checks of 
employees to ensure that the credit union does not violate 12 U.S.C. 
1785(d), which prohibits a credit union from hiring an individual 
convicted of certain criminal offenses or who is subject to a 
prohibition order under 12 U.S.C. 1786(g).
    \36\ Under 12 CFR Part 748, appendix A, a credit union's member 
information systems consists of all of the methods used to access, 
collect, store, use, transmit, protect, or dispose of member 
information, including the systems maintained by its service providers. 
See 12 CFR Part 748, appendix A, Paragraph I.C.2.d.
    \37\ See FFIEC Information Technology Examination Handbook, 
Information Security Booklet, (December, 2002), available at http://
www.ffiec.gov/ffiecinfobase /html_pages/it_01.htm1infosec, for 
additional guidance on preventing, detecting, and responding to 
intrusions into financial institution computer systems.
---------------------------------------------------------------------------

    ii. In addition, each credit union should be able to address 
incidents of unauthorized access to member information in member 
information systems maintained by its domestic and foreign service 
providers. Therefore, consistent with the obligations in this Guidance 
that relate to these arrangements, and with existing guidance on this 
topic issued by the NCUA, \38\ a credit union's contract with its 
service provider should require the service provider to take appropriate 
actions to address incidents of unauthorized access to or use of the 
credit union's member information, including notification of the credit 
union as soon as possible of any such incident, to enable the 
institution to expeditiously implement its response program.
---------------------------------------------------------------------------

    \38\ See FFIEC Information Technology Examination Handbook, 
Outsourcing Technology Services Booklet, (June 2004), available at 
http://www.ffiec.gov/ffiecinfobase /html_pages/it_01.htm1 outscouring 
for additional guidance on managing outsourced relationships.
---------------------------------------------------------------------------

                   A. Components of a Response Program

    1. At a minimum, a credit union's response program should contain 
procedures for the following:
    a. Assessing the nature and scope of an incident, and identifying 
what member information systems and types of member information have 
been accessed or misused;
    b. Notifying the appropriate NCUA Regional Director, and, in the 
case of state-chartered credit unions, its applicable state supervisory 
authority, as soon as possible when the credit union becomes aware of an 
incident involving unauthorized access to or use of sensitive member 
information as defined below.
    c. Consistent with the NCUA's Suspicious Activity Report (``SAR'') 
regulations, \39\ notifying appropriate law enforcement authorities, in 
addition to filing a timely SAR in situations involving Federal criminal 
violations requiring immediate attention, such as when a reportable 
violation is ongoing;
---------------------------------------------------------------------------

    \39\ A credit union's obligation to file a SAR is set out in the 
NCUA's SAR regulations and guidance. See 12 CFR Part 748.1(c); NCUA 
Letter to Credit Unions No. 04-CU-03, Suspiciouis Activity Reports, 
March 2004; NCUA Regulatory Alert No. 04-RA-01, The Suspicious Activity 
Report (SAR) Activity Review--Trends, Tips, & Isues, Issue 6, November 
2003, February 2004.
---------------------------------------------------------------------------

    d. Taking appropriate steps to contain and control the incident to 
prevent further unauthorized access to or use of member information, for 
example, by monitoring, freezing, or closing affected accounts, while 
preserving records and other evidence; \40\ and
---------------------------------------------------------------------------

    \40\ See FFIEC Information Technology Examination Handbook, 
Information Security Booklet, (December 2002), pp. 68-74.
---------------------------------------------------------------------------

    e. Notifying members when warranted.
    2. Where an incident of unauthorized access to member information 
involves member information systems maintained by a credit union's 
service providers, it is the responsibility of the credit union to 
notify the credit union's members and regulator. However, a credit union 
may authorize or contract with its service provider to notify the credit 
union's members or regulators on its behalf.

[[Page 1161]]

                           III. Member Notice

    i. Credit unions have an affirmative duty to protect their members' 
information against unauthorized access or use. Notifying members of a 
security incident involving the unauthorized access or use of the 
member's information in accordance with the standard set forth below is 
a key part of that duty.
    ii. Timely notification of members is important to manage a credit 
union's reputation risk. Effective notice also may reduce a credit 
union's legal risk, assist in maintaining good member relations, and 
enable the credit union's members to take steps to protect themselves 
against the consequences of identity theft. When member notification is 
warranted, a credit union may not forgo notifying its customers of an 
incident because the credit union believes that it may be potentially 
embarrassed or inconvenienced by doing so.

                    A. Standard for Providing Notice

    When a credit union becomes aware of an incident of unauthorized 
access to sensitive member information, the credit union should conduct 
a reasonable investigation to promptly determine the likelihood that the 
information has been or will be misused. If the credit union determines 
that misuse of its information about a member has occurred or is 
reasonably possible, it should notify the affected member as soon as 
possible. Member notice may be delayed if an appropriate law enforcement 
agency determines that notification will interfere with a criminal 
investigation and provides the credit union with a written request for 
the delay. However, the credit union should notify its members as soon 
as notification will no longer interfere with the investigation.

                     1. Sensitive Member Information

    Under Part 748.0, a credit union must protect against unauthorized 
access to or use of member information that could result in substantial 
harm or inconvenience to any member. Substantial harm or inconvenience 
is most likely to result from improper access to sensitive member 
information because this type of information is most likely to be 
misused, as in the commission of identity theft.
    For purposes of this Guidance, sensitive member information means a 
member's name, address, or telephone number, in conjunction with the 
member's social security number, driver's license number, account 
number, credit or debit card number, or a personal identification number 
or password that would permit access to the member's account. Sensitive 
member information also includes any combination of components of member 
information that would allow someone to log onto or access the member's 
account, such as user name and password or password and account number.

                           2. Affected Members

    If a credit union, based upon its investigation, can determine from 
its logs or other data precisely which members' information has been 
improperly accessed, it may limit notification to those members with 
regard to whom the credit union determines that misuse of their 
information has occurred or is reasonably possible. However, there may 
be situations where the credit union determines that a group of files 
has been accessed improperly, but is unable to identify which specific 
member's information has been accessed. If the circumstances of the 
unauthorized access lead the credit union to determine that misuse of 
the information is reasonably possible, it should notify all members in 
the group.

                       B. Content of Member Notice

    1. Member notice should be given in a clear and conspicuous manner. 
The notice should describe the incident in general terms and the type of 
member information that was the subject of unauthorized access or use. 
It also should generally describe what the credit union has done to 
protect the members' information from further unauthorized access. In 
addition, it should include a telephone number that members can call for 
further information and assistance. \41\ The notice also should remind 
members of the need to remain vigilant over the next twelve to twenty-
four months, and to promptly report incidents of suspected identity 
theft to the credit union. The notice should include the following 
additional items, when appropriate:
---------------------------------------------------------------------------

    \41\ The credit union should, therefore, ensure that it has 
reasonable policies and procedures in place, including trained 
personnel, to respond appropriately to member inquiries and requests for 
assistance.
---------------------------------------------------------------------------

    a. A recommendation that the member review account statements and 
immediately report any suspicious activity to the credit union;
    b. A description of fraud alerts and an explanation of how the 
member may place a fraud alert in the member's consumer reports to put 
the member's creditors on notice that the member may be a victim of 
fraud;
    c. A recommendation that the member periodically obtain credit 
reports from each nationwide credit reporting agency and have 
information relating to fraudulent transactions deleted;
    d. An explanation of how the member may obtain a credit report free 
of charge; and
    e. Information about the availability of the FTC's online guidance 
regarding steps a consumer can take to protect against identity

[[Page 1162]]

theft. The notice should encourage the member to report any incidents of 
identity theft to the FTC, and should provide the FTC's Web site address 
and toll-free telephone number that members may use to obtain the 
identity theft guidance and report suspected incidents of identity 
theft. \42\
---------------------------------------------------------------------------

    \42\ Currently, the FTC Web site for the ID Theft brochure and the 
FTC Hotline phone number are http://www.ftc.gov/idtheft and 1-877-
IDTHEFT. The credit union may also refer members to any materials 
developed pursuant to section 15(1)(b) of the FACT Act (educational 
materials developed by the FTC to teach the public how to prevent 
identity theft).
---------------------------------------------------------------------------

    2. NCUA encourages credit unions to notify the nationwide consumer 
reporting agencies prior to sending notices to a large number of members 
that include contact information for the reporting agencies.

                      C. Delivery of Member Notice

    Member notice should be delivered in any manner designed to ensure 
that a member can reasonably be expected to receive it. For example, the 
credit union may choose to contact all members affected by telephone or 
by mail, or by electronic mail for those members for whom it has a valid 
e-mail address and who have agreed to receive communications 
electronically.

[70 FR 22778, May 2, 2005]



PART 749_RECORDS PRESERVATION PROGRAM AND APPENDICES_RECORD RETENTION
GUIDELINES; CATASTROPHIC ACT PREPAREDNESS GUIDELINES--Table of Contents



Sec.
749.0  Purpose and scope.
749.1  Definitions.
749.2  Vital records preservation program.
749.3  Vital records center.
749.4  Format for vital records preservation.
749.5  Format for records required by other NCUA regulations.

Appendix A to Part 749--Record Retention Guidelines
Appendix B to Part 749--Catastrophic Act Preparedness Guidelines

    Authority: 12 U.S.C. 1766, 1783 and 1789, 15 U.S.C. 7001(d).

    Source: 66 FR 40579, Aug. 3, 2001, unless otherwise noted.



Sec. 749.0  Purpose and scope.

    (a) This part describes the obligations of all federally-insured 
credit unions to maintain a records preservation program to identify, 
store and reconstruct vital records in the event that the credit union's 
records are destroyed and provides recommendations for restoring vital 
member services. All credit unions must have a written program that 
includes plans for safeguarding records and reconstructing vital 
records. To complement these plans, it is recommended a credit union 
develop a method for restoring vital member services in the event of a 
catastrophic act as defined in Sec. 748.1(b) of this chapter. 
Additionally, the regulation establishes flexibility in the format 
credit unions may use for maintaining writings, records or information 
required by other NCUA regulations.
    (b) Appendix A to this part provides guidance concerning the 
appropriate length of time credit unions should retain various types of 
operational records. Appendix B to this part also provides guidance for 
developing a program for responding to a catastrophic act to ensure 
duplicate vital records can be used for restoration of vital member 
services.

[72 FR 42273, Aug. 2, 2007]



Sec. 749.1  Definitions.

    For purposes of this part:
    Vital member services mean informational account inquiries, share 
withdrawals and deposits, and loan payments and disbursements.
    Vital records refer to the following records:
    (a) A list of share, deposit, and loan balances for each member's 
account as of the close of the most recent business day that:
    (1) Shows each balance individually identified by a name or number;
    (2) Lists multiple loans of one account separately; and
    (3) Contains information sufficient to enable the credit union to 
locate each member, such as address and telephone number.
    (b) A financial report, which lists all of the credit union's asset 
and liability accounts and bank reconcilements, current as of the most 
recent month-end.
    (c) A list of the credit union's accounts at financial institutions, 
insurance policies, and investments along

[[Page 1163]]

with related contact information, current as of the most recent month-
end.
    (d) Emergency contact information for employees, officials, 
regulatory offices, and vendors used to support vital records.

[72 FR 42273, Aug. 2, 2007]



Sec. 749.2  Vital records preservation program.

    The board of directors of a credit union is responsible for 
establishing a vital records preservation program within 6 months after 
its insurance certificate is issued. The program must be in writing and 
contain procedures for maintaining duplicate vital records at a vital 
records center. The procedures must include: designated staff 
responsible for vital records preservation, a schedule for the storage 
and destruction of records, and a records preservation log detailing for 
each record stored, its name, storage location, storage date, and name 
of the person sending the record for storage. It is recommended credit 
unions include in these procedures a method for using duplicate records 
to restore vital member services in the event of catastrophic act. 
Credit unions which have some or all of their records maintained by an 
off-site data processor are considered to be in compliance for the 
storage of those records if the service agreement specifies the data 
processor safeguards against the simultaneous destruction of production 
and back-up information.

[72 FR 42273, Aug. 2, 2007]



Sec. 749.3  Vital records center.

    A vital records center is defined as a storage facility, which may 
include another federally-insured credit union, at any location far 
enough from the credit union's offices to avoid the simultaneous loss of 
both sets of records in the event of a catastrophic act. A credit union 
must maintain or contract with a third party to maintain any equipment 
or software for its vital records center necessary to access records.

[72 FR 42273, Aug. 2, 2007]



Sec. 749.4  Format for vital records preservation.

    Preserved records may be in any format that can be used to 
reconstruct the credit union's records. The format used must accurately 
reflect the information in the record, remain accessible to all persons 
entitled to access by statute, regulation or rule of law, and be capable 
of reproduction by transmission, printing, or otherwise.

[72 FR 42273, Aug. 2, 2007]



Sec. 749.5  Format for records required by other NCUA regulations.

    Where NCUA regulations require credit unions to retain certain 
writings, records or information, credit unions may use any format that 
accurately reflects the information in the record, is accessible to all 
persons entitled to access by statute, regulation or rule of law, and is 
capable of being reproduced by transmission, printing, or otherwise. The 
credit union must maintain the necessary equipment or software to permit 
an examiner to access the records during the examination process.

[72 FR 42273, Aug. 2, 2007]



        Sec. Appendix A to Part 749--Record Retention Guidelines

    Credit unions often look to NCUA for guidance on the appropriate 
length of time to retain various types of operational records. NCUA does 
not regulate in this area, but as an aid to credit unions it is 
publishing this appendix of suggested guidelines for record retention. 
NCUA recognizes that credit unions must strike a balance between the 
competing demands of space, resource allocation and the desire to retain 
all the records that they may need to conduct their business 
successfully. Efficiency requires that all records that are no longer 
useful be discarded, just as both efficiency and safety require that 
useful records be preserved and kept readily available.

    A. What Format Should the Credit Union Use for Retaining Records?

    NCUA does not recommend a particular format for record retention. If 
the credit union stores records on microfilm, microfiche, or in an 
electronic format, the stored records must be accurate, reproducible and 
accessible to an NCUA examiner. If records are stored on the credit 
union premises, they should be immediately accessible upon the

[[Page 1164]]

examiner's request; if records are stored by a third party or off-site, 
then they should be made available to the examiner within a reasonable 
time after the examiner's request. The credit union must maintain the 
necessary equipment or software to permit an examiner to review and 
reproduce stored records upon request. The credit union should also 
ensure that the reproduction is acceptable for submission as evidence in 
a legal proceeding.

  B. Who Is Responsible for Establishing a System for Record Disposal?

    The credit union's board of directors may approve a schedule 
authorizing the disposal of certain records on a continuing basis upon 
expiration of specified retention periods. A schedule provides a system 
for disposal of records and eliminates the need for board approval each 
time the credit union wants to dispose of the same types of records 
created at different times.

C. What Procedures Should a Credit Union Follow When Destroying Records?

    The credit union should prepare an index of any records destroyed 
and retain the index permanently. Destruction of records should 
ordinarily be carried out by at least two persons whose signatures, 
attesting to the fact that records were actually destroyed, should be 
affixed to the listing.

          D. What Are the Recommended Minimum Retention Times?

    Record destruction may impact the credit union's legal standing to 
collect on loans or defend itself in court. Since each state can impose 
its own rules, it is prudent for a credit union to consider consulting 
with local counsel when setting minimum retention periods. A record 
pertaining to a member's account that is not considered a vital record 
may be destroyed once it is verified by the supervisory committee. 
Individual Share and Loan Ledgers should be retained permanently. 
Records, for a particular period, should not be destroyed until both a 
comprehensive annual audit by the supervisory committee and a 
supervisory examination by the NCUA have been made for that period.

             E. What Records Should Be Retained Permanently?

    1. Official records of the credit union that should be retained 
permanently are:
    (a) Charter, bylaws, and amendments.
    (b) Certificates or licenses to operate under programs of various 
government agencies, such as a certificate to act as issuing agent for 
the sale of U.S. savings bonds.
    2. Key operational records that should be retained permanently are:
    (a) Minutes of meetings of the membership, board of directors, 
credit committee, and supervisory committee.
    (b) One copy of each financial report, NCUA Form 5300 or 5310, or 
their equivalent, and the Credit Union Profile report, NCUA Form 4501, 
or its equivalent as submitted to NCUA at the end of each quarter.
    (c) One copy of each supervisory committee comprehensive annual 
audit report and attachments.
    (d) Supervisory committee records of account verification.
    (e) Applications for membership and joint share account agreements.
    (f) Journal and cash record.
    (g) General ledger.
    (h) Copies of the periodic statements of members, or the individual 
share and loan ledger. (A complete record of the account should be kept 
permanently.)
    (i) Bank reconcilements.
    (j) Listing of records destroyed.

      F. What Records Should a Credit Union Designate for Periodic 
                              Destruction?

    Any record not described above is appropriate for periodic 
destruction unless it must be retained to comply with the requirements 
of consumer protection regulations. Periodic destruction should be 
scheduled so that the most recent of the following records are available 
for the annual supervisory committee audit and the NCUA examination. 
Records that may be periodically destroyed include:
    (a) Applications of paid off loans.
    (b) Paid notes.
    (c) Various consumer disclosure forms, unless retention is required 
by law.
    (d) Cash received vouchers.
    (e) Journal vouchers.
    (f) Canceled checks.
    (g) Bank statements.
    (h) Outdated manuals, canceled instructions, and nonpayment 
correspondence from the NCUA and other governmental agencies.

[66 FR 40579, Aug. 3, 2001, as amended at 74 FR 35769, July 21, 2009]



  Sec. Appendix B to Part 749--Catastrophic Act Preparedness Guidelines

    Credit unions often look to NCUA for guidance on preparing for a 
catastrophic act. While NCUA has minimal regulation in this area, \1\ as 
an aid to credit unions it is publishing this appendix of suggested 
guidelines.

[[Page 1165]]

It is recommended that all credit unions develop a program to prepare 
for a catastrophic act. The program should be developed with oversight 
and approval of the board of directors. It is recommended the program 
address the following five elements:
---------------------------------------------------------------------------

    \1\ See 12 CFR 748.1(b) concerning a FICU's reporting of any 
catastrophic act that occurs at its office to its regional director and 
12 CFR 749.3 concerning the location of a FICU's vital records center to 
avoid the simultaneous loss of both sets of records in the event of 
disaster.
---------------------------------------------------------------------------

    (1) A business impact analysis to evaluate potential threats;
    (2) A risk assessment to determine critical systems and necessary 
resources;
    (3) A written plan addressing:
    i. Persons with authority to enact the plan;
    ii. Preservation and ability to restore vital records;
    iii. A method for restoring vital member services through 
identification of alternate operating location(s) or mediums to provide 
services, such as telephone centers, shared service centers, agreements 
with other credit unions, or other appropriate methods;
    iv. Communication methods for employees and members;
    v. Notification of regulators as addressed in 12 CFR 748.1(b);
    vi. Training and documentation of training to ensure all employees 
and volunteer officials are aware of procedures to follow in the event 
of destruction of vital records or loss of vital member services; and
    vii. Testing procedures, including a means for documenting the 
testing results.
    (4) Internal controls for reviewing the plan at least annually and 
for revising the plan as circumstances warrant, for example, to address 
changes in the credit union's operations; and
    (5) Annual testing.

[72 FR 42274, Aug. 2, 2007, as amended at 77 FR 71085, Nov. 29, 2012]



PART 750_GOLDEN PARACHUTE AND INDEMNIFICATION PAYMENTS--
Table of Contents



Sec.
750.0  Scope.
750.1  Definitions.
750.2  Golden parachute payments prohibited.
750.3  Prohibited indemnification payments.
750.4  Permissible golden parachute payments.
750.5  Permissible indemnification payments.
750.6  Filing instructions; appeal.
750.7  Applicability in the event of liquidation or conservatorship.

    Authority: 12 U.S.C. 1786(t).

    Source: 76 FR 30517, May 26, 2011, unless otherwise noted.



Sec. 750.0  Scope.

    (a) This part limits and prohibits, in certain circumstances, the 
ability of Federally insured credit unions, including Federally and 
state chartered natural person credit unions and Federally and state 
chartered corporate credit unions, to enter into contracts to pay and to 
make golden parachute and indemnification payments to institution-
affiliated parties (IAPs).
    (b) The limitations on golden parachute payments apply to troubled 
Federally insured credit unions that seek to enter into contracts to pay 
or to make golden parachute payments to their IAPs. A ``golden parachute 
payment'' is generally considered to be any payment to an IAP which is 
contingent on the termination of that person's employment and is 
received when the Federally insured credit union making the payment is 
troubled. The definition of golden parachute payment does not include 
payments pursuant to qualified retirement plans, nonqualified bona fide 
deferred compensation plans, nondiscriminatory severance pay plans, 
other types of common benefits plans, state statutes and death benefits. 
Certain limited exceptions to the golden parachute payment prohibition 
are provided for in cases involving unassisted mergers and the hiring of 
new management to help improve a troubled Federally insured credit 
union's financial condition. A procedure is also set forth to permit a 
Federally insured credit union to request permission to make what would 
otherwise be a prohibited golden parachute payment.
    (c) The limitations on indemnification payments apply to all 
Federally insured credit unions, including state chartered credit 
unions, regardless of their financial health. Generally, this part 
prohibits Federally insured credit unions from indemnifying an IAP for 
that portion of the costs sustained with regard to an administrative 
proceeding or civil action commenced by NCUA or a state regulatory 
authority that results in a final order or settlement pursuant to which 
the IAP is assessed a civil money penalty, removed from office, 
prohibited from participating in the affairs of a Federally insured 
credit union or required to cease

[[Page 1166]]

and desist from an action or take an affirmative action described in 
section 206 of the Federal Credit Union Act, 12 U.S.C. 1786. There are 
exceptions to this general prohibition. First, a Federally insured 
credit union may purchase commercial insurance to cover these expenses, 
except judgments and penalties. Second, the credit union may advance 
legal and other professional expenses to an IAP directly (except for 
judgments and penalties) if its board of directors makes certain 
specific findings and the IAP provides a written affirmation and agrees 
in writing to reimburse the credit union if it is ultimately determined 
that the IAP violated a law or regulation or has engaged in certain 
unsafe or unsound practices or breaches of fiduciary duty. For Federal 
credit unions, fiduciary duty is defined in 701.4 of this chapter. State 
chartered credit unions should look to applicable state law.



Sec. 750.1  Definitions.

    As used in this part:
    (a) Benefit plan means any employee benefit plan, contract, 
agreement or other arrangement subject to the requirements in 
Sec. 701.19 of this chapter; provided, however, that to the extent the 
plan exhibits characteristics of a deferred compensation plan or 
arrangement, or severance plan, it meets the criteria set forth in 
paragraph (b) or (h), respectively, of this section.
    (b) Bona fide deferred compensation plan or arrangement means any 
plan, contract, agreement or other arrangement where:
    (1) An IAP voluntarily elects to defer all or a portion of the 
reasonable compensation, wages or fees paid for services rendered that 
otherwise would have been paid to the IAP at the time the services were 
rendered, including a plan providing for crediting a reasonable 
investment return on the elective deferrals, and the Federally insured 
credit union either:
    (i) Recognizes compensation expense and accrues a liability for the 
benefit payments according to generally accepted accounting principles 
(GAAP); or
    (ii) Segregates or otherwise sets aside assets in a trust that may 
only be used to pay plan and other benefits, except that the assets of 
the trust may be available to satisfy claims of the Federally insured 
credit union's creditors in the case of insolvency; or
    (2) A Federally insured credit union establishes a nonqualified 
deferred compensation or supplemental retirement plan, other than an 
elective deferral plan described in paragraph (b)(1) of this section:
    (i) Primarily for the purpose of providing benefits for certain IAPs 
in excess of the limitations on contributions and benefits imposed by 
sections 415, 401(a)(17), 402(g) or any other applicable provision of 
the Internal Revenue Code of 1986 (26 U.S.C. 415, 401(a)(17), 402(g)); 
or
    (ii) Primarily for the purpose of providing supplemental retirement 
benefits or other deferred compensation for a select group of directors, 
management or highly compensated employees, excluding severance payments 
described in paragraph (d)(2)(v) of this section and permissible golden 
parachute payments described in Sec. 750.4; and
    (3) In the case of any nonqualified deferred compensation or 
supplemental retirement plans as described in paragraphs (b)(1) and (2) 
of this section, the following requirements apply:
    (i) The plan was in effect at least one year before any of the 
events described in paragraph (d)(1)(ii) of this section;
    (ii) Any payment made pursuant to the plan is made in accordance 
with the terms of the plan as in effect no later than one year before 
any of the events described in paragraph (d)(1)(ii) of this section and 
in accordance with any amendments to the plan during that one year 
period that do not increase the benefits payable under the plan;
    (iii) The IAP has a vested right, as defined under the applicable 
plan document, at the time of termination of employment to payments 
under the plan;
    (iv) Benefits under the plan are accrued each period only for 
current or prior service rendered to the employer, except that an 
allowance may be made for service with a predecessor employer;

[[Page 1167]]

    (v) Any payment made pursuant to the plan is not based on any 
discretionary acceleration of vesting or accrual of benefits that occurs 
at any time later than one year before any of the events described in 
paragraph (d)(1)(ii) of this section;
    (vi) The Federally insured credit union has previously recognized 
compensation expense and accrued a liability for the benefit payments 
according to GAAP or segregated or otherwise set aside assets in a trust 
that may only be used to pay plan benefits, except that the assets of 
the trust may be available to satisfy claims of the credit union's 
creditors in the case of insolvency; and
    (vii) Payments pursuant to the plans must not exceed the accrued 
liability computed in accordance with GAAP.
    (c) Federally insured credit union means a Federal credit union, 
state chartered credit union, or corporate credit union the member 
accounts of which are insured under the Act.
    (d) Golden parachute payment. (1) The term golden parachute payment 
means any payment or any agreement to make any payment in the nature of 
compensation by any Federally insured credit union for the benefit of 
any current or former IAP pursuant to an obligation of the credit union 
that:
    (i) Is contingent on, or by its terms is payable on or after, the 
termination of the party's primary employment or affiliation with the 
credit union; and
    (ii) Is received on or after, or is made in contemplation of, any of 
the following events:
    (A) The insolvency of the Federally insured credit union that is 
making the payment; or
    (B) The appointment of any conservator or liquidating agent for the 
Federally insured credit union; or
    (C) The federally insured credit union is in troubled condition as 
defined in Sec. 700.2 of this chapter; or
    (D) In the case of a corporate credit union, the federally insured 
credit union is undercapitalized as defined in Sec. 704.4 of this 
chapter; or
    (E) The federally insured credit union is subject to a proceeding to 
terminate or suspend its share insurance; and
    (iii) Is payable to an IAP whose employment by or affiliation with a 
Federally insured credit union is terminated at a time when the 
Federally insured credit union by which the IAP is employed or with 
which the IAP is affiliated satisfies any of the conditions enumerated 
in paragraphs (d)(1)(ii)(A) through (E) of this section, or in 
contemplation of any of these conditions.
    (2) Exceptions. The term golden parachute payment does not include:
    (i) Any payment made pursuant to a deferred compensation plan under 
section 457(b) of the Internal Revenue Code of 1986, 26 U.S.C. 457(b), 
or a pension or retirement plan that is qualified or is intended within 
a reasonable period of time to be qualified under section 401 of the 
Internal Revenue Code of 1986, 26 U.S.C. 401; or
    (ii) Any payment made pursuant to a benefit plan as that term is 
defined in paragraph (a) of this section; or
    (iii) Any payment made pursuant to a bona fide deferred compensation 
plan or arrangement as defined in paragraph (b) of this section; or
    (iv) Any payment made by reason of death or by reason of termination 
caused by the disability of an IAP; or
    (v) Any payment made pursuant to a nondiscriminatory severance pay 
plan or arrangement that provides for payment of severance benefits to 
all eligible employees upon involuntary termination other than for 
cause, voluntary resignation, or early retirement; provided, however, 
that no employee will receive any payment that exceeds the base 
compensation paid to the employee during the twelve months, or a longer 
period or greater benefit as the NCUA will consent to, immediately 
preceding termination of employment, resignation or early retirement, 
and the severance pay plan or arrangement must not or cannot have been 
adopted or modified to increase the amount or scope of severance 
benefits at a time when the Federally insured credit union was in a 
condition specified in paragraph (d)(1)(ii) of this section or in 
contemplation of that condition without the prior written consent of 
NCUA; or
    (vi) Any severance or similar payment required to be made pursuant 
to a state statute applicable to all employers within the appropriate 
jurisdiction, with the exception of employers that may be exempt due to 
their small

[[Page 1168]]

number of employees or other similar criteria; or
    (vii) Any other payment NCUA determines to be permissible in 
accordance with Sec. 750.4.
    (e) Institution-affiliated party (IAP) means any individual meeting 
the criteria in section 206(r) of the Act, 12 U.S.C. 1786(r).
    (f) Liability or legal expense means:
    (1) Any legal or other professional fees and expenses incurred in 
connection with any claim, proceeding, or action;
    (2) The amount of, and any cost incurred in connection with, any 
settlement of any claim, proceeding, or action; and
    (3) The amount of, and any cost incurred in connection with, any 
judgment or penalty imposed with respect to any claim, proceeding, or 
action.
    (g) NCUA means the National Credit Union Administration.
    (h) Nondiscriminatory means that the plan, contract or arrangement 
applies to all employees of a Federally insured credit union who meet 
reasonable and customary eligibility requirements applicable to all 
employees, such as minimum length of service requirements. A 
nondiscriminatory plan, contract or arrangement may provide different 
benefits based only on objective criteria, such as salary, total 
compensation, length of service, job grade or classification, applied on 
a proportionate basis (with a variance in severance benefits relating to 
any criterion of plus or minus ten percent) to groups of employees 
consisting of not less than 33% of all employees.
    (i) Payment means:
    (1) Any direct or indirect transfer of any funds or any asset;
    (2) Any forgiveness of any debt or other obligation;
    (3) The conferring of any benefit; or
    (4) Any segregation of any funds or assets, the establishment or 
funding of any trust or the purchase of or arrangement for any letter of 
credit or other instrument, for the purpose of making, or pursuant to 
any agreement to make, any payment on or after the date on which the 
funds or assets are segregated, or at the time of or after such trust is 
established or letter of credit or other instrument is made available, 
without regard to whether the obligation to make such payment is 
contingent on:
    (i) The determination, after such date, of the liability for the 
payment of such amount; or
    (ii) The liquidation, after such date, of the amount of such 
payment.
    (j) Prohibited indemnification payment. (1) Prohibited 
indemnification payment means any payment or any agreement or 
arrangement to make any payment by any Federally insured credit union 
for the benefit of any person who is or was an IAP of the Federally 
insured credit union, to pay or reimburse such person for any civil 
money penalty, judgment, or other liability or legal expense resulting 
from any administrative or civil action instituted by NCUA or any 
appropriate state regulatory authority, in the case of a credit union or 
corporate credit union chartered by a state, that results in a final 
order or settlement pursuant to which such person:
    (i) Is assessed a civil money penalty;
    (ii) Is removed from office or prohibited from participating in the 
conduct of the affairs of the Federally insured credit union; or
    (iii) Is required to cease and desist from an action or take any 
affirmative action described in section 206 of the Act (12 U.S.C.1786) 
with respect to the credit union.
    (2) Exceptions. Prohibited indemnification payment does not include 
any reasonable payment that:
    (i) Is used to purchase a commercial insurance policy or fidelity 
bond, provided that the insurance policy or bond must not be used to pay 
or reimburse an IAP for the cost of any judgment or civil money penalty 
assessed against the IAP in an administrative proceeding or civil action 
commenced by NCUA or the appropriate state supervisory authority, in the 
case of a credit union or corporate credit union chartered by a state, 
but may pay any legal or professional expenses incurred in connection 
with a proceeding or action or the amount of any restitution, to the 
Federally insured credit union or its conservator or liquidating agent; 
or
    (ii) Represents partial indemnification for legal or professional 
expenses specifically attributable to particular

[[Page 1169]]

charges for which there has been a formal and final adjudication or 
finding in connection with a settlement that the IAP has not violated 
certain laws or regulations or has not engaged in certain unsafe or 
unsound practices or breaches of fiduciary duty, unless the 
administrative action or civil proceeding has resulted in a final 
prohibition order against the IAP.

[76 FR 30517, May 26, 2011, as amended at 76 FR 36980, June 24, 2011; 78 
FR 4029, Jan. 18, 2013; 78 FR 32545, May 31, 2013; 79 FR 12658, Mar. 6, 
2014]



Sec. 750.2  Golden parachute payments prohibited.

    A Federally insured credit union must not make or agree to make any 
golden parachute payment, except as permitted by this part.



Sec. 750.3  Prohibited indemnification payments.

    A Federally insured credit union must not make or agree to make any 
prohibited indemnification payment, except as permitted by this 
chapter.\1\
---------------------------------------------------------------------------

    \1\ The provisions in this part 750 control to the extent of any 
inconsistency with Sec. 701.33 of this chapter.
---------------------------------------------------------------------------



Sec. 750.4  Permissible golden parachute payments.

    (a) A Federally insured credit union may agree to make or may make a 
golden parachute payment if:
    (1) NCUA, with written concurrence of the appropriate state 
supervisory authority in the case of a state chartered credit union or 
corporate credit union, determines the payment or agreement is 
permissible; or
    (2) An agreement is made in order to hire a person to become an IAP 
at a time when the Federally insured credit union satisfies or in an 
effort to prevent it from imminently satisfying any of the criteria in 
Sec. 750.1(d)(1)(ii), and NCUA, with written concurrence of the 
appropriate state supervisory authority in the case of a state chartered 
credit union or corporate credit union, consents in writing to the 
amount and terms of the golden parachute payment. NCUA's consent will 
not improve the IAP's position in the event of the insolvency of the 
credit union since NCUA's consent cannot bind a liquidating agent or 
affect the provability of claims in liquidation. In the event the credit 
union is placed into conservatorship or liquidation, the conservator or 
the liquidating agent will not be obligated to pay the promised golden 
parachute and the IAP will not be accorded preferential treatment on the 
basis of any prior approval; or
    (3) A payment is made pursuant to an agreement that provides for a 
reasonable severance payment, not to exceed twelve months' salary, to an 
IAP in the event of a merger of the Federally insured credit union; 
provided, however, that a Federally insured credit union must obtain the 
consent of NCUA before making a payment and this paragraph (a)(3) does 
not apply to any merger of a Federally insured credit union resulting 
from an assisted transaction described in section 208 of the Act, 12 
U.S.C. 1788, or the Federally insured credit union being placed into 
conservatorship or liquidation; and
    (4) A Federally insured credit union or IAP making a request 
pursuant to paragraphs (a)(1) through (3) of this section must 
demonstrate it does not possess and is not aware of any information, 
evidence, documents or other materials indicating there is a reasonable 
basis to believe, at the time the payment is proposed to be made, that:
    (i) The IAP has committed any fraudulent act or omission, breach of 
trust or fiduciary duty, or insider abuse with regard to the Federally 
insured credit union that has had or is likely to have a material 
adverse effect on the Federally insured credit union;
    (ii) The IAP is substantially responsible for the insolvency of, the 
appointment of a conservator liquidating agent for, or the troubled 
condition, as defined by Sec. 700.2 of this chapter, of the Federally 
insured credit union;
    (iii) The IAP has materially violated any applicable Federal or 
state law or regulation that has had or is likely to have a material 
effect on the Federally insured credit union; or
    (iv) The IAP has violated or conspired to violate sections 215, 656, 
657, 1005, 1006, 1007, 1014, 1032, or 1344 of title 18 of the United 
States Code, or sections 1341 or 1343 of that title affecting

[[Page 1170]]

a Federally insured financial institution, as defined in title 18 of the 
United States Code.
    (b) In making a determination under paragraphs (a)(1) through (3) of 
this section, NCUA may consider:
    (1) Whether, and to what degree, the IAP was in a position of 
managerial or fiduciary responsibility;
    (2) The length of time the IAP was affiliated with the Federally 
insured credit union and the degree to which the proposed payment 
represents a reasonable payment for services rendered over the period of 
employment; and
    (3) Any other factors or circumstances indicating the proposed 
payment would be contrary to the intent of section 206(t) of the Act or 
this part.

[76 FR 30517, May 26, 2011; 79 FR 12658, Mar. 6, 2014]



Sec. 750.5  Permissible indemnification payments.

    (a) A Federally insured credit union may make or agree to make 
reasonable indemnification payments to an IAP, including advanced funds 
to pay or reimburse reasonable legal fees or other professional expenses 
incurred by an IAP in an administrative proceeding or civil action 
initiated by NCUA or a state regulatory authority if:
    (1) The Federally insured credit union's board of directors, in good 
faith, determines in writing after due investigation and consideration 
that:
    (i) The IAP acted in good faith and in a manner he or she believed 
to be consistent with his or her fiduciary duty;
    (ii) The advancement or payment of the expenses will not materially 
adversely affect the credit union's safety and soundness; and
    (iii) The IAP has the financial capability or has otherwise made 
appropriate financial arrangements sufficient to repay the advance if 
required in accordance with this rule; and
    (2) The IAP provides:
    (i) A written affirmation of his or her reasonable good faith belief 
that he or she acted in a manner believed to be consistent with his or 
her fiduciary duty; and
    (ii) An agreement in writing to reimburse the Federally insured 
credit union, to the extent not covered by payments from insurance or 
bonds purchased pursuant to Sec. 750.1(j)(2)(i), for that portion of any 
advanced indemnification payments which ultimately become prohibited 
indemnification payments as defined in Sec. 750.1(j); and
    (3) The indemnification payments do not ultimately constitute 
prohibited indemnification payments as defined inSec. 750.1(j).
    (b) An IAP seeking indemnification payments must not participate in 
any way in the board of director's discussion and approval of such 
payments; however, the IAP may present his or her request to the board 
and respond to any inquiries from the board concerning his or her 
involvement in the circumstances giving rise to the administrative 
proceeding or civil action.
    (c) In the event a majority of the members of the board of directors 
are named as respondents in an administrative proceeding or civil action 
and request indemnification, the remaining members of the board may 
authorize independent legal counsel to review the indemnification 
request and provide the remaining members of the board with a written 
opinion of counsel as to whether the conditions in paragraph (a)(1) 
through (3) of this section have been met. If independent legal counsel 
concludes that the conditions have been met, the remaining members of 
the board of directors may rely on the opinion in authorizing the 
requested indemnification.
    (d) In the event all of the members of the board of directors are 
named as respondents in an administrative proceeding or civil action and 
request indemnification, the board will authorize independent legal 
counsel to review the indemnification request and provide the board with 
a written opinion of counsel as to whether the conditions in paragraph 
(a)(1) through (3) of this section have been met. If independent legal 
counsel concludes the conditions have been met, the board of directors 
may rely on the opinion in authorizing the requested indemnification.

[76 FR 30517, May 26, 2011; 79 FR 12658, Mar. 6, 2014]

[[Page 1171]]



Sec. 750.6  Filing instructions; appeal.

    (a) Requests to make excess nondiscriminatory severance plan 
payments pursuant toSec. 750.1(d)(2)(v) and golden parachute payments 
permitted by Sec. 750.4 must be submitted in writing to NCUA. In the 
case of a Federal or state chartered natural person credit union, such 
written requests must be submitted to the NCUA regional director for the 
region in which the credit union is located. In the case of a Federal or 
state chartered corporate credit union, such written requests must be 
submitted to the Director of the Office of National Examinations and 
Supervision. The request must be in letter form and must contain all 
relevant factual information as well as the reasons why such approval 
should be granted. If written concurrence by the state supervisory 
authority is required, the requesting party must submit a copy of its 
written request to the state supervisory authority where the credit 
union is located.
    (b) An FICU whose request for approval by NCUA in accordance with 
paragraph (a) of this section has been denied may file an appeal of that 
denial with the NCUA Board by following the procedures set out in this 
paragraph.
    (1) The appeal must be in writing and filed with the Secretary of 
the Board, National Credit Union Administration, 1775 Duke Street, 
Alexandria, VA 22314-3428, and must be filed not later than sixty days 
after the initial determination denying the request.
    (2) The Board shall make its determination concerning the appeal 
based on what is submitted in writing; there shall be no personal 
appearance before the Board in connection with an appeal under this 
paragraph.
    (3) The Board shall make its determination concerning the appeal 
within 180 days from the date of its receipt of the appeal. The decision 
by the Board on appeal shall be provided to the appellant in writing, 
stating the reasons for the decision, and shall constitute a final 
agency decision. Failure by the Board to issue a decision on appeal 
within the 180-day period provided for under this section shall be 
deemed to be denial of such appeal.
    (4) A final determination by the Board is reviewable in accordance 
with the provisions of chapter 7, title 5, United States Code, by the 
United States District Court for the Eastern District of Virginia or the 
U.S. District Court for the Federal judicial district where the FICU's 
principal place of business is located. Any request for judicial review 
under this section must be filed within 60 days of the date of the 
Board's final decision. If any appellant fails to file before the end of 
the 60-day period, the Board's decision shall be final, and the 
appellant shall have no further rights or remedies with respect to the 
request.

[76 FR 30517, May 26, 2011, as amended at 78 FR 32545, May 31, 2013; 79 
FR 12658, Mar. 6, 2014]



Sec. 750.7  Applicability in the event of liquidation or 
conservatorship.

    The provisions of this part, or any consent or approval granted 
under the provisions of this part by NCUA, will not in any way bind any 
liquidating agent or conservator for a failed Federally insured credit 
union and will not in any way obligate the liquidating agent or 
conservator to pay any claim or obligation pursuant to any golden 
parachute, severance, indemnification or other agreement. Claims for 
employee welfare benefits or other benefits that are contingent, even if 
otherwise vested, when a liquidating agent or conservator is appointed 
for any Federally insured credit union, including any contingency for 
termination of employment, are not provable claims or actual, direct 
compensatory damage claims against such liquidating agent or 
conservator. Nothing in this part may be construed to permit the payment 
of salary or any liability or legal expense of any IAP contrary to 12 
U.S.C. 1786(t)(3).



PART 760_LOANS IN AREAS HAVING SPECIAL FLOOD HAZARDS--
Table of Contents



Sec.
760.1  Authority, purpose, and scope.
760.2  Definitions.
760.3  Requirement to purchase flood insurance where available.
760.4  Exemptions.
760.5  Escrow requirement.

[[Page 1172]]

760.6  Required use of standard flood hazard determination form.
760.7  Force placement of flood insurance.
760.8  Determination fees.
760.9  Notice of special flood hazards and availability of Federal 
          disaster relief assistance.
760.10  Notice of servicer's identity.

Appendix A to Part 760--Sample Form of Notice of Special Flood Hazards 
          and Availability of Federal Disaster Relief Assistance
Appendix B to Part 760--Sample Clause for Option to Escrow for 
          Outstanding Loans

    Authority: 12 U.S.C. 1757, 1789; 42 U.S.C. 4012a, 4104a, 4104b, 
4106, and 4128.

    Source: 80 FR 43259, July 21, 2015, unless otherwise noted.



Sec. 760.1  Authority, purpose, and scope.

    (a) Authority. This part is issued pursuant to 12 U.S.C. 1757, 1789 
and 42 U.S.C. 4012a, 4104a, 4104b, 4106, 4128.
    (b) Purpose. The purpose of this part is to implement the 
requirements of the National Flood Insurance Act of 1968 and the Flood 
Disaster Protection Act of 1973, as amended (42 U.S.C. 4001-4129).
    (c) Scope. This part, except for Secs. 760.6 and 760.8, applies to 
loans secured by buildings or mobile homes located or to be located in 
areas determined by the Administrator of the Federal Emergency 
Management Agency to have special flood hazards. Sections 760.6 and 
760.8 apply to loans secured by buildings or mobile homes, regardless of 
location.



Sec. 760.2  Definitions.

    As used in this part:
    Act means the National Flood Insurance Act of 1968, as amended (42 
U.S.C. 4001-4129).
    Administrator of FEMA means the Administrator of the Federal 
Emergency Management Agency.
    Building means a walled and roofed structure, other than a gas or 
liquid storage tank, that is principally above ground and affixed to a 
permanent site, and a walled and roofed structure while in the course of 
construction, alteration, or repair.
    Community means a State or a political subdivision of a State that 
has zoning and building code jurisdiction over a particular area having 
special flood hazards.
    Credit union means a Federal or State-chartered credit union that is 
insured by the National Credit Union Share Insurance Fund.
    Designated loan means a loan secured by a building or mobile home 
that is located or to be located in a special flood hazard area in which 
flood insurance is available under the Act.
    Mobile home means a structure, transportable in one or more 
sections, that is built on a permanent chassis and designed for use with 
or without a permanent foundation when attached to the required 
utilities. The term mobile home does not include a recreational vehicle. 
For purposes of this part, the term mobile home means a mobile home on a 
permanent foundation. The term mobile home includes a manufactured home 
as that term is used in the NFIP.
    NFIP means the National Flood Insurance Program authorized under the 
Act.
    Residential improved real estate means real estate upon which a home 
or other residential building is located or to be located.
    Servicer means the person responsible for:
    (1) Receiving any scheduled, periodic payments from a borrower under 
the terms of a loan, including amounts for taxes, insurance premiums, 
and other charges with respect to the property securing the loan; and
    (2) Making payments of principal and interest and any other payments 
from the amounts received from the borrower as may be required under the 
terms of the loan.
    Special flood hazard area means the land in the flood plain within a 
community having at least a one percent chance of flooding in any given 
year, as designated by the Administrator of FEMA.
    Table funding means a settlement at which a loan is funded by a 
contemporaneous advance of loan funds and an assignment of the loan to 
the person advancing the funds.



Sec. 760.3  Requirement to purchase flood insurance where available.

    (a) In general. A credit union shall not make, increase, extend, or 
renew

[[Page 1173]]

any designated loan unless the building or mobile home and any personal 
property securing the loan is covered by flood insurance for the term of 
the loan. The amount of insurance must be at least equal to the lesser 
of the outstanding principal balance of the designated loan or the 
maximum limit of coverage available for the particular type of property 
under the Act. Flood insurance coverage under the Act is limited to the 
building or mobile home and any personal property that secures a loan 
and not the land itself.
    (b) Table funded loan. A credit union that acquires a loan from a 
mortgage broker or other entity through table funding shall be 
considered to be making a loan for the purposes of this part.



Sec. 760.4  Exemptions.

    The flood insurance requirement prescribed by Sec. 760.3 does not 
apply with respect to:
    (a) Any State-owned property covered under a policy of self-
insurance satisfactory to the Administrator of FEMA, who publishes and 
periodically revises the list of States falling within this exemption;
    (b) Property securing any loan with an original principal balance of 
$5,000 or less and a repayment term of one year or less; or
    (c) Any structure that is a part of any residential property but is 
detached from the primary residential structure of such property and 
does not serve as a residence. For purposes of this paragraph (c):
    (1) ``A structure that is a part of a residential property'' is a 
structure used primarily for personal, family, or household purposes, 
and not used primarily for agricultural, commercial, industrial, or 
other business purposes;
    (2) A structure is ``detached'' from the primary residential 
structure if it is not joined by any structural connection to that 
structure; and
    (3) ``Serve as a residence'' shall be based upon the good faith 
determination of the credit union that the structure is intended for use 
or actually used as a residence, which generally includes sleeping, 
bathroom, or kitchen facilities.



Sec. 760.5  Escrow requirement.

    (a) In general--(1) Applicability. Except as provided in paragraphs 
(a)(2) or (c) of this section, a credit union, or a servicer acting on 
behalf of the credit union, shall require the escrow of all premiums and 
fees for any flood insurance required under Sec. 760.3(a) for any 
designated loan secured by residential improved real estate or a mobile 
home that is made, increased, extended, or renewed on or after January 
1, 2016, payable with the same frequency as payments on the designated 
loan are required to be made for the duration of the loan.
    (2) Exceptions. Paragraph (a)(1) of this section does not apply if:
    (i) The loan is an extension of credit primarily for business, 
commercial, or agricultural purposes;
    (ii) The loan is in a subordinate position to a senior lien secured 
by the same residential improved real estate or mobile home for which 
the borrower has obtained flood insurance coverage that meets the 
requirements of Sec. 760.3(a);
    (iii) Flood insurance coverage for the residential improved real 
estate or mobile home is provided by a policy that:
    (A) Meets the requirements of Sec. 760.3(a);
    (B) Is provided by a condominium association, cooperative, 
homeowners association, or other applicable group; and
    (C) The premium for which is paid by the condominium association, 
cooperative, homeowners association, or other applicable group as a 
common expense;
    (iv) The loan is a home equity line of credit;
    (v) The loan is a nonperforming loan, which is a loan that is 90 or 
more days past due and remains nonperforming until it is permanently 
modified or until the entire amount past due, including principal, 
accrued interest, and penalty interest incurred as the result of past 
due status, is collected or otherwise discharged in full; or
    (vi) The loan has a term of not longer than 12 months.
    (3) Duration of exception. If a credit union, or a servicer acting 
on behalf of the credit union, determines at any time during the term of 
a designated loan secured by residential improved

[[Page 1174]]

real estate or a mobile home that is made, increased, extended, or 
renewed on or after January 1, 2016, that an exception under paragraph 
(a)(2) of this section does not apply, then the credit union or its 
servicer shall require the escrow of all premiums and fees for any flood 
insurance required under Sec. 760.3(a) as soon as reasonably practicable 
and, if applicable, shall provide any disclosure required under section 
10 of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2609) 
(RESPA).
    (4) Escrow account. The credit union, or a servicer acting on behalf 
of the credit union, shall deposit the flood insurance premiums and fees 
on behalf of the borrower in an escrow account. This escrow account will 
be subject to escrow requirements adopted pursuant to section 10 of 
RESPA, which generally limits the amount that may be maintained in 
escrow accounts for certain types of loans and requires escrow account 
statements for those accounts, only if the loan is otherwise subject to 
RESPA. Following receipt of a notice from the Administrator of FEMA or 
other provider of flood insurance that premiums are due, the credit 
union, or a servicer acting on behalf of the credit union, shall pay the 
amount owed to the insurance provider from the escrow account by the 
date when such premiums are due.
    (b) Notice. For any loan for which a credit union is required to 
escrow under paragraph (a) or paragraph (c)(2) of this section or may be 
required to escrow under paragraph (a)(3) of this section during the 
term of the loan, the credit union, or a servicer acting on behalf of 
the credit union, shall mail or deliver a written notice with the notice 
provided under Sec. 760.9 informing the borrower that the credit union 
is required to escrow all premiums and fees for required flood 
insurance, using language that is substantially similar to model clauses 
on the escrow requirement in appendix A.
    (c) Small lender exception--(1) Qualification. Except as may be 
required under applicable State law, paragraphs (a), (b) and (d) of this 
section do not apply to a credit union:
    (i) That has total assets of less than $1 billion as of December 31 
of either of the two prior calendar years; and
    (ii) On or before July 6, 2012:
    (A) Was not required under Federal or State law to deposit taxes, 
insurance premiums, fees, or any other charges in an escrow account for 
the entire term of any loan secured by residential improved real estate 
or a mobile home; and
    (B) Did not have a policy of consistently and uniformly requiring 
the deposit of taxes, insurance premiums, fees, or any other charges in 
an escrow account for any loans secured by residential improved real 
estate or a mobile home.
    (2) Change in status. If a credit union previously qualified for the 
exception in paragraph (c)(1) of this section, but no longer qualifies 
for the exception because it had assets of $1 billion or more for two 
consecutive calendar year ends, the credit union must escrow premiums 
and fees for flood insurance pursuant to paragraph (a) of this section 
for any designated loan made, increased, extended, or renewed on or 
after July 1 of the first calendar year of changed status.
    (d) Option to escrow--(1) In general. A credit union, or a servicer 
acting on behalf of the credit union, shall offer and make available to 
the borrower the option to escrow all premiums and fees for any flood 
insurance required under Sec. 760.3 for any loan secured by residential 
improved real estate or a mobile home that is outstanding on January 1, 
2016, or July 1 of the first calendar year in which the credit union has 
had a change in status pursuant to paragraph (c)(2) of this section, 
unless:
    (i) The credit union or the loan qualifies for an exception from the 
escrow requirement under paragraphs (a)(2) or (c) of this section, 
respectively;
    (ii) The borrower is already escrowing all premiums and fees for 
flood insurance for the loan; or
    (iii) The credit union is required to escrow flood insurance 
premiums and fees pursuant to paragraph (a) of this section.
    (2) Notice. For any loan subject to paragraph (d) of this section, 
the credit union, or a servicer acting on behalf of the credit union, 
shall mail or deliver to the borrower no later than June 30, 2016, or 
September 30 of the first calendar year in which the credit union

[[Page 1175]]

has had a change in status pursuant to paragraph (c)(2) of this section, 
a notice in writing, or if the borrower agrees, electronically, 
informing the borrower of the option to escrow all premiums and fees for 
any required flood insurance and the method(s) by which the borrower may 
request the escrow, using language similar to the model clause in 
appendix B to this part.
    (3) Timing. The credit union or servicer must begin escrowing 
premiums and fees for flood insurance as soon as reasonably practicable 
after the credit union or servicer receives the borrower's request to 
escrow.

[80 FR 43261, July 21, 2015]



Sec. 760.6  Required use of standard flood hazard determination
form.

    (a) Use of form. A credit union shall use the standard flood hazard 
determination form developed by the Administrator of FEMA when 
determining whether the building or mobile home offered as collateral 
security for a loan is or will be located in a special flood hazard area 
in which flood insurance is available under the Act. The standard flood 
hazard determination form may be used in a printed, computerized, or 
electronic manner. A credit union may obtain the standard flood hazard 
determination form from FEMA's Web site at www.fema.gov.
    (b) Retention of form. A credit union shall retain a copy of the 
completed standard flood hazard determination form, in either hard copy 
or electronic form, for the period of time the credit union owns the 
loan.



Sec. 760.7  Force placement of flood insurance.

    (a) Notice and purchase of coverage. If a credit union, or a 
servicer acting on behalf of the credit union, determines at any time 
during the term of a designated loan, that the building or mobile home 
and any personal property securing the designated loan is not covered by 
flood insurance or is covered by flood insurance in an amount less than 
the amount required under Sec. 760.3, then the credit union or its 
servicer shall notify the borrower that the borrower should obtain flood 
insurance, at the borrower's expense, in an amount at least equal to the 
amount required under Sec. 760.3, for the remaining term of the loan. If 
the borrower fails to obtain flood insurance within 45 days after 
notification, then the credit union or its servicer shall purchase 
insurance on the borrower's behalf. The credit union or its servicer may 
charge the borrower for the cost of premiums and fees incurred in 
purchasing the insurance, including premiums or fees incurred for 
coverage beginning on the date on which flood insurance coverage lapsed 
or did not provide a sufficient coverage amount.
    (b) Termination of force-placed insurance--(1) Termination and 
refund. Within 30 days of receipt by a credit union, or a servicer 
acting on behalf of the credit union, of a confirmation of a borrower's 
existing flood insurance coverage, the credit union or its servicer 
shall:
    (i) Notify the insurance provider to terminate any insurance 
purchased by the credit union or its servicer under paragraph (a) of 
this section; and
    (ii) Refund to the borrower all premiums paid by the borrower for 
any insurance purchased by the credit union or its servicer under 
paragraph (a) of this section during any period during which the 
borrower's flood insurance coverage and the insurance coverage purchased 
by the credit union or its servicer were each in effect, and any related 
fees charged to the borrower with respect to the insurance purchased by 
the credit union or its servicer during such period.
    (2) Sufficiency of demonstration. For purposes of confirming a 
borrower's existing flood insurance coverage under paragraph (b) of this 
section, a credit union or its servicer shall accept from the borrower 
an insurance policy declarations page that includes the existing flood 
insurance policy number and the identity of, and contact information 
for, the insurance company or agent.



Sec. 760.8  Determination fees.

    (a) General. Notwithstanding any Federal or State law other than the 
Flood Disaster Protection Act of 1973, as amended (42 U.S.C. 4001-4129), 
any credit union, or a servicer acting on behalf of the credit union, 
may charge a

[[Page 1176]]

reasonable fee for determining whether the building or mobile home 
securing the loan is located or will be located in a special flood 
hazard area. A determination fee may also include, but is not limited 
to, a fee for life-of-loan monitoring.
    (b) Borrower fee. The determination fee authorized by paragraph (a) 
of this section may be charged to the borrower if the determination:
    (1) Is made in connection with a making, increasing, extending, or 
renewing of the loan that is initiated by the borrower;
    (2) Reflects the Administrator of FEMA's revision or updating of 
floodplain areas or flood-risk zones;
    (3) Reflects the Administrator of FEMA's publication of a notice or 
compendium that:
    (i) Affects the area in which the building or mobile home securing 
the loan is located; or
    (ii) By determination of the Administrator of FEMA, may reasonably 
require a determination whether the building or mobile home securing the 
loan is located in a special flood hazard area; or
    (4) Results in the purchase of flood insurance coverage by the 
credit union or its servicer on behalf of the borrower under Sec. 760.7.
    (c) Purchaser or transferee fee. The determination fee authorized by 
paragraph (a) of this section may be charged to the purchaser or 
transferee of a loan in the case of the sale or transfer of the loan.



Sec. 760.9  Notice of special flood hazards and availability of Federal
disaster relief assistance.

    (a) Notice requirement. When a credit union makes, increases, 
extends, or renews a loan secured by a building or a mobile home located 
or to be located in a special flood hazard area, the credit union shall 
mail or deliver a written notice to the borrower and to the servicer in 
all cases whether or not flood insurance is available under the Act for 
the collateral securing the loan.
    (b) Contents of notice. The written notice must include the 
following information:
    (1) A warning, in a form approved by the Administrator of FEMA, that 
the building or the mobile home is or will be located in a special flood 
hazard area;
    (2) A description of the flood insurance purchase requirements set 
forth in section 102(b) of the Flood Disaster Protection Act of 1973, as 
amended (42 U.S.C. 4012a(b));
    (3) A statement, where applicable, that flood insurance coverage is 
available from private insurance companies that issue standard flood 
insurance policies on behalf of the NFIP or directly from the NFIP;
    (4) A statement that flood insurance that provides the same level of 
coverage as a standard flood insurance policy under the NFIP may also be 
available from a private insurance company that issues policies on 
behalf of the company;
    (5) A statement that the borrower is encouraged to compare the flood 
insurance coverage, deductibles, exclusions, conditions, and premiums 
associated with flood insurance policies issued on behalf of the NFIP 
and policies issued on behalf of private insurance companies and that 
the borrower should direct inquiries regarding the availability, cost, 
and comparisons of flood insurance coverage to an insurance agent; and
    (6) A statement whether Federal disaster relief assistance may be 
available in the event of damage to the building or mobile home caused 
by flooding in a Federally declared disaster.
    (c) Timing of notice. The credit union shall provide the notice 
required by paragraph (a) of this section to the borrower within a 
reasonable time before the completion of the transaction, and to the 
servicer as promptly as practicable after the credit union provides 
notice to the borrower and in any event no later than the time the 
credit union provides other similar notices to the servicer concerning 
hazard insurance and taxes. Notice to the servicer may be made 
electronically or may take the form of a copy of the notice to the 
borrower.
    (d) Record of receipt. The credit union shall retain a record of the 
receipt of the notices by the borrower and the

[[Page 1177]]

servicer for the period of time the credit union owns the loan.
    (e) Alternate method of notice. Instead of providing the notice to 
the borrower required by paragraph (a) of this section, a credit union 
may obtain satisfactory written assurance from a seller or lessor that, 
within a reasonable time before the completion of the sale or lease 
transaction, the seller or lessor has provided such notice to the 
purchaser or lessee. The credit union shall retain a record of the 
written assurance from the seller or lessor for the period of time the 
credit union owns the loan.
    (f) Use of sample form of notice. A credit union will be considered 
to be in compliance with the requirement for notice to the borrower of 
this section by providing written notice to the borrower containing the 
language presented in appendix A to this part within a reasonable time 
before the completion of the transaction. The notice presented in 
appendix A to this part satisfies the borrower notice requirements of 
the Act.

[80 FR 43259, July 21, 2015, as amended at 80 FR 43262, July 21, 2015]



Sec. 760.10  Notice of servicer's identity.

    (a) Notice requirement. When a credit union makes, increases, 
extends, renews, sells, or transfers a loan secured by a building or 
mobile home located or to be located in a special flood hazard area, the 
credit union shall notify the Administrator of FEMA (or the 
Administrator of FEMA's designee) in writing of the identity of the 
servicer of the loan. The Administrator of FEMA has designated the 
insurance provider to receive the credit union's notice of the 
servicer's identity. This notice may be provided electronically if 
electronic transmission is satisfactory to the Administrator of FEMA's 
designee.
    (b) Transfer of servicing rights. The credit union shall notify the 
Administrator of FEMA (or the Administrator of FEMA's designee) of any 
change in the servicer of a loan described in paragraph (a) of this 
section within 60 days after the effective date of the change. This 
notice may be provided electronically if electronic transmission is 
satisfactory to the Administrator or his or her designee. Upon any 
change in the servicing of a loan described in paragraph (a) of this 
section, the duty to provide notice under this paragraph (b) shall 
transfer to the transferee servicer.



  Sec. Appendix A to Part 760--Sample Form of Notice of Special Flood 
     Hazards and Availability of Federal Disaster Relief Assistance

    We are giving you this notice to inform you that:
    The building or mobile home securing the loan for which you have 
applied is or will be located in an area with special flood hazards.
    The area has been identified by the Administrator of the Federal 
Emergency Management Agency (FEMA) as a special flood hazard area using 
FEMA's Flood Insurance Rate Map or the Flood Hazard Boundary Map for the 
following community: ___. This area has a one percent (1%) chance of a 
flood equal to or exceeding the base flood elevation (a 100-year flood) 
in any given year. During the life of a 30-year mortgage loan, the risk 
of a 100-year flood in a special flood hazard area is 26 percent (26%).
    Federal law allows a lender and borrower jointly to request the 
Administrator of FEMA to review the determination of whether the 
property securing the loan is located in a special flood hazard area. If 
you would like to make such a request, please contact us for further 
information.
    __The community in which the property securing the loan is located 
participates in the National Flood Insurance Program (NFIP). Federal law 
will not allow us to make you the loan that you have applied for if you 
do not purchase flood insurance. The flood insurance must be maintained 
for the life of the loan. If you fail to purchase or renew flood 
insurance on the property, Federal law authorizes and requires us to 
purchase the flood insurance for you at your expense.
      At a minimum, flood insurance purchased must cover the 
lesser of:
    (1) The outstanding principal balance of the loan; or
    (2) the maximum amount of coverage allowed for the type of property 
under the NFIP.
    Flood insurance coverage under the NFIP is limited to the building 
or mobile home and any personal property that secures your loan and not 
the land itself.
      Federal disaster relief assistance (usually in the form of 
a low-interest loan) may be available for damages incurred in excess of 
your flood insurance if your community's participation in the NFIP is in 
accordance with NFIP requirements.

[[Page 1178]]

      Although you may not be required to maintain flood 
insurance on all structures, you may still wish to do so, and your 
mortgage lender may still require you to do so to protect the collateral 
securing the mortgage. If you choose not to maintain flood insurance on 
a structure and it floods, you are responsible for all flood losses 
relating to that structure.

            Availability of Private Flood Insurance Coverage

    Flood insurance coverage under the NFIP may be purchased through an 
insurance agent who will obtain the policy either directly through the 
NFIP or through an insurance company that participates in the NFIP. 
Flood insurance that provides the same level of coverage as a standard 
flood insurance policy under the NFIP may be available from private 
insurers that do not participate in the NFIP. You should compare the 
flood insurance coverage, deductibles, exclusions, conditions, and 
premiums associated with flood insurance policies issued on behalf of 
the NFIP and policies issued on behalf of private insurance companies 
and contact an insurance agent as to the availability, cost, and 
comparisons of flood insurance coverage.

                [Escrow Requirement for Residential Loans

    Federal law may require a lender or its servicer to escrow all 
premiums and fees for flood insurance that covers any residential 
building or mobile home securing a loan that is located in an area with 
special flood hazards. If your lender notifies you that an escrow 
account is required for your loan, then you must pay your flood 
insurance premiums and fees to the lender or its servicer with the same 
frequency as you make loan payments for the duration of your loan. These 
premiums and fees will be deposited in the escrow account, which will be 
used to pay the flood insurance provider.]
    __Flood insurance coverage under the NFIP is not available for the 
property securing the loan because the community in which the property 
is located does not participate in the NFIP. In addition, if the non-
participating community has been identified for at least one year as 
containing a special flood hazard area, properties located in the 
community will not be eligible for Federal disaster relief assistance in 
the event of a Federally declared flood disaster.

[80 FR 43262, July 21, 2015]



  Sec. Appendix B to Part 760--Sample Clause for Option to Escrow for 
                            Outstanding Loans

                          Escrow Option Clause

    You have the option to escrow all premiums and fees for the payment 
on your flood insurance policy that covers any residential building or 
mobile home that is located in an area with special flood hazards and 
that secures your loan. If you choose this option:
      Your payments will be deposited in an escrow account to be 
paid to the flood insurance provider.
      The escrow amount for flood insurance will be added to the 
regular mortgage payment that you make to your lender or its servicer.
      The payments you make into the escrow account will 
accumulate over time and the funds will be used to pay your flood 
insurance policy when your lender or servicer receives a notice from 
your flood insurance provider that the flood insurance premium is due.
    To choose this option, follow the instructions below. If you have 
any questions about the option, contact [Insert Name of Lender or 
Servicer] at [Insert Contact Information].
    [Insert Instructions for Selecting to Escrow]

[80 FR 43263, July 21, 2015]



PART 761_REGISTRATION OF RESIDENTIAL MORTGAGE LOAN ORIGINATORS--
Table of Contents



    Authority: 12 U.S.C. 1751 et seq. and 5101 et seq.

    Source: 78 FR 32545, May 31, 2013, unless otherwise noted.



Sec. 761.1  Cross reference.

    The rules formerly at 12 CFR part 761 have been republished by the 
Consumer Financial Protection Bureau at 12 CFR part 1007, ``S.A.F.E. 
Mortgage Licensing Act--Federal Registration of Residential Mortgage 
Loan Originators (Regulation G)''.

[[Page 1179]]



SUBCHAPTER B_REGULATIONS AFFECTING THE OPERATIONS OF THE NATIONAL CREDIT 
                          UNION ADMINISTRATION





PART 790_DESCRIPTION OF NCUA; REQUESTS FOR AGENCY ACTION--
Table of Contents



Sec.
790.1  Scope.
790.2  Central and field office organization.
790.3  Requests for action.

    Authority: 12 U.S.C. 1766, 1789, 1795f.

    Source: 58 FR 45431, Aug. 30, 1993, unless otherwise noted.



Sec. 790.1  Scope.

    This part contains a description of NCUA's organization and the 
procedures for public requests for action by the Board. Part 790 
pertains to the practices of the National Credit Union Administration 
(NCUA) only and does not apply to credit union operations.



Sec. 790.2  Central and field office organization.

    (a) General organization. NCUA is composed of the Board with a 
Central Office in Alexandria, Virginia, five Regional Offices, the Asset 
Management and Assistance Center, the Community Development Revolving 
Loan Program, and the NCUA Central Liquidity Facility (CLF).
    (b) Central Office. The Central Office address is NCUA, 1775 Duke 
St., Alexandria, Virginia 22314-3428.
    (1) The NCUA Board. NCUA is managed by its Board. The Board consists 
of three members appointed by the President, with the advice and consent 
of the Senate, for six-year terms. One Board member is designated by the 
President to be Chairman of the Board. The Chairman shall be the 
spokesman for the Board and shall represent the Board and the NCUA in 
its official relations with other branches of the government. A second 
member is designated by the Board to be Vice-Chairman. The Board is also 
responsible for management of the National Credit Union Share Insurance 
Fund (NCUSIF) and serves as the Board of Directors of the CLF.
    (2) Secretary of the Board. The Secretary of the Board is 
responsible for the secretarial functions of the Board. The Secretary's 
responsibilities include preparing agendas for meetings of the Board, 
preparing and maintaining the minutes for all official actions taken by 
the Board, and executing and maintaining all documents adopted by the 
Board or under its direction. The Secretary also serves as the Secretary 
of the CLF.
    (3) Asset Management and Assistance Center. The President of the 
Asset Management and Assistance Center (AMAC) is responsible for 
monitoring, evaluating, disposing, and/or managing major assets acquired 
by NCUA; responsible for managing involuntary liquidations for all 
federally insured credit unions placed into involuntary liquidation 
including the orderly processing of payments of share insurance, sale 
and/or collection of loan portfolios, liquidation of other assets and 
achieving other recoveries, payments to creditors, and distributions to 
any uninsured shareholders. The President, AMAC, serves as a primary 
consultant with regional offices on asset sales or purchases to 
restructure problem case credit unions, as technical expert to evaluate 
specific areas of credit union operations, and as instructor in training 
classes; responsible to prepare and negotiate bond claims; responsible 
to manage or assist in the management of conservatorships. The address 
of AMAC is 4807 Spicewood Springs Road, Suite 5100, Austin, Texas 78759-
8490.
    (4) The Office of the Chief Financial Officer. NCUA's Chief 
Financial Officer plans, organizes, implements, directs, and provides 
overall direction and leadership for:
    (i) Agency-wide strategic planning, budget formulation, and 
performance reporting;
    (ii) The agency's financial management system and financial 
reporting functions;
    (iii) Procurement and facilities management to include various 
administrative responsibilities such as property management, mail 
services, graphics

[[Page 1180]]

support, supply management, printing, and publications management; and
    (iv) Managing the operations of the Operating and Insurance Funds, 
including payroll, travel policies, revenue assessment, and dividend 
distributions.
    (5) Office of Examination and Insurance. The Director of the Office 
of Examination and Insurance: formulates standards and procedures for 
examination and supervision of the community of federally insured credit 
unions, and reports to the Board on the performance of the examination 
program; manages the risk to the NCUSIF, to include overseeing the 
NCUSIF Investment Committee, monitoring the adequacy of NCUSIF reserves, 
analyzing the reasons for NCUSIF losses, formulating policies and 
procedures regarding the supervision of financially troubled credit 
unions, and evaluating certain requests for special assistance pursuant 
to Section 208 of the Federal Credit Union Act and for certain proposed 
administrative actions regarding federally insured credit unions; serves 
as the Board expert on accounting principles and standards and on 
auditing standards; represents NCUA at meetings with the American 
Institute of Certified Public Accountants (AICPA), Federal Financial 
Institutions Examination Council (FFIEC) and General Accounting Office 
(GAO); and collects data and provides statistical reports. The Director 
is responsible for developing and conducting research in support of NCUA 
programs, and for preparing reports on research activities for the 
information and use of agency staff, credit union officials, state 
credit union supervisory authorities, and other governmental and private 
groups. The Director is also responsible for providing interest rate 
risk assessment, investment expertise and advice to the Board and agency 
staff and conducting research and development to assess risk areas of 
emerging products, delivery systems, infrastructure issues, and 
investments.
    (6) Office of the Executive Director. The Executive Director reports 
to the entire NCUA Board. The Executive Director translates NCUA Board 
policy decisions into workable programs, delegates responsibility for 
these programs to appropriate staff members, and coordinates the 
activities of the senior executive staff, which includes: The General 
Counsel; the Regional Directors; and the Office Directors for the Asset 
Management and Assistance Center, Chief Economist, Chief Financial 
Officer, Chief Information Officer, Consumer Protection, Continuity and 
Security Management, Examination and Insurance, Human Resources, 
Minority and Women Inclusion, National Examinations and Supervision, 
Public and Congressional Affairs and Small Credit Union Initiatives. 
Because of the nature of the attorney/client relationship between the 
Board and General Counsel, the General Counsel may be directed by the 
Board not to disclose discussions and/or assignments with anyone, 
including the Executive Director. The Executive Director is otherwise to 
be privy to all matters within senior executive staff's responsibility. 
The Office of the Executive Director also supervises the agency's 
ombudsman. The ombudsman investigates complaints and recommends 
solutions on regulatory issues that cannot be resolved at the regional 
level.
    (7) Office of General Counsel. The General Counsel reports to the 
entire NCUA Board. The General Counsel has overall responsibility for 
all legal matters affecting NCUA and for liaison with the Department of 
Justice. The General Counsel represents NCUA in all litigation and 
administrative hearings when such direct representation is permitted by 
law and, in other instances, assists the attorneys responsible for the 
conduct of such litigation. The General Counsel also provides NCUA with 
legal advice and opinions on all matters of law, and the public with 
interpretations of the Federal Credit Union Act, the NCUA Rules and 
Regulations, and other NCUA Board directives. The Office has 
responsibility for processing Freedom of Information Act requests and 
appeals. The General Counsel has responsibility for the drafting, 
reviewing, and publication of all items which appear in the Federal 
Register, including rules, regulations, and notices required by law and 
carrying out the Board's responsibilities under the Privacy Act.
    (8) The Office of Human Resources. The Office of Human Resources 
provides a

[[Page 1181]]

comprehensive program for the management of NCUA's human resources. This 
is done in support of NCUA's goal to recruit, develop, and retain a 
quality and representative workforce. The Director is responsible for 
managing NCUA's compensation program, for facilitating good organization 
design, for staffing positions through recruitment and merit promotion 
programs, and for maintaining an automated personnel records system. The 
Director is also responsible for the Board's performance management, 
incentive awards, employee assistance, and benefit programs. These 
programs are geared to foster healthy employee/management relations and 
to provide employees with good working conditions. The Director is also 
responsible for providing a comprehensive program for the training and 
development of NCUA's staff, including developing policy consistent with 
the Government Employees Training Act; providing training opportunities 
equitably so that all employees have the skills necessary to help meet 
the agency's mission; evaluating the agency's training and development 
efforts; and ensuring that the agencies training monies are spent in a 
cost efficient manner and in accordance with the law.
    (9) Office of the Chief Information Officer. The Chief Information 
Officer has responsibility for the management and administration of 
NCUA's information resources. This includes the development, 
maintenance, operation, and support of information systems which 
directly support the Agency's mission, maintaining and operating the 
Agency's information processing infrastructure, responding to requests 
for releasable Agency information, and insuring all related material 
security and integrity risks are recognized and controlled as much as 
possible. The Chief Information Officer is also responsible for carrying 
out the Board's responsibilities under the Paperwork Reduction Act and 
in directing NCUA responses to reporting requirements.
    (10) Office of the Inspector General. The Inspector General reports 
directly to the Board and provides semi-annual reports regarding audit 
and investigation activities to the Board and the Congress. The 
Inspector General is responsible for: (a) Conducting independent audits 
and investigations of all NCUA programs and functions to promote 
efficiency; (b) reviewing policies and procedures to evaluate controls 
to prevent fraud, waste, and abuse; and (c) reviewing existing and 
proposed legislation and regulations to evaluate their impact on the 
economic and efficient administration of the Agency.
    (11) Office of Public and Congressional Affairs. The Director of the 
Office of Public Congressional Affairs is responsible for maintaining 
NCUA's relationship with the public and the media; for liaison with the 
U.S. Congress, and with other Executive Branch agencies concerning 
legislative matters; and for the analysis and development of legislative 
proposals and public affairs programs.
    (12) Office of Small Credit Union Initiatives. This Office is 
responsible for coordinating NCUA policy as it relates to community 
development credit unions, including those credit unions designated as 
``low-income.'' The Office administers the Community Development 
Revolving Loan Program for Credit Unions (Program). This Program was 
funded from a congressional appropriation and serves as a loan and 
technical assistance vehicle for low-income credit unions. The Office 
Director serves as Program Chairman and authorizes loans and technical 
assistance to participating credit unions. The Program is governed by 
part 705 of subchapter A of this chapter.
    (13) Office of Minority and Women Inclusion. The Office of Minority 
and Women Inclusion (OMWI) was established pursuant to the Dodd-Frank 
Wall Street Reform and Consumer Protection Act of 2010. The Director of 
OMWI reports to the NCUA Chairman. OMWI has the responsibility for all 
NCUA matters relating to diversity in management, employment, and 
business activities. Specific duties of the office include developing 
and implementing standards for: Equal employment opportunity and the 
racial, ethnic, and gender diversity of the workforce and senior 
management of NCUA; increased participation of minority-owned and women-
owned businesses in the programs and contracts of NCUA, including 
standards for coordinating

[[Page 1182]]

technical assistance to such businesses; assessing the diversity 
policies and practices of credit unions regulated by NCUA; and 
preserving credit unions run by minorities and/or serving minorities. 
The Director of OMWI also serves as NCUA's Director of Equal Employment 
Opportunity.
    (14) NCUA Central Liquidity Facility (CLF). The CLF was created to 
improve general financial stability by providing funds to meet the 
liquidity needs of credit unions. It is a mixed-ownership government 
corporation under the Government Corporation Control Act (31 U.S.C. 9101 
et seq.). The CLF is managed by the President, under the general 
supervision of the NCUA Board which serves as the CLF Board of 
Directors. The Chairman of the NCUA Board serves as the Chairman of the 
CLF Board of Directors. The Secretary of the NCUA Board serves as the 
Secretary of the CLF Board of Directors. The NCUA Board shall appoint 
the CLF President and Vice President.
    (15) Office of Consumer Protection. (i) The Office of Consumer 
Financial Protection and Access contains four divisions:
    (A) The Division of Consumer Compliance Policy and Outreach;
    (B) The Division of Consumer Affairs;
    (C) The Division of Consumer Access; and
    (D) The Division of Consumer Access-South.
    (ii) The Office provides consumer services, including consumer 
education and complaint resolution; establishes, consolidates, and 
coordinates consumer financial protections within the agency; acts as 
the central liaison on consumer financial protection with other federal 
agencies; and nationalizes field of membership processing and chartering 
activities.
    (16) The Office of Chief Economist. The Office of Chief Economist is 
within the Office of the Executive Director and reports to the Deputy 
Executive Director. The office analyzes developments in key components 
of the economy and monitors trends and conditions in the domestic and 
international markets for money, credit, foreign exchange and 
commodities, and relates these trends to overall macroeconomic 
conditions and government monetary and fiscal policies for the purpose 
of evaluating effects on credit unions. The office provides advice and 
guidance to the NCUA Board, the Office of the Executive Director, and 
the Office of Capital Markets.
    (17) The Office of Continuity and Security Management. The Director 
of the Office of Continuity and Security Management is responsible for 
NCUA's emergency preparedness and for coordinating the response to 
natural disasters or national security events; for timely dissemination 
of information on cyber threats, terrorism, foreign criminal activity, 
and other national security threats to the agency or to the credit union 
sector; and for conducting risk assessments and managing executive 
branch programs to protect NCUA personnel and facilities, and to 
safeguard classified national security information.
    (c) Field Offices. NCUA's programs are conducted through Regional 
Offices and the Office of National Examinations and Supervision.
    (1) Regional Offices. (i) The NCUA has five Regional Offices:

------------------------------------------------------------------------
     Region No.          Area within region          Office address
------------------------------------------------------------------------
I...................  Connecticut, Maine,       9 Washington Square,
                       Massachusetts,            Washington Avenue
                       Michigan, New             Extension, Albany, NY
                       Hampshire, New York,      12205-5512.
                       Rhode Island, Vermont,
                       Wisconsin.
II..................  Delaware, District of     1900 Duke St., Suite
                       Columbia, Maryland, New   300, Alexandria, VA
                       Jersey, Ohio,             22314-3498.
                       Pennsylvania, Virginia,
                       West Virginia.
III.................  Alabama, Arkansas,        7000 Central Parkway,
                       Florida, Georgia,         Suite 1600, Atlanta, GA
                       Indiana, Kentucky,        30328-4598.
                       Louisiana, Mississippi,
                       North Carolina, Puerto
                       Rico, South Carolina,
                       Tennessee, Virgin
                       Islands.
IV..................  Colorado, Illinois,       4807 Spicewood Springs
                       Iowa, Kansas,             Road, Suite 5200,
                       Minnesota, Missouri,      Austin, TX 78759-8490.
                       Montana, Nebraska, New
                       Mexico, North Dakota,
                       Oklahoma, South Dakota,
                       Texas, Wyoming.
V...................  Alaska, Arizona,          1230 W. Washington
                       California, Guam,         Street, Suite 301,
                       Hawaii, Idaho, Nevada,    Tempe, AZ 85281.
                       Oregon, Utah,
                       Washington.
------------------------------------------------------------------------


[[Page 1183]]

    (ii) A Regional Director is in charge of each Regional Office. The 
Regional Director manages NCUA's programs in the Region assigned in 
accordance with established policies. A Regional Director's duties 
include: directing examination and supervision programs to promote and 
assure safety and soundness; assisting other offices in chartering and 
insurance issues; managing regional resources to meet program objectives 
in the most economical and practical manner; and maintaining good public 
relations with public, private, and governmental organizations, federal 
credit union officials, credit union organizations, and other groups 
which have an interest in credit union matters in the assigned region. 
The Regional Director maintains liaison and cooperation with other 
regional offices of federal departments and agencies, state agencies, 
city and county officials, and other governmental units that affect 
credit unions. The Regional Director is aided by an Associate Regional 
Director for Operations and Associate Regional Director for Programs. 
Staff working in the Regional Office report to the Associate Regional 
Director for Operations. Each region is divided into examiner districts, 
each assigned to a Supervisory Credit Union Examiner; groups of 
examiners are directed by a Supervisory Credit Union Examiner, each of 
whom in turn reports directly to the Associate Regional Director for 
Programs.
    (2) Office of National Examination and Supervision. Similar to a 
Regional Director, the Director of the Office of National Examinations 
and Supervision manages NCUA's program for corporate credit unions and 
oversees the activities of natural person credit unions with assets 
totaling $10 billion or more, in accordance with established policies. 
The Director's duties include directing chartering, insurance, 
examination, and supervision programs to promote and assure safety and 
soundness; managing office resources to meet program objectives in the 
most economical and practical manner; and maintaining good public 
relations with public, private and governmental organizations, credit 
union officials, credit union organizations, and other groups which have 
an interest in credit union matters in the assigned office. The Director 
maintains liaison and cooperation with other regional offices of federal 
departments and agencies, state agencies, city and county officials, and 
other governmental units that affect credit unions. The Director is 
aided by a Deputy Director. Staff working in the office report to the 
Director of Supervision, who in turn reports to the Deputy Director. 
Field staff is divided into examiner districts, each assigned to a 
National Field Supervisor; groups of examiners are directed by a 
National Field Supervisor, each of whom in turn reports directly to the 
Deputy Director.

[58 FR 45431, Aug. 30, 1993]

    Editorial Note: For Federal Register citations affecting Sec. 790.2, 
see the List of CFR Sections Affected, which appears in the Finding Aids 
section of the printed volume and at www.fdsys.gov.



Sec. 790.3  Requests for action.

    Except as otherwise provided by NCUA regulation, all applications, 
requests, and submittals for action by the NCUA shall be in writing and 
addressed to the appropriate office described in Sec. 790.2. This will 
usually be one of the Regional Offices. In instances where the 
appropriate office cannot be determined, requests should be sent to the 
Office of Public and Congressional Affairs.



PART 791_RULES OF NCUA BOARD PROCEDURE; PROMULGATION OF NCUA RULES 
AND REGULATIONS; PUBLIC OBSERVATION OF NCUA BOARD MEETINGS--
Table of Contents



                 Subpart A_Rules of NCUA Board Procedure

Sec.
791.1  Scope.
791.2  Number of votes required for board action.
791.3  Voting by proxy.
791.4  Methods of acting.
791.5  Scheduling of board meetings.
791.6  Subject matter of a meeting.

          Subpart B_Promulgation of NCUA Rules and Regulations

791.7  Scope.

[[Page 1184]]

791.8  Promulgation of NCUA rules and regulations.

 Subpart C_Public Observation of NCUA Board Meetings Under the Sunshine 
                                   Act

791.9  Scope.
791.10  Definitions.
791.11  Open meetings.
791.12  Exemptions.
791.13  Public announcement of meetings.
791.14  Regular procedure for closing meeting discussions or limiting 
          the disclosure of information.
791.15  Requests for open meeting.
791.16  General counsel certification.
791.17  Maintenance of meeting records.
791.18  Public availability of meeting records and other documents.

    Authority: 12 U.S.C. 1766, 1789 and 5 U.S.C. 552b.

    Source: 53 FR 29647, Aug. 8, 1988, unless otherwise noted.



                 Subpart A_Rules of NCUA Board Procedure



Sec. 791.1  Scope.

    The rules contained in this subpart are the rules of procedure 
governing how the Board conducts its business. These rules concern the 
Board's exercise of its authority to act on behalf of NCUA; the conduct, 
scheduling and subject matter of Board meetings; and the recording of 
Board action.



Sec. 791.2  Number of votes required for board action.

    The agreement of at least two of the three Board members is required 
for any action by the Board.



Sec. 791.3  Voting by proxy.

    Proxy voting shall not be allowed for any action by the Board.



Sec. 791.4  Methods of acting.

    (a) Board meetings--(1) Applicability of the Sunshine Act. The 
Government in the Sunshine Act (5 U.S.C. 552b, ``Sunshine Act'') 
requires that joint deliberations of the Board be held in accordance 
with its open meetings provisions (5 U.S.C. 552b (b) through (f)). 
(Subpart C of this part contains NCUA's regulations implementing the 
Sunshine Act.)
    (2) Presiding officer. The Chairman is the presiding officer, and in 
the Chairman's absence, the designated Vice Chairman shall preside. The 
presiding officer shall make procedural rulings. Any Board member may 
appeal a ruling made by the presiding officer. The appeal of a 
procedural ruling by the presiding officer shall be immediately 
considered by the Board, and a majority decision by the Board shall 
decide the procedural ruling.
    (b) Notation voting. Notation voting is the circulation of written 
memoranda and voting sheets to the office of each Board member 
simultaneously and the tabulation of responses.
    (1) Matters that may be decided by notation voting. Notation voting 
may be used only for administrative or time sensitive matters, for 
example, enforcement or interagency actions requiring prompt Board 
action matters.
    (2) Notation vote sheets. Notation vote sheets will be used to 
record the vote tally on a notation vote. The Secretary of the Board has 
administrative responsibility over notation voting, including the 
authority to establish deadlines for voting, receive notation vote 
sheets, count votes, and determine whether further action is required.
    (3) Veto of notation voting. In view of public policy for openness 
reflected in the Sunshine Act, each Board member is authorized to veto 
the use of notation voting for the consideration of any particular 
matter, and thus requires that the matter be placed on the agenda of the 
next regularly scheduled Board meeting that is held at least ten days 
after the date of the veto.
    (4) Disclosure of result. A record is to be maintained of Board 
transactions by use of the notation voting procedure. Public disclosure 
of this record is determined by the provisions of the Freedom of 
Information Act (5 U.S.C. 552).

[53 FR 29647, Aug. 8, 1988, as amended at 62 FR 64267, Dec. 5, 1997; 70 
FR 55517, Sept. 22, 2005; 75 FR 34623, June 18, 2010]



Sec. 791.5  Scheduling of board meetings.

    (a) Meeting calls--(1) Regular meetings. The Board will hold regular 
meetings each month unless there is no business or a quorum is not 
available. The Secretary of the Board will coordinate the dates for 
meetings.
    (2) Special meetings. The Chairman shall call special meetings 
either on

[[Page 1185]]

the Chairman's own initiative or within fourteen days of a request from 
two Board members that is accompanied by an NCUA B-1 form and a Board 
Action Memorandum that states the specific issue(s) or action(s) to be 
considered by the Board.
    (b) Notice of meetings--(1) Notifying the public. The Sunshine Act 
and subpart C set forth the procedures for notifying the public of Board 
meetings.
    (2) Notifying board members--(i) Special meetings. Except in cases 
of emergency, as determined by a majority of the Board, each Board 
member is entitled to receive notice of any special meeting at least 
twenty-four hours in advance of such meeting. The notice shall set forth 
the place, day, hour, and nature of business to be transacted at the 
meeting. In cases of emergency a record of the vote, including a 
statement explaining the decision that an emergency exists, will be 
maintained.
    (ii) Regular meetings. Each Board member is entitled to receive 
notice of the agenda and/or notice of any changes in the subject matter 
of such meetings concurrent with the public release of such notices 
under the Sunshine Act. Each Board member shall be entitled to at least 
twenty-four hours advance notice of the consideration of a particular 
subject matter, except in cases of emergency as determined by a majority 
of the Board. In cases of emergency, a record of the vote, including a 
statement explaining the decision that an emergency exists, will be 
maintained.

[53 FR 29647, Aug. 8, 1988, as amended at 62 FR 64267, Dec. 5, 1997; 63 
FR 5859, Feb. 5, 1998; 75 FR 34623, June 18, 2010]



Sec. 791.6  Subject matter of a meeting.

    (a) Agenda. The Chairman is responsible for the final order of each 
meeting agenda. Items shall be placed on the agenda by determination of 
the Chairman or, at the request of any Board Member, an item will be 
placed on the agenda of the next regularly scheduled meeting provided 
that the request is submitted at least ten days in advance of the next 
regularly scheduled meeting and is accompanied by an NCUA B-1 form and a 
Board Action Memorandum that states the specific issue(s) or action(s) 
to be considered by the Board.
    (b) Submission of recommended agenda items. Recommended agenda items 
may be submitted to the Secretary of the Board by Board members, the 
Executive Staff (which includes all Office Directors and President of 
the Central Liquidity Facility), and Regional Directors.

[61 FR 55208, Oct. 25, 1996, as amended at 62 FR 64267, Dec. 5, 1997; 63 
FR 5859, Feb. 5, 1998]



          Subpart B_Promulgation of NCUA Rules and Regulations



Sec. 791.7  Scope.

    The rules contained in this subpart B pertain to the promulgation of 
NCUA rules and regulations.



Sec. 791.8  Promulgation of NCUA rules and regulations.

    (a) NCUA's procedures for developing regulations are governed by the 
Administrative Procedure Act (5 U.S.C. 551 et seq.), the Regulatory 
Flexibility Act (5 U.S.C. 601 et seq.), and NCUA's policies for the 
promulgation of rules and regulations as set forth in its Interpretive 
Ruling and Policy Statement 87-2, as amended by Interpretive Ruling and 
Policy Statements 03-2 and 15-1.
    (b) Proposed rulemaking. Notices of proposed rulemaking are 
published in the Federal Register except as specified in paragraph (d) 
of this section or as otherwise provided by law. A notice of proposed 
rulemaking may also be identified as a ``request for comments'' or as a 
``proposed rule.'' The notice will include:
    (1) A statement of the nature of the rulemaking proceedings;
    (2) Reference to the authority under which the rule is proposed;
    (3) Either the terms or substance of the proposed rule or a 
description of the subjects and issues involved; and
    (4) A statement of the effect of the proposed rule on state-
chartered federally-insured credit unions.
    (c) Public participation. After publication of notice of proposed 
rulemaking, interested persons will be afforded the opportunity to 
participate in the making of the rule through the submission

[[Page 1186]]

of written data, views, or arguments, delivered within the time 
prescribed in the notice of proposed rulemaking, to the Secretary, NCUA 
Board, 1775 Duke Street, Alexandria, VA 22314-3428. Interested persons 
may also petition the Board for the issuance, amendment, or repeal of 
any rule by mailing such petition to the Secretary of the Board at the 
address given in this section.
    (d) Exceptions to notice. The following are not subject to the 
notice requirement contained in paragraph (b) of this section:
    (1) Matters relating to agency management or personnel or to public 
property, loans, grants, benefits, or contracts;
    (2) When persons subject to the proposed rule are named and either 
personally served or otherwise have actual notice thereof in accordance 
with law;
    (3) Interpretive rules, general statements of policy, or rules of 
agency organization, procedure or practice, unless notice or hearing is 
required by statute; and
    (4) If the Board, for good cause, finds (and incorporates the 
finding and a brief statement therefor in the rules issued) that notice 
and public procedure thereon are impracticable, unnecessary, or contrary 
to the public interest, unless notice or hearing is required by statute.
    (e) Effective dates. No substantive rule issued by NCUA shall be 
effective less than 30 days after its publication in the Federal 
Register, except that this requirement may not apply to:
    (1) Rules which grant or recognize an exemption or relieve a 
restriction;
    (2) Interpretive rules and statements of policy; or
    (3) Any substantive rule which the Board makes effective at an 
earlier date upon good cause found and published with such rule.
    (f) NCUA has an Office of Management and Budget (OMB) control number 
for rulemakings containing an information collection within the meaning 
of the Paperwork Reduction Act (44 U.S.C. 3501). A list of OMB control 
numbers is available to the public for review online at http://
www.RegInfo.gov.

[53 FR 29647, Aug. 8, 1988, as amended at 59 FR 36041, July 15, 1994; 68 
FR 31952, May 29, 2003; 75 FR 34623, June 18, 2010; 78 FR 4038, Jan. 18, 
2013; 80 FR 57517, Sept. 24, 2015]



 Subpart C_Public Observation of NCUA Board Meetings Under the Sunshine 
                                   Act



Sec. 791.9  Scope.

    This subpart contains regulations implementing subsections (b) 
through (f) of the ``Government in the Sunshine Act'' (5 U.S.C. 552b). 
The primary purpose of these regulations is to provide the public with 
the fullest access authorized by law to the deliberations and decisions 
of the Board, while protecting the rights of individuals and preserving 
the ability of the agency to carry out its responsibilities.



Sec. 791.10  Definitions.

    For the purpose of this subpart:
    (a) Agency means the National Credit Union Administration;
    (b) Subdivision of the Board means a group composed of two Board 
members authorized by the Board to act on behalf of the agency;
    (c) Meeting means any deliberations by two or more members of the 
Board or any subdivision of the Board that determine or result in the 
joint conduct or disposition of official agency business with the 
exception of: (1) Deliberations to determine whether a meeting or a 
portion thereof will be open or closed to public observation and whether 
information regarding closed meetings will be withheld from public 
disclosure; (2) deliberations to determine whether or when to schedule a 
meeting; and (3) infrequent dispositions of official agency business by 
sequential circulation of written recommendations to individual Board 
members (``notation voting procedure''), provided the votes of each 
Board member and the action taken are recorded for each matter and are 
publicly available, unless exempted from disclosure pursuant to 5 U.S.C. 
552 (the Freedom of Information Act);

[[Page 1187]]

    (d) Public observation means that a member or group of the public 
may listen to and observe any open meeting and may record in an 
unobtrusive manner any portion of that meeting by use of a camera or any 
other electronic device, but shall not participate in any meeting unless 
authorized by the Board;
    (e) Public announcement or publicly announce means making reasonable 
efforts under the particular circumstances to fully inform the public, 
especially those individuals who have expressed interest in the subject 
matters to be discussed or the decisions of the agency;
    (f) Sunshine Act means the open meeting provisions of the 
``Government in the Sunshine Act'' (5 U.S.C. 552b.)

[53 FR 29647, Aug. 8, 1988, as amended at 78 FR 32546, May 31, 2013]



Sec. 791.11  Open meetings.

    Except as provided in Sec. 791.12(a), any portion of any meeting of 
the Board shall be open to public observation. The Board, and any 
subdivision of the Board, shall jointly conduct official agency business 
only in accordance with this subpart.



Sec. 791.12  Exemptions.

    (a) Under the procedures specified in Sec. 791.14, the Board may 
close a meeting or any portion of a meeting from public observation or 
may withhold information pertaining to such meetings provided the Board 
has properly determined that the public interest does not require 
otherwise and that the meeting (or any portion thereof) or the 
disclosure of meeting information is likely to:
    (1) Disclose matters that are:
    (i) Specifically authorized under criteria established by an 
Executive Order to be kept secret in the interests of national defense 
or foreign policy; and
    (ii) In fact properly classified pursuant to such Executive Order;
    (2) Relate solely to internal personnel rules and practices;
    (3) Disclose matters specifically exempted from disclosure by 
statute (other than section 552 of title 5 of the United States Code, 
the Freedom of Information Act), provided that such statute:
    (i) Requires that the matters be withheld from the public in such a 
manner as to leave no discretion on the issue, or
    (ii) Establishes particular criteria for withholding or refers to 
particular types of matters to be withheld;
    (4) Disclose trade secrets and commercial or financial information 
obtained from a person and privileged or confidential;
    (5) Involve accusing any person of a crime, or formally censuring 
any person;
    (6) Disclose information of a personal nature where disclosure would 
constitute a clearly unwarranted invasion of personal privacy;
    (7) Disclose investigatory records compiled for enforcement 
purposes, or information which if written would be contained in such 
records, but only to the extent that the production of such records or 
information would:
    (i) Interfere with enforcement proceedings,
    (ii) Deprive a person of a right to a fair trial or an impartial 
adjudication,
    (iii) Constitute an unwarranted invasion of personal privacy,
    (iv) Disclose the identity of a confidential source and, in the case 
of a record compiled by a criminal law enforcement authority in the 
course of a criminal investigation, or by a Federal agency conducting a 
lawful national security intelligence investigation, confidential 
information furnished only by the confidential source,
    (v) Disclose investigative techniques and procedures, or
    (vi) Endanger the life or physical safety of law enforcement 
personnel;
    (8) Disclose information contained in or related to examination, 
operating, or condition reports prepared by, on behalf of, or for the 
use of Federal agencies responsible for the regulation or supervision of 
financial institutions;
    (9) Disclose information the premature disclosure of which would be 
likely to (i)(A) lead to significant speculation in currencies, 
securities, or commodities, or (B) significantly endanger the stability 
of any financial institution, or (ii) be likely to significantly 
frustrate implementation of a proposed action,

[[Page 1188]]


except that this paragraph (a)(9) shall not apply in any instance where 
the Board has already disclosed to the public the content or nature of 
its proposed action, or where the Board is required by law to make such 
disclosure on its own initiative prior to taking final action on such 
proposal; or
    (10) Specifically concern the issuance of a subpoena, participation 
in a civil action or proceeding, an action in a foreign court or 
international tribunal, or an arbitration, or the initiation, conduct or 
disposition of a particular case of formal agency adjudication pursuant 
to the procedures in section 554 of title 5 of the United States Code or 
otherwise involving a determination on the record after opportunity for 
a hearing.
    (b) Prior to closing a meeting whose discussions are likely to fall 
within the exemptions stated in paragraph (a) of this section, the Board 
will balance the public interest in observing the deliberations of an 
exemptible matter and the agency need for confidentiality of the 
exemptible matter. In weighing these interests, the Board is assisted by 
the General Counsel as provided in Sec. 791.16, by expressions of the 
public interest set forth in requests for open meetings as provided by 
Sec. 791.15(b), and by the brief staff analysis of public interest which 
will accompany each staff recommendation that an agenda item be 
considered in a closed meeting.

[53 FR 29647, Aug. 8, 1988, as amended at 75 FR 34623, June 18, 2010]



Sec. 791.13  Public announcement of meetings.

    (a) Except as otherwise provided in this section, the Board shall, 
for each meeting, make a public announcement, at least one week in 
advance of the meeting, of the time, place and subject matter of the 
meeting, whether it will be open or closed to public observation, and 
the name and telephone number of the Secretary of the Board or the 
person designated by the Board to respond to requests for information 
about the meeting.
    (b) Advance notice is required unless a majority of the members of 
the Board determine by a recorded vote that agency business requires 
that a meeting be called at an earlier date, in which case, the 
information to be announced in paragraph (a) of this section shall be 
publicly announced at the earliest practicable time.
    (c) A change, including a postponement or a cancellation, in the 
time or place of a meeting after a published announcement may be made 
only if announced at the earliest practicable time.
    (d) A change in or deletion of the subject matter of a meeting or 
any portion of a meeting or a redetermination to open or close a meeting 
or any portion of a meeting after a published announcement may be made 
only if:
    (1) A majority of the Board determines by recorded vote that agency 
business so requires and that no earlier announcement of the change was 
possible and
    (2) Public announcement of the change and of the vote of each member 
on such change shall be made at the earliest practicable time.
    (e) Each meeting announcement or amendment thereof shall be posted 
on the Public Notice Bulletin Board in the reception area of the agency 
headquarters and may be made available by other means deemed desirable 
by the Board. Immediately following each public announcement required by 
this section, the stated information shall be submitted to the Federal 
Register for publication.
    (f) No announcement shall contain information which is determined to 
be exempt from disclosure under Sec. 791.12(a).
    (g) The agency shall maintain a mailing list of names and addresses 
of all persons who wish to receive copies of agency announcements of 
meetings open to public observation and amendments to such 
announcements. Requests to be placed on the mailing list should be made 
by telephoning or by writing to the Secretary of the Board.



Sec. 791.14  Regular procedure for closing meeting discussions or
limiting the disclosure of information.

    (a) A decision to close any portion of a meeting and to withhold 
information about any portion of a meeting closed pursuant to 
Sec. 791.12(a) will be taken only when a majority of the entire

[[Page 1189]]

Board votes to take such action. In deciding whether to close a meeting 
or any portion of a meeting or to withhold information, the Board shall 
independently consider whether the public interest requires an open 
meeting. A separate vote of the Board will be taken and recorded for 
each portion of a meeting to be closed to public observation pursuant to 
Sec. 791.12(a) or to withhold information from the public pursuant to 
Sec. 791.12(a). A single vote may be taken and recorded with respect to 
a series of meetings, or any portions of meetings which are proposed to 
be closed to the public, or with respect to any information concerning 
the series of meetings, so long as each meeting in the series involves 
the same particular matters and is scheduled to be held no more than 
thirty days after the initial meeting in such series. No proxies shall 
be allowed.
    (b) Any person whose interests may be directly affected by any 
portion of a meeting for any of the reasons stated in Sec. 791.12(a) 
(5), (6) or (7) may request that the Board close such portion of the 
meeting. After receiving notice of a person's desire for any specified 
portion of a meeting to be closed, the Board, upon a request by one 
member, will decide by recorded vote whether to close the relevant 
portion or portions of the meeting. This procedure applies to requests 
received either prior or subsequent to the announcement of a decision to 
hold an open meeting.
    (c) Within one day after any vote is taken pursuant to paragraph (a) 
or (b) of this section, the Board shall make publicly available a 
written copy of the vote taken indicating the vote of each Board member. 
Except to the extent that such information is withheld and exempt from 
disclosure, for each meeting or any portion of a meeting closed to the 
public, the Board shall make publicly available within one day after the 
required vote, a written explanation of its action, together with a list 
of all persons expected to attend the closed meeting and their 
affiliation. The list of persons to attend need not include the names of 
individual staff, but shall state the offices of the agency expected to 
participate in the meeting discussions.



Sec. 791.15  Requests for open meeting.

    (a) Following any announcement that the Board intends to close a 
meeting or any portion of any meeting, any person may make a written 
request to the Secretary of the Board that the meeting or a portion of 
the meeting be open. The request shall be circulated to the members of 
the Board, and the Board, upon the request of one member, shall 
reconsider its action under Sec. 791.14 before the meeting or before 
discussion of the matter at the meeting. If the Board decides to open a 
portion of a meeting proposed to be closed, the Board shall publicly 
announce its decision in accordance with Sec. 791.13(e). If no request 
is received from a Board member to reconsider the decision to close a 
meeting or portion thereof prior to the meeting discussion, the Chairman 
of the Board shall certify that the Board did not receive a request to 
reconsider its decision to close the discussion of the matter.
    (b) The request to open a portion of a meeting shall be submitted to 
the Secretary of the Board in advance of the meeting in question. The 
request shall set forth the requestor's interest in the matter to be 
discussed and the reasons why the requestor believes that the public 
interest requires that the meeting or portions thereof be open to public 
observation.
    (c) The submission of a request to open a portion of a meeting shall 
not act to stay the effectiveness of Board action or to postpone or 
delay the meeting unless the Board decides otherwise.
    (d) The Secretary of the Board shall advise the requestor of the 
Board's consideration of the request to open a portion of the meeting as 
soon as practicable.



Sec. 791.16  General counsel certification.

    For each meeting or any portion of a meeting closed to public 
observation under Sec. 791.14, the General Counsel shall publicly 
certify, whether in his or her opinion, the meeting or portion thereof 
may be closed to public observation and shall state each relevant 
exemption provision of law. A copy of the certification, together with a 
statement from the presiding officer of the meeting setting forth the 
time and

[[Page 1190]]

place of the meeting and the persons present, shall be retained as a 
part of the permanent meeting records. As part of the certification, the 
General Counsel shall recommend to the Board whether the public interest 
requires that the meeting or portions thereof proposed to be closed to 
public observation be held in the open.



Sec. 791.17  Maintenance of meeting records.

    (a) Except in those circumstances which are beyond the control of 
the agency, the Board shall maintain a complete transcript or electronic 
recording adequate to record fully the proceedings of each meeting, or 
any portion thereof, closed to public observation. However, for meetings 
closed under Sec. 791.12(a) (8), (9)(i) or (10), the Board shall 
maintain either a transcript, a recording or a set of minutes. The Board 
shall maintain a complete electronic recording for each open meeting or 
any portion thereof. All records shall clearly identify each speaker.
    (b) A set of minutes shall fully and clearly describe all matters 
discussed and shall provide a full and accurate summary of any actions 
taken, and the reasons for taking such action. Minutes shall also 
include a description of each of the views expressed by each person in 
attendance on any item and the record of any roll call vote, reflecting 
the vote of each member. All documents considered in connection with any 
action shall be identified in the minutes.
    (c) The agency shall maintain a complete verbatim copy of the 
transcript, a complete copy of the minutes or a complete electronic 
recording of each meeting, or any portion of a meeting, closed to public 
observation, for at least two years after such meeting or for one year 
after the conclusion of any agency proceeding with respect to which the 
meeting or any portion was held, whichever occurs later. The agency 
shall maintain a complete electronic recording of each open meeting for 
at least three months after the meeting date. A complete set of minutes 
shall be maintained on a permanent basis for all meetings.



Sec. 791.18  Public availability of meeting records and other
documents.

    (a) The agency shall make promptly available to the public, in the 
Public Reference Room, the transcript, electronic recording, or minutes 
of any meeting, deleting any agenda item or any item of the testimony of 
a witness received at a closed meeting which the Board determined, 
pursuant to paragraph (c) of this section, was exempt from disclosure 
under Sec. 791.12(a). The exemption or exemptions relied upon for any 
deleted information shall be reflected on any record or recording.
    (b) Copies of any transcript, minutes or transcription of a 
recording, disclosing the identity of each speaker, shall be furnished 
to any person requesting such information in the form specified in 
paragraph (a) of this section. Copies shall be furnished at the actual 
cost of duplication or transcription unless waived by the Secretary of 
the Board.
    (c) Following each meeting or any portion of a meeting closed 
pursuant to Sec. 791.12(a), the General Counsel or his designee, after 
consultation with the Secretary of the Board, shall determine which, if 
any, portions of the meeting transcript, electronic recording or minutes 
not otherwise available under 5 U.S.C. 552a (the Privacy Act) contain 
information which should be withheld pursuant to Sec. 791.12(a). If, at 
a later time, the Board determines that there is no further 
justification for withholding any meeting record or other item of 
information from the public which has previously been withheld, then 
such information shall be made available to the public.
    (d) Except for information determined by the Board to be exempt from 
disclosure pursuant to paragraph (c) of this section, meeting records 
shall be promptly available to the public in the Public Reference Room. 
Meeting records include but are not limited to: The transcript, 
electronic recording or minutes of each meeting, as required by 
Sec. 791.17(a); the notice requirements of Secs. 791.13 and 791.14(c); 
and the General Counsel Certification along with the presiding officer's 
statement, as required by Sec. 791.16.

[[Page 1191]]

    (e) These provisions do not affect the procedures set forth in part 
792, subpart A, governing the inspection and copying of agency records, 
except that the exemptions set forth in Sec. 791.12(a) of this subpart 
and in 5 U.S.C. 552b(c) shall govern in the case of a request made 
pursuant to part 792, subpart A, to copy or inspect the meeting records 
described in this section. Any documents considered or mentioned at 
Board meetings may be obtained subject to the procedures set forth in 
part 792, subpart A.

[53 FR 29647, Aug. 8, 1988, as amended at 58 FR 17493, Apr. 5, 1993; 64 
FR 57365, Oct. 25, 1999]



PART 792_REQUESTS FOR INFORMATION UNDER THE FREEDOM OF INFORMATION
ACT AND PRIVACY ACT, AND BY SUBPOENA; SECURITY PROCEDURES FOR 
CLASSIFIED INFORMATION--Table of Contents



                Subpart A_The Freedom of Information Act

                             General Purpose

Sec.
792.01  What is the purpose of this subpart?

                       Records Publicly Available

792.02  What records does NCUA make available to the public for 
          inspection and copying?
792.03  How will I know which records to request?
792.04  How can I obtain these records?
792.05  What is the significance of records made available and indexed?

                     Records Available Upon Request

792.06  Can I obtain other records?
792.07  Where do I send my request?
792.08  What must I include in my request?
792.09  What if my request does not meet the requirements of this 
          subpart?
792.10  What will NCUA do with my request?
792.11  What kind of records are exempt from public disclosure?
792.12  How will I know what records NCUA has determined to be exempt?
792.13  Can I get the records in different forms or formats?
792.14  Who is responsible for responding to my request?
792.15  How long will it take to process my request?
792.16  What unusual circumstances can delay NCUA's response?
792.17  What can I do if the time limit passes and I still have not 
          received a response?

                          Expedited Processing

792.18  What if my request is urgent and I cannot wait for the records?

                                  Fees

792.19  How does NCUA calculate the fees for processing my request?
792.20  What are the charges for each fee category?
792.21  Will NCUA provide a fee estimate?
792.22  What will NCUA charge for other services?
792.23  Can I avoid charges by sending multiple, small requests?
792.24  Can NCUA charge me interest if I fail to pay my bill?
792.25  Will NCUA charge me if the records are not found or are 
          determined to be exempt?
792.26  Will I be asked to pay fees in advance?

                         Fee Waiver or Reduction

792.27  Can fees be reduced or waived?

                                 Appeals

792.28  What if I am not satisfied with the response I receive?

                            Submitter Notice

792.29  If I send NCUA confidential commercial information, can it be 
          disclosed under FOIA?

                        Release of Exempt Records

792.30  Is there a prohibition against disclosure of exempt records?
792.31  Can exempt records be disclosed to credit unions, financial 
          institutions and state or federal agencies?
792.32  Can exempt records be disclosed to investigatory agencies?

Subpart B [Reserved]

    Subpart C_Production of Nonpublic Records and Testimony of NCUA 
                     Employees in Legal Proceedings

792.40  What does this subpart prohibit?
792.41  When does this subpart apply?
792.42  How do I request nonpublic records or testimony?
792.43  What must my written request contain?
792.44  When should I make a request?
792.45  Where do I send my request?
792.46  What will the NCUA do with my request?
792.47  If my request is granted, what fees apply?

[[Page 1192]]

792.48  If my request is granted, what restrictions apply?
792.49  Definitions.

        Subpart D_Security Procedures for Classified Information

792.50  Program.
792.51  Procedures.

                        Subpart E_The Privacy Act

792.52  Scope.
792.53  Definitions.
792.54  Procedures for requests pertaining to individual records in a 
          system of records.
792.55  Times, places, and requirements for identification of 
          individuals making requests and identification of records 
          requested.
792.56  Notice of existence of records, access decisions and disclosure 
          of requested information; time limits.
792.57  Special procedures: Information furnished by other agencies; 
          medical records.
792.58  Requests for correction or amendment to a record; administrative 
          review of requests.
792.59  Appeal of initial determination.
792.60  Disclosure of record to person other than the individual to whom 
          it pertains.
792.61  Accounting for disclosures.
792.62  Requests for accounting for disclosures.
792.63  Collection of information from individuals; information forms.
792.64  Contracting for the operation of a system of records.
792.65  Fees.
792.66  Exemptions.
792.67  Security of systems of records.
792.68  Use and collection of Social Security numbers.
792.69  Training and employee standards of conduct with regard to 
          privacy.

    Authority: 5 U.S.C. 301, 552, 552a, 552b; 12 U.S.C. 1752a(d), 1766, 
1789, 1795f; E.O. 12600, 52 FR 23781, 3 CFR, 1987 Comp., p.235; E.O. 
13526, 75 FR 707, 2009 Comp. p.298.

    Source: 54 FR 18476, May 1, 1989, unless otherwise noted.



                Subpart A_The Freedom of Information Act

    Source: 63 FR 14338, Mar. 25, 1998, unless otherwise noted.

                             General Purpose



Sec. 792.01  What is the purpose of this subpart?

    This subpart describes the procedures you must follow to obtain 
records from NCUA under the Freedom of Information Act (FOIA), (5 U.S.C. 
552).

                       Records Publicly Available



Sec. 792.02  What records does NCUA make available to the public for
inspection and copying?

    Except for records that are exempt from public disclosure under FOIA 
as amended (5 U.S.C. 552) or are promptly published and copies are 
available for purchase, NCUA routinely makes the following five types of 
records available for you to inspect and copy and in an electronic 
format:
    (a) Final opinions, including concurring and dissenting opinions, 
and orders made in the adjudication of cases;
    (b) Statements of policy and interpretations which have been adopted 
by the agency but not published in the Federal Register;
    (c) Administrative staff manuals and instructions to staff that 
affect a member of the public;
    (d) Copies of all records, regardless of form or format, which have 
been released after March 31, 1997, in response to a FOIA request and 
which, because of the nature of their subject matter, NCUA determines 
have been or are likely to become the subject of subsequent requests; or 
records that have been requested three (3) or more times; and
    (e) Indices of the documents referred to in this paragraph.

[63 FR 14338, Mar. 25, 1998, as amended at 81 FR 93794, Dec. 22, 2016]



Sec. 792.03  How will I know which records to request?

    NCUA maintains current indices providing identifying information for 
the public for any matter referred to in Sec. 792.02, issued, adopted, 
or promulgated after July 4, 1967. The listing of material in an index 
is for the convenience of possible users and does not constitute a 
determination that all of the items listed will be disclosed. NCUA has 
determined that publication of the

[[Page 1193]]

indices is unnecessary and impractical. You may obtain copies of indices 
by making a request to the NCUA, Office of General Counsel, 1775 Duke 
Street, Alexandria, VA 22314-2387, Attn: FOIA Officer or as indicated on 
the NCUA Web site at www.ncua.gov. The indices are available for public 
inspection and copying, provided at their duplication cost, and in an 
electronic format. The indices are:
    (a) NCUA Publications List: Manuals relating to general and 
technical information, booklets published by NCUA, and the Credit Union 
Directory. The NCUA Publications list is available on the NCUA web site.
    (b) Directives Control Index: A list of statements of policy, NCUA 
Instructions, Bulletins, Letters to Credit Unions, and certain internal 
manuals.
    (c) Popular FOIA Index: Records released in response to a FOIA 
request, that NCUA determines are likely to be the subject of subsequent 
requests because of the nature of their subject matter, or records that 
have been requested three (3) or more times. The Popular FOIA Index is 
available on the NCUA Web site.

[63 FR 14338, Mar. 25, 1998, as amended at 73 FR 56937, Oct. 1, 2008; 81 
FR 93794, Dec. 22, 2016]



Sec. 792.04  How can I obtain these records?

    You may obtain these types of records or information in the 
following ways:
    (a) You may obtain copies of the records referenced in Sec. 792.02 
by obtaining the index referred to in Sec. 792.03 and following the 
ordering instructions it contains, or by making a written request to 
NCUA, Office of General Counsel, 1775 Duke Street, Alexandria, Virginia 
22314-3428, Attn: FOIA Officer or as indicated on the NCUA Web site.
    (b) If they were created by NCUA on or after November 1, 1996, 
records referenced in Sec. 792.02 are available on the NCUA web site, 
found at http://www.ncua.gov.

[63 FR 14338, Mar. 25, 1998, as amended at 73 FR 56937, Oct. 1, 2008]



Sec. 792.05  What is the significance of records made available
and indexed?

    The records referred to in Sec. 792.02 may be relied on, used, or 
cited as precedent by NCUA against a party, provided:
    (a) The materials have been indexed and either made available or 
published; or
    (b) The party has actual and timely notice of the materials' 
contents.

                     Records Available Upon Request



Sec. 792.06  Can I obtain other records?

    Except with respect to records routinely made available under 
Sec. 792.02 or published in the Federal Register, or to the extent that 
records are exempt under the FOIA, if you make a request for records in 
accordance with this subpart, NCUA will make such records available to 
you, including records maintained in electronic format, as long as you 
agree to pay the actual, direct costs.



Sec. 792.07  Where do I send my request?

    (a) You must send your written request to one of NCUA's Information 
Centers. The Central Office and Office of Inspector General are 
designated as Information Centers for the NCUA. The Freedom of 
Information Officer of the Office of General Counsel is responsible for 
the operation of the Information Center maintained at the Central 
Office. The Inspector General is responsible for the operation of the 
Inspector General Information Center.
    (b) If you are seeking any NCUA record, other than those maintained 
by the Office of Inspector General, you should send your request to 
NCUA, Office of the General Counsel, 1775 Duke Street, Alexandria, 
Virginia 22314-3428, Attn: FOIA Officer or as indicated on the NCUA Web 
site at http://www.ncua.gov.
    (c) If you are seeking a record you think may be maintained by the 
NCUA Office of Inspector General, then you should send your request to 
the Inspector General, NCUA, 1775 Duke Street, Alexandria, Virginia 
22314-3428.

[68 FR 61737, Oct. 30, 2003; 73 FR 56937, Oct. 1, 2008]

[[Page 1194]]



Sec. 792.08  What must I include in my request?

    Until an Information Center receives your FOIA request, it is not 
obligated to search for responsive records, meet time deadlines, or 
release any records. A request will not be considered received if it 
does not include all of the items in paragraphs (a) through (c) of this 
section.
    (a) Your request must be in writing and include the words ``FOIA 
REQUEST'' on both the envelope and request letter. The request letter 
must also include your name, address and a telephone number where you 
can be reached during normal business hours. If you would like us to 
respond to your FOIA request by electronic mail (e-mail), you should 
include your e-mail address.
    (b) A reasonable description of the records you seek. A reasonable 
description is one that enables an NCUA employee, who is familiar with 
the subject area of the request, to locate the record with a reasonable 
amount of effort.
    (c) A statement agreeing to pay all applicable fees or to pay fees 
up to a certain maximum amount, or requesting a fee reduction or waiver 
in accordance with Sec. 792.27. If the actual fees are expected to 
exceed the maximum amount you indicate in your request, NCUA will 
contact you to see if you are willing to pay the estimated fees. If you 
do not want to pay the estimated fees, your request will be closed and 
no bill will be sent.
    (d) If other than paper copy, you must identify the form and format 
of responsive information you are requesting.

[63 FR 14338, Mar. 25, 1998, as amended at 68 FR 61737, Oct. 30, 2003; 
73 FR 56937, Oct. 1, 2008]



Sec. 792.09  What if my request does not meet the requirements of this
subpart?

    NCUA need not accept or process your request if it does not comply 
with the requirements of this subpart. NCUA may return such a request to 
you with an explanation of the deficiency. You may then submit a 
corrected request, which will be treated as a new request.



Sec. 792.10  What will NCUA do with my request?

    (a) On receipt of any request, the Information Center assigns it to 
the appropriate processing schedule, pursuant to paragraph (b) of this 
section. The date of receipt for any request, including one that is 
addressed incorrectly or is forwarded to NCUA by another agency, is the 
earlier of the date the appropriate Information Center actually receives 
the request or 10 working days after either of NCUA's Information 
Centers receives the request.
    (b) NCUA has a multi-track processing system. Requests for records 
that are readily identifiable by the Information Center and have already 
been cleared for public release may qualify for fast track processing. 
Requests that meet the requirements of Sec. 792.18 will be processed on 
the expedited track. All other requests will be handled under normal 
processing procedures in the order they were received.
    (c) The Information Center will make the determination whether a 
request qualifies for fast track processing or expedited track 
processing. You may contact the Information Center to learn to which 
track your request has been assigned. If your request has not qualified 
for fast track processing, you will have an opportunity to limit the 
scope of material requested to qualify for fast track processing. 
Limitations of requests must be in writing. If your request for 
expedited processing is not granted, you will be advised of your right 
to appeal.
    (d) The Information Center will normally process requests in the 
order they are received in the separate processing tracks. However, in 
NCUA's discretion, a particular request may be processed out of turn.
    (e) Upon a determination by the appropriate Information Center to 
comply with your initial request for records, the records will be made 
promptly available to you. NCUA will also advise the requester of the 
right to seek assistance from the FOIA Public Liaison. If we notify you 
of a denial of your request, we will include the reason for the denial. 
NCUA will also advise the requester of the right to utilize dispute 
resolution services offered

[[Page 1195]]

by the FOIA Public Liaison and the Office of Government Information 
Services.
    (f) The Information Center will search for records responsive to 
your request and will generally include all records in existence at the 
time the search begins. If we use a different search cut-off date, we 
will inform you of that date.

[63 FR 14338, Mar. 25, 1998, as amended at 68 FR 61737, Oct. 30, 2003; 
73 FR 30478, May 28, 2008; 73 FR 56937, Oct. 1, 2008; 81 FR 93794, Dec. 
22, 2016]



Sec. 792.11  What kind of records are exempt from public disclosure?

    (a) All records of NCUA or any officer, employee, or agent thereof, 
are confidential, privileged and exempt from disclosure, except as 
otherwise provided in this subpart, if they are:
    (1) Records specifically authorized under criteria established by an 
Executive Order to be kept secret in the interest of national defense or 
foreign policy and are in fact properly classified pursuant to an 
Executive Order.
    (2) Records related solely to NCUA internal personnel rules and 
practices. This exemption applies to internal rules or instructions 
which must be kept confidential in order to assure effective performance 
of the functions and activities for which NCUA is responsible and which 
do not materially affect members of the public. This exemption also 
applies to manuals and instructions to the extent that release of the 
information would permit circumvention of laws or regulations.
    (3) Specifically exempted from disclosure by statute, where the 
statute either makes nondisclosure mandatory or establishes particular 
criteria for withholding information.
    (4) Records which contain trade secrets and commercial or financial 
information which relate to the business, personal or financial affairs 
of any person or organization, are furnished to NCUA, and are 
confidential or privileged. This exemption includes, but is not limited 
to, various types of confidential sales and cost statistics, trade 
secrets, and names of key customers and personnel. Assurances of 
confidentiality given by staff are not binding on NCUA.
    (5) Inter-agency or intra-agency memoranda or letters which would 
not be available by law to a private party in litigation with NCUA. This 
exemption preserves the existing freedom of NCUA officials and employees 
to engage in full and frank written or taped communications with each 
other and with officials and employees of other agencies. It includes, 
but is not limited to, inter-agency and intra-agency reports, memoranda, 
letters, correspondence, work papers, and minutes of meetings, as well 
as staff papers prepared for use within NCUA or in concert with other 
governmental agencies. In applying this exemption, the NCUA will not 
withhold records based on the deliberative process privilege if the 
records were created 25 years or more before the date on which the 
records were requested.
    (6) Personnel, medical, and similar files (including financial 
files) pertaining to another person, the disclosure of which would 
constitute a clearly unwarranted invasion of personal privacy without 
the subject person's written consent or proof of death. Written consent 
consists of a written statement by the subject person, authorizing the 
release of the information to you, and including either the subject 
person's notarized signature or a declaration made under penalty of 
perjury that the statement is true and correct. Proof of death consists 
of evidence that the subject of your request is deceased--such as a 
death certificate, a newspaper obituary, or some comparable proof of 
death. Files exempt from disclosure include, but are not limited to:
    (i) The personnel records of the NCUA;
    (ii) The personnel records voluntarily submitted by private parties 
in response to NCUA's requests for proposals; and
    (iii) Files containing reports, records or other material pertaining 
to individual cases in which disciplinary or other administrative action 
has been or may be taken.
    (7) Records or information compiled for law enforcement purposes, 
but only to the extent that the production of such law enforcement 
records or information:

[[Page 1196]]

    (i) Could reasonably be expected to interfere with enforcement 
proceedings;
    (ii) Would deprive a person of a right to a fair trial or an 
impartial adjudication;
    (iii) Could reasonably be expected to constitute an unwarranted 
invasion of personal privacy;
    (iv) Could reasonably be expected to disclose the identity of a 
confidential source, including a state, local, or foreign agency or 
authority or any private institution which furnished information on a 
confidential basis, and, in the case of a record or information compiled 
by a criminal law enforcement authority in the course of a criminal 
investigation on or by an agency conducting a lawful national security 
intelligence investigation, information furnished by the confidential 
source;
    (v) Would disclose techniques and procedures for law enforcement 
investigation or prosecutions, or would disclose guidelines for law 
enforcement investigations or prosecutions if such disclosure could 
reasonably be expected to risk circumvention of the law; or
    (vi) Could reasonably be expected to endanger the life or physical 
safety of any individual. This includes, but is not limited to, 
information relating to enforcement proceedings upon which NCUA has 
acted or will act in the future.
    (8) Contained in or related to examination, operating or condition 
reports prepared by, or on behalf of, or for the use of NCUA or any 
agency responsible for the regulation or supervision of financial 
institutions. This includes all information, whether in formal or 
informal report form, the disclosure of which would harm the financial 
security of credit unions or would interfere with the relationship 
between NCUA and credit unions.
    (b) We will provide any reasonably segregable portion of a requested 
record after deleting those portions that are exempt from disclosure 
under this section.

[63 FR 14338, Mar. 25, 1998, as amended at 73 FR 56937, Oct. 1, 2008; 81 
FR 93794, Dec. 22, 2016]



Sec. 792.12  How will I know what records NCUA has determined to 
be exempt?

    As long as it is technically feasible and does not threaten an 
interest protected by the FOIA, we will:
    (a) Mark the place where we redacted information from documents 
released to you and note the exemption that protects the information 
from public disclosure; or
    (b) Make reasonable efforts to include with our response to you an 
estimate of the volume of information withheld.



Sec. 792.13  Can I get the records in different forms or formats?

    NCUA will provide a copy of the record in any form or format 
requested, such as computer disk, if the record is readily reproducible 
by us in that form or format, but we will not provide more than one copy 
of any record.



Sec. 792.14  Who is responsible for responding to my request?

    The Freedom of Information Officer or designee is responsible for 
making the initial determination whether to grant or deny a request for 
information submitted to the Central Office Information Center. The 
Inspector General or designee is responsible for making the initial 
determination whether to grant or deny a request for information 
submitted to the Inspector General Information Center. This official may 
refer a request to an NCUA employee who is familiar with the subject 
area of the request. Other NCUA staff members may aid the official by 
providing information, advice, recommending a decision, or implementing 
a decision, but no NCUA employee other than an authorized official may 
make the initial determination. Referral of a request by the official to 
an employee will not affect the time limitation imposed in Sec. 792.15 
unless the request involves an unusual circumstance as provided in 
Sec. 792.16.

[63 FR 14338, Mar. 25, 1998, as amended at 68 FR 61737, Oct. 30, 2003]

[[Page 1197]]



Sec. 792.15  How long will it take to process my request?

    NCUA will respond to requests within 20 working days, except:
    (a)(1) Where the running of such time is suspended while:
    (i) The Information Center awaits additional information from the 
requester. A suspension of time for this purpose may occur only once 
during the processing period; and
    (ii) The Information Center clarifies with the requester issues 
regarding the payment of fees pursuant to Sec. 792.26.
    (2) The Information Center's receipt of the requester's response to 
the request for additional information or clarification ends the tolling 
period;
    (b) In unusual circumstances, as defined in 5 U.S.C. 552(a)(6)(B) 
and Sec. 792.16, the time limit may be extended for:
    (1) An additional 10 working days as provided by written notice to 
you, stating the reasons for the extension and the date on which a 
determination will be sent; or
    (2) Such alternative time period as mutually agreed by you and the 
Information Office, when NCUA notifies you that the request cannot be 
processed in the specified time limit. In such cases, NCUA will make 
available its FOIA Public Liaison and notify the requester of the right 
to seek dispute resolution services from the Office of Government 
Information Services.

[63 FR 14338, Mar. 25, 1998, as amended at 73 FR 56938, Oct. 1, 2008; 81 
FR 93794, Dec. 22, 2016]



Sec. 792.16  What unusual circumstances can delay NCUA's response?

    (a) In unusual circumstances, the time limits for responding to your 
request (or your appeal) may be extended by NCUA. If NCUA extends the 
time, it will provide you with written notice setting forth the reasons 
for such extension and the date on which a determination is expected to 
be dispatched. Our notice will not specify a date that would result in 
an extension for more than 10 working days, except as set forth in 
paragraph (c) of this section. The unusual circumstances that can delay 
NCUA's response to your request are:
    (1) The need to search for, and collect the requested records from 
field facilities or other establishments that are separate from the 
office processing the request;
    (2) The need to search for, collect, and appropriately examine a 
voluminous amount of separate and distinct records which are demanded in 
a single request; or
    (3) The need for consultation, which will be conducted with all 
practicable speed, with another agency having substantial interest in 
the determination of the request or among two or more components of NCUA 
having a substantial interest in the subject matter.
    (b) If you, or you and a group of others acting in concert, submit 
multiple requests that NCUA believes actually constitute a single 
request, which would otherwise satisfy the unusual circumstances 
criteria specified in this section, and the requests involve related 
matters, then NCUA may aggregate those requests and the provisions of 
Sec. 792.15(b) will apply.
    (c) If NCUA sends you an extension notice, it will also advise you 
that you can either limit the scope of your request so that it can be 
processed within the statutory time limit or agree to an alternative 
time frame for processing your request. In such cases, NCUA will make 
available its FOIA Public Liaison and notify the requester of the right 
to seek dispute resolution services from the Office of Government 
Information Services.

[63 FR 14338, Mar. 25, 1998, as amended at 73 FR 30478, May 28, 2008; 81 
FR 93794, Dec. 22, 2016]



Sec. 792.17  What can I do if the time limit passes and I still have
not received a response?

    (a) If NCUA does not comply with the time limits under Sec. 792.15, 
or as extended under Sec. 792.16, you do not have to pay search fees; 
requesters qualifying for free search fees will not have to pay 
duplication fees. However, if NCUA has extended the time limits under 
Sec. 792.16 and more than 5,000 pages are necessary to respond to the 
request, NCUA may charge you search fees (or for requesters qualifying 
for free search fees, duplication fees), if NCUA has discussed with you 
via written mail, electronic mail, or telephone

[[Page 1198]]

(or made not less than 3 good-faith attempts to do so) how you could 
effectively limit the scope of the request.
    (b) You can seek assistance from the FOIA Public Liaison or dispute 
resolution services from the Office of Government Information Services. 
You also can file suit against NCUA because you will be deemed to have 
exhausted your administrative remedies if NCUA fails to comply with the 
time limit provisions of this subpart. If NCUA can show that exceptional 
circumstances exist and that it is exercising due diligence in 
responding to your request, the court may retain jurisdiction and allow 
NCUA to complete its review of the records. You may have to pay search 
or duplication fees if a court has determined that exceptional 
circumstances exist and has extended the time limits for NCUA's response 
by a court order. In determining whether exceptional circumstances 
exist, the court may consider your refusal to modify the scope of your 
request or arrange an alternative time frame for processing after being 
given the opportunity to do so by NCUA, when it notifies you of the 
existence of unusual circumstances as set forth in Sec. 792.16.

[81 FR 93795, Dec. 22, 2016]

                          Expedited Processing



Sec. 792.18  What if my request is urgent and I cannot wait for the 
records?

    You may request expedited processing of your request if you can show 
a compelling need for the records. In cases where your request for 
expedited processing is granted or if NCUA has determined to expedite 
the response, it will be processed as soon as practicable.
    (a) To demonstrate a compelling need for expedited processing, you 
must provide a certified statement. The statement, certified by you to 
be true and correct to the best of your knowledge and belief, must 
demonstrate that:
    (1) The failure to obtain the records on an expedited basis could 
reasonably be expected to pose an imminent threat to the life or 
physical safety of an individual; or
    (2) The requester is a representative of the news media, as defined 
in Sec. 792.20, and there is urgency to inform the public concerning 
actual or alleged NCUA activity.
    (b) In response to a request for expedited processing, the 
Information Center will notify you of the determination within ten 
working days of receipt of the request. If the Information Center denies 
your request for expedited processing, you may file an appeal pursuant 
to the procedures set forth in Sec. 792.28, and NCUA will expeditiously 
respond to the appeal.
    (c) The Information Center will normally process requests in the 
order they are received in the separate processing tracks. However, in 
NCUA's discretion, a particular request may be processed out of turn.

[63 FR 14338, Mar. 25, 1998, as amended at 73 FR 56938, Oct. 1, 2008]

                                  Fees



Sec. 792.19  How does NCUA calculate the fees for processing my
request?

    We will charge you our allowable direct costs, unless they are less 
than the cost of billing you. Direct costs means those expenditures that 
NCUA actually incurs in searching for, duplicating and reviewing 
documents to respond to a FOIA request. Search means all time spent 
looking for material that is responsive to a request, including page-by-
page or line-by-line identification of material within documents. 
Searches may be done manually or by computer. Search does not include 
modification of an existing program or system that would significantly 
interfere with the operation of an automated information system. Review 
means examining documents to determine whether any portion should be 
withheld and preparing documents for disclosure. Fees are subject to 
change as costs increase. The current rate schedule is available on our 
web site at http://www.ncua.gov. We may contract with the private sector 
to locate, reproduce or disseminate records. NCUA will not contract out 
responsibilities that FOIA requires it to discharge, such as determining 
the applicability of an exemption, or determining whether to waive or 
reduce fees. The following labor and duplication rate calculations 
apply:

[[Page 1199]]

    (a) NCUA will charge fees at the following rates for manual searches 
for and review of records:
    (1) If search/review is done by clerical staff, the hourly rate for 
CU-5, plus 16% of that rate to cover benefits;
    (2) If search/review is done by professional staff, the hourly rate 
for CU-13, plus 16% of that rate to cover benefits.
    (b) NCUA will charge fees at the hourly rate for CU-13, plus 16% of 
that rate to cover benefits, plus the hourly cost of operating the 
computer for computer searches for records.
    (c) NCUA will charge the following duplication fees:
    (1) The per-page fee for paper copy reproduction of a document is 
$.10;
    (2) The fee for documents generated by computer is the hourly fee 
for the computer operator, plus the cost of materials (computer paper, 
tapes, labels, etc.);
    (3) If any other method of duplication is used, NCUA will charge the 
actual direct cost of duplication.

[63 FR 14338, Mar. 25, 1998, as amended at 73 FR 56938, Oct. 1, 2008]



Sec. 792.20  What are the charges for each fee category?

    The fee category definitions are:
    (a) Commercial use request means a request from or on behalf of one 
who seeks information for a use or purpose that furthers the commercial, 
trade, or profit interests of the requester or the person on whose 
behalf the request is made.
    (b) Educational institution means a preschool, an elementary or 
secondary school, an institution of undergraduate higher education, an 
institution of graduate higher education, an institution of professional 
education, and an institution of vocational education operating a 
program or programs of scholarly research.
    (c) Noncommercial scientific institution means an institution that 
is not operated for a ``commercial'' purpose as that term is used in 
paragraph (a) of this section and is operated solely for the purpose of 
conducting scientific research, the results of which are not intended to 
promote any particular product or industry.
    (d) Representative of the news media means any person actively 
gathering news for an entity that is organized and operated to publish 
or broadcast news to the public. Included within the meaning of public 
is the credit union community. The term news means information that is 
about current events or that would be of current interest to the public. 
You may consult the following chart to find the fees applicable to your 
request:

----------------------------------------------------------------------------------------------------------------
      If your fee category is              You'll receive                     And you'll be charged
----------------------------------------------------------------------------------------------------------------
Commercial use.....................  0 hours free search.......  search time
                                     0 hours free review.......  review time
                                     0 free pages..............  duplication
Educational institution,             Unlimited free search       duplication
 noncommercial scientific             hours.
 institution, newsmedia.             Unlimited free review
                                      hours.
                                     100 free pages............
All others.........................  2 hours free search.......  search time
                                     Unlimited free review
                                      hours.
                                     100 free pages............  duplication
----------------------------------------------------------------------------------------------------------------



Sec. 792.21  Will NCUA provide a fee estimate?

    NCUA will notify you of the estimated amount if fees are likely to 
exceed $25, unless you have indicated in advance a willingness to pay 
fees as high as those anticipated. You will then have the opportunity to 
confer with NCUA personnel to reformulate the request to meet your needs 
at a lower cost.



Sec. 792.22  What will NCUA charge for other services?

    Complying with requests for special services is entirely at the 
discretion of NCUA. NCUA will recover the full costs of providing such 
services to the extent it elects to provide them.



Sec. 792.23  Can I avoid charges by sending multiple, small requests?

    You may not file multiple requests, each seeking portions of a 
document or

[[Page 1200]]

similar documents, solely to avoid payment of fees. If this is done, 
NCUA may aggregate any such requests and charge you accordingly.



Sec. 792.24  Can NCUA charge me interest if I fail to pay my bill?

    NCUA can assess interest charges on an unpaid bill starting on the 
31st day following the date of the bill. If you fail to pay your bill 
within 30 days, interest will be at the rate prescribed in 31 U.S.C. 
3717, and will accrue from the date of the billing.



Sec. 792.25  Will NCUA charge me if the records are not found or are
determined to be exempt?

    NCUA may assess fees for time spent searching and reviewing, even if 
it fails to locate the records or if records located are determined to 
be exempt from disclosure.



Sec. 792.26  Will I be asked to pay fees in advance?

    NCUA will require you to give an assurance of payment or an advance 
payment only when:
    (a) NCUA estimates or determines that allowable charges that you may 
be required to pay are likely to exceed $250. NCUA will notify you of 
the likely cost and obtain satisfactory assurance of full payment where 
you have a history of prompt payment of FOIA fees, or require an advance 
payment of an amount up to the full estimated charges in the case where 
you have no history of payment; or
    (b) You have previously failed to pay a fee charged in a timely 
fashion. NCUA may require you to pay the full amount owed, plus any 
applicable interest, or demonstrate that you have, in fact, paid the 
fee, and to make an advance payment of the full amount of the estimated 
fee before we begin to process a new request or a pending request from 
you.
    (c) If you are required to make an advance payment of fees, then the 
administrative time limits prescribed in Sec. 792.16 will begin only 
after NCUA has received the fee payments described.

                         Fee Waiver or Reduction



Sec. 792.27  Can fees be reduced or waived?

    You may request that NCUA waive or reduce fees if disclosure of the 
information you request is in the public interest because it is likely 
to contribute significantly to public understanding of the operations or 
activities of the government, and is not primarily in your commercial 
interest.
    (a) NCUA will make a determination of whether the public interest 
requirement above is met based on the following factors:
    (1) Whether the subject of the requested records concerns 
identifiable operations or activities of the government, with a 
connection that is direct and clear;
    (2) Whether the disclosable portions of the requested records are 
meaningfully informative about government operations and activities in 
order to be likely to contribute to an understanding of government 
operations or activities. Information already in the public domain, 
either in a duplicate or substantially identical form where nothing new 
would be added to the public's understanding, would not be meaningfully 
informative;
    (3) Whether disclosure of the requested information will contribute 
to public understanding, meaning a reasonably broad audience of persons 
interested in the subject, as opposed to the individual understanding of 
the requester. A requester's expertise in the subject area and ability 
and intention to effectively convey information to the public will be 
considered. Representatives of the news media are presumed to satisfy 
this consideration; and
    (4) Whether the disclosure is likely to contribute significantly to 
public understanding of government operations or activities. The level 
of public understanding before disclosure must be enhanced by the 
disclosure to a significant extent.
    (b) If the public interest requirement is met, NCUA will make a 
determination on the commercial interest requirement based upon the 
following factors:

[[Page 1201]]

    (1) Whether you have a commercial interest that would be furthered 
by the requested disclosure; and if so
    (2) Whether the magnitude of your commercial interest is 
sufficiently large in comparison with the public interest in disclosure, 
that disclosure is primarily in your commercial interest.
    (c) If the required public interest exists and your commercial 
interest is not primary in comparison, NCUA will waive or reduce fees.
    (d) If you are not satisfied with our determination on your fee 
waiver or reduction request, you may submit an appeal to the General 
Counsel in accordance with Sec. 792.28.

[63 FR 14338, Mar. 25, 1998, as amended at 73 FR 56938, Oct. 1, 2008]

                                 Appeals



Sec. 792.28  What if I am not satisfied with the response I receive?

    If you are not satisfied with NCUA's response to your request, you 
can seek dispute resolution services from the FOIA Public Liaison and 
the Office of Government Information Services, and you can file an 
administrative appeal. Your appeal must be in writing and must be filed 
within 90 days from receipt of the initial determination (in cases of 
denials of the entire request or denials of a fee waiver or reduction), 
or from receipt of any records being made available pursuant to the 
initial determination (in cases of partial denials). In the response to 
your initial request, the Freedom of Information Act Officer or the 
Inspector General (or designee), will notify you that you may appeal any 
adverse determination to the Office of General Counsel. The General 
Counsel, or designee, as set forth in this paragraph, will:
    (a) Make a determination with respect to any appeal within 20 
working days after the receipt of such appeal. If, on appeal, the denial 
of the request for records is, in whole or in part, upheld, the Office 
of General Counsel will notify you of the provisions for judicial review 
of that determination under FOIA. Where you do not address your appeal 
to the General Counsel, the time limitations stated above will be 
computed from the date of receipt of the appeal by the General Counsel.
    (b) The General Counsel is the official responsible for determining 
all appeals from initial determinations. In case of this person's 
absence, the appropriate officer acting in the General Counsel's stead 
will make the appellate determination, unless such officer was 
responsible for the initial determination, in which case the Vice-
Chairman of the NCUA Board will make the appellate determination.
    (c) All appeals should be addressed to the General Counsel in the 
Central Office and should be clearly identified as such on the envelope 
and in the letter of appeal by using the indicator ``FOIA-APPEAL.'' 
Failure to address an appeal properly may delay commencement of the time 
limitation stated in paragraph (a)(1) of this section, to take account 
of the time reasonably required to forward the appeal to the Office of 
General Counsel.

[63 FR 14338, Mar. 25, 1998, as amended at 68 FR 61737, Oct. 30, 2003; 
73 FR 30478, May 28, 2008; 73 FR 56938, Oct. 1, 2008; 81 FR 93795, Dec. 
22, 2016]

                            Submitter Notice



Sec. 792.29  If I send NCUA confidential commercial information,
can it be disclosed under FOIA?

    (a) If you submit confidential commercial information to NCUA, it 
may be disclosed in response to a FOIA request in accordance with this 
section.
    (b) For purposes of this section:
    (1) Confidential commercial information means commercial or 
financial information provided to NCUA by a submitter that arguably is 
protected from disclosure under Sec. 792.11(a)(4) because disclosure 
could reasonably be expected to cause substantial competitive harm.
    (2) Submitter means any person or entity who provides business 
information, directly or indirectly, to NCUA.
    (c) Submitters of business information must use good faith efforts 
to designate, by appropriate markings, either at the time of submission 
or at a reasonable time thereafter, those portions of their submissions 
deemed to be protected from disclosure under Sec. 792.11(a)(4). Such a 
designation shall expire ten years after the date of submission.

[[Page 1202]]

    (d) We will provide a submitter with written notice of a FOIA 
request or administrative appeal encompassing designated business 
information when:
    (1) The information has been designated in good faith by the 
submitter as confidential commercial information deemed protected from 
disclosure under Sec. 792.11(a)(4); or
    (2) NCUA has reason to believe that the information may be protected 
from disclosure under Sec. 792.11(a)(4).
    (e) A copy of the notice to the submitter will also be provided to 
the FOIA requester.
    (f) Through the notice described in paragraph (d) of this section, 
NCUA will afford the submitter a reasonable period of time within which 
to provide a detailed written statement of any objection to disclosure. 
The statement must describe why the information is confidential 
commercial information and why it should not be disclosed.
    (g) Whenever we decide that we must disclose confidential commercial 
information over the objection of the submitter, we will send both the 
submitter and the FOIA requester, within a reasonable number of days 
prior to the specified disclosure date, a written notice which will 
include:
    (1) A statement of the reasons for which the submitter's disclosure 
objection was not sustained; and
    (2) A description of the information to be disclosed; and
    (3) A specified disclosure date.
    (h) If a requester brings suit to compel disclosure of confidential 
commercial information, we will promptly notify the submitter.
    (i) The notice requirements of paragraph (d) of this section do not 
apply if:
    (1) We determine that the information should not be disclosed;
    (2) The information has been lawfully published or has been 
officially made available to the public;
    (3) Disclosure of the information is required by law; or
    (4) The designation made by the submitter in accordance with 
paragraph (c) of this section appears obviously frivolous; except that 
in such case, NCUA will provide the submitter with written notice of any 
final administrative decision to disclose the information within a 
reasonable number of days prior to the specified disclosure date.

                      Release of Exempt Information



Sec. 792.30  Is there a prohibition against disclosure of exempt
records?

    Except those authorized officials listed in Sec. 792.14, or as 
provided in Secs. 792.31-792.32, and subpart C of this part, no officer, 
employee, or agent of NCUA or of any federally-insured credit union 
shall disclose or permit the disclosure of any exempt records of NCUA to 
any person other than those NCUA or credit union officers, employees, or 
agents properly entitled to such information for the performance of 
their official duties.



Sec. 792.31  Can exempt records be disclosed to credit unions,
financial institutions and state or federal agencies?

    The NCUA Board, in its sole discretion, or any person designated by 
it in writing, may make available to certain governmental agencies and 
insured financial institutions copies of reports of examination and 
other documents, papers or information for their use, when necessary, in 
the performance of their official duties or functions. All reports, 
documents and papers made available pursuant to this paragraph shall 
remain the property of NCUA. No person, agency or employee shall 
disclose the reports or exempt records without NCUA's express written 
authorization.



Sec. 792.32  Can exempt records be disclosed to investigatory
agencies?

    The NCUA Board, or any person designated by it in writing, in its 
discretion and in appropriate circumstances, may disclose to proper 
federal or state authorities copies of exempt records pertaining to 
irregularities discovered in credit unions which may constitute either 
unsafe or unsound practices or violations of federal or state, civil or 
criminal law.

Subpart B [Reserved]

[[Page 1203]]



    Subpart C_Production of Nonpublic Records and Testimony of NCUA 
                     Employees in Legal Proceedings

    Source: 62 FR 56054, Oct. 29, 1997, unless otherwise noted.



Sec. 792.40  What does this subpart prohibit?

    This subpart prohibits the release of nonpublic records or the 
appearance of an NCUA employee to testify in legal proceedings except as 
provided in this subpart. Any person possessing nonpublic records may 
release them or permit their disclosure only as provided in this 
subpart.
    (a) Duty of NCUA employees. (1) If an NCUA employee is served with a 
subpoena requiring him or her to appear as a witness or produce records, 
the employee must promptly notify the Office of General Counsel. The 
General Counsel has the authority to instruct NCUA employees to refuse 
appearing as a witness or to withhold nonpublic records. The General 
Counsel may let an NCUA employee provide testimony, including expert or 
opinion testimony, if the General Counsel determines that the need for 
the testimony clearly outweighs contrary considerations.
    (2) If a court or other appropriate authority orders or demands 
expert or opinion testimony or testimony beyond authorized subjects 
contrary to the General Counsel's instructions, an NCUA employee must 
immediately notify the General Counsel of the order and respectfully 
decline to comply. An NCUA employee must decline to answer questions on 
the grounds that this subpart forbids such disclosure and should produce 
a copy of this subpart, request an opportunity to consult with the 
Office of General Counsel, and explain that providing such testimony 
without approval may expose him or her to disciplinary or other adverse 
action.
    (b) Duty of persons who are not NCUA employees. (1) If you are not 
an NCUA employee but have custody of nonpublic records and are served 
with a subpoena requiring you to appear as a witness or produce records, 
you must promptly notify the NCUA about the subpoena. Also, you must 
notify the issuing court or authority and the person or entity for whom 
the subpoena was issued of the contents of this subpart. Notice to the 
NCUA is made by sending a copy of the subpoena to the General Counsel of 
the NCUA, Office of General Counsel, 1775 Duke Street, Alexandria, 
Virginia 22314-3428. After receiving notice, the NCUA may advise the 
issuing court or authority and the person or entity for whom the 
subpoena was issued that this subpart applies and, in addition, may 
intervene, attempt to have the subpoena quashed or withdrawn, or 
register appropriate objections.
    (2) After notifying the Office of General Counsel, you should 
respond to a subpoena by appearing at the time and place stated in the 
subpoena. Unless authorized by the General Counsel, you should decline 
to produce any records or give any testimony, basing your refusal on 
this subpart. If the issuing court or authority orders the disclosure of 
records or orders you to testify, you should continue to decline to 
produce records or testify and should advise the Office of General 
Counsel.
    (c) Penalties. Anyone who discloses nonpublic records or gives 
testimony related to those records, except as expressly authorized by 
the NCUA or as ordered by a federal court after NCUA has had the 
opportunity to be heard, may face the penalties provided in 18 U.S.C. 
641 and other applicable laws. Also, former NCUA employees, in addition 
to the prohibition contained in this subpart, are subject to the 
restrictions and penalties of 18 U.S.C. 207.



Sec. 792.41  When does this subpart apply?

    This subpart applies if you want to obtain nonpublic records or 
testimony of an NCUA employee for legal proceedings. It doesn't apply to 
the release of records under the Freedom of Information Act (FOIA), 5 
U.S.C. 552, or the Privacy Act, 5 U.S.C. 552a, or the release of records 
to federal or state investigatory agencies under Sec. 792.32.

[62 FR 56054, Oct. 29, 1997, as amended at 65 FR 63789, Oct. 25, 2000]



Sec. 792.42  How do I request nonpublic records or testimony?

    (a) To request nonpublic records or the testimony of an NCUA 
employee,

[[Page 1204]]

you must submit a written request to the General Counsel of the NCUA. If 
you serve a subpoena on the NCUA or an NCUA employee before submitting a 
written request and receiving a final determination, the NCUA will 
oppose the subpoena on the grounds that you failed to follow the 
requirements of this subpart. You may serve a subpoena as long as it is 
accompanied by a written request that complies with this subpart.
    (b) To request nonpublic records that are part of the records of the 
Office of the Inspector General or the testimony of an NCUA employee on 
matters within the knowledge of the NCUA employee as a result of his or 
her employment with the Office of the Inspector General, you must submit 
a written request to the Office of the Inspector General. Your request 
will be handled in accordance with the provisions of this subpart except 
that the Inspector General will be responsible for those determinations 
that would otherwise be made by the General Counsel.



Sec. 792.43  What must my written request contain?

    Your written request for records or testimony must include:
    (a) The caption of the legal proceeding, docket number, and name of 
the court or other authority involved.
    (b) A copy of the complaint or equivalent document setting forth the 
assertions in the case and any other pleading or document necessary to 
show relevance.
    (c) A list of categories of records sought, a detailed description 
of how the information sought is relevant to the issues in the legal 
proceeding, and a specific description of the substance of the testimony 
or records sought.
    (d) A statement as to how the need for the information outweighs the 
need to maintain the confidentiality of the information and outweighs 
the burden on the NCUA to produce the records or provide testimony.
    (e) A statement indicating that the information sought is not 
available from another source, such as a credit union's own books and 
records, other persons or entities, or the testimony of someone other 
than an NCUA employee, for example, retained experts.
    (f) A description of all prior decisions, orders, or pending motions 
in the case that bear upon the relevance of the records or testimony you 
want.
    (g) The name, address, and telephone number of counsel to each party 
in the case.
    (h) An estimate of the amount of time you anticipate that you and 
other parties will need with each NCUA employee for interviews, 
depositions, or testifying.



Sec. 792.44  When should I make a request?

    You should submit your request at least 45 days before the date that 
you need the records or testimony. If you want to have your request 
processed in less time, you must explain why you couldn't submit the 
request earlier and why you need expedited processing. If you are 
requesting the testimony of an NCUA employee, the NCUA expects you to 
anticipate your need for the testimony in sufficient time to obtain it 
by a deposition. The General Counsel may deny a request for testimony at 
a legal proceeding unless you explain why you could not use deposition 
testimony. The General Counsel will determine the location of a 
deposition taking into consideration the NCUA's interest in minimizing 
the disruption for an NCUA employee's work schedule and the costs and 
convenience of other persons attending the deposition.



Sec. 792.45  Where do I send my request?

    You must send your request or subpoena for records or testimony to 
the attention of the General Counsel for the NCUA, Office of General 
Counsel, 1775 Duke Street, Alexandria, Virginia 22314-3428. You must 
send your request or subpoena for records or testimony from the Office 
of the Inspector General to the attention of the NCUA Inspector General, 
1775 Duke Street, Alexandria, Virginia 22314-3428.



Sec. 792.46  What will the NCUA do with my request?

    (a) Factors the NCUA will consider. The NCUA may consider various 
factors in reviewing a request for nonpublic records or testimony of 
NCUA employees, including:

[[Page 1205]]

    (1) Whether disclosure would assist or hinder the NCUA in performing 
its statutory duties or use NCUA resources unreasonably, including 
whether responding to the request will interfere with NCUA employees' 
ability to do their work.
    (2) Whether disclosure is necessary to prevent the perpetration of a 
fraud or other injustice in the matter or if you can get the records or 
testimony you want from sources other than the NCUA.
    (3) Whether the request is unduly burdensome.
    (4) Whether disclosure would violate a statute, executive order, or 
regulation, for example, the Privacy Act, 5 U.S.C. 552a.
    (5) Whether disclosure would reveal confidential, sensitive or 
privileged information, trade secrets or similar, confidential 
commercial or financial information, or would otherwise be inappropriate 
for release and, if so, whether a confidentiality agreement or 
protective order as provided in Sec. 792.48(a) can adequately limit the 
disclosure.
    (6) Whether the disclosure would interfere with law enforcement 
proceedings, compromise constitutional rights, or hamper NCUA research 
or investigatory activities.
    (7) Whether the disclosure could result in NCUA appearing to favor 
one litigant over another.
    (8) Any other factors the NCUA determines to be relevant to the 
interests of the NCUA.
    (b) Review of your request. The NCUA will process your request in 
the order it is received. The NCUA will try to respond to your request 
within 45 days, but this may vary depending on the scope of your 
request.
    (c) Final determination. The General Counsel makes the final 
determination on requests for nonpublic records or NCUA employee 
testimony. All final determinations are in the sole discretion of the 
General Counsel. The General Counsel will notify you and the court or 
other authority of the final determination of your request. In 
considering your request, the General Counsel may contact you to inform 
you of the requirements of this subpart, ask that the request or 
subpoena be modified or withdrawn, or may try to resolve the request or 
subpoena informally without issuing a final determination. You may seek 
judicial review of the final determination under the Administrative 
Procedure Act. 5 U.S.C. 702.



Sec. 792.47  If my request is granted, what fees apply?

    (a) Generally. You must pay any fees associated with complying with 
your request, including copying fees for records and witness fees for 
testimony. The General Counsel may condition the production of records 
or appearance for testimony upon advance payment of a reasonable 
estimate of the fees.
    (b) Fees for records. You must pay all fees for searching, reviewing 
and duplicating records produced in response to your request. The fees 
will be the same as those charged by the NCUA under its Freedom of 
Information Act regulations, Sec. 792.19.
    (c) Witness fees. You must pay the fees, expenses, and allowances 
prescribed by the court's rules for attendance by a witness. If no such 
fees are prescribed, the local federal district court rule concerning 
witness fees, for the federal district court closest to where the 
witness appears, will apply. For testimony by current NCUA employees, 
you must pay witness fees, allowances, and expenses to the General 
Counsel by check made payable to the ``National Credit Union 
Administration'' within 30 days from receipt of NCUA's billing 
statement. For the testimony of a former NCUA employee, you must pay 
witness fees, allowances, and expenses directly to the former employee, 
in accordance with 28 U.S.C. 1821 or other applicable statutes.
    (d) Certification of records. The NCUA may authenticate or certify 
records to facilitate their use as evidence. If you require 
authenticated records, you must request certified copies at least 45 
days before the date they will be needed. The request should be sent to 
the General Counsel. You will be charged a certification fee of $5.00 
per document.
    (e) Waiver of fees. A waiver or reduction of any fees in connection 
with the testimony, production, or certification or authentication of 
records may be

[[Page 1206]]

granted in the discretion of the General Counsel. Waivers will not be 
granted routinely. If you request a waiver, your request for records or 
testimony must state the reasons why a waiver should be granted.

[62 FR 56054, Oct. 29, 1997, as amended at 65 FR 63789, Oct. 25, 2000]



Sec. 792.48  If my request is granted, what restrictions apply?

    (a) Records. The General Counsel may impose conditions or 
restrictions on the release of nonpublic records, including a 
requirement that you obtain a protective order or execute a 
confidentiality agreement with the other parties in the legal proceeding 
that limits access to and any further disclosure of the nonpublic 
records. The terms of a confidentiality agreement or protective order 
must be acceptable to the General Counsel. In cases where protective 
orders or confidentiality agreements have already been executed, the 
NCUA may condition the release of nonpublic records on an amendment to 
the existing protective order or confidentiality agreement.
    (b) Testimony. The General Counsel may impose conditions or 
restrictions on the testimony of NCUA employees, including, for example, 
limiting the areas of testimony or requiring you and the other parties 
to the legal proceeding to agree that the transcript of the testimony 
will be kept under seal or will only be used or made available in the 
particular legal proceeding for which you requested the testimony. The 
General Counsel may also require you to provide a copy of the transcript 
of the testimony to the NCUA at your expense.



Sec. 792.49  Definitions.

    Legal proceedings means any matter before any federal, state or 
foreign administrative or judicial authority, including courts, 
agencies, commissions, boards or other tribunals, involving such 
proceedings as lawsuits, licensing matters, hearings, trials, discovery, 
investigations, mediation or arbitration. When the NCUA is a party to a 
legal proceeding, it will be subject to the applicable rules of civil 
procedure governing production of documents and witnesses, however, this 
subpart will still apply to the testimony of former NCUA employees.
    NCUA employee means current and former officials, members of the 
Board, officers, directors, employees and agents of the National Credit 
Union Administration, including contract employees and consultants and 
their employees. This definition does not include persons who are no 
longer employed by the NCUA and are retained or hired as expert 
witnesses or agree to testify about general matters, matters available 
to the public, or matters with which they had no specific involvement or 
responsibility during their employment.
    Nonpublic records means any NCUA records that are exempt from 
disclosure under Sec. 792.11, the NCUA regulations implementing the 
provisions of the Freedom of Information Act. For example, this means 
records created in connection with NCUA's examination and supervision of 
insured credit unions, including examination reports, internal 
memoranda, and correspondence, and, also, records created in connection 
with NCUA's enforcement and investigatory responsibilities.
    Subpoena means any order, subpoena for records or other tangible 
things or for testimony, summons, notice or legal process issued in a 
legal proceeding.
    Testimony means any written or oral statements made by an individual 
in connection with a legal proceeding including personal appearances in 
court or at depositions, interviews in person or by telephone, responses 
to written interrogatories or other written statements such as reports, 
declarations, affidavits, or certifications or any response involving 
more than the delivery of records.

[62 FR 56054, Oct. 29, 1997, as amended at 65 FR 63789, Oct. 25, 2000]



        Subpart D_Security Procedures for Classified Information



Sec. 792.50  Program.

    (a) The NCUA's Executive Director is designated as the person 
responsible for implementation and oversight of NCUA's program for 
maintaining the

[[Page 1207]]

security of confidential information regarding national defense and 
foreign relations. The Executive Director receives questions, 
suggestions and complaints regarding all elements of this program. The 
Executive Director is solely responsible for changes to the program and 
assures that the program is consistent with legal requirements.
    (b) The Executive Director is the Agency's official contact for 
declassification requests regardless of the point of origin of such 
requests.

[54 FR 18476, May 1, 1989, as amended at 59 FR 36042, July 15, 1994; 67 
FR 30774, May 8, 2002; 73 FR 30478, May 28, 2008; 78 FR 32546, May 31, 
2013]



Sec. 792.51  Procedures.

    (a) Mandatory review. All declassification requests made by a member 
of the public, by a government employee or by an agency shall be handled 
by the Executive Director or the Executive Director's designee. Under no 
circumstances shall the Executive Director refuse to confirm the 
existence or nonexistence of a document under the Freedom of Information 
Act or the mandatory review provisions of other applicable law, unless 
the fact of its existence or nonexistence would itself be classifiable 
under applicable law. Although NCUA has no authority to classify or 
declassify information, it occasionally handles information classified 
by another agency. The Executive Director shall refer all 
declassification requests to the agency that originally classified the 
information. The Executive Director or the Executive Director's designee 
shall notify the requesting person or agency that the request has been 
referred to the originating agency and that all further inquiries and 
appeals must be made directly to the other agency.
    (b) Handling and safeguarding national security information. All 
information classified ``Top Secret,'' ``Secret,'' and ``Confidential'' 
shall be delivered to the Executive Director or the Executive Director's 
designee immediately upon receipt. The Executive Director shall advise 
those who may come into possession of such information of the name of 
the current designee. If the Executive Director is unavailable, the 
designee shall lock the documents, unopened, in the combination safe 
located in the secure facility of the Office of the Executive Director. 
If the Executive Director or the Executive Director's designee is 
unavailable to receive such documents, the documents shall be delivered 
in accordance with NCUA's mail handling procedures for classified 
information. Under no circumstances shall classified materials that 
cannot be delivered to the Executive Director or the Executive 
Director's designee be stored in a location other than in the safe 
designated by the Executive Director for information classified ``Top 
Secret,'' ``Secret,'' and ``Confidential.''
    (c) Storage. All classified documents shall be stored in the safe 
designated by the Executive Director for information classified ``Top 
Secret,'' ``Secret,'' and ``Confidential.'' The combination shall be 
known only to the Executive Director and the Executive Director's 
designee holding the proper security clearance.
    (d) Employee education. (1) The Executive Director shall send a memo 
to every NCUA employee who:
    (i) Has a security clearance; and
    (ii) May handle classified materials.
    (2) This memo shall describe NCUA procedures for handling, 
reproducing and storing classified documents. The Executive Director 
shall require each such employee to review applicable Executive Orders 
on the classification of national security information.
    (e) Agency terminology. The National Credit Union Administration's 
Central Office shall use the terms ``Top Secret,'' ``Secret'' or 
``Confidential'' only in relation to materials classified for national 
security purposes.

[63 FR 14338, Mar. 25, 1998, as amended at 67 FR 30774, May 8, 2002; 73 
FR 30478, May 28, 2008; 78 FR 32547, May 31, 2013]



                        Subpart E_The Privacy Act

    Source: 54 FR 18476, May 1, 1989, unless otherwise noted. 
Redesignated at 63 FR 14338, Mar. 25, 1998. Nomenclature change at 73 FR 
56938, Oct. 1, 2008.



Sec. 792.52  Scope.

    This subpart governs requests made of NCUA under the Privacy Act (5 
U.S.C. 552a). The regulation applies to

[[Page 1208]]

all records maintained by NCUA which contain personal information about 
an individual and some means of identifying the individual, and which 
are contained in a system of records from which information may be 
retrieved by use of an identifying particular; sets forth procedures 
whereby individuals may seek and gain access to records concerning 
themselves and request amendments of those records; and sets forth 
requirements applicable to NCUA employees' maintaining, collecting, 
using, or disseminating such records.



Sec. 792.53  Definitions.

    For purposes of this subpart:
    (a) Individual means a citizen of the United States or an alien 
lawfully admitted for permanent residence.
    (b) Maintain includes maintain, collect, use, or disseminate.
    (c) Record means any item, collection, or grouping of information 
about an individual that is maintained by NCUA, and that contains the 
name, or an identifying number, symbol, or other identifying particular 
assigned to the individual.
    (d) System of records means a group of any records under NCUA's 
control from which information is retrieved by the name of the 
individual or by some identifying number, symbol, or other identifying 
particular assigned to the individual.
    (e) Routine use means, with respect to the disclosure of a record, 
the use of such record for a purpose which is compatible with the 
purpose for which it was collected.
    (f) Statistical record means a record in a system of records 
maintained for statistical research or reporting purposes only and not 
used in whole or in part in making any determination about an 
identifiable individual, except as provided by section 8 of title 13 of 
the United States Code.
    (g) Notice of Systems of Records means the annual notice published 
by NCUA in the Federal Register informing the public of the existence 
and character of the systems of records it maintains. The Notice of 
Systems of Records also is available on NCUA's Web site at http://
www.ncua.gov.
    (h) System manager means the NCUA official responsible for the 
maintenance, collection, use or distribution of information contained in 
a system of records. The system manager for each system of records is 
provided in the Federal Register publication of NCUA's annual systems of 
records notice.
    (i) Working day means Monday through Friday excluding legal public 
holidays.

[54 FR 18476, May 1, 1989, as amended at 73 FR 56938, Oct. 1, 2008]



Sec. 792.54  Procedures for requests pertaining to individual records 
in a system of records.

    (a) Individuals desiring to know if a system of records contains 
records pertaining to them, and individuals requesting access to records 
in a system of records pertaining to them should submit a written 
request to the appropriate system manager as identified in the Notice of 
Systems of Records. An individual who does not have access to the 
Federal Register and who is unable to determine the appropriate system 
manager to whom to submit a request may submit a request to the Privacy 
Officer, Office of General Counsel, National Credit Union 
Administration, 1775 Duke Street, Alexandria, VA 22314-3428, in which 
case the request will be referred to the appropriate system manager.
    (b) Individuals requesting notification of, or access to, records 
should include the words ``PRIVACY ACT REQUEST'' on both the letter and, 
as appropriate, the envelope, cover document or subject line; describe 
the record sought; the approximate dates covered by the record; and, the 
systems of record in which records are thought to be included. 
Individuals must also meet the identification requirements in 
Sec. 792.55.

[73 FR 56938, Oct. 1, 2008]



Sec. 792.55  Times, places, and requirements for identification 
of individuals making requests and identification of records 
requested.

    (a) The following standards are applicable to an individual 
submitting requests either in person or by mail under Sec. 792.54:
    (1) Individuals appearing in person, if not personally known to the 
system

[[Page 1209]]

manager responding to the request, must present a single document 
bearing a photograph (such as a passport or identification badge) or two 
items of identification which do not bear a photograph but do bear both 
a name and address (such as a driver's license or voter registration 
card);
    (2) Individuals submitting requests by mail or written electronic 
form, such as facsimile or e-mail, may establish identity by a 
signature, address, date of birth, employee identification number if 
any, and one other identifier such as a photocopy of driver's license or 
other document. If inadequate identifying information is provided, the 
system manager responding to the request may require further identifying 
information before any notification or responsive disclosure.
    (3) Individuals appearing in person or submitting requests by mail 
or written electronic form, who cannot provide the required 
documentation or identification, may provide an unsworn declaration 
subscribed to as true under penalty of perjury.
    (b) The parent or guardian of a minor or a person judicially 
determined to be incompetent shall, in addition to establishing identity 
of the minor or other person as required in paragraph (a) of this 
section, furnish a copy of a birth certificate showing parentage or a 
court order establishing guardianship.
    (c) A record may be disclosed to a representative of an individual 
to whom the record pertains provided the system manager receives written 
authorization from the individual who is the subject of the record.
    (d) An individual seeking to review records about that individual 
may be accompanied by another person of their own choosing. In such 
cases, the individual seeking access shall be required to furnish a 
written statement authorizing discussion of that individual's records in 
the accompanying person's presence.
    (e) In addition to the requirements set forth in paragraphs (a), (b) 
and (c) of this section, the published ``Notice of System of Records'' 
for individual systems may include further requirements of 
identification where necessary to retrieve the individual records from 
the system.

[54 FR 18476, May 1, 1989. Redesignated at 63 FR 14338, Mar. 25, 1998, 
as amended at 64 FR 57365, Oct. 25, 1999; 65 FR 63790, Oct. 25, 2000; 73 
FR 56939, Oct. 1, 2008]



Sec. 792.56  Notice of existence of records, access decisions and 
disclosure of requested information; time limits.

    (a) The system manager identified in the record access procedure 
section of the ``Notice of Systems of Records'' and identified in 
accordance with Sec. 792.54(a), by an individual seeking notification 
of, or access to, a record, shall be responsible:
    (1) For determining whether access is available under the Privacy 
Act; (2) for notifying the requesting individual of that determination; 
and (3) for providing access to information determined to be available. 
In the case of an individual access request made in person, information 
determined to be available shall be provided by allowing a personal 
review of the record or portion of a record containing the information 
requested and determined to be available, and the individual shall be 
allowed to have a copy of all or any portion of available information 
made in a form comprehensible to him. In the case of an individual 
access request made by mail, information determined to be available 
shall be provided by mail, unless the individual has requested 
otherwise.
    (b) The following time limits shall be applicable to the required 
determinations, notification and provisions of access set forth in 
paragraph (a) of this section:
    (1) A request concerning a single system of records which does not 
require consultation with or requisition of records from another agency 
will be responded to within 20 working days after receipt of the 
request.
    (2) A request requiring requisition of records from or consultation 
with another agency will be responded to within 30 working days of 
receipt of the request.
    (3) If a request under paragraphs (b)(1) or (2) of this section 
presents unusual difficulties in determining whether the records 
involved are exempt from disclosure, the Privacy Act

[[Page 1210]]

Officer, in the Office of General Counsel, may extend the time period 
established by the regulations by 10 working days.
    (c) Nothing in this section shall be construed to allow an 
individual access to any information compiled in reasonable anticipation 
of a civil action or proceeding, or any information exempted from the 
access provisions of the Privacy Act.

[54 FR 18476, May 1, 1989, as amended at 59 FR 36042, July 15, 1994; 64 
FR 57365, Oct. 25, 1999; 65 FR 63790, Oct. 25, 2000]



Sec. 792.57  Special procedures: Information furnished by other
agencies; medical records.

    (a) When a request for records or information from NCUA includes 
information furnished by other Federal agencies, the system manager 
responsible for action on the request shall consult with the appropriate 
agency prior to making a decision to disclose or refuse access to the 
record, but the decision whether to disclose the record shall be made in 
the first instance by the system manager.
    (b) Medical records may be disclosed on request to the individuals 
to whom they pertain unless disclosing the medical information directly 
to the requesting individual could have an adverse effect on the 
individual. Where medical information is potentially adverse to the 
requesting individual, the system manager responsible may advise the 
requesting individual that the medical records will be transmitted only 
to a physician designated in writing by the individual.

[54 FR 18476, May 1, 1989. Redesignated at 63 FR 14338, Mar. 25, 1998, 
as amended at 65 FR 63790, Oct. 25, 2000; 73 FR 56939, Oct. 1, 2008]



Sec. 792.58  Requests for correction or amendment to a record;
administrative review of requests.

    (a) An individual may request amendment of a record concerning that 
individual by submitting a written request, either in person or by mail, 
to the system manager identified in the Notice of Systems of Records. 
The words ``PRIVACY ACT--REQUEST TO AMEND RECORD'' should be written on 
the letter and the envelope. The request must describe the system of 
records containing the record sought to be amended, indicate the 
particular record involved, the nature of the correction sought, and the 
justification for the correction or amendment. An individual who does 
not have access to NCUA's Notice of Systems of Records, and to whom the 
appropriate address is otherwise unavailable, may submit a request to 
the Privacy Act Officer, Office of General Counsel, National Credit 
Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428, 
in which case the request will then be referred to the appropriate 
system manager. The date of receipt of the request will be determined as 
of the date of receipt by the system manager.
    (b) Within 10 working days of receipt of the request, the 
appropriate system manager shall advise the individual that the request 
has been received. The appropriate system manager will promptly (under 
normal circumstances, not later than 30 working days after receipt of 
the request) advise the individual that the record will be amended or 
corrected, or inform the individual of rejection of the request to amend 
the record, the reason for the rejection, and the procedures established 
by Sec. 792.59 for the individual to request a review of that rejection.

[54 FR 18476, May 1, 1989, as amended at 59 FR 36041, 36042, July 15, 
1994; 65 FR 63790, Oct. 25, 2000; 73 FR 56939, Oct. 1, 2008]



Sec. 792.59  Appeal of initial determination.

    (a) A rejection, in whole or in part, of a request to amend or 
correct a record may be appealed to the General Counsel within 30 
working days of receipt of notice of the rejection. Appeals shall be in 
writing, and shall set forth the specific item of information sought to 
be corrected and the documentation justifying the correction. Appeals 
must be addressed to the Office of General Counsel, National Credit 
Union Administration, 1775 Duke Street, Alexandria, VA 22314-3428 with 
the words ``PRIVACY ACT--APPEAL'' written on the letter and the 
envelope. Appeals shall be decided within 30 working days of receipt 
unless the General Counsel, for good cause, extends such period for an 
additional 30 working days.

[[Page 1211]]

    (b) Within the time limits set forth in paragraph (a) of this 
section, the General Counsel shall either advise the individual of a 
decision to amend or correct the record, or advise the individual of a 
determination that an amendment or correction is not warranted on the 
facts, in which case the individual shall be advised of the right to 
provide for the record a ``Statement of Disagreement'' and of the right 
to further appeal pursuant to the Privacy Act. For records under the 
jurisdiction of the Office of Personnel Management, appeals will be made 
pursuant to that agency's regulations.
    (c) If an appeal under this section is denied in whole or in part, 
an individual may file a statement of disagreement concisely stating the 
reason(s) for disagreeing with the denial for amendment or correction, 
and clearly identifying each part of any record that is disputed. The 
statement must be sent within 30 working days of the date of receipt of 
the notice of General Counsel's refusal to authorize amendment or 
correction, to the General Counsel, National Credit Union 
Administration, 1775 Duke Street, Alexandria, VA 22314-3428. Upon 
receipt of a statement of disagreement in accordance with this section, 
the General Counsel shall take steps to ensure that the statement is 
included in the system of records containing the disputed item and that 
the original item is so marked to indicate that there is a statement of 
dispute and where, within the system of records, that statement may be 
found.
    (d) When a record has been amended or corrected or a statement of 
disagreement has been furnished, the system manger for the system of 
records containing the record shall, within 30 days thereof, advise all 
prior recipients of information to which the amendment or statement of 
disagreement relates whose identity can be determined by an accounting 
made as required by the Privacy Act of 1974 or any other accounting 
previously made, of the amendment or statement of disagreement. When a 
statement of disagreement has been furnished, the system manager shall 
also provide any subsequent recipient of a disclosure containing 
information to which the statement relates with a copy of the statement 
and note the disputed portion of the information disclosed. A concise 
statement of the reasons for not making the requested amendment may also 
be provided if deemed appropriate.
    (e) If access is denied because of an exemption, the individual will 
be notified of the right to appeal that determination to the General 
Counsel within 30 days after receipt. Appeals will be determined within 
20 working days.

[54 FR 18476, May 1, 1989, as amended at 59 FR 36041, July 15, 1994; 65 
FR 63790, Oct. 25, 2000; 73 FR 56939, Oct. 1, 2008]



Sec. 792.60  Disclosure of record to person other than the individual
to whom it pertains.

    No record or item of information concerning an individual which is 
contained in a system of records maintained by NCUA shall be disclosed 
by any means of communication to any person, or to another agency, 
without the prior written consent of the individual to whom the record 
or item of information pertains, unless the disclosure would be--
    (a) To an employee of the NCUA who has need for the record in the 
performance of duty;
    (b) Required by the Freedom of Information Act;
    (c) For a routine use as described in the ``Notice of Systems of 
Records,'' published in the Federal Register, which describes the system 
of records in which the record or item of information is contained;
    (d) To the Bureau of the Census for purposes of planning or carrying 
out a census or survey or related activity pursuant to the provisions of 
title 13 of the United States Code;
    (e) To a recipient who has provided the NCUA with advance adequate 
written assurance that the record or item will be used soley as a 
statistical research or reporting record, and the record is to be 
transferred in a form that is not individually identifiable;
    (f) To the National Archives and Records Administration as a record 
or item which has sufficient historical or other value to warrant its 
continued

[[Page 1212]]

preservation by the United States Government, or for evaluation by the 
Archivist of the United States or the designee of the Archivist to 
determine whether the record has such value;
    (g) To another agency or to an instrumentality of any governmental 
jurisdiction within or under the control of the United States for a 
civil or criminal law enforcement activity if the activity is authorized 
by law, and if the head of the agency or instrumentality has made a 
written request to NCUA specifying the particular portion desired and 
the law enforcement activity for which the record or item is sought;
    (h) To a person pursuant to a showing of compelling circumstances 
affecting the health or safety of an individual if, upon such 
disclosure, notification is transmitted to the last known address of 
such individual;
    (i) To either House of Congress, or, to the extent of matter within 
its jurisdiction, any committee or subcommittee thereof, any joint 
committee of Congress or subcommittee of any such joint committee;
    (j) To the Comptroller General, or any of his authorized 
representatives, in the course of the performance of the duties of the 
Government Accountability Office;
    (k) Pursuant to the order of a court of competent jurisdiction; or
    (l) To a consumer reporting agency in accordance with section 
3711(f) of title 31 of the United States Code (31 U.S.C. 3711(f)).

[54 FR 18476, May 1, 1989, as amended at 73 FR 56939, Oct. 1, 2008]



Sec. 792.61  Accounting for disclosures.

    (a) Each system manager identified in the ``Notice of Systems of 
Records'' must establish a system of accounting for all disclosures of 
information or records under the Privacy Act made outside NCUA. 
Accounting procedures may be established in the least expensive and most 
convenient form that will permit the system manager to advise 
individuals, promptly upon request, of the persons or agencies to which 
records concerning them have been disclosed.
    (b) Accounting records, at a minimum, shall include the information 
disclosed, the name and address of the person or agency to whom 
disclosure was made, and the date of disclosure. When records are 
transferred to the National Archives and Records Administration for 
storage in records centers, the accounting pertaining to those records 
shall be transferred with the records themselves.
    (c) Any accounting made under this section shall be retained for at 
least five years or the life of the record, whichever is longer, after 
the disclosure for which the accounting is made.

[54 FR 18476, May 1, 1989, as amended at 73 FR 56939, Oct. 1, 2008]



Sec. 792.62  Requests for accounting for disclosures.

    At the time of the request for access or correction or at any other 
time, an individual may request an accounting of disclosures made of the 
individual's record outside the NCUA. Request for accounting shall be 
directed to the system manager. Any available accounting, whether kept 
in accordance with the requirements of the Privacy Act or under 
procedures established prior to September 27, 1975, shall be made 
available to the individual, except that an accounting need not be made 
available if it relates to:
    (a) A disclosure made pursuant to the Freedom of Information Act (5 
U.S.C. 552);
    (b) A disclosure made within the NCUA;
    (c) A disclosure made to a law enforcement agency pursuant to 5 
U.S.C. 552a(b)(7);
    (d) A disclosure which has been exempted from the provisions of 5 
U.S.C. 552a(c)(3) pursuant to 5 U.S.C. 552a (j) or (k).



Sec. 792.63  Collection of information from individuals; information
forms.

    (a) The system manager for each system of records is responsible for 
reviewing all forms developed and used to collect information from or 
about individuals for incorporation into the system of records.
    (b) The purpose of the review shall be to eliminate any requirement 
for information that is not relevant and necessary to carry out an NCUA 
function

[[Page 1213]]

and to accomplish the following objectives:
    (1) To ensure that no information concerning religion, political 
beliefs or activities, association memberships (other than those 
required for a professional license), or the exercise of other First 
Amendment rights is required to be disclosed unless such requirement of 
disclosure is expressly authorized by statute or by the individual about 
whom the record is maintained, or unless pertinent to and within the 
scope of any authorized law enforcement activity;
    (2) To ensure that the form or accompanying statement makes clear to 
the individual which information by law must be disclosed and the 
authority for that requirement, and which information is voluntary;
    (3) To ensure that the form or accompanying statement makes clear 
the principal purpose or purposes for which the information is being 
collected, and states concisely the routine uses that will be made of 
the information;
    (4) To ensure that the form or accompanying statement clearly 
indicates to the individual the effects on him or her, if any, of 
refusing to provide some or all of the requested information; and
    (5) To ensure that any form requesting disclosure of a social 
security number, or an accompanying statement, clearly advises the 
individual of the statute or regulation requiring disclosure of the 
number, or clearly advises the individual that disclosure is voluntary 
and that no consequence will flow from a refusal to disclose it, and the 
uses that will be made of the number whether disclosed mandatorily or 
voluntarily.
    (c) Any form which does not meet the objectives specified in the 
Privacy Act and this section shall be revised to conform thereto.

[54 FR 18476, May 1, 1989, as amended at 73 FR 56939, Oct. 1, 2008]



Sec. 792.64  Contracting for the operation of a system of records.

    (a) No NCUA component shall contract for the operation of a system 
of records by or on behalf of the Agency without the express approval of 
the NCUA Board.
    (b) Any contract which is approved shall continue to ensure 
compliance with the requirements of the Privacy Act. The contracting 
component shall have the responsibility for ensuring that the contractor 
complies with the contract requirements relating to the Privacy Act.



Sec. 792.65  Fees.

    (a) Fees pursuant to 5 U.S.C. 552a(f)(5) shall be assessed for 
actual copies of records provided to individuals on the following basis, 
unless the system manager determining access waives the fee because of 
the inability of the individual to pay or the cost of collecting the fee 
exceeds the fee:
    (1) For copies of documents provided, copy fees as stated in NCUA's 
current FOIA fee schedule; and
    (2) For copying information, if any, maintained in nondocument form, 
the direct cost to NCUA may be assessed.
    (b) If it is determined that access fees chargeable under this 
section will amount to more than $25, and the individual has not 
indicated in advance willingness to pay fees as high as are anticipated, 
the individual shall be notified of the amount of the anticipated fees 
before copies are made, and the individual's access request shall not be 
considered to have been received until receipt by NCUA of written 
agreement to pay.

[54 FR 18476, May 1, 1989. Redesignated at 63 FR 14338, Mar. 25, 1998, 
as amended at 65 FR 63790, Oct. 25, 2000]



Sec. 792.66  Exemptions.

    (a) NCUA maintains several systems of records that are exempted from 
some provisions of the Privacy Act. The system number and name, 
description of records contained in the system, exempted provisions and 
reasons for exemption are as follows:
    (b)(1) System NCUA-1, entitled ``Employee Suitability Security 
Investigations Containing Adverse Information,'' consists of adverse 
information about NCUA employees that had been obtained as a result of 
routine U.S. Office of Personnel Management (OPM) security 
investigations. To the extent that NCUA maintains records in this system 
pursuant to OPM guidelines

[[Page 1214]]

that may require retrieval of information by use of individual 
identifiers, those records are encompassed by and included in the OPM 
Central system of records number Central-9 entitled, ``Personnel 
Investigations Records,'' and thus are subject to the exemptions 
promulgated by OPM. Additionally, in order to ensure the protection of 
properly confidential sources, particularly as to those records which 
are not maintained pursuant to such Office of Personnel Management 
requirements, the records in these systems of records are exempted, 
pursuant to section k(5) of the Privacy Act (5 U.S.C. 552a(k)(5)), from 
section (d) of the Act (5 U.S.C. 552a(d)). To the extent that disclosure 
of a record would reveal the identity of a confidential source, NCUA 
need not grant access to that record by its subject. Information which 
would reveal a confidential source shall, however, whenever possible, be 
extracted or summarized in a manner which protects the source and the 
summary or extract shall be provided to the requesting individual.
    (2) System NCUA-8, entitled, ``Investigative Reports Involving Any 
Crime or Suspicious Activity Against a Credit Union, NCUA,'' consists of 
investigatory or enforcement records about individuals suspected of 
involvement in violations of laws or regulations, whether criminal or 
administrative. These records are maintained in an overall context of 
general investigative information concerning crimes against credit 
unions. To the extent that individually identifiable information is 
maintained for purposes of protecting the security of any investigations 
by appropriate law enforcement authorities and promoting the successful 
prosecution of all actual criminal activity, the records in this system 
are exempted, pursuant to section k(2) of the Privacy Act (5 U.S.C. 552a 
(k)(2)), from sections (c)(3), (d), (e)(1), (e)(2), (e)(4)(G), 
(e)(4)(H), (f), and (g). The records in this system are also exempted 
pursuant to section (j)(2) of the Privacy Act, 5 U.S.C. 552a(j)(2), from 
sections (c)(3), (d), (e)(1), (e)(2), (e)(4)(G), (e)(4)(H), (f), and 
(g). Where possible, information that would identify a confidential 
source will be extracted or summarized in a manner that protects the 
source and the summary or extract will be provided to the requesting 
individual.
    (3) System NCUA-20, entitled, ``Office of Inspector General (OIG) 
Investigative Records,'' consists of OIG records of closed and pending 
investigations of individuals alleged to have been involved in criminal 
violations. The records in this system are exempted pursuant to sections 
(k)(2) of the Privacy Act, 5 U.S.C. 552a(k)(2), from sections (c)(3), 
(d), (e)(1), (e)(4)(G), (e)(4)(H), (e)(4)(I), and (f). The records in 
this system are also exempted pursuant to section (j)(2) of the Privacy 
Act, 5 U.S.C. 552a(j)(2), from sections (c)(3), (c)(4), (d), (e)(1), 
(e)(2), (e)(3), and (g). NCUA need not make an accounting of previous 
disclosures of a record in this system of records available to its 
subject, and NCUA need not grant access to any records in this system of 
records by their subject. Further, whenever individuals request records 
about themselves and maintained in this system of records, the NCUA will 
advise the individuals only that no records available to them pursuant 
to the Privacy Act of 1974 have been identified. However, if review of 
the record reveals that the information contained therein has been used 
or is being used to deny the individuals any right, privilege or benefit 
for which they are eligible or to which they would otherwise be entitled 
under federal law, the individuals will be advised of the existence of 
the information and will be provided the information, except to the 
extent disclosure would identify a confidential source. Where possible, 
information which would identify a confidential source will be extracted 
or summarized in a manner which protects the source and the summary or 
extract will be provided to the requesting individual.
    (4) System NCUA-13, entitled, ``Litigation Case Files,'' consists of 
investigatory materials compiled for law enforcement purposes. Records 
in the Litigation Case Files system are used in connection with the 
execution of NCUA's legal and enforcement responsibilities. Because the 
system covers investigatory materials compiled for law enforcement 
purposes, it is eligible for exemption under subsection (k)(2)

[[Page 1215]]

of the Privacy Act. 5 U.S.C. 552a(k)(2). The Litigation Case Files 
system is exempt from subsections (c)(3), (d), (e)(1), (e)(4)(G), (H), 
(I) and (f) of the Privacy Act. 5 U.S.C. 552a (c)(3), (d), (e)(1), 
(e)(4)(G), (H), (I) and (f). However, if an individual is denied any 
right, privilege, or benefit to which he would otherwise be entitled by 
federal law, or for which he otherwise would be eligible, as a result of 
the maintenance of such records, the records or information will be made 
available to him, provided the identity of a confidential source is not 
disclosed. NCUA need not make an accounting of previous disclosures of a 
record in this system of records available to its subject, and NCUA need 
not grant access to any records in this system of records by their 
subject. Further, whenever individuals request records about themselves 
and maintained in this system of records, the NCUA will advise the 
individuals only that no records available to them pursuant to the 
Privacy Act of 1974 have been identified. However, if review of the 
record reveals that the information contained therein has been used or 
is being used to deny the individuals any right, privilege or benefit 
for which they are eligible or to which they would otherwise be entitled 
under federal law, the individuals will be advised of the existence of 
the information and will be provided the information, except to the 
extent disclosure would identify a confidential source. Where possible, 
information that would identify a confidential source will be extracted 
or summarized in a manner which protects the source and the summary or 
extract will be provided to the requesting individual.
    (c) For purposes of this section, a ``confidential source'' means a 
source who furnished information to the Government under an express 
promise that the identity of the source would remain confidential, or, 
prior to September 27, 1976, under an implied promise that the identity 
of the source would be held in confidence.

[54 FR 18476, May 1, 1989, as amended at 60 FR 31912, June 19, 1995; 64 
FR 57365, Oct. 25, 1999; 65 FR 63790, Oct. 25, 2000; 73 FR 56940, Oct. 
1, 2008; 75 FR 34623, June 18, 2010]



Sec. 792.67  Security of systems of records.

    (a) Each system manager, with the approval of the head of that 
Office, shall establish administrative and physical controls to insure 
the protection of a system of records from unauthorized access or 
disclosure and from physical damage or destruction. The controls 
instituted shall be proportional to the degree of sensitivity of the 
records, but at a minimum must insure: that records are enclosed in a 
manner to protect them from public view; that the area in which the 
records are stored is supervised during all business hours to prevent 
unauthorized personnel from entering the area or obtaining access to the 
records; and that the records are inaccessible during nonbusiness hours.
    (b) Each system manager, with the approval of the head of that 
Office, shall adopt access restriction to insure that only those 
individuals within the agency who have a need to have access to the 
records for the performance of duty have access. Procedures shall also 
be adopted to prevent accidental access to or dissemination of records.



Sec. 792.68  Use and collection of Social Security numbers.

    The head of each NCUA Office shall take such measures as are 
necessary to ensure that employees authorized to collect information 
from individuals are advised that individuals may not be required 
without statutory or regulatory authorization to furnish Social Security 
numbers, and that individuals who are requested to provide Social 
Security numbers voluntarily must be advised that furnishing the number 
is not required and that no penalty or denial of benefits will flow from 
the refusal to provide it.



Sec. 792.69  Training and employee standards of conduct with regard
to privacy.

    (a) The Director of the Office of Human Resources, with advice from 
the Senior Privacy Act Officer, is responsible for training NCUA 
employees in the obligations imposed by the Privacy Act and this 
subpart.
    (b) The head of each NCUA Office shall be responsible for assuring 
that

[[Page 1216]]

employees subject to that person's supervision are advised of the 
provisions of the Privacy Act, including the criminal penalties and 
civil liabilities provided therein, and that such employees are made 
aware of their responsibilities to protect the security of personal 
information, to assure its accuracy, relevance, timeliness, and 
completeness, to avoid unauthorized disclosure either orally or in 
writing, and to insure that no information system concerning 
individuals, no matter how small or specialized, is maintained without 
public notice.
    (c) With respect to each system of records maintained by NCUA, 
Agency employees shall:
    (1) Collect no information of a personal nature from individuals 
unless authorized to collect it to achieve a function or carry out an 
NCUA responsibility;
    (2) Collect from individuals only that information which is 
necessary to NCUA functions or responsibilities;
    (3) Collect information, wherever possible, directly from the 
individual to whom it relates;
    (4) Inform individuals from whom information is collected of the 
authority for collection, the purposes thereof, the routine uses that 
will be made of the information, and the effects, both legal and 
practical of not furnishing the information;
    (5) Not collect, maintain, use, or disseminate information 
concerning an individual's religious or political beliefs or activities 
or his membership in associations or organizations, unless:
    (i) The individual has volunteered such information for his own 
benefit;
    (ii) The information is expressly authorized by statute to be 
collected, maintained, used, or disseminated; or
    (iii) Activities involved are pertinent to and within the scope of 
an authorized investigation or adjudication.
    (6) Advise their supervisors of the existence or contemplated 
development of any record system which retrieves information about 
individuals by individual identifier.
    (7) Maintain an accounting, in the prescribed form, of all 
dissemination of personal information outside NCUA, whether made orally 
or in writing;
    (8) Disseminate no information concerning individuals outside NCUA 
except when authorized by 5 U.S.C. 552a or pursuant to a routine use as 
set forth in the ``routine use'' section of the ``Notice of Systems of 
Records'' published in the Federal Register.
    (9) Maintain and process information concerning individuals with 
care in order to ensure that no inadvertent disclosure of the 
information is made either within or outside NCUA; and
    (10) Call to the attention of the proper NCUA authorities any 
information in a system maintained by NCUA which is not authorized to be 
maintained under the provisions of the Privacy Act, including 
information on First Amendment activities, information that is 
inaccurate, irrelevant or so incomplete as to risk unfairness to the 
individuals concerned.
    (c) Heads of offices within NCUA shall, at least annually, review 
the record systems subject to their supervision to ensure compliance 
with the provisions of the Privacy Act.

[54 FR 18476, May 1, 1989, as amended at 59 FR 36042, July 15, 1994; 65 
FR 63790, Oct. 25, 2000; 67 FR 30774, May 8, 2002; 73 FR 56940, Oct. 1, 
2008]



PART 793_TORT CLAIMS AGAINST THE GOVERNMENT--Table of Contents



                            Subpart A_General

Sec.
793.1  Scope of regulations.

                          Subpart B_Procedures

793.2  Administrative claim; when presented; place of filing.
793.3  Administrative claim; who may file.
793.4  Administrative claims; evidence and information to be submitted.
793.5  Investigation, examination, and determination of claims.
793.6  Final denial of claim.
793.7  Payment of approved claims.
793.8  Release.
793.9  Penalties.
793.10  Limitation of National Credit Union Administration's authority.

    Authority: 12 U.S.C. 1766.

    Source: 37 FR 5928, Mar. 23, 1972, unless otherwise noted. 
Redesignated at 49 FR 559, Jan. 5, 1984.

[[Page 1217]]



                            Subpart A_General



Sec. 793.1  Scope of regulations.

    The regulation in this part shall apply only to claims asserted 
under the Federal Tort Claims Act, as amended, 28 U.S.C. 2671-2680, 
accruing on or after January 18, 1967, for money damages against the 
United States for damage to or loss of property or personal injury or 
death caused by the negligent or wrongful act or omission of any 
employee of the National Credit Union Administration while acting within 
the scope of his office of employment.



                          Subpart B_Procedures



Sec. 793.2  Administrative claim; when presented; place of filing.

    (a) For purposes of the regulations in this part, a claim shall be 
deemed to have been presented when the National Credit Union 
Administration receives, at a place designated in paragraph (b) of this 
section, an executed Standard Form 95 or other written notification of 
an incident accompanied by a claim for money damages in a sum certain 
for damage to or loss of property, for personal injury, or for death, 
alleged to have occurred by reason of the incident. A claim which should 
have been presented to the National Credit Union Administration but 
which was mistakenly addressed to or filed with another Federal agency, 
shall be deemed to be presented to the National Credit Union 
Administration as of the date that the claim is received by the National 
Credit Union Administration. A claim mistakenly addressed to or filed 
with the National Credit Union Administration shall forthwith be 
transferred to the appropriate Federal agency, if ascertainable, or 
returned to the claimant.
    (b) A claim presented in compliance with paragraph (a) of this 
section may be amended by the claimant at any time prior to final action 
by the Office of General Counsel, National Credit Union Administration 
or prior to the exercise of the claimant's option to bring suit under 28 
U.S.C. 2675(a). Amendments shall be submitted in writing and signed by 
the claimant or his duly authorized agent or legal representative. Upon 
the timely filing of an amendment to a pending claim, the National 
Credit Union Administration shall have 6 months in which to make a final 
disposition of the claim as amended and the claimant's option under 28 
U.S.C. 2675(a) shall not accrue until 6 months after the filing of an 
amendment.
    (c) Forms may be obtained and claims may be filed with the regional 
office of the National Credit Union Administration having jurisdiction 
over the employee involved in the accident or incident, or with the 
Office of General Counsel, National Credit Union Administration, 1775 
Duke Street, Alexandria, VA 22314-3428.

[37 FR 5928, Mar. 23, 1972. Redesignated at 49 FR 559, Jan. 5, 1984, and 
amended at 59 FR 36041, July 15, 1994]



Sec. 793.3  Administrative claim; who may file.

    (a) A claim for injury to or loss of property may be presented by 
the owner of the property interest which is the subject matter of the 
claim, his duly authorized agent, or his legal representative.
    (b) A claim for personal injury may be presented by the injured 
person, his duly authorized agent, or his legal representative.
    (c) A claim based on death may be presented by the executor or 
administrator of the decedent's estate or by any other person legally 
entitled to assert such a claim under applicable State law.
    (d) A claim for loss wholly compensated by an insurer with the 
rights of a subrogee may be presented by the insurer. A claim for loss 
partially compensated by an insurer with the rights of a subrogee may be 
presented by the insurer or the insured individually, as their 
respective interests appear, or jointly. Whenever an insurer presents a 
claim asserting the rights of a subrogee, he shall present with his 
claim appropriate evidence that he has the rights of a subrogee.
    (e) A claim presented by an agent or legal representative shall be 
presented in the name of the claimant, be signed by the agent or legal 
representative, show the title or legal capacity of the person signing, 
and be accompanied by evidence of his authority to present a claim on 
behalf of the claimant as

[[Page 1218]]

agent, executor, administrator, parent, guardian, or other 
representative.



Sec. 793.4  Administrative claims; evidence and information to be
submitted.

    (a) Death. In support of a claim based on death, the claimant may be 
required to submit the following evidence or information:
    (1) An authenticated death certificate or other competent evidence 
showing the cause of death, date of death, and age of the decedent.
    (2) Decedent's employment or occupation at the time of death, 
including his monthly or yearly salary or earnings (if any), and the 
duration of his last employment or occupation.
    (3) Full names, addresses, birthdates, kinship, and marital status 
of the decedent's survivors, including those survivors who were 
dependent for support upon the decedent at the time of his death.
    (4) Degree of support afforded by the decedent to each survivor 
dependent upon him for support at the time of his death.
    (5) Decedent's general physical and mental condition before death.
    (6) Itemized bills for medical and burial expenses incurred by 
reason of the incident causing death, or itemized receipts or payments 
for such expenses.
    (7) If damages for pain and suffering before death are claimed, a 
physician's detailed statement specifying the injuries suffered, 
duration of pain and suffering, any drugs administered for pain and the 
decedent's physical condition in the interval between injury and death.
    (8) Any other evidence or information which may have a bearing on 
the responsibility of the United States for the death or the damages 
claimed.
    (b) Personal injury. In support of a claim based on personal injury, 
the claimant may be required to submit the following evidence or 
information:
    (1) A written report by his attending physician or dentist setting 
forth the nature and extent of the injury, nature and extent of the 
treatment, any degree of temporary or permanent disability, the 
prognosis, period of hospitalization, and any diminished earning 
capacity. In addition, the claimant may be required to submit to a 
physical and/or mental examination by a physician employed or designated 
by the National Credit Union Administration. A copy or report of the 
examining physician shall be made available to the claimant upon the 
claimant's written request provided that claimant has, upon request, 
furnished the report referred to in the first sentence of this paragraph 
and has made or agrees to make available to the National Credit Union 
Administration any other physician's reports previously or thereafter 
made of the physical or mental condition which is the subject of his 
claim.
    (2) Itemized bills for medical, dental, and hospital expenses 
incurred, or itemized receipts of payment for such expenses.
    (3) If the prognosis reveals the necessity for future treatment, a 
statement of expected duration of and expenses for such treatment.
    (4) If a claim is made for loss of time from employment, a written 
statement from his employer showing actual time lost from his 
employment, whether he is a full or part time employee, and wages or 
salary actually lost.
    (5) If a claim is made for loss of income and the claimant is self-
employed, documentary evidence showing the amount of earnings actually 
lost.
    (6) Any other evidence or information which may have a bearing on 
the responsibility of the United States for the personal injury or the 
damages claimed.
    (c) Property damage. In support of a claim for damages to or loss of 
property, real or personal, the claimant may be required to submit the 
following information or evidence:
    (1) Proof of ownership.
    (2) A detailed statement of the amount claimed with respect to each 
item of property.
    (3) An itemized receipt of payment for necessary repairs or itemized 
written estimates of the cost of such repairs.
    (4) A statement listing date of purchase, purchase price, market 
value of the property as of date of damage, and salvage value, where 
repair is not economical.
    (5) Any other evidence or information which may have a bearing on 
the responsibility of the United States for

[[Page 1219]]

the injury to or loss of property or the damages claimed.
    (d) Time limit. All evidence required to be submitted by this 
section shall be furnished by the claimant within a reasonable time. 
Failure of a claimant to furnish evidence necessary for a determination 
of his claim within 3 months after a request therefore has been mailed 
to his last known address may be deemed an abandonment of the claim. The 
claim may be thereupon disallowed.

[37 FR 5928, Mar. 23, 1972, as amended at 75 FR 34623, June 18, 2010]



Sec. 793.5  Investigation, examination, and determination of claims.

    When a claim is received, the constituent agency out of whose 
activities the claim arose shall make such investigation as may be 
necessary or appropriate for a determination of the validity of the 
claim and thereafter shall forward the claim, together with all 
pertinent material, and a recommendation based on the merits of the 
case, with regard to the allowance or disallowance of the claim, to the 
Office of General Counsel, National Credit Union Administration to whom 
authority has been delegated to adjust, determine, compromise and settle 
all claims hereunder.



Sec. 793.6  Final denial of claim.

    (a) Final denial of an administrative claim shall be in writing and 
sent to the claimant, his attorney, or legal representative by certified 
or registered mail. The notification of final denial may include a 
statement of the reasons for the denial and shall include a statement 
that, if the claimant is dissatisfied with the action of the National 
Credit Union Administration, he may file suit in an appropriate U.S. 
District Court not later than 6 months after the date of mailing the 
notification.
    (b) Prior to the commencement of suit and prior to the expiration of 
the 6-month period after the date of mailing, by certified or registered 
mail of notice of final denial of the claim as provided in 28 U.S.C. 
2401(b), a claimant, his duly authorized agent, or legal representative, 
may file a written request with the National Credit Union Administration 
for reconsideration of a final denial of a claim under paragraph (a) of 
this section. Upon the timely filing of a request for reconsideration 
the National Credit Union Administration shall have 6 months from the 
date of filing in which to make a final disposition of the claim and the 
claimant's option under 28 U.S.C. 2675(a) to bring suit shall not accrue 
until 6 months after the filing of a request for reconsideration. Final 
National Credit Union Administration action on a request for 
reconsideration shall be effected in accordance with the provisions of 
paragraph (a) of this section.



Sec. 793.7  Payment of approved claims.

    (a) Upon allowance of his claim, claimant or his duly authorized 
agent shall sign the voucher for payment, Standard Form 1145, before 
payment is made.
    (b) When the claimant is represented by an attorney, the voucher for 
payment (S.F. 1145) shall designate both the claimant and his attorney 
as ``payees.'' The check shall be delivered to the attorney whose 
address shall appear on the voucher.



Sec. 793.8  Release.

    Acceptance by the claimant, his agent or legal representative, of 
any award, compromise or settlement made hereunder, shall be final and 
conclusive on the claimant, his agent or legal representative and any 
other person on whose behalf or for whose benefit the claim has been 
presented, and shall constitute a complete release of any claim against 
the United States and any employee of the Government whose act or 
omission gave rise to the claim, by reason of the same subject matter.



Sec. 793.9  Penalties.

    A person who files a false claim or makes a false or fraudulent 
statement in a claim against the United States may be liable to a fine 
of not more than $10,000 or to imprisonment of not more than 5 years, or 
both (18 U.S.C. 287-1001), and, in addition, to a forfeiture of $2,000 
and a penalty of double the loss or damage sustained by the United 
States (31 U.S.C. 231).

[[Page 1220]]



Sec. 793.10  Limitation on National Credit Union Administration's 
authority.

    (a) An award, compromise or settlement of a claim hereunder in 
excess of $25,000 shall be effected only with the prior written approval 
of the Attorney General or his designee. For purposes of this paragraph, 
a principal claim and any derivative or subrogated claim shall be 
treated as a single claim.
    (b) An administrative claim may be adjusted, determined, compromised 
or settled hereunder only after consultation with the Department of 
Justice when, in the opinion of the National Credit Union 
Administration:
    (1) A new precedent or a new point of law is involved; or
    (2) A question of policy is or may be involved; or
    (3) The United States is or may be entitled to indemnity or 
contribution from a third party and the National Credit Union 
Administration is unable to adjust the third party claim; or
    (4) The compromise of a particular claim, as a practical matter, 
will or may control the disposition of a related claim in which the 
amount to be paid may exceed $25,000.
    (c) An administrative claim may be adjusted, determined, compromised 
or settled only after consultation with the Department of Justice when 
it is learned that the United States or any employee, agent or cost-plus 
contractor of the United States is involved in litigation based on a 
claim arising out of the same incident or transaction.



PART 794_ENFORCEMENT OF NONDISCRIMINATION ON THE BASIS OF HANDICAP 
IN PROGRAMS OR ACTIVITIES CONDUCTED BY THE NATIONAL CREDIT UNION
ADMINISTRATION--Table of Contents



Sec.
794.101  Purpose.
794.102  Application.
794.103  Definitions.
794.104-794.109  [Reserved]
794.110  Self-evaluation.
794.111  Notice.
794.112-794.129  [Reserved]
794.130  General prohibitions against discrimination.
794.131-794.139  [Reserved]
794.140  Employment.
794.141-794.148  [Reserved]
794.149  Program accessibility: Discrimination prohibited.
794.150  Program accessibility: Existing facilities.
794.151  Program accessibility: New construction and alterations.
794.152-794.159  [Reserved]
794.160  Communications.
794.161-794.169  [Reserved]
794.170  Compliance procedures.
794.171-794.999  [Reserved]

    Authority: 29 U.S.C. 794.

    Source: 51 FR 22889, 22896, June 23, 1986, unless otherwise noted.



Sec. 794.101  Purpose.

    This part effectuates section 119 of the Rehabilitation, 
Comprehensive Services, and Developmental Disabilities Amendments of 
1978, which amended section 504 of the Rehabilitation Act of 1973 to 
prohibit discrimination on the basis of handicap in programs or 
activities conducted by Executive agencies or the United States Postal 
Service.



Sec. 794.102  Application.

    This part applies to all programs or activities conducted by the 
agency.



Sec. 794.103  Definitions.

    For purposes of this part, the term--
    Assistant Attorney General means the Assistant Attorney General, 
Civil Rights Division, United States Department of Justice.
    Auxiliary aids means services or devices that enable persons with 
impaired sensory, manual, or speaking skills to have an equal 
opportunity to participate in, and enjoy the benefits of, programs or 
activities conducted by the agency. For example, auxiliary aids useful 
for persons with impaired vision include readers, brailled materials, 
audio recordings, telecommunications devices and other similar services 
and devices. Auxiliary aids useful for persons with impaired hearing 
include telephone handset amplifiers, telephones compatible with hearing 
aids, telecommunication devices for deaf persons (TDD's), interpreters, 
notetakers, written materials, and other similar services and devices.

[[Page 1221]]

    Complete complaint means a written statement that contains the 
complainant's name and address and describes the agency's alleged 
discriminatory action in sufficient detail to inform the agency of the 
nature and date of the alleged violation of section 504. It shall be 
signed by the complainant or by someone authorized to do so on his or 
her behalf. Complaints filed on behalf of classes or third parties shall 
describe or identify (by name, if possible) the alleged victims of 
discrimination.
    Facility means all or any portion of buildings, structures, 
equipment, roads, walks, parking lots, rolling stock or other 
conveyances, or other real or personal property.
    Handicapped person means any person who has a physical or mental 
impairment that substantially limits one or more major life activities, 
has a record of such an impairment, or is regarded as having such an 
impairment.
    As used in this definition, the phrase:
    (1) Physical or mental impairment includes--
    (i) Any physiological disorder or condition, cosmetic disfigurement, 
or anatomical loss affecting one or more of the following body systems: 
Neurological; musculoskeletal; special sense organs; respiratory, 
including speech organs; cardiovascular; reproductive; digestive; 
genitourinary; hemic and lymphatic; skin; and endocrine; or
    (ii) Any mental or psychological disorder, such as mental 
retardation, organic brain syndrome, emotional or mental illness, and 
specific learning disabilities. The term physical or mental impairment 
includes, but is not limited to, such diseases and conditions as 
orthopedic, visual, speech, and hearing impairments, cerebral palsy, 
epilepsy, muscular dystrophy, multiple sclerosis, cancer, heart disease, 
diabetes, mental retardation, emotional illness, and drug addiction and 
alocoholism.
    (2) Major life activities includes functions such as caring for 
one's self, performing manual tasks, walking, seeing, hearing, speaking, 
breathing, learning, and working.
    (3) Has a record of such an impairment means has a history of, or 
has been misclassified as having, a mental or physical impairment that 
substantially limits one or more major life activities.
    (4) Is regarded as having an impairment means--
    (i) Has a physical or mental impairment that does not substantially 
limit major life activities but is treated by the agency as constituting 
such a limitation;
    (ii) Has a physical or mental impairment that substantially limits 
major life activities only as a result of the attitudes of others toward 
such impairment; or
    (iii) Has none of the impairments defined in paragraph (1) of this 
definition but is treated by the agency as having such an impairment.
    Historic preservation programs means programs conducted by the 
agency that have preservation of historic properties as a primary 
purpose.
    Historic properties means those properties that are listed or 
eligible for listing in the National Register of Historic Places or 
properties designated as historic under a statute of the appropriate 
State or local government body.
    Qualified handicapped person means--
    (1) With respect to preschool, elementary, or secondary education 
services provided by the agency, a handicapped person who is a member of 
a class of persons otherwise entitled by statute, regulation, or agency 
policy to receive education services from the agency.
    (2) With respect to any other agency program or activity under which 
a person is required to perform services or to achieve a level of 
accomplishment, a handicapped person who meets the essential eligibility 
requirements and who can acheive the purpose of the program or activity 
without modifications in the program or activity that the agency can 
demonstrate would result in a fundamental alteration in its nature;
    (3) With respect to any other program or activity, a handicapped 
person who meets the essential eligibility requirements for 
participation in, or receipt of benefits from, that program or activity; 
and
    (4) Qualified handicapped person is defined for purposes of 
employment in 29 CFR 1613.702(f), which is made applicable to this part 
by Sec. 794.140.

[[Page 1222]]

    Section 504 means section 504 of the Rehabilitation Act of 1973 
(Pub. L. 93-112, 87 Stat. 394 (29 U.S.C. 794)), as amended by the 
Rehabilitation Act Amendments of 1974 (Pub. L. 93-516, 88 Stat. 1617), 
and the Rehabilitation, Comprehensive Services, and Developmental 
Disabilities Amendments of 1978 (Pub. L. 95-602, 92 Stat. 2955). As used 
in this part, section 504 applies only to programs or activities 
conducted by Executive agencies and not to federally assisted programs.
    Substantial impairment means a significant loss of the integrity of 
finished materials, design quality, or special character resulting from 
a permanent alteration.



Secs. 794.104-794.109  [Reserved]



Sec. 794.110  Self-evaluation.

    (a) The agency shall, by August 24, 1987, evaluate its current 
policies and practices, and the effects thereof, that do not or may not 
meet the requirements of this part, and, to the extent modification of 
any such policies and practices is required, the agency shall proceed to 
make the necessary modifications.
    (b) The agency shall provide an opportunity to interested persons, 
including handicapped persons or organizations representing handicapped 
persons, to participate in the self-evaluation process by submitting 
comments (both oral and written).
    (c) The agency shall, until three years following the completion of 
the self-evaluation, maintain on file and make available for public 
inspection:
    (1) A description of areas examined and any problems identified, and
    (2) A description of any modifications made.



Sec. 794.111  Notice.

    The agency shall make available to employees, applicants, 
participants, beneficiaries, and other interested persons such 
information regarding the provisions of this part and its applicability 
to the programs or activities conducted by the agency, and make such 
information available to them in such manner as the head of the agency 
finds necessary to apprise such persons of the protections against 
discrimination assured them by section 504 and this regulation.



Secs. 794.112-794.129  [Reserved]



Sec. 794.130  General prohibitions against discrimination.

    (a) No qualified handicapped person shall, on the basis of handicap, 
be excluded from participation in, be denied the benefits of, or 
otherwise be subjected to discrimination under any program or activity 
conducted by the agency.
    (b)(1) The agency, in providing any aid, benefit, or service, may 
not, directly or through contractual, licensing, or other arrangements, 
on the basis of handicap--
    (i) Deny a qualified handicapped person the opportunity to 
participate in or benefit from the aid, benefit, or service;
    (ii) Afford a qualified handicapped person an opportunity to 
participate in or benefit from the aid, benefit, or service that is not 
equal to that afforded others;
    (iii) Provide a qualified handicapped person with an aid, benefit, 
or service that is not as effective in affording equal opportunity to 
obtain the same result, to gain the same benefit, or to reach the same 
level of achievement as that provided to others;
    (iv) Provide different or separate aid, benefits, or services to 
handicapped persons or to any class of handicapped persons than is 
provided to others unless such action is necessary to provide qualified 
handicapped persons with aid, benefits, or services that are as 
effective as those provided to others;
    (v) Deny a qualified handicapped person the opportunity to 
participate as a member of planning or advisory boards; or
    (vi) Otherwise limit a qualified handicapped person in the enjoyment 
of any right, privilege, advantage, or opportunity enjoyed by others 
receiving the aid, benefit, or service.
    (2) The agency may not deny a qualified handicapped person the 
opportunity to participate in programs or activities that are not 
separate or different, despite the existence of permissibly separate or 
different programs or activities.

[[Page 1223]]

    (3) The agency may not, directly or through contractual or other 
arrangments, utilize criteria or methods of administration the purpose 
or effect of which would--
    (i) Subject qualified handicapped persons to discrimination on the 
basis of handicap; or
    (ii) Defeat or substantially impair accomplishment of the objectives 
of a program activity with respect to handicapped persons.
    (4) The agency may not, in determining the site or location of a 
facility, make selections the purpose or effect of which would--
    (i) Exclude handicapped persons from, deny them the benefits of, or 
otherwise subject them to discrimination under any program or activity 
conducted by the agency; or
    (ii) Defeat or substantially impair the accomplishment of the 
objectives of a program or activity with respect to handicapped persons.
    (5) The agency, in the selection of procurement contractors, may not 
use criteria that subject qualified handicapped persons to 
discrimination on the basis of handicap.
    (6) The agency may not administer a licensing or certification 
program in a manner that subjects qualified handicapped persons to 
discrimination on the basis of handicap, nor may the agency establish 
requirements for the programs or activities of licensees or certified 
entities that subject qualified handicapped persons to discrimination on 
the basis of handicap. However, the programs or activities of entities 
that are licensed or certified by the agency are not, themselves, 
covered by this part.
    (c) The exclusion of nonhandicapped persons from the benefits of a 
program limited by Federal statute or Executive order to handicapped 
persons or the exclusion of a specific class of handicapped persons from 
a program limited by Federal statute or Executive order to a different 
class of handicapped persons is not prohibited by this part.
    (d) The agency shall administer programs and activities in the most 
integrated setting appropriate to the needs of qualified handicapped 
persons.



Secs. 794.131-794.139  [Reserved]



Sec. 794.140  Employment.

    No qualified handicapped person shall, on the basis of handicap, be 
subjected to discrimination in employment under any program or activity 
conducted by the agency. The definitions, requirements, and procedures 
of section 501 of the Rehabilitation Act of 1973 (29 U.S.C. 791), as 
established by the Equal Employment Opportunity Commission in 29 CFR 
part 1613, shall apply to employment in federally conducted programs or 
activities.



Secs. 794.141-794.148  [Reserved]



Sec. 794.149  Program accessibility: Discrimination prohibited.

    Except as otherwise provided in Sec. 794.150, no qualified 
handicapped person shall, because the agency's facilities are 
inaccessible to or unusable by handicapped persons, be denied the 
benefits of, be excluded from participation in, or otherwise be 
subjected to discrimination under any program or activity conducted by 
the agency.



Sec. 794.150  Program accessibility: Existing facilities.

    (a) General. The agency shall operate each program or activity so 
that the program or activity, when viewed in its entirety, is readily 
accessible to and usable by handicapped persons. This paragraph does 
not--
    (1) Necessarily require the agency to make each of its existing 
facilities accessible to and usable by handicapped persons;
    (2) In the case of historic preservation programs, require the 
agency to take any action that would result in a substantial impairment 
of significant historic features of an historic property; or
    (3) Require the agency to take any action that it can demonstrate 
would result in a fundamental alteration in the nature of a program or 
activity or in undue financial and administrative burdens. In those 
circumstances where agency personnel believe that the proposed action 
would fundamentally alter the program or activity or would result in 
undue financial and administrative burdens, the agency has the

[[Page 1224]]

burden of proving that compliance with Sec. 794.150(a) would result in 
such alteration or burdens. The decision that compliance would result in 
such alteration or burdens must be made by the agency head or his or her 
designee after considering all agency resources available for use in the 
funding and operation of the conducted program or activity, and must be 
accompanied by a written statement of the reasons for reaching that 
conclusion. If an action would result in such an alteration or such 
burdens, the agency shall take any other action that would not result in 
such an alteration or such burdens but would nevertheless ensure that 
handicapped persons receive the benefits and services of the program or 
activity.
    (b) Methods--(1) General. The agency may comply with the 
requirements of this section through such means as redesign of 
equipment, reassignment of services to accessible buildings, assignment 
of aides to beneficiaries, home visits, delivery of services at 
alternate accessible sites, alteration of existing facilities and 
construction of new facilities, use of accessible rolling stock, or any 
other methods that result in making its programs or activities readily 
accessible to and usable by handicapped persons. The agency is not 
required to make structural changes in existing facilities where other 
methods are effective in achieving compliance with this section. The 
agency, in making alterations to existing buildings, shall meet 
accessibility requirements to the extent compelled by the Architectural 
Barriers Act of 1968, as amended (42 U.S.C. 4151-4157), and any 
regulations implementing it. In choosing among available methods for 
meeting the requirements of this section, the agency shall give priority 
to those methods that offer programs and activities to qualified 
handicapped persons in the most integrated setting appropriate.
    (2) Historic preservation programs. In meeting the requirements of 
Sec. 794.150(a) in historic preservation programs, the agency shall give 
priority to methods that provide physical access to handicapped persons. 
In cases where a physical alteration to an historic property is not 
required because of Sec. 794.150(a)(2) or (a)(3), alternative methods of 
achieving program accessibility include--
    (i) Using audio-visual materials and devices to depict those 
portions of an historic property that cannot otherwise be made 
accessible;
    (ii) Assigning persons to guide handicapped persons into or through 
portions of historic properties that cannot otherwise be made 
accessible; or
    (iii) Adopting other innovative methods.
    (c) Time period for compliance. The agency shall comply with the 
obligations established under this section by October 21, 1986, except 
that where structural changes in facilities are undertaken, such changes 
shall be made by August 22, 1989, but in any event as expeditiously as 
possible.
    (d) Transition plan. In the event that structural changes to 
facilities will be undertaken to achieve program accessibility, the 
agency shall develop, by February 23, 1987, a transition plan setting 
forth the steps necessary to complete such changes. The agency shall 
provide an opportunity to interested persons, including handicapped 
persons or organizations representing handicapped persons, to 
participate in the development of the transition plan by submitting 
comments (both oral and written). A copy of the transition plan shall be 
made available for public inspection. The plan shall, at a minimum--
    (1) Identify physical obstacles in the agency's facilities that 
limit the accessibility of its programs or activities to handicapped 
persons;
    (2) Describe in detail the methods that will be used to make the 
facilities accessible;
    (3) Specify the schedule for taking the steps necessary to achieve 
compliance with this section and, if the time period of the transition 
plan is longer than one year, identify steps that will be taken during 
each year of the transition period; and
    (4) Indicate the official responsible for implementation of the 
plan.



Sec. 794.151  Program accessibility: New construction and alterations.

    Each building or part of a building that is constructed or altered 
by, on

[[Page 1225]]

behalf of, or for the use of the agency shall be designed, constructed, 
or altered so as to be readily accessible to and usable by handicapped 
persons. The definitions, requirements, and standards of the 
Architectural Barriers Act (42 U.S.C. 4151-4157), as established in 41 
CFR 101-19.600 to 101-19.607, apply to buildings covered by this 
section.



Secs. 794.152-794.159  [Reserved]



Sec. 794.160  Communications.

    (a) The agency shall take appropriate steps to ensure effective 
communication with applicants, participants, personnel of other Federal 
entities, and members of the public.
    (1) The agency shall furnish appropriate auxiliary aids where 
necessary to afford a handicapped person an equal opportunity to 
participate in, and enjoy the benefits of, a program or activity 
conducted by the agency.
    (i) In determining what type of auxiliary aid is necessary, the 
agency shall give primary consideration to the requests of the 
handicapped person.
    (ii) The agency need not provide individually prescribed devices, 
readers for personal use or study, or other devices of a personal 
nature.
    (2) Where the agency communicates with applicants and beneficiaries 
by telephone, telecommunication devices for deaf person (TDD's) or 
equally effective telecommunication systems shall be used.
    (b) The agency shall ensure that interested persons, including 
persons with impaired vision or hearing, can obtain information as to 
the existence and location of accessible services, activities, and 
facilities.
    (c) The agency shall provide signage at a primary entrance to each 
of its inaccessible facilities, directing users to a location at which 
they can obtain information about accessible facilities. The 
international symbol for accessibility shall be used at each primary 
entrance of an accessible facility.
    (d) This section does not require the agency to take any action that 
it can demonstrate would result in a fundamental alteration in the 
nature of a program or activity or in undue financial and adminstrative 
burdens. In those circumstances where agency personnel believe that the 
proposed action would fundamentally alter the program or activity or 
would result in undue financial and administrative burdens, the agency 
has the burden of proving that compliance with Sec. 794.160 would result 
in such alteration or burdens. The decision that compliance would result 
in such alteration or burdens must be made by the agency head or his or 
her designee after considering all agency resources available for use in 
the funding and operation of the conducted program or activity, and must 
be accompanied by a written statement of the reasons for reaching that 
conclusion. If an action required to comply with this section would 
result in such an alteration or such burdens, the agency shall take any 
other action that would not result in such an alteration or such burdens 
but would nevertheless ensure that, to the maximum extent possible, 
handicapped persons receive the benefits and services of the program or 
activity.



Secs. 794.161-794.169  [Reserved]



Sec. 794.170  Compliance procedures.

    (a) Except as provided in paragraph (b) of this section, this 
section applies to all allegations of discrimination on the basis of 
handicap in programs or activities conducted by the agency.
    (b) The agency shall process complaints alleging violations of 
section 504 with respect to employment according to the procedures 
established by the Equal Employment Opportunity Commission in 29 CFR 
part 1613 pursuant to section 501 of the Rehabilitation Act of 1973 (29 
U.S.C. 791).
    (c) The Director, Office of Administration, shall be responsible for 
coordinating implementation of this section. Complaints may be sent to 
NCUA, 1776 G Street NW., Room 7261, Washington, DC 20456.
    (d) The agency shall accept and investigate all complete complaints 
for which it has jurisdiction. All complete complaints must be filed 
within 180 days of the alleged act of discrimination. The agency may 
extend this time period for good cause.

[[Page 1226]]

    (e) If the agency receives a complaint over which it does not have 
jurisdiction, it shall promptly notify the complainant and shall make 
reasonable efforts to refer the complaint to the appropriate government 
entity.
    (f) The agency shall notify the Architectural and Transportation 
Barriers Compliance Board upon receipt of any complaint alleging that a 
building or facility that is subject to the Architectural Barriers Act 
of 1968, as amended (42 U.S.C. 4151-4157), or section 502 of the 
Rehabilitation Act of 1973, as amended (29 U.S.C. 792), is not readily 
accessible to and usable by handicapped persons.
    (g) Within 180 days of the receipt of a complete complaint for which 
it has jurisdiction, the agency shall notify the complainant of the 
results of the investigation in a letter containing--
    (1) Findings of fact and conclusions of law;
    (2) A description of a remedy for each violation found; and
    (3) A notice of the right to appeal.
    (h) Appeals of the findings of fact and conclusions of law or 
remedies must be filed by the complainant within 90 days of receipt from 
the agency of the letter required by Sec. 794.170(g). The agency may 
extend this time for good cause.
    (i) Timely appeals shall be accepted and processed by the head of 
the agency.
    (j) The head of the agency shall notify the complainant of the 
results of the appeal within 60 days of the receipt of the request. If 
the head of the agency determines that additional information is needed 
from the complainant, he or she shall have 60 days from the date of 
receipt of the additional information to make his or her determination 
on the appeal.
    (k) The time limits cited in paragraphs (g) and (j) of this section 
may be extended with the permission of the Assistant Attorney General.
    (l) The agency may delegate its authority for conducting complaint 
investigations to other Federal agencies, except that the authority for 
making the final determination may not be delegated to another agency.

[51 FR 22889, 22896, June 23, 1986, as amended at 51 FR 22889, June 23, 
1986; 59 FR 36042, July 15, 1994]



Secs. 794.171-794.999  [Reserved]



PART 796_POST-EMPLOYMENT RESTRICTIONS FOR CERTAIN NCUA EXAMINERS--
Table of Contents



Sec.
796.1  What is the purpose and scope of this part?
796.2  Who is considered a senior examiner of the NCUA?
796.3  What special post-employment restrictions apply to senior 
          examiners?
796.4  When do these special restrictions become effective and may they 
          be waived?
796.5  What are the penalties for violating these special post-
          employment restrictions?
796.6  What other definitions and rules of construction apply for 
          purposes of this part?

    Authority: 12 U.S.C. 1786(w).

    Source: 70 FR 72703, Dec. 7, 2005, unless otherwise noted.



Sec. 796.1  What is the purpose and scope of this part?

    This part identifies those National Credit Union Administration 
(NCUA) employees who are subject to the special, post-employment 
restrictions in section 1786(w) of the Act and implements those 
restrictions as they apply to NCUA employees.



Sec. 796.2  Who is considered a senior examiner of the NCUA?

    For purposes of this part, an NCUA employee is considered to be the 
``senior examiner'' for a federally insured credit union if the 
employee--
    (a) Has been authorized by NCUA to conduct examinations or 
inspections of federally insured credit unions on behalf of NCUA;
    (b) Has continuing, broad, and lead responsibility for examining or 
inspecting that federally insured credit union;
    (c) Routinely interacts with officers or employees of that federally 
insured credit union; and
    (d) Devotes a substantial portion of his or her time to supervising 
or examining that federally insured credit union.

[[Page 1227]]



Sec. 796.3  What special post-employment restrictions apply to senior
examiners?

    (a) Senior examiners of federally insured credit unions. An officer 
or employee of the NCUA who performs work (onsite or offsite) as the 
senior examiner of a federally insured credit union for a total of two 
or more months during the last 12 months of individual's employment with 
NCUA may not, within one year after leaving NCUA employment, knowingly 
accept compensation as an employee, officer, director, or consultant 
from that credit union.
    (b) Example. An NCUA resident corporate credit union examiner 
assigned to work at a federally insured, corporate credit union for two 
or more months during the last 12 months of that individual's employment 
with NCUA will be subject to the one-year prohibition of this section.



Sec. 796.4  When do these special restrictions become effective 
and may they be waived?

    The post-employment restrictions in section 1786(w) of the Act and 
Sec. 796.3 do not apply to any current or former NCUA employee, if:
    (a) The individual ceased to be an NCUA employee on or before 
December 17, 2005; or
    (b) The Chairman of the NCUA Board certifies in writing and on a 
case-by-case basis that granting the senior examiner a waiver of the 
restrictions would not affect the integrity of the NCUA's supervisory 
program.



Sec. 796.5  What are the penalties for violating these special
post-employment restrictions?

    (a) Penalties under section 1786(w)(5) of the Act. An NCUA senior 
examiner who violates the post-employment restrictions set forth in 
Sec. 796.3 can be:
    (1) Removed from participating in the affairs of the relevant credit 
union and prohibited from participating in the affairs of any federally 
insured credit union for a period of up to five years; and, 
alternatively, or in addition,
    (2) Assessed a civil monetary penalty up to the amount specified in 
Sec. 747.1001 of this chapter.
    (b) Other penalties. The penalties in paragraph (a) of this section 
are not exclusive, and a senior examiner who violates the restrictions 
in Sec. 796.3 also may be subject to other administrative, civil, and 
criminal remedies and penalties as provided in law.

[70 FR 72703, Dec. 7, 2005, as amended at 80 FR 57289, Sept. 23, 2015]



Sec. 796.6  What other definitions and rules of construction apply 
for purposes of this part?

    For purposes of this part, a person shall be deemed to act as a 
``consultant'' for a federally insured credit union or other company 
only if the person works directly on matters for, or on behalf of, such 
credit union.



PART 797_PROCEDURES FOR DEBT COLLECTION--Table of Contents



    Subpart A_Scope, Purpose, Definitions and Delegation of Authority

Sec.
797.1  Scope.
797.2  Purpose.
797.3  Definitions.
797.4  Delegation of authority.

                     Subpart B_Administrative Offset

797.5  Authority and scope.
797.6  Administrative offset prior to completion of procedures.
797.7  Procedures.
797.8  Right to agency review.
797.9  Review procedures.
797.10  Special review.
797.11  Interest, administrative costs, and penalties.
797.12  Refunds.
797.13  Requests for administrative offset where NCUA is the creditor 
          agency.
797.14  Requests for administrative offset where NCUA is the paying 
          agency.
797.15  Administrative offset against amounts payable from Civil Service 
          Retirement and Disability Fund.
797.16  Stay of offset.

                         Subpart C_Salary Offset

797.17  Authority and scope.
797.18  Notice requirements where NCUA is the creditor agency.
797.19  Review of agency records related to the debt.
797.20  Procedures to request a hearing.
797.21  Hearing procedures.
797.22  Voluntary repayment agreement.

[[Page 1228]]

797.23  Certification where NCUA is the creditor agency.
797.24  Certification where NCUA is the paying agency.
797.25  Recovery from final check or other payments due a separated 
          employee.

    Authority: 12 U.S.C. 1752a; 5 U.S.C. 5514; 31 U.S.C. 3711, 3716, 
3720A, 3720D.

    Source: 73 FR 11341, Mar. 3, 2008, unless otherwise noted.



    Subpart A_Scope, Purpose, Definitions and Delegation of Authority



Sec. 797.1  Scope.

    This part establishes NCUA procedures for the collection of certain 
debts owed to the United States.
    (a) This part applies to collections by NCUA from:
    (1) Federal employees who are indebted to NCUA;
    (2) Employees of NCUA who are indebted to other agencies or NCUA; 
and
    (3) Former federal employees who are indebted to NCUA.
    (b) This part does not apply:
    (1) To debts or claims arising under the Internal Revenue Code of 
1986 (Title 26, U.S. Code), the Social Security Act (42 U.S.C. 301 et 
seq.), or the tariff laws of the United States;
    (2) To a situation to which the Contract Disputes Act (41 U.S.C. 601 
et seq.) applies;
    (3) In any case where collection of a debt is explicitly provided 
for or prohibited by another statute;
    (4) To debts owed to or payments made by NCUA in connection with 
NCUA's conservatorship, liquidation, supervision, enforcement, or 
insurance responsibilities pursuant to 12 U.S.C. 1786 and 1787, nor does 
it limit or affect NCUA's authority with respect to debts and/or claims 
pursuant to 12 U.S.C. 1752(a) and 1766.
    (c) Nothing in this part precludes the compromise, suspension, or 
termination of collection actions, where appropriate, under standards 
implementing the Debt Collection Improvement Act (DCIA) (31 U.S.C. 3711 
et seq.), the Federal Claims Collection Standards (FCCS) (31 CFR parts 
900 through 904); or any other applicable law.



Sec. 797.2  Purpose.

    (a) The purpose of this part is to implement federal statutes and 
regulatory standards authorizing NCUA to collect debts owed to the 
United States. This part is consistent with the following federal 
statutes and regulations:
    (1) DCIA at 31 U.S.C. 3711 (collection and compromise of claims); 
section 3716 (administrative offset), and section 3717 (interest and 
penalty on claims).
    (2) 5 U.S.C. 5514 (salary offset);
    (3) 5 U.S.C. 5584 (waiver of claims for overpayment);
    (4) 31 CFR parts 900 through 904 (FCCS);
    (5) 5 CFR part 550, subpart K (salary offset);
    (6) 31 U.S.C. 3720D, 31 CFR 285.11 (administrative wage 
garnishment); and
    (7) 5 CFR 831.1801 through 1808 (U.S. Office of Personnel Management 
(OPM) offset).
    (b) Collectively, these statutes and regulations prescribe the 
manner in which federal agencies should proceed to establish the 
existence and validity of debts owed to the federal government and 
describe the remedies available to agencies to offset valid debts.



Sec. 797.3  Definitions.

    Except where the context clearly indicates otherwise or where the 
term is defined elsewhere in this subpart, the following definitions 
shall apply to this subpart.
    (a) Administrative offset, as defined in 31 U.S.C. 3701(a)(1), means 
withholding money payable by the United States government to, or held by 
the government for, a person to satisfy a debt the person owes the 
government.
    (b) Agency means a department, agency, or instrumentality in the 
Executive, Judicial, or Legislative branch of the government.
    (c) Claim or debt means money or property owed by a person or entity 
to an agency of the federal government. A ``claim'' or ``debt'' includes 
amounts due the government, fees, services, overpayments, penalties, 
damages, interest, fines and forfeitures. For purposes of this part, a 
debt owed to NCUA constitutes a debt owed to the federal government.

[[Page 1229]]

    (d) Claim certification means a creditor agency's written request to 
a paying agency to effect an administrative or salary offset.
    (e) Creditor agency means an agency to which a claim or debt is 
owed.
    (f) Debtor means the person or entity owing money to the federal 
government.
    (g) Disposable pay means that part of current basic pay or other 
authorized pay remaining after the deduction of any amount required by 
law to be withheld. NCUA shall allow the deductions described in 5 CFR 
581.105(b) through (f).
    (h) Employee means a current employee of NCUA or another agency.
    (i) FCCS means the Federal Claims Collection Standards published in 
31 CFR part 900.
    (j) Hearing official means an individual who is authorized to 
conduct a hearing with respect to the existence or amount of a debt 
claimed and issue a final decision on the basis of such hearing. A 
hearing official may not be under the supervision or control of NCUA 
when NCUA is the creditor agency.
    (k) NCUA means the National Credit Union Administration.
    (l) Paying agency means an agency of the federal government owing 
money to a debtor against which an administrative or salary offset can 
be effected.
    (m) Salary offset means an administrative offset to collect a debt 
under 5 U.S.C. 5514 by deductions at one or more officially established 
pay intervals from the current pay account of a debtor.
    (n) Waiver means the cancellation, remission, forgiveness, or 
nonrecovery of a debt allegedly owed by an employee to NCUA or another 
agency as permitted or required by 5 U.S.C. 5584 or any other law.



Sec. 797.4  Delegation of authority.

    Authority to conduct the following activities is delegated to the 
Executive Director to:
    (a) Initiate and carry out the debt collection process on behalf of 
NCUA, in accordance with the FCCS;
    (b) Accept or reject compromise offers, suspend, terminate or waive 
collection actions to the full extent of NCUA's legal authority under 12 
U.S.C. 1752(a) and 1789; 31 U.S.C. 3711, and any other applicable 
statute or regulation.
    (c) Report to consumer reporting agencies certain data pertaining to 
delinquent debts, where appropriate;
    (d) Use offset procedures, including administrative and salary 
offset, to collect debts; and
    (e) Take any other action necessary to promptly and effectively 
collect debts owed to the government in accordance with the policies 
contained herein and as otherwise provided by law.



                     Subpart B_Administrative Offset



Sec. 797.5  Authority and scope.

    NCUA may collect a debt owed to the federal government from a 
person, organization, or other entity by administrative offset, pursuant 
to 31 U.S.C. 3716, where:
    (a) The debt is certain in amount;
    (b) Administrative offset is feasible, desirable, and not otherwise 
prohibited;
    (c) The applicable statute of limitations has not expired; and
    (d) Administrative offset is in the best interest of the federal 
government.



Sec. 797.6  Administrative offset prior to completion of procedures.

    Prior to the completion of the procedures described in Sec. 797.7, 
NCUA may effect administrative offset if failure to offset would 
substantially prejudice its ability to collect the debt, and if the time 
before the payment is to be made does not reasonably permit completion 
of the procedures described in Sec. 797.7. Such prior administrative 
offset shall be followed promptly by the completion of the procedures 
described in Sec. 797.7.



Sec. 797.7  Procedures.

    Prior to collecting any debt by administrative offset or referring 
such claim to another agency for collection through administrative 
offset, NCUA shall provide the debtor with a written Notice of Intent to 
Collect by Administrative Offset (the Notice) at least 30 calendar days 
before administrative offset is to commence.

[[Page 1230]]

    The Notice shall provide the following information:
    (a) The nature and amount of the debt, the intention of NCUA to 
collect the debt through administrative offset, and a statement of the 
rights of the debtor under this section, including the right to request 
a waiver under 5 U.S.C. 5584;
    (b) An opportunity to inspect and copy the records of NCUA related 
to the debt or receive copies if personal inspection is impractical;
    (c) The payment due date, which shall be 30 calendar days from the 
date after receipt of the initial demand for payment;
    (d) An opportunity for the debtor to obtain a review of the 
determination of indebtedness. Any request for review by the debtor 
shall be in writing and shall be submitted to NCUA within 15 calendar 
days after receipt of the Notice. NCUA may waive the time limits for 
requesting review for good cause shown by the debtor. NCUA shall provide 
the debtor with a reasonable opportunity for an oral hearing when:
    (1) An applicable statute authorizes or requires NCUA to consider 
waiver of the indebtedness involved, the debtor requests waiver of the 
indebtedness, and the waiver determination turns on an issue of 
credibility or veracity; or
    (2) The debtor requests reconsideration of the debt and NCUA 
determines that the question of the indebtedness cannot be resolved by 
review of the documentary evidence, as for example, when the validity of 
the debt turns on an issue of credibility or veracity. Unless otherwise 
required by law, an oral hearing under this subpart is not required to 
be a formal evidentiary hearing, although NCUA shall document all 
significant matters discussed at the hearing. In those cases where an 
oral hearing is not required by this subpart, NCUA shall make its 
determination on the request for waiver or reconsideration based upon a 
review of the written record.
    (e) An opportunity to enter into a written agreement for the 
repayment of the amount of the claim at the discretion of NCUA;
    (f) That charges for interest, penalties, and administrative costs 
will be assessed against the debtor, in accordance with 31 U.S.C. 3717, 
if payment is not received by the payment due date, unless excused by 
the FCCS;
    (g) That if the debtor has not entered into an agreement with NCUA 
to pay the debt, has not requested NCUA to review the debt, or has not 
paid the debt by the payment due date, NCUA intends to collect the debt 
by all legally available means;
    (h) The name and address of the Executive Director whom the debtor 
shall send all correspondence relating to the debt; and
    (i) Other information, as may be appropriate.



Sec. 797.8  Right to agency review.

    (a) If the debtor disputes the claim, the debtor may request a 
review of NCUA's determination of the existence of the debt or of the 
amount of the debt. If only part of the claim is disputed, the 
undisputed portion should be paid by the payment due date.
    (b) To obtain a review, the debtor shall submit a written request 
for review to the Executive Director within 15 calendar days after 
receipt of the Notice. The debtor's request for review shall state the 
basis on which the claim is disputed.
    (c) The NCUA shall promptly notify the debtor, in writing, that the 
NCUA has received the request for review. The NCUA shall conduct its 
review of the claim in accordance with Sec. 797.9.



Sec. 797.9  Review procedures.

    (a) Unless an oral hearing is required by Sec. 797.7(d), NCUA's 
review shall be a review of the written record of the claim.
    (b) If an oral hearing is required, NCUA shall provide the debtor 
with a reasonable opportunity for such a hearing. The oral hearing, 
however, shall not be an adversarial adjudication and need not take the 
form of a formal evidentiary hearing. All significant matters discussed 
at the hearing, however, will be carefully documented.
    (c) Any review required by this part, whether a review of the 
written record or an oral hearing, shall be conducted by a hearing 
official. When NCUA is the creditor agency and the debtor is an NCUA 
employee, NCUA shall contact any agency designated in appendix

[[Page 1231]]

A to 5 CFR part 581 to arrange for a hearing official. When NCUA is the 
creditor agency and the debtor is not an NCUA employee (i.e., the debtor 
is employed by another federal agency, also known as the paying agency), 
and NCUA cannot provide a prompt and appropriate hearing, NCUA may 
contact an agent of the paying agency designated in appendix A to 5 CFR 
part 581 to arrange for a hearing official. The paying agency must 
cooperate with NCUA to provide a hearing official, as required by the 
FCCS.
    (d) The hearing official shall issue a final written decision based 
on documentary evidence and, if applicable, information developed at an 
oral hearing. The written decision shall be issued as soon as 
practicable after the review but not later than 60 days after the date 
on which the request for review was received by NCUA, unless the debtor 
requests a delay in the proceedings. A delay in the proceedings shall be 
granted if the hearing official determines that there is good cause to 
grant the delay. If a delay is granted, the 60-day decision period shall 
be extended by the number of days by which the review was postponed.
    (e) Upon issuance of the written opinion, NCUA shall promptly notify 
the debtor of the hearing official's decision. The notification shall 
include a copy of the written decision issued by the hearing official.



Sec. 797.10  Special review.

    (a) An employee subject to offset, or a voluntary repayment 
agreement, may, at any time, request a special review by the Executive 
Director of the amount of the offset or voluntary repayment, based on 
materially changed circumstances, including, but not limited to, 
catastrophic illness, divorce, death, or disability.
    (b) To determine whether an offset would prevent the employee from 
meeting essential subsistence expenses, the employee shall submit a 
detailed statement and supporting documents for the employee, the 
employee's spouse, and dependents indicating the employee's assets and 
liabilities.
    (c) If the employee requests a special review under this section, 
the employee shall file an alternative proposed offset or payment 
schedule and a statement.
    (d) The Executive Director shall evaluate the statement and 
supporting documents, and determine whether the original offset or 
repayment schedule imposes an undue financial hardship on the employee. 
The Executive Director shall notify the employee in writing within 30 
calendar days of such determination, including, if appropriate, a 
revised offset or payment schedule. If the special review results in a 
revised offset or repayment schedule, NCUA shall provide a new 
certification to the paying agency.



Sec. 797.11  Interest, administrative costs, and penalties.

    Where NCUA is the creditor agency, it shall assess interest, 
penalties and administrative costs pursuant to 31 U.S.C. 3717 and 31 CFR 
parts 900 through 904, unless excused in accordance with the FCCS.



Sec. 797.12  Refunds.

    NCUA shall refund promptly those amounts recovered by offset but 
later found not to be owed to the federal government.



Sec. 797.13  Requests for administrative offset where NCUA is the
creditor agency.

    (a) NCUA may request that a debt owed to NCUA be collected by 
administrative offset against funds due and payable to a debtor by 
another agency.
    (b) In requesting administrative offset, NCUA, as creditor, shall 
certify in writing to the agency holding funds of the debtor:
    (1) That the debtor owes the debt;
    (2) The amount and basis of the debt; and
    (3) That NCUA has complied with the requirements of its own 
administrative offset regulations and the applicable provisions of the 
FCCS with respect to providing the debtor with due process.



Sec. 797.14  Requests for administrative offset from other federal
agencies where NCUA is the paying agency.

    (a) Any agency may request that funds due and payable to a debtor by 
NCUA be administratively offset in

[[Page 1232]]

order to collect a debt owed to such agency by the debtor.
    (b) NCUA shall initiate the requested administrative offset only 
upon receipt of a written certification from the creditor agency that:
    (1) The debtor owes the debt, including the amount and basis of the 
debt;
    (2) The agency has prescribed regulations for the exercise of 
administrative offset; and
    (3) The agency has complied with its own administrative offset 
regulations and with the applicable provisions of the FCCS, with respect 
to providing the debtor with due process.



Sec. 797.15  Administrative offset against amounts payable from Civil
Service Retirement and Disability Fund.

    NCUA may request that monies payable to a debtor from the Civil 
Service Retirement and Disability Fund be administratively offset to 
collect debts owed to NCUA by the debtor. NCUA shall provide OPM with a 
written certification that states the debtor owes the debt, the amount 
of the debt, and that NCUA has complied with the agency's offset 
regulations, as well as, the requirements set forth in 31 CFR parts 900 
through 904 and OPM's regulations.



Sec. 797.16  Stay of offset.

    (a) When a creditor agency receives a debtor's request for 
inspection of agency records, the offset is stayed for 15 calendar days 
beyond the date set for the record inspection.
    (b) When a creditor agency receives a debtor's offer to enter into a 
repayment agreement, the offset is stayed until the debtor is notified 
as to whether the proposed agreement is acceptable.
    (c) When a review is conducted, the offset is stayed until the 
creditor agency issues a final written decision. The written decision 
must be issued within 60 days after receipt of the debtor's request for 
review.



                         Subpart C_Salary Offset



Sec. 797.17  Authority and scope.

    (a) NCUA may collect debts owed by employees to the federal 
government by means of salary offset under the authority of 5 U.S.C. 
5514, 5 CFR part 550, subpart K, and this subpart. The procedures set 
forth in this subpart apply to situations where NCUA is attempting to 
collect a debt by salary offset that is owed to it by an individual 
employed by NCUA or by another agency; or where NCUA employs an 
individual who owes a debt to another agency. Since salary offset is a 
type of administrative offset, this subpart supplements subpart B.
    (b) The procedures set forth in this subpart do not apply to:
    (1) Any routine intra-agency adjustment of pay that is attributable 
to clerical or administrative error or delay in processing pay documents 
that have occurred within the four pay periods preceding the adjustment, 
or any adjustment to collect a debt amounting to $50 or less. However, 
at the time of any such adjustment, or as soon thereafter as possible, 
NCUA or its designated payroll agent shall provide the employee with a 
written notice of the nature and the amount of the adjustment and a 
point of contact for contesting such adjustment.
    (2) Any negative adjustment to pay that arises from an employee's 
election of coverage or a change in coverage under a federal benefits 
program that requires periodic deductions from pay, if the amount to be 
recovered was accumulated over four pay periods or less. However, at the 
time that such adjustment is made, NCUA shall provide the employee a 
statement that informs the employee of the previous overpayment.



Sec. 797.18  Notice requirements where NCUA is the creditor agency.

    Where NCUA seeks salary offset under 5 U.S.C. 5514 as the creditor 
agency, NCUA shall first provide the employee with a written Notice of 
Intent to Collect by Salary Offset (the Notice) at least 30 calendar 
days before salary offset is to commence. The Notice shall provide the 
following information:
    (a) That the Executive Director has determined that a debt is owed 
to NCUA and intends to collect the debt

[[Page 1233]]

by means of deduction from the employee's current disposable pay account 
until the debt and all accumulated interest is paid in full or otherwise 
resolved;
    (b) The amount of the debt and the factual basis for the debt;
    (c) A salary offset schedule stating the frequency and amount of 
each deduction, stated as a fixed dollar amount or percentage of 
disposable pay not to exceed 15 percent;
    (d) That in lieu of salary offset, the employee may propose a 
voluntary repayment plan to satisfy the debt on terms acceptable to 
NCUA, which must be documented in writing, signed by the employee and 
the Executive Director, and documented in NCUA's files;
    (e) NCUA's policy concerning interest, penalties, and administrative 
costs, and a statement that such assessments must be made, unless 
excused in accordance with the FCCS;
    (f) That the employee has the right to inspect and copy NCUA records 
related to the debt, or to receive copies of such records if personal 
inspection is impractical;
    (g) That the employee has a right to request a hearing regarding the 
existence and amount of the debt claimed or the salary offset schedule 
proposed by NCUA, provided that the employee files a request for such a 
hearing with NCUA in accordance with Sec. 797.20, and that such a 
hearing will be conducted by a hearing official not under the 
supervision or control of NCUA;
    (h) The procedure and deadline for requesting a hearing, including 
the name, address, and telephone number of the Executive Director or 
other designated individual to whom a request for a hearing must be 
sent;
    (i) That a request for hearing must be received by NCUA on or before 
the 30th calendar day following receipt of the Notice, and that filing 
of a request for hearing will stay the collection proceedings;
    (j) That NCUA will initiate salary offset procedures not less than 
30 days from the date of the employee's receipt of the Notice, unless 
the employee files a timely request for a hearing;
    (k) That if a hearing is held, the hearing official will issue a 
decision at the earliest practical date, but not later than 60 days 
after the filing of the request for the hearing, unless the employee 
requests a delay in the proceedings which is granted by the hearing 
official;
    (l) That any knowingly false or frivolous statements, 
representations, or evidence may subject the employee to disciplinary 
procedures appropriate under 5 U.S.C. chapter 75, 5 CFR part 752; 
penalties under the False Claims Act, 31 U.S.C. 3729 through 3731; 
criminal penalties under 18 U.S.C. 286, 287, 1001, 1002; or any other 
applicable statutory authority; and
    (m) That the employee also has the right to request waiver of 
overpayment pursuant to 5 U.S.C. 5584, and may exercise any other rights 
and remedies available under statutes or regulations governing the 
program for which the collection is being made.



Sec. 797.19  Review of NCUA records related to the debt.

    (a) An employee who desires to inspect or copy NCUA records related 
to the employee's debt must send a written request to the Executive 
Director or the individual designated in the Notice. The letter must be 
received in the office of that individual within 15 calendar days after 
the employee's receipt of the Notice.
    (b) In response to a timely request submitted by the employee, the 
employee shall be notified of the location and time when the employee 
may inspect and copy records related to the debt. If the employee is 
unable personally to inspect such records, NCUA shall arrange to send 
copies of such records to the employee.



Sec. 797.20  Procedures to request a hearing.

    (a) To request a hearing, an employee must send a written request to 
the Executive Director within 15 calendar days after the employee's 
receipt of the Notice. If the employee files a request for a hearing 
after the expiration of the 15th calendar day, NCUA may accept the 
request if the employee can show that the delay was the result of 
circumstances beyond the employee's control or the employee failed to 
receive actual notice of the filing deadline.

[[Page 1234]]

    (b) The request for a hearing must be signed by the employee and 
must fully identify and explain with reasonable specificity all the 
facts, evidence, and witnesses, if any, that support the employee's 
position. The request must also state whether the employee is requesting 
an oral or documentary hearing. If an oral hearing is requested, the 
request shall state why the matter cannot be resolved by a review of 
documentary evidence alone.
    (c) The failure of an employee to request a hearing will be 
considered an admission by the employee that the debt exists in the 
amount specified in the Notice.



Sec. 797.21  Hearing procedures.

    (a) Obtaining the services of a hearing official. When the debtor is 
not an NCUA employee and NCUA cannot provide a prompt and appropriate 
hearing before a hearing official, NCUA may request a hearing official 
from an agent of the paying agency, as designated in 5 CFR part 581, 
appendix A, or as otherwise designated by the paying agency. When the 
debtor is an NCUA employee, NCUA may contact any agent of another 
agency, as designated in 5 CFR part 581, appendix A.
    (b) Notice of hearing. After the employee requests a hearing, the 
hearing official shall notify the employee of the form of the hearing to 
be provided. If the hearing will be oral, the notice shall set forth the 
date, time, and location of the hearing, which must occur no more than 
30 calendar days after the request is received, unless the employee 
requests that the hearing be delayed. If the hearing will be conducted 
by an examination of documents, the employee, within 30 calendar days, 
shall submit any evidence or written arguments that should be considered 
by the hearing official.
    (c) Oral hearing. (1) An employee who requests an oral hearing shall 
be provided an oral hearing if the hearing official determines that the 
matter cannot be resolved by an examination of the documents alone, as 
for example, when an issue of credibility or veracity is involved. The 
oral hearing need not be an adversarial adjudication and rules of 
evidence need not apply.
    (2) Oral hearings may take the form of, but are not limited to:
    (i) Informal conferences with the hearing official in which the 
employee and agency representative are given full opportunity to present 
evidence, witnesses, and argument;
    (ii) Informal meetings in which the hearing examiner interviews the 
employee; or
    (iii) Formal written submissions followed by an opportunity for oral 
presentation.
    (d) Hearing by examination of documents. If the hearing official 
determines that an oral hearing is not necessary, the hearing official 
shall make the determination based upon an examination of the documents.
    (e) Record. The hearing official shall maintain a summary record of 
any hearing conducted under this section.
    (f) Decision. (1) The hearing official shall issue a written 
decision based upon evidence and information developed at the hearing or 
in the case of a documentary hearing the decision shall be based on the 
documents and written submissions. The decision shall be issued, as soon 
as practicable after the hearing, but not later than 60 calendar days 
after the hearing request was received by NCUA. If the hearing was 
delayed at the request of the employee, the 60-day decision period shall 
be extended by the number of days by which the hearing was postponed.
    (2) The decision of the hearing official shall be final and is 
considered to be an official certification regarding the existence and 
the amount of the debt for purposes of executing salary offset under 5 
U.S.C. 5514. If the hearing official determines that a debt may not be 
collected by salary offset, but NCUA finds that the debt is still valid, 
NCUA may seek collection of the debt through other means in accordance 
with applicable law and regulations.
    (g) Content of decision. The written decision shall include:
    (1) A summary of the facts concerning the origin, nature, and amount 
of the debt;
    (2) The hearing official's findings, analysis, and conclusions; and
    (3) The terms of any repayment schedules, if applicable.

[[Page 1235]]

    (h) Failure to appear. If the employee or the NCUA representative 
fails to appear, the hearing official shall proceed with the hearing as 
scheduled, and issue the decision based upon the oral testimony 
presented and the documentation submitted by both parties. At the 
request of both parties, the hearing official may re-schedule the 
hearing date.



Sec. 797.22  Voluntary repayment agreement.

    (a) In response to the Notice, an employee may propose to repay the 
debt voluntarily in lieu of salary offset by submitting a written 
proposed repayment schedule to NCUA. Any proposal under this section 
must be received by NCUA within 15 calendar days after receipt of the 
Notice.
    (b) In response to a timely proposal by the employee, NCUA shall 
notify the employee whether the employee's proposed repayment schedule 
is acceptable. NCUA has the discretion to accept, reject, or propose to 
the employee a modification of the proposed repayment schedule.
    (1) If NCUA decides that the proposed repayment schedule is 
unacceptable, the employee shall have 15 calendar days from the date of 
the decision in which to file a request for a hearing.
    (2) If NCUA decides that the proposed repayment schedule is 
acceptable or the employee agrees to a modification proposed by NCUA, an 
agreement shall be put in writing and signed by both the employee and 
NCUA.



Sec. 797.23  Certification where NCUA is the creditor agency.

    (a) NCUA shall issue a certification in all cases where the hearing 
official determines that a debt exists or the employee admits the 
existence and amount of the debt, as for example, by failing to request 
a hearing.
    (b) The certification must be in writing and state:
    (1) That the employee owes the debt;
    (2) The amount and basis of the debt;
    (3) The date the federal government's right to collect the debt 
first accrued;
    (4) The date the employee was notified of the debt, the action(s) 
taken pursuant to NCUA's regulations, and the dates such actions were 
taken;
    (5) If the collection is to be made by lump-sum payment, the amount 
and date such payment will be collected;
    (6) If the collection is to be made in installments, the amount or 
percentage of disposable pay to be collected in each installment and, if 
NCUA wishes, the desired commencing date of the first installment, if a 
date other than the next officially established pay period; and
    (7) A statement that NCUA's regulation on salary offset has been 
approved by OPM pursuant to 5 CFR part 550, subpart K.



Sec. 797.24  Certification where NCUA is the paying agency.

    (a) Upon issuance of a proper certification by NCUA or upon receipt 
of a proper certification from another creditor agency, NCUA shall send 
the employee a written notice of salary offset.
    (b) Such written notice of salary offset shall advise the employee 
of the:
    (1) Certification that has been issued by NCUA or received from 
another creditor agency;
    (2) Amount of the debt and of the deductions to be made; and
    (3) Date and pay period when the salary offset will begin.
    (c) If NCUA is not the creditor agency, NCUA shall provide a copy of 
the notice to the creditor agency and advise the creditor agency of the 
dollar amount to be offset and the pay period when the offset will 
begin.



Sec. 797.25  Recovery from final check or other payments due 
a separated employee.

    (a) Lump-sum deduction from final check. In order liquidate a debt, 
a lump-sum deduction exceeding 15 percent of disposable pay may be made 
pursuant to 31 U.S.C. 3716 from any final salary payment due a former 
employee, whether the former employee was separated voluntarily or 
involuntarily.
    (b) Lump-sum deductions from other sources. Whenever an employee 
subject to salary offset is separated from NCUA, and the balance of the 
debt cannot be liquidated by offset of the final salary payment, NCUA 
may offset any later payments of any kind to the

[[Page 1236]]

former employee to collect the balance of the debt pursuant to 31 U.S.C. 
3716.

                        PARTS 798	799 [RESERVED]

[[Page 1237]]



                  CHAPTER VIII--FEDERAL FINANCING BANK




  --------------------------------------------------------------------
Part                                                                Page
800-809         [Reserved]

810             Federal financing bank bills................        1239
811             Book-entry procedure for Federal financing 
                    bank securities.........................        1240
812-899         [Reserved]

[[Page 1239]]

                        PARTS 800	809 [RESERVED]



PART 810_FEDERAL FINANCING BANK BILLS--Table of Contents



Sec.
810.0  Authority for issue and sale.
810.1  Description of Federal Financing Bank bills.
810.2  Public notice of offering.
810.3  Payment at maturity.
810.4  Acceptance of FFB bills for various purposes.
810.5  Taxation.
810.6  Exemption.
810.7  Federal Reserve Banks as fiscal agents.
810.8  Reservations as to terms of circular.

    Authority: Secs. 9-11, 87 Stat. 939, 940; (12 U.S.C. 2288, 2289, 
2290).

    Source: 39 FR 26397, July 19, 1974, unless otherwise noted.



Sec. 810.0  Authority for issue and sale.

    The Federal Financing Bank is authorized under the Federal Financing 
Bank Act of 1973, to issue publicly, with the approval of the Secretary 
of the Treasury, obligations having such maturities and bearing such 
rate or rates of interest as may be determined by the Bank. Pursuant to 
this authority, Federal Financing Bank bills, referred to herein as 
``FFB bills,'' are offered for sale from time to time and tenders 
invited therefor, through the Federal Reserve Banks. The FFB bills so 
offered, the tenders made, and all subsequent transactions therein are 
subject to the terms and conditions of the public notice offering the 
bills for sale, this circular, and to the extent not inconsistent with 
such notice and circular, to Department of the Treasury Circular No. 
418, current revision, the regulations governing United States Treasury 
bills, and all other regulations governing United States securities.



Sec. 810.1  Description of Federal Financing Bank bills.

    (a) General. Federal Financing Bank bills are bearer obligations of 
the Federal Financing Bank, the terms of which provide for payment of a 
specified amount on a specified date. They are issued only by Federal 
Reserve Banks and Branches, pursuant to tenders accepted by the Federal 
Financing Bank, and are available in both definitive and book-entry 
form. Where issued as a definitive security, it shall not be valid 
unless the issue date, the maturity date and the CUSIP number are 
imprinted thereon.
    (b) Denominations. Federal Financing Bank bills will be issued in 
denominations of $10,000, $15,000, $50,000, $100,000, $500,000 and 
$1,000,000 (maturity value).



Sec. 810.2  Public notice of offering.

    On the occasion of an offering of FFB bills, tenders therefor will 
be invited through public notices issued by the Federal Financing Bank. 
Each notice will set forth the amount offered, the issue date, the date 
they will be due and payable, the place and the date of the closing hour 
for the receipt of tenders and the date on which payment for accepted 
tenders must be made or completed.



Sec. 810.3  Payment at maturity.

    Each FFB bill will be paid in its face amount at maturity upon 
presentation and surrender to any Federal Reserve Bank or Branch or to 
the Department of the Treasury, Bureau of the Public Debt, Securities 
Transaction Branch, Washington, DC 20226. If a FFB bill is presented and 
surrendered for redemption after it has become overdue, the Federal 
Financing Bank may require satisfactory proof of ownership, as provided 
in Sec. 306.25 of Department of the Treasury Circular No. 300, current 
revision.



Sec. 810.4  Acceptance of FFB bills for various purposes.

    Federal Financing Bank bills are lawful investments and may be 
accepted as security for all fiduciary, trust, and public funds, the 
investment or deposit of which shall be under the authority or control 
of the United States, the District of Columbia, the Commonwealth of 
Puerto Rico or any territory or possession of the United States. They 
are eligible for purchase by national banks, and will be accepted at 
maturity value to secure public moneys.

[[Page 1240]]



Sec. 810.5  Taxation.

    All FFB bills shall be subject to Federal taxation to the same 
extent as obligations of private corporations are taxed.



Sec. 810.6  Exemption.

    Obligations of the Federal Financing Bank are deemed to be exempted 
securities within the meaning of section 3(a)(2) of the Securities Act 
of 1933 (15 U.S.C. 77c(a)(2), of section 3(a)(12) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78(a)(12)), and of section 304(a)(4) of 
the Trust Indenture Act of 1939 (15 U.S.C. 77ddd(a)(4)).



Sec. 810.7  Federal Reserve Banks as fiscal agents.

    The Federal Reserve Banks, as fiscal agents of the United States, 
have been authorized by the Department of the Treasury to perform all 
such acts as may be necessary to carry out the provisions of this and 
other circulars of the Department of the Treasury as may be applicable 
to FFB bills, and of any public notice or notices issued in connection 
with any offering of these securities.



Sec. 810.8  Reservations as to terms of circular.

    The Federal Financing Bank reserves the right to amend, supplement, 
revise or withdraw all or any of the provisions of this circular at any 
time or from time to time.



PART 811_BOOK-ENTRY PROCEDURE FOR FEDERAL FINANCING BANK SECURITIES--
Table of Contents



Sec.
811.0  Definition of terms.
811.1  Authority of Reserve Banks.
811.2  Scope and effect of book-entry procedure.
811.3  Transfer or pledge.
811.4  Withdrawal of Federal Financing Bank securities.
811.5  Delivery of Federal Financing Bank securities.
811.6  Registered bonds and notes.
811.7  Servicing book-entry Federal Financing Bank securities; payment 
          of interest; payment at maturity or upon call.

    Authority: The Federal Financing Bank Act of 1973, sections 9-11, 87 
Stat. 939, 940; 12 U.S.C. 2288, 2289, 2290.

    Source: 40 FR 5532, Feb. 6, 1975, unless otherwise noted.



Sec. 811.0  Definition of terms.

    In this part, unless the context otherwise requires or indicates:
    (a) Reserve Bank means the Federal Reserve Bank of New York (and any 
other Federal Reserve Bank which agrees to issue Federal Financing Bank 
securities in book-entry form) as fiscal agent of the United States 
acting on behalf of the Federal Financing Bank and, when indicated, 
acting in its individual capacity.
    (b) Federal Financing Bank security means a Federal Financing Bank 
bond, note, certificate of indebtedness, or bill issued under the 
Federal Financing Bank Act of 1973, in the form of a definitive Federal 
Financing Bank security or a book-entry Federal Financing Bank security.
    (c) Definitive Federal Financing Bank security means a Federal 
Financing Bank bond, note, certificate of indebtedness, or bill issued 
under the Federal Financing Bank Act of 1973, in engraved or printed 
form.
    (d) Book-entry Federal Financing Bank security means a Federal 
Financing Bank bond, note, certificate of indebtedness, or bill issued 
under the Federal Financing Bank Act of 1973, in the form of an entry 
made as prescribed in this part on the records of a Reserve Bank.
    (e) Pledge includes a pledge of, or any other security interest in, 
Federal Financing Bank securities as collateral for loans or advances or 
to secure deposits of public monies or the performance of an obligation.
    (f) Date of call is the date fixed in the official notice of call 
published in the Federal Register on which the Federal Financing Bank 
will make payment of the security before maturity in accordance with its 
terms.
    (g) Member bank means any national bank, State bank or bank or trust 
company which is a member of a Reserve Bank.



Sec. 811.1  Authority of Reserve Banks.

    Each Reserve Bank is hereby authorized, in accordance with the 
provisions of this part, to: (a) Issue book-entry Federal Financing Bank 
securities by

[[Page 1241]]

means of entries on its records which shall include the name of the 
depositor, the amount, the loan title (or series) and maturity date; (b) 
effect conversions between book-entry Federal Financing Bank securities 
and definitive Federal Financing Bank securities; (c) otherwise service 
and maintain book-entry Federal Financing Bank securities; and (d) issue 
a confirmation of transaction in the form of a written advice (serially 
numbered or otherwise) which specifies the amount and description of any 
securities, that is, loan title (or series) and maturity date, sold or 
transferred and the date of the transaction.



Sec. 811.2  Scope and effect of book-entry procedure.

    (a) A Reserve Bank, as fiscal agent of the United States acting on 
behalf of the Federal Financing Bank, may apply the book-entry procedure 
provided for in this part to any Federal Financing Bank securities which 
have been or are hereafter deposited for any purpose in accounts with it 
in its individual capacity under terms and conditions which indicate 
that the Reserve Bank will continue to maintain such deposit accounts in 
its individual capacity, notwithstanding application of the book-entry 
procedure to such securities. This paragraph is applicable, but not 
limited, to securities deposited:
    (1) As collateral pledged to a Reserve Bank (in its individual 
capacity) for advances by it;
    (2) By a member bank for its sole account;
    (3) By a member bank held for the account of its customers;
    (4) In connection with deposits in a member bank of funds of States, 
municipalities, or other political subdivisions; or,
    (5) In connection with the performance of an obligation or duty 
under Federal, State, municipal, or local law, or judgments or decrees 
of courts.


The application of the book-entry procedure under this paragraph shall 
not derogate from or adversely affect the relationship that would 
otherwise exist between a Reserve Bank in its individual capacity and 
its depositors covering any deposits under this paragraph. Whenever the 
book-entry procedure is applied to such Federal Financing Bank 
securities, the Reserve Bank is authorized to take all action necessary 
in respect of the book-entry procedure to enable such Reserve Bank in 
its individual capacity to perform its obligations as depositary with 
respect to such Federal Financing Bank securities.
    (b) A Reserve Bank, as fiscal agent of the United States acting on 
behalf of the Federal Financing Bank, shall apply the book-entry 
procedure to Federal Financing Bank securities deposited as collateral 
pledged to the United States under current revisions of Department of 
the Treasury Circulars Nos. 92 and 176 (31 CFR, parts 203 and 202), and 
may apply the book-entry procedure, with the approval of the Secretary 
of the Treasury, to any other Federal Financing Bank securities 
deposited with a Reserve Bank, as fiscal agent of the United States.
    (c) Any person having an interest in Federal Financing Bank 
securities which are deposited with a Reserve Bank (in either its 
individual capacity or as fiscal agent of the United States) for any 
purpose shall be deemed to have consented to their conversion to book-
entry Federal Financing Bank securities pursuant to the provisions of 
this part, and in the manner and under the procedures prescribed by the 
Reserve Bank.
    (d) No deposits shall be accepted under this section on or after the 
date of maturity or call of the securities.



Sec. 811.3  Transfer or pledge.

    (a) A transfer or a pledge of book-entry Federal Financing Bank 
securities to a Reserve Bank (in its individual capacity or as fiscal 
agent of the United States), or to the United States, or to any 
transferee or pledgee eligible to maintain an appropriate book-entry 
account in its name with a Reserve Bank under this part, is effected and 
perfected, notwithstanding any provision of law to the contrary, by a 
Reserve Bank making an appropriate entry in its records of the 
securities transferred or pledged. The making of such an entry in the 
records of a Reserve Bank shall:

[[Page 1242]]

    (1) Have the effect of a delivery in bearer form of definitive 
Federal Financing Bank securities; (2) have the effect of a taking of 
delivery by the transferee or pledgee; (3) constitute the transferee or 
pledgee a holder; and (4) if a pledge, effect a perfected security 
interest therein in favor of the pledgee. A transfer or pledge of book-
entry Federal Financing Bank securities effected under this paragraph 
shall have priority over any transfer, pledge, or other interest, 
theretofore or thereafter effected or perfected under paragraph (b) of 
this section or in any other manner.
    (b) A transfer or a pledge of transferable Federal Financing Bank 
securities, or any interest therein, which is maintained by a Reserve 
Bank (in its individual capacity or as fiscal agent of the United 
States) in a book-entry account under this part, including securities in 
book-entry form under Sec. 811.2(a)(3), is effected, and a pledge is 
perfected, by any means that would be effective under applicable law to 
effect a transfer or to effect and perfect a pledge of the Federal 
Financing Bank securities, or any interest therein, if the securities 
were maintained by the Reserve Bank in bearer definitive form. For 
purposes of transfer or pledge hereunder, book-entry Federal Financing 
Bank securities maintained by a Reserve Bank shall, notwithstanding any 
provision of law to the contrary, be deemed to be maintained in bearer 
definitive form. A Reserve Bank maintaining book-entry Federal Financing 
Bank securities either in its individual capacity or as fiscal agent of 
the United States is not a bailee for purposes of notification of 
pledges of those securities under this subsection, or a third person in 
possession for purposes of acknowledgement of transfers thereof under 
this subsection. Where transferable Federal Financing Bank securities 
are recorded on the books of a depositary (a bank, banking institution, 
financial firm, or a similar party, which regularly accepts in the 
course of its business Federal Financing Bank securities as a custodial 
service for customers, and maintains accounts in the names of such 
customers reflecting ownership of or interest in such securities) for 
account of the pledgor or transferor thereof and such securities are on 
deposit with a Reserve Bank in a book-entry account hereunder, such 
depositary shall, for purposes of perfecting a pledge of such securities 
or effecting delivery of such securities to a purchaser under applicable 
provisions of law, be the bailee to which notification of the pledge of 
the securities may be given or the third person in possession from which 
acknowledgment of the holding of the securities for the purchaser may be 
obtained. A Reserve Bank will not accept notice or advice of a transfer 
or pledge effected or perfected under this subsection, and any such 
notice or advice shall have no effect. A Reserve Bank may continue to 
deal with its depositor in accordance with the provisions of this part, 
notwithstanding any transfer or pledge effected or perfected under this 
subsection.
    (c) No filing or recording with a public recording office or officer 
shall be necessary or effective with respect to any transfer or pledge 
of book-entry Federal Financing Bank securities or any interest therein.
    (d) A Reserve Bank shall, upon receipt of appropriate instructions, 
convert book-entry Federal Financing Bank securities into definitive 
Federal Financing Bank securities and deliver them in accordance with 
such instructions; no such conversion shall affect existing interests in 
such Federal Financing Bank securities.
    (e) A transfer of book-entry Federal Financing Bank securities 
within a Reserve Bank shall be made in accordance with procedures 
established by the Bank not inconsistent with this part. The transfer of 
book-entry Federal Financing Bank securities by a Reserve Bank may be 
made through a telegraphic transfer procedure.
    (f) All requests for transfer or withdrawal must be made prior to 
the maturity or date of call of the securities.



Sec. 811.4  Withdrawal of Federal Financing Bank securities.

    (a) A depositor of book-entry Federal Financing Bank securities may 
withdraw them from a Reserve Bank by requesting delivery of like 
definitive Federal Financing Bank securities to itself or on its order 
to a transferee.

[[Page 1243]]

    (b) Federal Financing Bank securities which are actually to be 
delivered upon withdrawal may be issued either in registered or in 
bearer form, except that Federal Financing Bank bills will be issued in 
bearer form only.



Sec. 811.5  Delivery of Federal Financing Bank securities.

    A Reserve Bank which has received Federal Financing Bank securities 
and effected pledges, made entries regarding them, or transferred or 
delivered them according to the instructions of its depositor is not 
liable for conversion or for participation in breach of fiduciary duty 
even though the depositor had no right to dispose of or take other 
action in respect of the securities. A Reserve Bank shall be fully 
discharged of its obligations under this part by the delivery of Federal 
Financing Bank securities in definitive form to its depositor or upon 
the order of such depositor. Customers of a member bank or other 
depository (other than a Reserve Bank) may obtain Federal Financing Bank 
securities in definitive form only by causing the depositor of the 
Reserve Bank to order the withdrawal thereof from the Reserve Bank.



Sec. 811.6  Registered bonds and notes.

    Registered Federal Financing Bank securities deposited with a 
Reserve Bank for any purpose specified in Sec. 811.2 shall be assigned 
for conversion to book-entry Federal Financing Bank securities. The 
assignment, which shall be executed in accordance with the provisions of 
subpart F of 31 CFR, part 306, so far as applicable, shall be to--

    Federal Reserve Bank of ______, as fiscal agent of the United States 
acting on behalf of the Federal Financing Bank for conversion to book-
entry Federal Financing Bank securities.



Sec. 811.7  Servicing book-entry Federal Financing Bank securities; 
payment of interest; payment at maturity or upon call.

    Interest becoming due on book-entry Federal Financing Bank 
securities shall be charged against the special agent account maintained 
by the Department of the Treasury for the Federal Financing Bank on the 
interest due date and remitted or credited in accordance with the 
depositor's instructions. Such securities shall be redeemed and charged 
against the above said account on the date of maturity or call, and the 
redemption proceeds, principal and interest, shall be disposed of in 
accordance with the depositor's instructions.

                        PARTS 812	899 [RESERVED]

[[Page 1245]]



                              FINDING AIDS




  --------------------------------------------------------------------

  A list of CFR titles, subtitles, chapters, subchapters and parts and 
an alphabetical list of agencies publishing in the CFR are included in 
the CFR Index and Finding Aids volume to the Code of Federal Regulations 
which is published separately and revised annually.

  Table of CFR Titles and Chapters
  Alphabetical List of Agencies Appearing in the CFR
  List of CFR Sections Affected

[[Page 1247]]



                    Table of CFR Titles and Chapters




                     (Revised as of January 1, 2017)

                      Title 1--General Provisions

         I  Administrative Committee of the Federal Register 
                (Parts 1--49)
        II  Office of the Federal Register (Parts 50--299)
       III  Administrative Conference of the United States (Parts 
                300--399)
        IV  Miscellaneous Agencies (Parts 400--500)

                    Title 2--Grants and Agreements

            Subtitle A--Office of Management and Budget Guidance 
                for Grants and Agreements
         I  Office of Management and Budget Governmentwide 
                Guidance for Grants and Agreements (Parts 2--199)
        II  Office of Management and Budget Guidance (Parts 200--
                299)
            Subtitle B--Federal Agency Regulations for Grants and 
                Agreements
       III  Department of Health and Human Services (Parts 300--
                399)
        IV  Department of Agriculture (Parts 400--499)
        VI  Department of State (Parts 600--699)
       VII  Agency for International Development (Parts 700--799)
      VIII  Department of Veterans Affairs (Parts 800--899)
        IX  Department of Energy (Parts 900--999)
         X  Department of the Treasury (Parts 1000--1099)
        XI  Department of Defense (Parts 1100--1199)
       XII  Department of Transportation (Parts 1200--1299)
      XIII  Department of Commerce (Parts 1300--1399)
       XIV  Department of the Interior (Parts 1400--1499)
        XV  Environmental Protection Agency (Parts 1500--1599)
     XVIII  National Aeronautics and Space Administration (Parts 
                1800--1899)
        XX  United States Nuclear Regulatory Commission (Parts 
                2000--2099)
      XXII  Corporation for National and Community Service (Parts 
                2200--2299)
     XXIII  Social Security Administration (Parts 2300--2399)
      XXIV  Housing and Urban Development (Parts 2400--2499)
       XXV  National Science Foundation (Parts 2500--2599)
      XXVI  National Archives and Records Administration (Parts 
                2600--2699)
     XXVII  Small Business Administration (Parts 2700--2799)

[[Page 1248]]

    XXVIII  Department of Justice (Parts 2800--2899)
      XXIX  Department of Labor (Parts 2900--2999)
       XXX  Department of Homeland Security (Parts 3000--3099)
      XXXI  Institute of Museum and Library Services (Parts 3100--
                3199)
     XXXII  National Endowment for the Arts (Parts 3200--3299)
    XXXIII  National Endowment for the Humanities (Parts 3300--
                3399)
     XXXIV  Department of Education (Parts 3400--3499)
      XXXV  Export-Import Bank of the United States (Parts 3500--
                3599)
     XXXVI  Office of National Drug Control Policy, Executive 
                Office of the President (Parts 3600--3699)
    XXXVII  Peace Corps (Parts 3700--3799)
     LVIII  Election Assistance Commission (Parts 5800--5899)
       LIX  Gulf Coast Ecosystem Restoration Council (Parts 5900--
                5999)

                        Title 3--The President

         I  Executive Office of the President (Parts 100--199)

                           Title 4--Accounts

         I  Government Accountability Office (Parts 1--199)

                   Title 5--Administrative Personnel

         I  Office of Personnel Management (Parts 1--1199)
        II  Merit Systems Protection Board (Parts 1200--1299)
       III  Office of Management and Budget (Parts 1300--1399)
        IV  Office of Personnel Management and Office of the 
                Director of National Intelligence (Parts 1400--
                1499)
         V  The International Organizations Employees Loyalty 
                Board (Parts 1500--1599)
        VI  Federal Retirement Thrift Investment Board (Parts 
                1600--1699)
      VIII  Office of Special Counsel (Parts 1800--1899)
        IX  Appalachian Regional Commission (Parts 1900--1999)
        XI  Armed Forces Retirement Home (Parts 2100--2199)
       XIV  Federal Labor Relations Authority, General Counsel of 
                the Federal Labor Relations Authority and Federal 
                Service Impasses Panel (Parts 2400--2499)
       XVI  Office of Government Ethics (Parts 2600--2699)
       XXI  Department of the Treasury (Parts 3100--3199)
      XXII  Federal Deposit Insurance Corporation (Parts 3200--
                3299)
     XXIII  Department of Energy (Parts 3300--3399)
      XXIV  Federal Energy Regulatory Commission (Parts 3400--
                3499)
       XXV  Department of the Interior (Parts 3500--3599)
      XXVI  Department of Defense (Parts 3600--3699)
    XXVIII  Department of Justice (Parts 3800--3899)

[[Page 1249]]

      XXIX  Federal Communications Commission (Parts 3900--3999)
       XXX  Farm Credit System Insurance Corporation (Parts 4000--
                4099)
      XXXI  Farm Credit Administration (Parts 4100--4199)
    XXXIII  Overseas Private Investment Corporation (Parts 4300--
                4399)
     XXXIV  Securities and Exchange Commission (Parts 4400--4499)
      XXXV  Office of Personnel Management (Parts 4500--4599)
     XXXVI  Department of Homeland Security (Parts 4600--4699)
    XXXVII  Federal Election Commission (Parts 4700--4799)
        XL  Interstate Commerce Commission (Parts 5000--5099)
       XLI  Commodity Futures Trading Commission (Parts 5100--
                5199)
      XLII  Department of Labor (Parts 5200--5299)
     XLIII  National Science Foundation (Parts 5300--5399)
       XLV  Department of Health and Human Services (Parts 5500--
                5599)
      XLVI  Postal Rate Commission (Parts 5600--5699)
     XLVII  Federal Trade Commission (Parts 5700--5799)
    XLVIII  Nuclear Regulatory Commission (Parts 5800--5899)
      XLIX  Federal Labor Relations Authority (Parts 5900--5999)
         L  Department of Transportation (Parts 6000--6099)
       LII  Export-Import Bank of the United States (Parts 6200--
                6299)
      LIII  Department of Education (Parts 6300--6399)
       LIV  Environmental Protection Agency (Parts 6400--6499)
        LV  National Endowment for the Arts (Parts 6500--6599)
       LVI  National Endowment for the Humanities (Parts 6600--
                6699)
      LVII  General Services Administration (Parts 6700--6799)
     LVIII  Board of Governors of the Federal Reserve System 
                (Parts 6800--6899)
       LIX  National Aeronautics and Space Administration (Parts 
                6900--6999)
        LX  United States Postal Service (Parts 7000--7099)
       LXI  National Labor Relations Board (Parts 7100--7199)
      LXII  Equal Employment Opportunity Commission (Parts 7200--
                7299)
     LXIII  Inter-American Foundation (Parts 7300--7399)
      LXIV  Merit Systems Protection Board (Parts 7400--7499)
       LXV  Department of Housing and Urban Development (Parts 
                7500--7599)
      LXVI  National Archives and Records Administration (Parts 
                7600--7699)
     LXVII  Institute of Museum and Library Services (Parts 7700--
                7799)
    LXVIII  Commission on Civil Rights (Parts 7800--7899)
      LXIX  Tennessee Valley Authority (Parts 7900--7999)
       LXX  Court Services and Offender Supervision Agency for the 
                District of Columbia (Parts 8000--8099)
      LXXI  Consumer Product Safety Commission (Parts 8100--8199)
    LXXIII  Department of Agriculture (Parts 8300--8399)
     LXXIV  Federal Mine Safety and Health Review Commission 
                (Parts 8400--8499)

[[Page 1250]]

     LXXVI  Federal Retirement Thrift Investment Board (Parts 
                8600--8699)
    LXXVII  Office of Management and Budget (Parts 8700--8799)
      LXXX  Federal Housing Finance Agency (Parts 9000--9099)
   LXXXIII  Special Inspector General for Afghanistan 
                Reconstruction (Parts 9300--9399)
    LXXXIV  Bureau of Consumer Financial Protection (Parts 9400--
                9499)
    LXXXVI  National Credit Union Administration (Parts 9600--
                9699)
     XCVII  Department of Homeland Security Human Resources 
                Management System (Department of Homeland 
                Security--Office of Personnel Management) (Parts 
                9700--9799)
    XCVIII  Council of the Inspectors General on Integrity and 
                Efficiency (Parts 9800--9899)
      XCIX  Military Compensation and Retirement Modernization 
                Commission (Parts 9900--9999)
         C  National Council on Disability (Partys 10000--10049)

                      Title 6--Domestic Security

         I  Department of Homeland Security, Office of the 
                Secretary (Parts 1--199)
         X  Privacy and Civil Liberties Oversight Board (Parts 
                1000--1099)

                         Title 7--Agriculture

            Subtitle A--Office of the Secretary of Agriculture 
                (Parts 0--26)
            Subtitle B--Regulations of the Department of 
                Agriculture
         I  Agricultural Marketing Service (Standards, 
                Inspections, Marketing Practices), Department of 
                Agriculture (Parts 27--209)
        II  Food and Nutrition Service, Department of Agriculture 
                (Parts 210--299)
       III  Animal and Plant Health Inspection Service, Department 
                of Agriculture (Parts 300--399)
        IV  Federal Crop Insurance Corporation, Department of 
                Agriculture (Parts 400--499)
         V  Agricultural Research Service, Department of 
                Agriculture (Parts 500--599)
        VI  Natural Resources Conservation Service, Department of 
                Agriculture (Parts 600--699)
       VII  Farm Service Agency, Department of Agriculture (Parts 
                700--799)
      VIII  Grain Inspection, Packers and Stockyards 
                Administration (Federal Grain Inspection Service), 
                Department of Agriculture (Parts 800--899)
        IX  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Fruits, Vegetables, Nuts), Department 
                of Agriculture (Parts 900--999)
         X  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Milk), Department of Agriculture 
                (Parts 1000--1199)

[[Page 1251]]

        XI  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Miscellaneous Commodities), Department 
                of Agriculture (Parts 1200--1299)
       XIV  Commodity Credit Corporation, Department of 
                Agriculture (Parts 1400--1499)
        XV  Foreign Agricultural Service, Department of 
                Agriculture (Parts 1500--1599)
       XVI  Rural Telephone Bank, Department of Agriculture (Parts 
                1600--1699)
      XVII  Rural Utilities Service, Department of Agriculture 
                (Parts 1700--1799)
     XVIII  Rural Housing Service, Rural Business-Cooperative 
                Service, Rural Utilities Service, and Farm Service 
                Agency, Department of Agriculture (Parts 1800--
                2099)
        XX  Local Television Loan Guarantee Board (Parts 2200--
                2299)
       XXV  Office of Advocacy and Outreach, Department of 
                Agriculture (Parts 2500--2599)
      XXVI  Office of Inspector General, Department of Agriculture 
                (Parts 2600--2699)
     XXVII  Office of Information Resources Management, Department 
                of Agriculture (Parts 2700--2799)
    XXVIII  Office of Operations, Department of Agriculture (Parts 
                2800--2899)
      XXIX  Office of Energy Policy and New Uses, Department of 
                Agriculture (Parts 2900--2999)
       XXX  Office of the Chief Financial Officer, Department of 
                Agriculture (Parts 3000--3099)
      XXXI  Office of Environmental Quality, Department of 
                Agriculture (Parts 3100--3199)
     XXXII  Office of Procurement and Property Management, 
                Department of Agriculture (Parts 3200--3299)
    XXXIII  Office of Transportation, Department of Agriculture 
                (Parts 3300--3399)
     XXXIV  National Institute of Food and Agriculture (Parts 
                3400--3499)
      XXXV  Rural Housing Service, Department of Agriculture 
                (Parts 3500--3599)
     XXXVI  National Agricultural Statistics Service, Department 
                of Agriculture (Parts 3600--3699)
    XXXVII  Economic Research Service, Department of Agriculture 
                (Parts 3700--3799)
   XXXVIII  World Agricultural Outlook Board, Department of 
                Agriculture (Parts 3800--3899)
       XLI  [Reserved]
      XLII  Rural Business-Cooperative Service and Rural Utilities 
                Service, Department of Agriculture (Parts 4200--
                4299)

                    Title 8--Aliens and Nationality

         I  Department of Homeland Security (Immigration and 
                Naturalization) (Parts 1--499)

[[Page 1252]]

         V  Executive Office for Immigration Review, Department of 
                Justice (Parts 1000--1399)

                 Title 9--Animals and Animal Products

         I  Animal and Plant Health Inspection Service, Department 
                of Agriculture (Parts 1--199)
        II  Grain Inspection, Packers and Stockyards 
                Administration (Packers and Stockyards Programs), 
                Department of Agriculture (Parts 200--299)
       III  Food Safety and Inspection Service, Department of 
                Agriculture (Parts 300--599)

                           Title 10--Energy

         I  Nuclear Regulatory Commission (Parts 0--199)
        II  Department of Energy (Parts 200--699)
       III  Department of Energy (Parts 700--999)
         X  Department of Energy (General Provisions) (Parts 
                1000--1099)
      XIII  Nuclear Waste Technical Review Board (Parts 1300--
                1399)
      XVII  Defense Nuclear Facilities Safety Board (Parts 1700--
                1799)
     XVIII  Northeast Interstate Low-Level Radioactive Waste 
                Commission (Parts 1800--1899)

                      Title 11--Federal Elections

         I  Federal Election Commission (Parts 1--9099)
        II  Election Assistance Commission (Parts 9400--9499)

                      Title 12--Banks and Banking

         I  Comptroller of the Currency, Department of the 
                Treasury (Parts 1--199)
        II  Federal Reserve System (Parts 200--299)
       III  Federal Deposit Insurance Corporation (Parts 300--399)
        IV  Export-Import Bank of the United States (Parts 400--
                499)
         V  Office of Thrift Supervision, Department of the 
                Treasury (Parts 500--599)
        VI  Farm Credit Administration (Parts 600--699)
       VII  National Credit Union Administration (Parts 700--799)
      VIII  Federal Financing Bank (Parts 800--899)
        IX  Federal Housing Finance Board (Parts 900--999)
         X  Bureau of Consumer Financial Protection (Parts 1000--
                1099)
        XI  Federal Financial Institutions Examination Council 
                (Parts 1100--1199)
       XII  Federal Housing Finance Agency (Parts 1200--1299)
      XIII  Financial Stability Oversight Council (Parts 1300--
                1399)
       XIV  Farm Credit System Insurance Corporation (Parts 1400--
                1499)

[[Page 1253]]

        XV  Department of the Treasury (Parts 1500--1599)
       XVI  Office of Financial Research (Parts 1600--1699)
      XVII  Office of Federal Housing Enterprise Oversight, 
                Department of Housing and Urban Development (Parts 
                1700--1799)
     XVIII  Community Development Financial Institutions Fund, 
                Department of the Treasury (Parts 1800--1899)

               Title 13--Business Credit and Assistance

         I  Small Business Administration (Parts 1--199)
       III  Economic Development Administration, Department of 
                Commerce (Parts 300--399)
        IV  Emergency Steel Guarantee Loan Board (Parts 400--499)
         V  Emergency Oil and Gas Guaranteed Loan Board (Parts 
                500--599)

                    Title 14--Aeronautics and Space

         I  Federal Aviation Administration, Department of 
                Transportation (Parts 1--199)
        II  Office of the Secretary, Department of Transportation 
                (Aviation Proceedings) (Parts 200--399)
       III  Commercial Space Transportation, Federal Aviation 
                Administration, Department of Transportation 
                (Parts 400--1199)
         V  National Aeronautics and Space Administration (Parts 
                1200--1299)
        VI  Air Transportation System Stabilization (Parts 1300--
                1399)

                 Title 15--Commerce and Foreign Trade

            Subtitle A--Office of the Secretary of Commerce (Parts 
                0--29)
            Subtitle B--Regulations Relating to Commerce and 
                Foreign Trade
         I  Bureau of the Census, Department of Commerce (Parts 
                30--199)
        II  National Institute of Standards and Technology, 
                Department of Commerce (Parts 200--299)
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)
        IV  Foreign-Trade Zones Board, Department of Commerce 
                (Parts 400--499)
       VII  Bureau of Industry and Security, Department of 
                Commerce (Parts 700--799)
      VIII  Bureau of Economic Analysis, Department of Commerce 
                (Parts 800--899)
        IX  National Oceanic and Atmospheric Administration, 
                Department of Commerce (Parts 900--999)
        XI  Technology Administration, Department of Commerce 
                (Parts 1100--1199)
      XIII  East-West Foreign Trade Board (Parts 1300--1399)

[[Page 1254]]

       XIV  Minority Business Development Agency (Parts 1400--
                1499)
            Subtitle C--Regulations Relating to Foreign Trade 
                Agreements
        XX  Office of the United States Trade Representative 
                (Parts 2000--2099)
            Subtitle D--Regulations Relating to Telecommunications 
                and Information
     XXIII  National Telecommunications and Information 
                Administration, Department of Commerce (Parts 
                2300--2399)

                    Title 16--Commercial Practices

         I  Federal Trade Commission (Parts 0--999)
        II  Consumer Product Safety Commission (Parts 1000--1799)

             Title 17--Commodity and Securities Exchanges

         I  Commodity Futures Trading Commission (Parts 1--199)
        II  Securities and Exchange Commission (Parts 200--399)
        IV  Department of the Treasury (Parts 400--499)

          Title 18--Conservation of Power and Water Resources

         I  Federal Energy Regulatory Commission, Department of 
                Energy (Parts 1--399)
       III  Delaware River Basin Commission (Parts 400--499)
        VI  Water Resources Council (Parts 700--799)
      VIII  Susquehanna River Basin Commission (Parts 800--899)
      XIII  Tennessee Valley Authority (Parts 1300--1399)

                       Title 19--Customs Duties

         I  U.S. Customs and Border Protection, Department of 
                Homeland Security; Department of the Treasury 
                (Parts 0--199)
        II  United States International Trade Commission (Parts 
                200--299)
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)
        IV  U.S. Immigration and Customs Enforcement, Department 
                of Homeland Security (Parts 400--599)

                     Title 20--Employees' Benefits

         I  Office of Workers' Compensation Programs, Department 
                of Labor (Parts 1--199)
        II  Railroad Retirement Board (Parts 200--399)
       III  Social Security Administration (Parts 400--499)
        IV  Employees' Compensation Appeals Board, Department of 
                Labor (Parts 500--599)

[[Page 1255]]

         V  Employment and Training Administration, Department of 
                Labor (Parts 600--699)
        VI  Office of Workers' Compensation Programs, Department 
                of Labor (Parts 700--799)
       VII  Benefits Review Board, Department of Labor (Parts 
                800--899)
      VIII  Joint Board for the Enrollment of Actuaries (Parts 
                900--999)
        IX  Office of the Assistant Secretary for Veterans' 
                Employment and Training Service, Department of 
                Labor (Parts 1000--1099)

                       Title 21--Food and Drugs

         I  Food and Drug Administration, Department of Health and 
                Human Services (Parts 1--1299)
        II  Drug Enforcement Administration, Department of Justice 
                (Parts 1300--1399)
       III  Office of National Drug Control Policy (Parts 1400--
                1499)

                      Title 22--Foreign Relations

         I  Department of State (Parts 1--199)
        II  Agency for International Development (Parts 200--299)
       III  Peace Corps (Parts 300--399)
        IV  International Joint Commission, United States and 
                Canada (Parts 400--499)
         V  Broadcasting Board of Governors (Parts 500--599)
       VII  Overseas Private Investment Corporation (Parts 700--
                799)
        IX  Foreign Service Grievance Board (Parts 900--999)
         X  Inter-American Foundation (Parts 1000--1099)
        XI  International Boundary and Water Commission, United 
                States and Mexico, United States Section (Parts 
                1100--1199)
       XII  United States International Development Cooperation 
                Agency (Parts 1200--1299)
      XIII  Millennium Challenge Corporation (Parts 1300--1399)
       XIV  Foreign Service Labor Relations Board; Federal Labor 
                Relations Authority; General Counsel of the 
                Federal Labor Relations Authority; and the Foreign 
                Service Impasse Disputes Panel (Parts 1400--1499)
        XV  African Development Foundation (Parts 1500--1599)
       XVI  Japan-United States Friendship Commission (Parts 
                1600--1699)
      XVII  United States Institute of Peace (Parts 1700--1799)

                          Title 23--Highways

         I  Federal Highway Administration, Department of 
                Transportation (Parts 1--999)
        II  National Highway Traffic Safety Administration and 
                Federal Highway Administration, Department of 
                Transportation (Parts 1200--1299)

[[Page 1256]]

       III  National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 1300--1399)

                Title 24--Housing and Urban Development

            Subtitle A--Office of the Secretary, Department of 
                Housing and Urban Development (Parts 0--99)
            Subtitle B--Regulations Relating to Housing and Urban 
                Development
         I  Office of Assistant Secretary for Equal Opportunity, 
                Department of Housing and Urban Development (Parts 
                100--199)
        II  Office of Assistant Secretary for Housing-Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Parts 200--299)
       III  Government National Mortgage Association, Department 
                of Housing and Urban Development (Parts 300--399)
        IV  Office of Housing and Office of Multifamily Housing 
                Assistance Restructuring, Department of Housing 
                and Urban Development (Parts 400--499)
         V  Office of Assistant Secretary for Community Planning 
                and Development, Department of Housing and Urban 
                Development (Parts 500--599)
        VI  Office of Assistant Secretary for Community Planning 
                and Development, Department of Housing and Urban 
                Development (Parts 600--699) [Reserved]
       VII  Office of the Secretary, Department of Housing and 
                Urban Development (Housing Assistance Programs and 
                Public and Indian Housing Programs) (Parts 700--
                799)
      VIII  Office of the Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Section 8 Housing Assistance 
                Programs, Section 202 Direct Loan Program, Section 
                202 Supportive Housing for the Elderly Program and 
                Section 811 Supportive Housing for Persons With 
                Disabilities Program) (Parts 800--899)
        IX  Office of Assistant Secretary for Public and Indian 
                Housing, Department of Housing and Urban 
                Development (Parts 900--1699)
         X  Office of Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Interstate Land Sales 
                Registration Program) (Parts 1700--1799)
       XII  Office of Inspector General, Department of Housing and 
                Urban Development (Parts 2000--2099)
        XV  Emergency Mortgage Insurance and Loan Programs, 
                Department of Housing and Urban Development (Parts 
                2700--2799) [Reserved]
        XX  Office of Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Parts 3200--3899)
      XXIV  Board of Directors of the HOPE for Homeowners Program 
                (Parts 4000--4099) [Reserved]
       XXV  Neighborhood Reinvestment Corporation (Parts 4100--
                4199)

[[Page 1257]]

                           Title 25--Indians

         I  Bureau of Indian Affairs, Department of the Interior 
                (Parts 1--299)
        II  Indian Arts and Crafts Board, Department of the 
                Interior (Parts 300--399)
       III  National Indian Gaming Commission, Department of the 
                Interior (Parts 500--599)
        IV  Office of Navajo and Hopi Indian Relocation (Parts 
                700--799)
         V  Bureau of Indian Affairs, Department of the Interior, 
                and Indian Health Service, Department of Health 
                and Human Services (Part 900)
        VI  Office of the Assistant Secretary-Indian Affairs, 
                Department of the Interior (Parts 1000--1199)
       VII  Office of the Special Trustee for American Indians, 
                Department of the Interior (Parts 1200--1299)

                      Title 26--Internal Revenue

         I  Internal Revenue Service, Department of the Treasury 
                (Parts 1--End)

           Title 27--Alcohol, Tobacco Products and Firearms

         I  Alcohol and Tobacco Tax and Trade Bureau, Department 
                of the Treasury (Parts 1--399)
        II  Bureau of Alcohol, Tobacco, Firearms, and Explosives, 
                Department of Justice (Parts 400--699)

                   Title 28--Judicial Administration

         I  Department of Justice (Parts 0--299)
       III  Federal Prison Industries, Inc., Department of Justice 
                (Parts 300--399)
         V  Bureau of Prisons, Department of Justice (Parts 500--
                599)
        VI  Offices of Independent Counsel, Department of Justice 
                (Parts 600--699)
       VII  Office of Independent Counsel (Parts 700--799)
      VIII  Court Services and Offender Supervision Agency for the 
                District of Columbia (Parts 800--899)
        IX  National Crime Prevention and Privacy Compact Council 
                (Parts 900--999)
        XI  Department of Justice and Department of State (Parts 
                1100--1199)

                            Title 29--Labor

            Subtitle A--Office of the Secretary of Labor (Parts 
                0--99)
            Subtitle B--Regulations Relating to Labor
         I  National Labor Relations Board (Parts 100--199)

[[Page 1258]]

        II  Office of Labor-Management Standards, Department of 
                Labor (Parts 200--299)
       III  National Railroad Adjustment Board (Parts 300--399)
        IV  Office of Labor-Management Standards, Department of 
                Labor (Parts 400--499)
         V  Wage and Hour Division, Department of Labor (Parts 
                500--899)
        IX  Construction Industry Collective Bargaining Commission 
                (Parts 900--999)
         X  National Mediation Board (Parts 1200--1299)
       XII  Federal Mediation and Conciliation Service (Parts 
                1400--1499)
       XIV  Equal Employment Opportunity Commission (Parts 1600--
                1699)
      XVII  Occupational Safety and Health Administration, 
                Department of Labor (Parts 1900--1999)
        XX  Occupational Safety and Health Review Commission 
                (Parts 2200--2499)
       XXV  Employee Benefits Security Administration, Department 
                of Labor (Parts 2500--2599)
     XXVII  Federal Mine Safety and Health Review Commission 
                (Parts 2700--2799)
        XL  Pension Benefit Guaranty Corporation (Parts 4000--
                4999)

                      Title 30--Mineral Resources

         I  Mine Safety and Health Administration, Department of 
                Labor (Parts 1--199)
        II  Bureau of Safety and Environmental Enforcement, 
                Department of the Interior (Parts 200--299)
        IV  Geological Survey, Department of the Interior (Parts 
                400--499)
         V  Bureau of Ocean Energy Management, Department of the 
                Interior (Parts 500--599)
       VII  Office of Surface Mining Reclamation and Enforcement, 
                Department of the Interior (Parts 700--999)
       XII  Office of Natural Resources Revenue, Department of the 
                Interior (Parts 1200--1299)

                 Title 31--Money and Finance: Treasury

            Subtitle A--Office of the Secretary of the Treasury 
                (Parts 0--50)
            Subtitle B--Regulations Relating to Money and Finance
         I  Monetary Offices, Department of the Treasury (Parts 
                51--199)
        II  Fiscal Service, Department of the Treasury (Parts 
                200--399)
        IV  Secret Service, Department of the Treasury (Parts 
                400--499)
         V  Office of Foreign Assets Control, Department of the 
                Treasury (Parts 500--599)
        VI  Bureau of Engraving and Printing, Department of the 
                Treasury (Parts 600--699)
       VII  Federal Law Enforcement Training Center, Department of 
                the Treasury (Parts 700--799)

[[Page 1259]]

      VIII  Office of International Investment, Department of the 
                Treasury (Parts 800--899)
        IX  Federal Claims Collection Standards (Department of the 
                Treasury--Department of Justice) (Parts 900--999)
         X  Financial Crimes Enforcement Network, Department of 
                the Treasury (Parts 1000--1099)

                      Title 32--National Defense

            Subtitle A--Department of Defense
         I  Office of the Secretary of Defense (Parts 1--399)
         V  Department of the Army (Parts 400--699)
        VI  Department of the Navy (Parts 700--799)
       VII  Department of the Air Force (Parts 800--1099)
            Subtitle B--Other Regulations Relating to National 
                Defense
       XII  Defense Logistics Agency (Parts 1200--1299)
       XVI  Selective Service System (Parts 1600--1699)
      XVII  Office of the Director of National Intelligence (Parts 
                1700--1799)
     XVIII  National Counterintelligence Center (Parts 1800--1899)
       XIX  Central Intelligence Agency (Parts 1900--1999)
        XX  Information Security Oversight Office, National 
                Archives and Records Administration (Parts 2000--
                2099)
       XXI  National Security Council (Parts 2100--2199)
      XXIV  Office of Science and Technology Policy (Parts 2400--
                2499)
     XXVII  Office for Micronesian Status Negotiations (Parts 
                2700--2799)
    XXVIII  Office of the Vice President of the United States 
                (Parts 2800--2899)

               Title 33--Navigation and Navigable Waters

         I  Coast Guard, Department of Homeland Security (Parts 
                1--199)
        II  Corps of Engineers, Department of the Army (Parts 
                200--399)
        IV  Saint Lawrence Seaway Development Corporation, 
                Department of Transportation (Parts 400--499)

                          Title 34--Education

            Subtitle A--Office of the Secretary, Department of 
                Education (Parts 1--99)
            Subtitle B--Regulations of the Offices of the 
                Department of Education
         I  Office for Civil Rights, Department of Education 
                (Parts 100--199)
        II  Office of Elementary and Secondary Education, 
                Department of Education (Parts 200--299)
       III  Office of Special Education and Rehabilitative 
                Services, Department of Education (Parts 300--399)

[[Page 1260]]

        IV  Office of Career, Technical and Adult Education, 
                Department of Education (Parts 400--499)
         V  Office of Bilingual Education and Minority Languages 
                Affairs, Department of Education (Parts 500--599) 
                [Reserved]
        VI  Office of Postsecondary Education, Department of 
                Education (Parts 600--699)
       VII  Office of Educational Research and Improvement, 
                Department of Education (Parts 700--799) 
                [Reserved]
            Subtitle C--Regulations Relating to Education
        XI  [Reserved]
       XII  National Council on Disability (Parts 1200--1299)

                          Title 35 [Reserved]

             Title 36--Parks, Forests, and Public Property

         I  National Park Service, Department of the Interior 
                (Parts 1--199)
        II  Forest Service, Department of Agriculture (Parts 200--
                299)
       III  Corps of Engineers, Department of the Army (Parts 
                300--399)
        IV  American Battle Monuments Commission (Parts 400--499)
         V  Smithsonian Institution (Parts 500--599)
        VI  [Reserved]
       VII  Library of Congress (Parts 700--799)
      VIII  Advisory Council on Historic Preservation (Parts 800--
                899)
        IX  Pennsylvania Avenue Development Corporation (Parts 
                900--999)
         X  Presidio Trust (Parts 1000--1099)
        XI  Architectural and Transportation Barriers Compliance 
                Board (Parts 1100--1199)
       XII  National Archives and Records Administration (Parts 
                1200--1299)
        XV  Oklahoma City National Memorial Trust (Parts 1500--
                1599)
       XVI  Morris K. Udall Scholarship and Excellence in National 
                Environmental Policy Foundation (Parts 1600--1699)

             Title 37--Patents, Trademarks, and Copyrights

         I  United States Patent and Trademark Office, Department 
                of Commerce (Parts 1--199)
        II  U.S. Copyright Office, Library of Congress (Parts 
                200--299)
       III  Copyright Royalty Board, Library of Congress (Parts 
                300--399)
        IV  Assistant Secretary for Technology Policy, Department 
                of Commerce (Parts 400--599)

           Title 38--Pensions, Bonuses, and Veterans' Relief

         I  Department of Veterans Affairs (Parts 0--199)
        II  Armed Forces Retirement Home (Parts 200--299)

[[Page 1261]]

                       Title 39--Postal Service

         I  United States Postal Service (Parts 1--999)
       III  Postal Regulatory Commission (Parts 3000--3099)

                  Title 40--Protection of Environment

         I  Environmental Protection Agency (Parts 1--1099)
        IV  Environmental Protection Agency and Department of 
                Justice (Parts 1400--1499)
         V  Council on Environmental Quality (Parts 1500--1599)
        VI  Chemical Safety and Hazard Investigation Board (Parts 
                1600--1699)
       VII  Environmental Protection Agency and Department of 
                Defense; Uniform National Discharge Standards for 
                Vessels of the Armed Forces (Parts 1700--1799)
      VIII  Gulf Coast Ecosystem Restoration Council (Parts 1800--
                1899)

          Title 41--Public Contracts and Property Management

            Subtitle A--Federal Procurement Regulations System 
                [Note]
            Subtitle B--Other Provisions Relating to Public 
                Contracts
        50  Public Contracts, Department of Labor (Parts 50-1--50-
                999)
        51  Committee for Purchase From People Who Are Blind or 
                Severely Disabled (Parts 51-1--51-99)
        60  Office of Federal Contract Compliance Programs, Equal 
                Employment Opportunity, Department of Labor (Parts 
                60-1--60-999)
        61  Office of the Assistant Secretary for Veterans' 
                Employment and Training Service, Department of 
                Labor (Parts 61-1--61-999)
   62--100  [Reserved]
            Subtitle C--Federal Property Management Regulations 
                System
       101  Federal Property Management Regulations (Parts 101-1--
                101-99)
       102  Federal Management Regulation (Parts 102-1--102-299)
  103--104  [Reserved]
       105  General Services Administration (Parts 105-1--105-999)
       109  Department of Energy Property Management Regulations 
                (Parts 109-1--109-99)
       114  Department of the Interior (Parts 114-1--114-99)
       115  Environmental Protection Agency (Parts 115-1--115-99)
       128  Department of Justice (Parts 128-1--128-99)
  129--200  [Reserved]
            Subtitle D--Other Provisions Relating to Property 
                Management [Reserved]
            Subtitle E--Federal Information Resources Management 
                Regulations System [Reserved]
            Subtitle F--Federal Travel Regulation System
       300  General (Parts 300-1--300-99)
       301  Temporary Duty (TDY) Travel Allowances (Parts 301-1--
                301-99)

[[Page 1262]]

       302  Relocation Allowances (Parts 302-1--302-99)
       303  Payment of Expenses Connected with the Death of 
                Certain Employees (Part 303-1--303-99)
       304  Payment of Travel Expenses from a Non-Federal Source 
                (Parts 304-1--304-99)

                        Title 42--Public Health

         I  Public Health Service, Department of Health and Human 
                Services (Parts 1--199)
        IV  Centers for Medicare & Medicaid Services, Department 
                of Health and Human Services (Parts 400--599)
         V  Office of Inspector General-Health Care, Department of 
                Health and Human Services (Parts 1000--1999)

                   Title 43--Public Lands: Interior

            Subtitle A--Office of the Secretary of the Interior 
                (Parts 1--199)
            Subtitle B--Regulations Relating to Public Lands
         I  Bureau of Reclamation, Department of the Interior 
                (Parts 400--999)
        II  Bureau of Land Management, Department of the Interior 
                (Parts 1000--9999)
       III  Utah Reclamation Mitigation and Conservation 
                Commission (Parts 10000--10099)

             Title 44--Emergency Management and Assistance

         I  Federal Emergency Management Agency, Department of 
                Homeland Security (Parts 0--399)
        IV  Department of Commerce and Department of 
                Transportation (Parts 400--499)

                       Title 45--Public Welfare

            Subtitle A--Department of Health and Human Services 
                (Parts 1--199)
            Subtitle B--Regulations Relating to Public Welfare
        II  Office of Family Assistance (Assistance Programs), 
                Administration for Children and Families, 
                Department of Health and Human Services (Parts 
                200--299)
       III  Office of Child Support Enforcement (Child Support 
                Enforcement Program), Administration for Children 
                and Families, Department of Health and Human 
                Services (Parts 300--399)
        IV  Office of Refugee Resettlement, Administration for 
                Children and Families, Department of Health and 
                Human Services (Parts 400--499)
         V  Foreign Claims Settlement Commission of the United 
                States, Department of Justice (Parts 500--599)

[[Page 1263]]

        VI  National Science Foundation (Parts 600--699)
       VII  Commission on Civil Rights (Parts 700--799)
      VIII  Office of Personnel Management (Parts 800--899)
        IX  Denali Commission (Parts 900--999)
         X  Office of Community Services, Administration for 
                Children and Families, Department of Health and 
                Human Services (Parts 1000--1099)
        XI  National Foundation on the Arts and the Humanities 
                (Parts 1100--1199)
       XII  Corporation for National and Community Service (Parts 
                1200--1299)
      XIII  Administration for Children and Families, Department 
                of Health and Human Services (Parts 1300--1399)
       XVI  Legal Services Corporation (Parts 1600--1699)
      XVII  National Commission on Libraries and Information 
                Science (Parts 1700--1799)
     XVIII  Harry S. Truman Scholarship Foundation (Parts 1800--
                1899)
       XXI  Commission on Fine Arts (Parts 2100--2199)
     XXIII  Arctic Research Commission (Part 2301)
      XXIV  James Madison Memorial Fellowship Foundation (Parts 
                2400--2499)
       XXV  Corporation for National and Community Service (Parts 
                2500--2599)

                          Title 46--Shipping

         I  Coast Guard, Department of Homeland Security (Parts 
                1--199)
        II  Maritime Administration, Department of Transportation 
                (Parts 200--399)
       III  Coast Guard (Great Lakes Pilotage), Department of 
                Homeland Security (Parts 400--499)
        IV  Federal Maritime Commission (Parts 500--599)

                      Title 47--Telecommunication

         I  Federal Communications Commission (Parts 0--199)
        II  Office of Science and Technology Policy and National 
                Security Council (Parts 200--299)
       III  National Telecommunications and Information 
                Administration, Department of Commerce (Parts 
                300--399)
        IV  National Telecommunications and Information 
                Administration, Department of Commerce, and 
                National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 400--499)

           Title 48--Federal Acquisition Regulations System

         1  Federal Acquisition Regulation (Parts 1--99)

[[Page 1264]]

         2  Defense Acquisition Regulations System, Department of 
                Defense (Parts 200--299)
         3  Health and Human Services (Parts 300--399)
         4  Department of Agriculture (Parts 400--499)
         5  General Services Administration (Parts 500--599)
         6  Department of State (Parts 600--699)
         7  Agency for International Development (Parts 700--799)
         8  Department of Veterans Affairs (Parts 800--899)
         9  Department of Energy (Parts 900--999)
        10  Department of the Treasury (Parts 1000--1099)
        12  Department of Transportation (Parts 1200--1299)
        13  Department of Commerce (Parts 1300--1399)
        14  Department of the Interior (Parts 1400--1499)
        15  Environmental Protection Agency (Parts 1500--1599)
        16  Office of Personnel Management, Federal Employees 
                Health Benefits Acquisition Regulation (Parts 
                1600--1699)
        17  Office of Personnel Management (Parts 1700--1799)
        18  National Aeronautics and Space Administration (Parts 
                1800--1899)
        19  Broadcasting Board of Governors (Parts 1900--1999)
        20  Nuclear Regulatory Commission (Parts 2000--2099)
        21  Office of Personnel Management, Federal Employees 
                Group Life Insurance Federal Acquisition 
                Regulation (Parts 2100--2199)
        23  Social Security Administration (Parts 2300--2399)
        24  Department of Housing and Urban Development (Parts 
                2400--2499)
        25  National Science Foundation (Parts 2500--2599)
        28  Department of Justice (Parts 2800--2899)
        29  Department of Labor (Parts 2900--2999)
        30  Department of Homeland Security, Homeland Security 
                Acquisition Regulation (HSAR) (Parts 3000--3099)
        34  Department of Education Acquisition Regulation (Parts 
                3400--3499)
        51  Department of the Army Acquisition Regulations (Parts 
                5100--5199)
        52  Department of the Navy Acquisition Regulations (Parts 
                5200--5299)
        53  Department of the Air Force Federal Acquisition 
                Regulation Supplement (Parts 5300--5399) 
                [Reserved]
        54  Defense Logistics Agency, Department of Defense (Parts 
                5400--5499)
        57  African Development Foundation (Parts 5700--5799)
        61  Civilian Board of Contract Appeals, General Services 
                Administration (Parts 6100--6199)
        63  Department of Transportation Board of Contract Appeals 
                (Parts 6300--6399)

[[Page 1265]]

        99  Cost Accounting Standards Board, Office of Federal 
                Procurement Policy, Office of Management and 
                Budget (Parts 9900--9999)

                       Title 49--Transportation

            Subtitle A--Office of the Secretary of Transportation 
                (Parts 1--99)
            Subtitle B--Other Regulations Relating to 
                Transportation
         I  Pipeline and Hazardous Materials Safety 
                Administration, Department of Transportation 
                (Parts 100--199)
        II  Federal Railroad Administration, Department of 
                Transportation (Parts 200--299)
       III  Federal Motor Carrier Safety Administration, 
                Department of Transportation (Parts 300--399)
        IV  Coast Guard, Department of Homeland Security (Parts 
                400--499)
         V  National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 500--599)
        VI  Federal Transit Administration, Department of 
                Transportation (Parts 600--699)
       VII  National Railroad Passenger Corporation (AMTRAK) 
                (Parts 700--799)
      VIII  National Transportation Safety Board (Parts 800--999)
         X  Surface Transportation Board (Parts 1000--1399)
        XI  Research and Innovative Technology Administration, 
                Department of Transportation (Parts 1400--1499) 
                [Reserved]
       XII  Transportation Security Administration, Department of 
                Homeland Security (Parts 1500--1699)

                   Title 50--Wildlife and Fisheries

         I  United States Fish and Wildlife Service, Department of 
                the Interior (Parts 1--199)
        II  National Marine Fisheries Service, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 200--299)
       III  International Fishing and Related Activities (Parts 
                300--399)
        IV  Joint Regulations (United States Fish and Wildlife 
                Service, Department of the Interior and National 
                Marine Fisheries Service, National Oceanic and 
                Atmospheric Administration, Department of 
                Commerce); Endangered Species Committee 
                Regulations (Parts 400--499)
         V  Marine Mammal Commission (Parts 500--599)
        VI  Fishery Conservation and Management, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 600--699)

[[Page 1267]]





           Alphabetical List of Agencies Appearing in the CFR




                     (Revised as of January 1, 2017)

                                                  CFR Title, Subtitle or 
                     Agency                               Chapter

Administrative Committee of the Federal Register  1, I
Administrative Conference of the United States    1, III
Advisory Council on Historic Preservation         36, VIII
Advocacy and Outreach, Office of                  7, XXV
Afghanistan Reconstruction, Special Inspector     5, LXXXIII
     General for
African Development Foundation                    22, XV
  Federal Acquisition Regulation                  48, 57
Agency for International Development              2, VII; 22, II
  Federal Acquisition Regulation                  48, 7
Agricultural Marketing Service                    7, I, IX, X, XI
Agricultural Research Service                     7, V
Agriculture Department                            2, IV; 5, LXXIII
  Advocacy and Outreach, Office of                7, XXV
  Agricultural Marketing Service                  7, I, IX, X, XI
  Agricultural Research Service                   7, V
  Animal and Plant Health Inspection Service      7, III; 9, I
  Chief Financial Officer, Office of              7, XXX
  Commodity Credit Corporation                    7, XIV
  Economic Research Service                       7, XXXVII
  Energy Policy and New Uses, Office of           2, IX; 7, XXIX
  Environmental Quality, Office of                7, XXXI
  Farm Service Agency                             7, VII, XVIII
  Federal Acquisition Regulation                  48, 4
  Federal Crop Insurance Corporation              7, IV
  Food and Nutrition Service                      7, II
  Food Safety and Inspection Service              9, III
  Foreign Agricultural Service                    7, XV
  Forest Service                                  36, II
  Grain Inspection, Packers and Stockyards        7, VIII; 9, II
       Administration
  Information Resources Management, Office of     7, XXVII
  Inspector General, Office of                    7, XXVI
  National Agricultural Library                   7, XLI
  National Agricultural Statistics Service        7, XXXVI
  National Institute of Food and Agriculture      7, XXXIV
  Natural Resources Conservation Service          7, VI
  Operations, Office of                           7, XXVIII
  Procurement and Property Management, Office of  7, XXXII
  Rural Business-Cooperative Service              7, XVIII, XLII
  Rural Development Administration                7, XLII
  Rural Housing Service                           7, XVIII, XXXV
  Rural Telephone Bank                            7, XVI
  Rural Utilities Service                         7, XVII, XVIII, XLII
  Secretary of Agriculture, Office of             7, Subtitle A
  Transportation, Office of                       7, XXXIII
  World Agricultural Outlook Board                7, XXXVIII
Air Force Department                              32, VII
  Federal Acquisition Regulation Supplement       48, 53
Air Transportation Stabilization Board            14, VI
Alcohol and Tobacco Tax and Trade Bureau          27, I
Alcohol, Tobacco, Firearms, and Explosives,       27, II
     Bureau of
AMTRAK                                            49, VII
American Battle Monuments Commission              36, IV
American Indians, Office of the Special Trustee   25, VII

[[Page 1268]]

Animal and Plant Health Inspection Service        7, III; 9, I
Appalachian Regional Commission                   5, IX
Architectural and Transportation Barriers         36, XI
     Compliance Board
Arctic Research Commission                        45, XXIII
Armed Forces Retirement Home                      5, XI
Army Department                                   32, V
  Engineers, Corps of                             33, II; 36, III
  Federal Acquisition Regulation                  48, 51
Bilingual Education and Minority Languages        34, V
     Affairs, Office of
Blind or Severely Disabled, Committee for         41, 51
     Purchase from People Who Are
Broadcasting Board of Governors                   22, V
  Federal Acquisition Regulation                  48, 19
Career, Technical and Adult Education, Office of  34, IV
Census Bureau                                     15, I
Centers for Medicare & Medicaid Services          42, IV
Central Intelligence Agency                       32, XIX
Chemical Safety and Hazardous Investigation       40, VI
     Board
Chief Financial Officer, Office of                7, XXX
Child Support Enforcement, Office of              45, III
Children and Families, Administration for         45, II, III, IV, X, XIII
Civil Rights, Commission on                       5, LXVIII; 45, VII
Civil Rights, Office for                          34, I
Council of the Inspectors General on Integrity    5, XCVIII
     and Efficiency
Court Services and Offender Supervision Agency    5, LXX
     for the District of Columbia
Coast Guard                                       33, I; 46, I; 49, IV
Coast Guard (Great Lakes Pilotage)                46, III
Commerce Department                               2, XIII; 44, IV; 50, VI
  Census Bureau                                   15, I
  Economic Analysis, Bureau of                    15, VIII
  Economic Development Administration             13, III
  Emergency Management and Assistance             44, IV
  Federal Acquisition Regulation                  48, 13
  Foreign-Trade Zones Board                       15, IV
  Industry and Security, Bureau of                15, VII
  International Trade Administration              15, III; 19, III
  National Institute of Standards and Technology  15, II
  National Marine Fisheries Service               50, II, IV
  National Oceanic and Atmospheric                15, IX; 50, II, III, IV, 
       Administration                             VI
  National Telecommunications and Information     15, XXIII; 47, III, IV
       Administration
  National Weather Service                        15, IX
  Patent and Trademark Office, United States      37, I
  Productivity, Technology and Innovation,        37, IV
       Assistant Secretary for
  Secretary of Commerce, Office of                15, Subtitle A
  Technology Administration                       15, XI
  Technology Policy, Assistant Secretary for      37, IV
Commercial Space Transportation                   14, III
Commodity Credit Corporation                      7, XIV
Commodity Futures Trading Commission              5, XLI; 17, I
Community Planning and Development, Office of     24, V, VI
     Assistant Secretary for
Community Services, Office of                     45, X
Comptroller of the Currency                       12, I
Construction Industry Collective Bargaining       29, IX
     Commission
Consumer Financial Protection Bureau              5, LXXXIV; 12, X
Consumer Product Safety Commission                5, LXXI; 16, II
Copyright Royalty Board                           37, III
Corporation for National and Community Service    2, XXII; 45, XII, XXV
Cost Accounting Standards Board                   48, 99
Council on Environmental Quality                  40, V
Court Services and Offender Supervision Agency    5, LXX; 28, VIII
     for the District of Columbia
Customs and Border Protection                     19, I
Defense Contract Audit Agency                     32, I

[[Page 1269]]

Defense Department                                2, XI; 5, XXVI; 32, 
                                                  Subtitle A; 40, VII
  Advanced Research Projects Agency               32, I
  Air Force Department                            32, VII
  Army Department                                 32, V; 33, II; 36, III; 
                                                  48, 51
  Defense Acquisition Regulations System          48, 2
  Defense Intelligence Agency                     32, I
  Defense Logistics Agency                        32, I, XII; 48, 54
  Engineers, Corps of                             33, II; 36, III
  National Imagery and Mapping Agency             32, I
  Navy Department                                 32, VI; 48, 52
  Secretary of Defense, Office of                 2, XI; 32, I
Defense Contract Audit Agency                     32, I
Defense Intelligence Agency                       32, I
Defense Logistics Agency                          32, XII; 48, 54
Defense Nuclear Facilities Safety Board           10, XVII
Delaware River Basin Commission                   18, III
Denali Commission                                 45, IX
District of Columbia, Court Services and          5, LXX; 28, VIII
     Offender Supervision Agency for the
Drug Enforcement Administration                   21, II
East-West Foreign Trade Board                     15, XIII
Economic Analysis, Bureau of                      15, VIII
Economic Development Administration               13, III
Economic Research Service                         7, XXXVII
Education, Department of                          2, XXXIV; 5, LIII
  Bilingual Education and Minority Languages      34, V
       Affairs, Office of
  Career, Technical and Adult Education, Office   34, IV
       of
  Civil Rights, Office for                        34, I
  Educational Research and Improvement, Office    34, VII
       of
  Elementary and Secondary Education, Office of   34, II
  Federal Acquisition Regulation                  48, 34
  Postsecondary Education, Office of              34, VI
  Secretary of Education, Office of               34, Subtitle A
  Special Education and Rehabilitative Services,  34, III
       Office of
  Career, Technical, and Adult Education, Office  34, IV
       of
Educational Research and Improvement, Office of   34, VII
Election Assistance Commission                    2, LVIII; 11, II
Elementary and Secondary Education, Office of     34, II
Emergency Oil and Gas Guaranteed Loan Board       13, V
Emergency Steel Guarantee Loan Board              13, IV
Employee Benefits Security Administration         29, XXV
Employees' Compensation Appeals Board             20, IV
Employees Loyalty Board                           5, V
Employment and Training Administration            20, V
Employment Standards Administration               20, VI
Endangered Species Committee                      50, IV
Energy, Department of                             2, IX; 5, XXIII; 10, II, 
                                                  III, X
  Federal Acquisition Regulation                  48, 9
  Federal Energy Regulatory Commission            5, XXIV; 18, I
  Property Management Regulations                 41, 109
Energy, Office of                                 7, XXIX
Engineers, Corps of                               33, II; 36, III
Engraving and Printing, Bureau of                 31, VI
Environmental Protection Agency                   2, XV; 5, LIV; 40, I, IV, 
                                                  VII
  Federal Acquisition Regulation                  48, 15
  Property Management Regulations                 41, 115
Environmental Quality, Office of                  7, XXXI
Equal Employment Opportunity Commission           5, LXII; 29, XIV
Equal Opportunity, Office of Assistant Secretary  24, I
     for
Executive Office of the President                 3, I
  Environmental Quality, Council on               40, V
  Management and Budget, Office of                2, Subtitle A; 5, III, 
                                                  LXXVII; 14, VI; 48, 99

[[Page 1270]]

  National Drug Control Policy, Office of         2, XXXVI; 21, III
  National Security Council                       32, XXI; 47, 2
  Presidential Documents                          3
  Science and Technology Policy, Office of        32, XXIV; 47, II
  Trade Representative, Office of the United      15, XX
       States
Export-Import Bank of the United States           2, XXXV; 5, LII; 12, IV
Family Assistance, Office of                      45, II
Farm Credit Administration                        5, XXXI; 12, VI
Farm Credit System Insurance Corporation          5, XXX; 12, XIV
Farm Service Agency                               7, VII, XVIII
Federal Acquisition Regulation                    48, 1
Federal Aviation Administration                   14, I
  Commercial Space Transportation                 14, III
Federal Claims Collection Standards               31, IX
Federal Communications Commission                 5, XXIX; 47, I
Federal Contract Compliance Programs, Office of   41, 60
Federal Crop Insurance Corporation                7, IV
Federal Deposit Insurance Corporation             5, XXII; 12, III
Federal Election Commission                       5, XXXVII; 11, I
Federal Emergency Management Agency               44, I
Federal Employees Group Life Insurance Federal    48, 21
     Acquisition Regulation
Federal Employees Health Benefits Acquisition     48, 16
     Regulation
Federal Energy Regulatory Commission              5, XXIV; 18, I
Federal Financial Institutions Examination        12, XI
     Council
Federal Financing Bank                            12, VIII
Federal Highway Administration                    23, I, II
Federal Home Loan Mortgage Corporation            1, IV
Federal Housing Enterprise Oversight Office       12, XVII
Federal Housing Finance Agency                    5, LXXX; 12, XII
Federal Housing Finance Board                     12, IX
Federal Labor Relations Authority                 5, XIV, XLIX; 22, XIV
Federal Law Enforcement Training Center           31, VII
Federal Management Regulation                     41, 102
Federal Maritime Commission                       46, IV
Federal Mediation and Conciliation Service        29, XII
Federal Mine Safety and Health Review Commission  5, LXXIV; 29, XXVII
Federal Motor Carrier Safety Administration       49, III
Federal Prison Industries, Inc.                   28, III
Federal Procurement Policy Office                 48, 99
Federal Property Management Regulations           41, 101
Federal Railroad Administration                   49, II
Federal Register, Administrative Committee of     1, I
Federal Register, Office of                       1, II
Federal Reserve System                            12, II
  Board of Governors                              5, LVIII
Federal Retirement Thrift Investment Board        5, VI, LXXVI
Federal Service Impasses Panel                    5, XIV
Federal Trade Commission                          5, XLVII; 16, I
Federal Transit Administration                    49, VI
Federal Travel Regulation System                  41, Subtitle F
Financial Crimes Enforcement Network              31, X
Financial Research Office                         12, XVI
Financial Stability Oversight Council             12, XIII
Fine Arts, Commission on                          45, XXI
Fiscal Service                                    31, II
Fish and Wildlife Service, United States          50, I, IV
Food and Drug Administration                      21, I
Food and Nutrition Service                        7, II
Food Safety and Inspection Service                9, III
Foreign Agricultural Service                      7, XV
Foreign Assets Control, Office of                 31, V
Foreign Claims Settlement Commission of the       45, V
     United States
Foreign Service Grievance Board                   22, IX
Foreign Service Impasse Disputes Panel            22, XIV
Foreign Service Labor Relations Board             22, XIV
Foreign-Trade Zones Board                         15, IV

[[Page 1271]]

Forest Service                                    36, II
General Services Administration                   5, LVII; 41, 105
  Contract Appeals, Board of                      48, 61
  Federal Acquisition Regulation                  48, 5
  Federal Management Regulation                   41, 102
  Federal Property Management Regulations         41, 101
  Federal Travel Regulation System                41, Subtitle F
  General                                         41, 300
  Payment From a Non-Federal Source for Travel    41, 304
       Expenses
  Payment of Expenses Connected With the Death    41, 303
       of Certain Employees
  Relocation Allowances                           41, 302
  Temporary Duty (TDY) Travel Allowances          41, 301
Geological Survey                                 30, IV
Government Accountability Office                  4, I
Government Ethics, Office of                      5, XVI
Government National Mortgage Association          24, III
Grain Inspection, Packers and Stockyards          7, VIII; 9, II
     Administration
Gulf Coast Ecosystem Restoration Council          2, LIX; 40, VIII
Harry S. Truman Scholarship Foundation            45, XVIII
Health and Human Services, Department of          2, III; 5, XLV; 45, 
                                                  Subtitle A,
  Centers for Medicare & Medicaid Services        42, IV
  Child Support Enforcement, Office of            45, III
  Children and Families, Administration for       45, II, III, IV, X, XIII
  Community Services, Office of                   45, X
  Family Assistance, Office of                    45, II
  Federal Acquisition Regulation                  48, 3
  Food and Drug Administration                    21, I
  Indian Health Service                           25, V
  Inspector General (Health Care), Office of      42, V
  Public Health Service                           42, I
  Refugee Resettlement, Office of                 45, IV
Homeland Security, Department of                  2, XXX; 5, XXXVI; 6, I; 8, 
                                                  I
  Coast Guard                                     33, I; 46, I; 49, IV
  Coast Guard (Great Lakes Pilotage)              46, III
  Customs and Border Protection                   19, I
  Federal Emergency Management Agency             44, I
  Human Resources Management and Labor Relations  5, XCVII
       Systems
  Immigration and Customs Enforcement Bureau      19, IV
  Transportation Security Administration          49, XII
HOPE for Homeowners Program, Board of Directors   24, XXIV
     of
Housing and Urban Development, Department of      2, XXIV; 5, LXV; 24, 
                                                  Subtitle B
  Community Planning and Development, Office of   24, V, VI
       Assistant Secretary for
  Equal Opportunity, Office of Assistant          24, I
       Secretary for
  Federal Acquisition Regulation                  48, 24
  Federal Housing Enterprise Oversight, Office    12, XVII
       of
  Government National Mortgage Association        24, III
  Housing--Federal Housing Commissioner, Office   24, II, VIII, X, XX
       of Assistant Secretary for
  Housing, Office of, and Multifamily Housing     24, IV
       Assistance Restructuring, Office of
  Inspector General, Office of                    24, XII
  Public and Indian Housing, Office of Assistant  24, IX
       Secretary for
  Secretary, Office of                            24, Subtitle A, VII
Housing--Federal Housing Commissioner, Office of  24, II, VIII, X, XX
     Assistant Secretary for
Housing, Office of, and Multifamily Housing       24, IV
     Assistance Restructuring, Office of
Immigration and Customs Enforcement Bureau        19, IV
Immigration Review, Executive Office for          8, V
Independent Counsel, Office of                    28, VII
Independent Counsel, Offices of                   28, VI

[[Page 1272]]

Indian Affairs, Bureau of                         25, I, V
Indian Affairs, Office of the Assistant           25, VI
     Secretary
Indian Arts and Crafts Board                      25, II
Indian Health Service                             25, V
Industry and Security, Bureau of                  15, VII
Information Resources Management, Office of       7, XXVII
Information Security Oversight Office, National   32, XX
     Archives and Records Administration
Inspector General
  Agriculture Department                          7, XXVI
  Health and Human Services Department            42, V
  Housing and Urban Development Department        24, XII, XV
Institute of Peace, United States                 22, XVII
Inter-American Foundation                         5, LXIII; 22, X
Interior Department                               2, XIV
  American Indians, Office of the Special         25, VII
       Trustee
  Endangered Species Committee                    50, IV
  Federal Acquisition Regulation                  48, 14
  Federal Property Management Regulations System  41, 114
  Fish and Wildlife Service, United States        50, I, IV
  Geological Survey                               30, IV
  Indian Affairs, Bureau of                       25, I, V
  Indian Affairs, Office of the Assistant         25, VI
       Secretary
  Indian Arts and Crafts Board                    25, II
  Land Management, Bureau of                      43, II
  National Indian Gaming Commission               25, III
  National Park Service                           36, I
  Natural Resource Revenue, Office of             30, XII
  Ocean Energy Management, Bureau of              30, V
  Reclamation, Bureau of                          43, I
  Safety and Enforcement Bureau, Bureau of        30, II
  Secretary of the Interior, Office of            2, XIV; 43, Subtitle A
  Surface Mining Reclamation and Enforcement,     30, VII
       Office of
Internal Revenue Service                          26, I
International Boundary and Water Commission,      22, XI
     United States and Mexico, United States 
     Section
International Development, United States Agency   22, II
     for
  Federal Acquisition Regulation                  48, 7
International Development Cooperation Agency,     22, XII
     United States
International Joint Commission, United States     22, IV
     and Canada
International Organizations Employees Loyalty     5, V
     Board
International Trade Administration                15, III; 19, III
International Trade Commission, United States     19, II
Interstate Commerce Commission                    5, XL
Investment Security, Office of                    31, VIII
James Madison Memorial Fellowship Foundation      45, XXIV
Japan-United States Friendship Commission         22, XVI
Joint Board for the Enrollment of Actuaries       20, VIII
Justice Department                                2, XXVIII; 5, XXVIII; 28, 
                                                  I, XI; 40, IV
  Alcohol, Tobacco, Firearms, and Explosives,     27, II
       Bureau of
  Drug Enforcement Administration                 21, II
  Federal Acquisition Regulation                  48, 28
  Federal Claims Collection Standards             31, IX
  Federal Prison Industries, Inc.                 28, III
  Foreign Claims Settlement Commission of the     45, V
       United States
  Immigration Review, Executive Office for        8, V
  Independent Counsel, Offices of                 28, VI
  Prisons, Bureau of                              28, V
  Property Management Regulations                 41, 128
Labor Department                                  2, XXIX; 5, XLII
  Employee Benefits Security Administration       29, XXV
  Employees' Compensation Appeals Board           20, IV
  Employment and Training Administration          20, V
  Employment Standards Administration             20, VI

[[Page 1273]]

  Federal Acquisition Regulation                  48, 29
  Federal Contract Compliance Programs, Office    41, 60
       of
  Federal Procurement Regulations System          41, 50
  Labor-Management Standards, Office of           29, II, IV
  Mine Safety and Health Administration           30, I
  Occupational Safety and Health Administration   29, XVII
  Public Contracts                                41, 50
  Secretary of Labor, Office of                   29, Subtitle A
  Veterans' Employment and Training Service,      41, 61; 20, IX
       Office of the Assistant Secretary for
  Wage and Hour Division                          29, V
  Workers' Compensation Programs, Office of       20, I, VII
Labor-Management Standards, Office of             29, II, IV
Land Management, Bureau of                        43, II
Legal Services Corporation                        45, XVI
Library of Congress                               36, VII
  Copyright Royalty Board                         37, III
  U.S. Copyright Office                           37, II
Local Television Loan Guarantee Board             7, XX
Management and Budget, Office of                  5, III, LXXVII; 14, VI; 
                                                  48, 99
Marine Mammal Commission                          50, V
Maritime Administration                           46, II
Merit Systems Protection Board                    5, II, LXIV
Micronesian Status Negotiations, Office for       32, XXVII
Military Compensation and Retirement              5, XCIX
     Modernization Commission
Millennium Challenge Corporation                  22, XIII
Mine Safety and Health Administration             30, I
Minority Business Development Agency              15, XIV
Miscellaneous Agencies                            1, IV
Monetary Offices                                  31, I
Morris K. Udall Scholarship and Excellence in     36, XVI
     National Environmental Policy Foundation
Museum and Library Services, Institute of         2, XXXI
National Aeronautics and Space Administration     2, XVIII; 5, LIX; 14, V
  Federal Acquisition Regulation                  48, 18
National Agricultural Library                     7, XLI
National Agricultural Statistics Service          7, XXXVI
National and Community Service, Corporation for   2, XXII; 45, XII, XXV
National Archives and Records Administration      2, XXVI; 5, LXVI; 36, XII
  Information Security Oversight Office           32, XX
National Capital Planning Commission              1, IV
National Commission for Employment Policy         1, IV
National Commission on Libraries and Information  45, XVII
     Science
National Council on Disability                    5, C; 34, XII
National Counterintelligence Center               32, XVIII
National Credit Union Administration              5, LXXXVI; 12, VII
National Crime Prevention and Privacy Compact     28, IX
     Council
National Drug Control Policy, Office of           2, XXXVI; 21, III
National Endowment for the Arts                   2, XXXII
National Endowment for the Humanities             2, XXXIII
National Foundation on the Arts and the           45, XI
     Humanities
National Geospatial-Intelligence Agency           32, I
National Highway Traffic Safety Administration    23, II, III; 47, VI; 49, V
National Imagery and Mapping Agency               32, I
National Indian Gaming Commission                 25, III
National Institute of Food and Agriculture        7, XXXIV
National Institute of Standards and Technology    15, II
National Intelligence, Office of Director of      5, IV; 32, XVII
National Labor Relations Board                    5, LXI; 29, I
National Marine Fisheries Service                 50, II, IV
National Mediation Board                          29, X
National Oceanic and Atmospheric Administration   15, IX; 50, II, III, IV, 
                                                  VI
National Park Service                             36, I
National Railroad Adjustment Board                29, III

[[Page 1274]]

National Railroad Passenger Corporation (AMTRAK)  49, VII
National Science Foundation                       2, XXV; 5, XLIII; 45, VI
  Federal Acquisition Regulation                  48, 25
National Security Council                         32, XXI
National Security Council and Office of Science   47, II
     and Technology Policy
National Telecommunications and Information       15, XXIII; 47, III, IV
     Administration
National Transportation Safety Board              49, VIII
Natural Resources Conservation Service            7, VI
Natural Resource Revenue, Office of               30, XII
Navajo and Hopi Indian Relocation, Office of      25, IV
Navy Department                                   32, VI
  Federal Acquisition Regulation                  48, 52
Neighborhood Reinvestment Corporation             24, XXV
Northeast Interstate Low-Level Radioactive Waste  10, XVIII
     Commission
Nuclear Regulatory Commission                     2, XX; 5, XLVIII; 10, I
  Federal Acquisition Regulation                  48, 20
Occupational Safety and Health Administration     29, XVII
Occupational Safety and Health Review Commission  29, XX
Ocean Energy Management, Bureau of                30, V
Oklahoma City National Memorial Trust             36, XV
Operations Office                                 7, XXVIII
Overseas Private Investment Corporation           5, XXXIII; 22, VII
Patent and Trademark Office, United States        37, I
Payment From a Non-Federal Source for Travel      41, 304
     Expenses
Payment of Expenses Connected With the Death of   41, 303
     Certain Employees
Peace Corps                                       2, XXXVII; 22, III
Pennsylvania Avenue Development Corporation       36, IX
Pension Benefit Guaranty Corporation              29, XL
Personnel Management, Office of                   5, I, XXXV; 5, IV; 45, 
                                                  VIII
  Human Resources Management and Labor Relations  5, XCVII
       Systems, Department of Homeland Security
  Federal Acquisition Regulation                  48, 17
  Federal Employees Group Life Insurance Federal  48, 21
       Acquisition Regulation
  Federal Employees Health Benefits Acquisition   48, 16
       Regulation
Pipeline and Hazardous Materials Safety           49, I
     Administration
Postal Regulatory Commission                      5, XLVI; 39, III
Postal Service, United States                     5, LX; 39, I
Postsecondary Education, Office of                34, VI
President's Commission on White House             1, IV
     Fellowships
Presidential Documents                            3
Presidio Trust                                    36, X
Prisons, Bureau of                                28, V
Privacy and Civil Liberties Oversight Board       6, X
Procurement and Property Management, Office of    7, XXXII
Productivity, Technology and Innovation,          37, IV
     Assistant Secretary
Public Contracts, Department of Labor             41, 50
Public and Indian Housing, Office of Assistant    24, IX
     Secretary for
Public Health Service                             42, I
Railroad Retirement Board                         20, II
Reclamation, Bureau of                            43, I
Refugee Resettlement, Office of                   45, IV
Relocation Allowances                             41, 302
Research and Innovative Technology                49, XI
     Administration
Rural Business-Cooperative Service                7, XVIII, XLII
Rural Development Administration                  7, XLII
Rural Housing Service                             7, XVIII, XXXV
Rural Telephone Bank                              7, XVI
Rural Utilities Service                           7, XVII, XVIII, XLII
Safety and Environmental Enforcement, Bureau of   30, II
Saint Lawrence Seaway Development Corporation     33, IV

[[Page 1275]]

Science and Technology Policy, Office of          32, XXIV
Science and Technology Policy, Office of, and     47, II
     National Security Council
Secret Service                                    31, IV
Securities and Exchange Commission                5, XXXIV; 17, II
Selective Service System                          32, XVI
Small Business Administration                     2, XXVII; 13, I
Smithsonian Institution                           36, V
Social Security Administration                    2, XXIII; 20, III; 48, 23
Soldiers' and Airmen's Home, United States        5, XI
Special Counsel, Office of                        5, VIII
Special Education and Rehabilitative Services,    34, III
     Office of
State Department                                  2, VI; 22, I; 28, XI
  Federal Acquisition Regulation                  48, 6
Surface Mining Reclamation and Enforcement,       30, VII
     Office of
Surface Transportation Board                      49, X
Susquehanna River Basin Commission                18, VIII
Technology Administration                         15, XI
Technology Policy, Assistant Secretary for        37, IV
Tennessee Valley Authority                        5, LXIX; 18, XIII
Thrift Supervision Office, Department of the      12, V
     Treasury
Trade Representative, United States, Office of    15, XX
Transportation, Department of                     2, XII; 5, L
  Commercial Space Transportation                 14, III
  Contract Appeals, Board of                      48, 63
  Emergency Management and Assistance             44, IV
  Federal Acquisition Regulation                  48, 12
  Federal Aviation Administration                 14, I
  Federal Highway Administration                  23, I, II
  Federal Motor Carrier Safety Administration     49, III
  Federal Railroad Administration                 49, II
  Federal Transit Administration                  49, VI
  Maritime Administration                         46, II
  National Highway Traffic Safety Administration  23, II, III; 47, IV; 49, V
  Pipeline and Hazardous Materials Safety         49, I
       Administration
  Saint Lawrence Seaway Development Corporation   33, IV
  Secretary of Transportation, Office of          14, II; 49, Subtitle A
  Transportation Statistics Bureau                49, XI
Transportation, Office of                         7, XXXIII
Transportation Security Administration            49, XII
Transportation Statistics Bureau                  49, XI
Travel Allowances, Temporary Duty (TDY)           41, 301
Treasury Department                               2, X;5, XXI; 12, XV; 17, 
                                                  IV; 31, IX
  Alcohol and Tobacco Tax and Trade Bureau        27, I
  Community Development Financial Institutions    12, XVIII
       Fund
  Comptroller of the Currency                     12, I
  Customs and Border Protection                   19, I
  Engraving and Printing, Bureau of               31, VI
  Federal Acquisition Regulation                  48, 10
  Federal Claims Collection Standards             31, IX
  Federal Law Enforcement Training Center         31, VII
  Financial Crimes Enforcement Network            31, X
  Fiscal Service                                  31, II
  Foreign Assets Control, Office of               31, V
  Internal Revenue Service                        26, I
  Investment Security, Office of                  31, VIII
  Monetary Offices                                31, I
  Secret Service                                  31, IV
  Secretary of the Treasury, Office of            31, Subtitle A
  Thrift Supervision, Office of                   12, V
Truman, Harry S. Scholarship Foundation           45, XVIII
United States and Canada, International Joint     22, IV
     Commission
United States and Mexico, International Boundary  22, XI
     and Water Commission, United States Section
U.S. Copyright Office                             37, II
Utah Reclamation Mitigation and Conservation      43, III
   Commission
[[Page 1276]]

Veterans Affairs Department                       2, VIII; 38, I
  Federal Acquisition Regulation                  48, 8
Veterans' Employment and Training Service,        41, 61; 20, IX
     Office of the Assistant Secretary for
Vice President of the United States, Office of    32, XXVIII
Wage and Hour Division                            29, V
Water Resources Council                           18, VI
Workers' Compensation Programs, Office of         20, I, VII
World Agricultural Outlook Board                  7, XXXVIII

[[Page 1277]]



List of CFR Sections Affected



All changes in this volume of the Code of Federal Regulations (CFR) that 
were made by documents published in the Federal Register since January 
1, 2012 are enumerated in the following list. Entries indicate the 
nature of the changes effected. Page numbers refer to Federal Register 
pages. The user should consult the entries for chapters, parts and 
subparts as well as sections for revisions.
For changes to this volume of the CFR prior to this listing, consult the 
annual edition of the monthly List of CFR Sections Affected (LSA). The 
LSA is available at www.fdsys.gov. For changes to this volume of the CFR 
prior to 2001, see the ``List of CFR Sections Affected, 1949-1963, 1964-
1972, 1973-1985, and 1986-2000'' published in 11 separate volumes. The 
``List of CFR Sections Affected 1986-2000'' is available at 
www.fdsys.gov.

                                  2012

12 CFR
                                                                   77 FR
                                                                    Page
Chapter VI
Policy statement...................................................65098
611  Authority citation revised....................................60595
611.100  (a) through (f) redesignated as (c) through (h); new (a) 
        and (b) added (eff. date pending)..........................60595
611.330  (b)(1), (2) and (c)(1) amended (eff. date pending)........60596
    Regulation at 77 FR 60596 confirmed............................76215
611.360  Added (eff. date pending).................................60596
    Regulation at 77 FR 60596 confirmed............................76215
611.400 (Subpart D)  Heading revised (eff. date pending)...........60596
    Regulation at 77 FR 60596 confirmed............................76215
611.400  (a), (b) and (d)(1) amended (eff. date pending)...........60596
    Regulation at 77 FR 60596 confirmed............................76215
611.410  Added (eff. date pending).................................60596
    Regulation at 77 FR 60596 confirmed............................76215
612.2145  (a)(2) amended (eff. date pending).......................60596
    Regulation at 77 FR 60596 confirmed............................76215
612.2155  (a)(2) amended (eff. date pending).......................60596
    Regulation at 77 FR 60596 confirmed............................76215
612.2165  (b)(12) amended (eff. date pending)......................60596
    Regulation at 77 FR 60596 confirmed............................76215
614.4352  Regulation at 76 FR 29997 confirmed......................39387
614.4353  Regulation at 76 FR 29997 confirmed......................39387
614.4354  Regulation at 76 FR 29997 confirmed......................39387
614.4356  Regulation at 76 FR 29997 confirmed......................39387
614.4362  Regulation at 76 FR 29997 confirmed......................39387
615.5131  (a) through (l) designations removed; amended (eff. date 
        pending)...................................................66370
615.5132  Revised (eff. date pending)..............................66371
615.5133  Revised (eff. date pending)..............................66371
615.5135  Removed (eff. date pending)..............................66372
615.5136  Revised (eff. date pending)..............................66372
615.5140  (a) revised (eff. date pending)..........................66372
615.5141  Removed (eff. date pending)..............................66374
615.5143  Revised (eff. date pending)..............................66374

[[Page 1278]]

615.5174  (a) amended; (d) revised; (e) added (eff. date pending) 
                                                                   66374
615.5180  Revised (eff. date pending)..............................66374
615.5181  Removed (eff. date pending)..............................66375
615.5182  Revised (eff. date pending)..............................66375
615.5201  Amended (eff. date pending)..............................66375
615.5570 (Subpart S)  Correctly reinstated; CFR correction.........75362
618.8440  Revised (eff. date pending)..............................25587
    Regulation at 77 FR 25587 confirmed............................37283
619  Authority citation revised....................................60596
    Regulation at 77 FR 60596 confirmed............................76215
619.9335  Added (eff. date pending)................................60596
    Regulation at 77 FR 60596 confirmed............................76215
620  Authority citation revised....................................60597
    Regulation at 77 FR 60597 confirmed............................76215
620.2  Heading, (c) and (d) revised (eff. date pending)............60597
    Regulation at 77 FR 60597 confirmed............................76215
620.4  (c) revised (eff. date pending).............................60597
    Regulation at 77 FR 60597 confirmed............................76215
620.5  (a)(11) and (e)(4) added; (h) revised; (i), (j) and (k) 
        removed; (l), (m) and (n) redesignated as new (i), (j) and 
        (k) (eff. date pending)....................................60597
    Regulation at 77 FR 60597 confirmed............................76215
620.6  Added (eff. date pending)...................................60597
    Regulation at 77 FR 60597 confirmed............................76215
620.10  (a) revised; (c) added (eff. date pending).................60600
    Regulation at 77 FR 60600 confirmed............................76215
620.11  (b) introductory text, (c) and (d) revised; (e) and (f) 
        removed (eff. date pending)................................60600
    Regulation at 77 FR 60600 confirmed............................76215
620.15  Revised (eff. date pending)................................60600
    Regulation at 77 FR 60600 confirmed............................76215
620.17  Revised (eff. date pending)................................60600
    Regulation at 77 FR 60600 confirmed............................76215
620.21  (a)(3)(i) revised (eff. date pending)......................60601
    Regulation at 77 FR 60601 confirmed............................76215
620.31  Revised (eff. date pending)................................60601
    Regulation at 77 FR 60601 confirmed............................76215
630  Authority citation revised.............................59052, 60602
    Regulation at 77 FR 60602 confirmed............................76215
    Regulation at 77 FR 59052 confirmed............................76356
630.6  (a)(3) and (4)(ii)(A) revised (eff. date pending)...........59053
    (b) revised (eff. date pending)................................60602
    Regulation at 77 FR 60602 confirmed............................76215
    Regulation at 77 FR 59053 confirmed............................76356
630.20  (n) revised (eff. date pending)............................59053
    (i) revised (eff. date pending)................................60602
    Regulation at 77 FR 60602 confirmed............................76215
    Regulation at 77 FR 59053 confirmed............................76356
652.1--652.45 (Subpart A)  Revised (eff. date pending).............66382
Chapter VII
Policy statement...................................................32004
701.21  (a) amended................................................71084
701.23  (b)(2) and (3) redesignated as (b)(3) and (4); new (b)(2), 
        (5) and (h) added; new (b)(5) introductory text amended....31990
701.25  Removed....................................................31991
701.31  (d)(3) amended.............................................16426
    (a)(1) amended.................................................71084
701.32  (b)(1) amended.............................................31991
701.36  (b)(2) revised; (d) removed; (e) redesignated as new (d) 
                                                                   31991
703.2  Amended; eff. 6-11-13.......................................74109
703.8  (b)(3) revised; eff. 6-11-13................................74109
703.9  (d) revised; eff. 6-11-13...................................74109
703.13  (d)(3) revised.............................................31991
703.14  (i) and (j) added..........................................31991
    (e), (g)(9), (11), (h)(1), (2) and (j)(1) revised; eff. 6-11-
13.................................................................74110

[[Page 1279]]

703.16  (b) and (d) removed; (c), (e) and (f) redesignated as new 
        (b), (c) and (d)...........................................31991
703.18  (b) redesignated as (c); new (b) added.....................31991
703.20  Added......................................................31991
704.2  Amended; eff. 6-11-13.......................................74110
704.6  (f), (g)(2)(iii) and (h)(1) revised; eff. 6-11-13...........74110
704  Appendices B and C amended;  eff. 6-11-13.....................74111
707.3  (c) amended.................................................71084
707.11  (b)(2)(i) and (c) amended..................................71084
707  Appendix B amended............................................71084
    Appendix C amended.............................................71085
709.10  (a)(5) revised; eff. 6-11-13...............................74111
713.6  (a)(1) and (c) revised; interim.............................31992
    Regulation at 77 FR 31992 confirmed............................74113
714.10  Amended....................................................71085
721.3  (b) through (l) redesignated as (c) through (m); new (b) 
        added......................................................31992
723.1  (e) revised.................................................31993
741.3  (b)(5) added.................................................5162
    (b)(2) revised.................................................32001
    (a)(2) amended; eff. 6-11-13...................................74112
741  Appendix B added...............................................5162
    Appendix C added...............................................32001
    Appendix B corrected...........................................57990
742  Removed.......................................................31993
748  Authority citation revised....................................71085
748  Appendix A amended............................................71085
749  Appendix A amended............................................71085
760.6  (a) amended.................................................16428
790.2  (b)(4), (5), (13) and (c)(2) revised; (c)(1) table amended 
                                                                   16428

                                  2013

12 CFR
                                                                   78 FR
                                                                    Page
Chapter VI
Chapter VI  Policy statement.......................................63380
602  Authority citation revised (eff. date pending)................77562
602.2  Heading revised; (c) redesignated as (d); new (c) added 
        (eff. date pending)........................................77562
604.420  (i)(1) amended............................................31831
    Regulation at 78 FR 31831 eff. date confirmed..................45051
610  Revised; interim..............................................51048
    Regulation at 78 FR 51048 eff. date confirmed..................63379
611  Actions on petitions..........................................11551
    Authority citation revised.....................................31831
    Regulation at 78 FR 31831 eff. date confirmed..................45051
611.1130  (a) amended..............................................31831
    Regulation at 78 FR 31831 eff. date confirmed..................45051
611.1135--611.1137 (Subpart I)  Heading revised....................31831
    Regulation at 78 FR 31831 eff. date confirmed..................45051
611.1136  Heading revised; (c) and section amended.................31831
    Regulation at 78 FR 31831 eff. date confirmed..................45051
611.1150--611.1158 (Subpart J)  Added..............................31831
    Regulation at 78 FR 31831 eff. date confirmed..................45051
612  Actions on petitions..........................................11551
612.2130  (p) and (t) revised......................................31834
    Regulation at 78 FR 31834 eff. date confirmed..................45051
615.5131  Regulation at 77 FR 66370 eff. date confirmed.............2615
615.5132  Regulation at 77 FR 66371 eff. date confirmed.............2615
615.5133  Regulation at 77 FR 66371 eff. date confirmed.............2615
615.5134  Revised; eff. date pending...............................23455
    (e) correctly amended; eff. date pending.......................26701
    Regulation at 78 FR 23455 eff. date confirmed..................37101
615.5135  Regulation at 77 FR 66372 eff. date confirmed.............2615
615.5136  Regulation at 77 FR 66372 eff. date confirmed.............2615
615.5140  Regulation at 77 FR 66372 eff. date confirmed.............2615
615.5141  Regulation at 77 FR 66374 eff. date confirmed.............2615
615.5143  Regulation at 77 FR 66374 eff. date confirmed.............2615
615.5174  Regulation at 77 FR 66374 eff. date confirmed.............2615
615.5180  Regulation at 77 FR 66374 eff. date confirmed.............2615
615.5181  Regulation at 77 FR 66375 eff. date confirmed.............2615
615.5182  Regulation at 77 FR 66375 eff. date confirmed.............2615
615.5201  Regulation at 77 FR 66375 eff. date confirmed.............2615
615.5207  (j) amended..............................................21036

[[Page 1280]]

    Regulation at 78 FR 21036 eff. date confirmed..................34550
615.5301  (b)(5), (i)(5) and (j)(1) introductory text amended......21036
    Regulation at 78 FR 21036 eff. date confirmed..................34550
618.8300  Amended (eff. date pending)..............................77562
618.8310  (c) added (eff. date pending)............................77562
618.8320  (b)(10) added (eff. date pending)........................77562
619  Actions on petitions..........................................11551
619.9338  Added....................................................31834
    Regulation at 78 FR 31834 eff. date confirmed..................45051
620  Actions on petitions..........................................11551
620.5  (a)(3) amended; (a)(12) added...............................31834
    Regulation at 78 FR 31834 eff. date confirmed..................45051
    (i), (j) and (k) correctly removed; (l), (m) and (n) correctly 
redesignated as new (i), new (j) and new (k); CFR correction.......58449
621  Authority citation revised (eff. date pending)................77562
621.1  Amended.....................................................31835
    Regulation at 78 FR 31835 eff. date confirmed..................45051
621.2  (e) amended.................................................31835
    Regulation at 78 FR 31835 eff. date confirmed..................45051
    (b) redesignated as (d); (a) and (c) through (i) redesignated 
as new (b) and (f) through (l); (a), (c), (e), (m) and (n) added 
(eff. date pending)................................................77562
621.6  (b) amended.................................................21037
    Regulation at 78 FR 21036 eff. date confirmed..................34550
621.12--621.14 (Subpart D)  Heading revised (eff. date pending)....77562
621.12  Heading revised (eff. date pending)........................77562
621.15  Added (eff. date pending)..................................77562
622.2  (d) amended.................................................31835
    Regulation at 78 FR 31835 eff. date confirmed..................45051
622.61  Revised....................................................24338
623  Authority citation revised....................................31835
    Regulation at 78 FR 31835 eff. date confirmed..................45051
623.2  (d) amended.................................................31835
    Regulation at 78 FR 31835 eff. date confirmed..................45051
630  Actions on petitions..........................................11551
630.20  (a)(2) amended.............................................31835
    Regulation at 78 FR 31835 eff. date confirmed..................45051
652  (b) Appendix A amended........................................21037
    Regulation at 78 FR 21036 eff. date confirmed..................34550
    Authority citation revised.....................................65552
652.1--652.45 (Subpart A)  Regulation at 77 FR 66382 eff. date 
        confirmed...................................................2879
652.5  Revised (eff. date pending).................................65552
652.35  Revised (eff. date pending)................................65553
652.40  Added (eff. date pending)..................................65553
652.60  Revised (eff. date pending)................................65149
652.61  Added (eff. date pending)..................................65149
652.62  Added (eff. date pending)..................................65149
Chapter VII
700.1  Revised.....................................................32543
700.2  Amended........................................4029, 32544, 77564
701.3  (d)(3) amended..............................................32544
701.14  (b)(3) and (4) revised......................................4029
    (c)(3)(i) amended..............................................32544
    (b)(4) revised; eff. 1-1-14....................................77564
701.22  Revised....................................................37956
    Regulation at 78 FR 37956 eff. date extended to 9-23-13........40953
701.23  Introductory text added....................................37958
    Regulation at 78 FR 37958 eff. date extended to 9-23-13........40953
701.34  (a)(1) revised..............................................4032
701.36  Revised....................................................57252
701.37  (c) amended.................................................4030
701  Appendix B amended.....................................13463, 32544
702.2  (a) revised.................................................32544
702.103  (a) amended................................................4037
702.104  (c) amended...............................................32544
703.1  (b)(5) and (6) revised; (b)(7) added........................76730
703.14  (a) revised................................................13213
704.2  Amended.....................................................32544
704.4  (d)(3)(ii) Revised; eff. 1-1-14.............................77565
704.10  Amended....................................................32544
704.12  (b) amended................................................32544

[[Page 1281]]

707.2  (e) and (v) removed; (f) through (u) and (w) through (z) 
        redesignated as (e) through (t) and (u) through (x)........32544
708a.101  Amended..................................................32544
708a.301  Amended..................................................32544
708b.2  Amended....................................................32544
709.1  (c) amended.................................................32545
712.1  Revised; eff. 6-30-14.......................................72548
712.2  (d)(1) removed; (d)(2) and (3) redesignated as (d)(1) and 
        (2)........................................................32545
    (d)(2) revised; eff. 6-30-14...................................72548
712.3  (d) revised; eff. 6-30-14...................................72548
712.4  Revised; eff. 6-30-14.......................................72549
712.9  Removed; eff. 6-30-14.......................................72549
712.10  Revised; eff. 6-30-14......................................72549
712.11  Added; eff. 6-30-14........................................72549
716  Revised.......................................................32545
721.3  (b) redesignated as (b)(1); (b)(2) added....................76731
722  Authority citation revised; eff. 1-18-14......................10442
    Regulation at 78 FR 10442 confirmed............................69793
722.3  (f) added; eff. 1-18-14.....................................10442
    Regulation at 78 FR 10442 confirmed............................69793
723.11  Introductory text amended..................................32545
723.12  Introductory text amended..................................32545
723.13  Amended....................................................32545
723.16  (b)(3) amended.............................................32545
725.2  (n) removed; (o), (p) and (q) redesignated as (n), (o) and 
        (p)........................................................32545
741.3  (b)(5) revised...............................................4037
741.6  (a) introductory text amended...............................32545
    (a) introductory text revised..................................64885
741.8  (c) amended.................................................32545
    (b)(2) and (3) amended; (b)(4) added...........................37958
    Regulation at 78 FR 37958 eff. date extended to 9-23-13........40953
741.12  Added; eff. 3-31-14........................................64883
741.204  Amended....................................................4032
741.205  Amended....................................................4029
741.220  Amended...................................................32545
741.222  Revised; eff. 6-30-14.....................................72550
741.223  Amended...................................................32545
741.225  Added.....................................................37958
    Regulation at 78 FR 37958 eff. date extended to 9-23-13........40953
745.1  (f) removed.................................................32545
745.14  Removed....................................................32545
747.901  Amended....................................................4029
748.1  (a) revised.................................................64885
748.2  Second (b)(2) correctly removed; CFR correction.............46256
748  Appendix A amended............................................32545
750.1  (e)(1)(ii)(C), (D) and (E) revised; (l) removed..............4029
    (a) removed; (b) through (k) redesignated as (a) through (j) 
                                                                   32545
750.6  (a) amended.................................................32545
761  Revised.......................................................32545
790.2  Heading and (c) revised; (b)(14) removed; (b)(15), (16) and 
        (17) redesignated as (b)(14), (15) and (16)................32546
791.8  (a) revised..................................................4038
791.10  (b) removed; (c) through (g) redesignated as (b) through 
        (f)........................................................32546
792.50  Amended....................................................32546
792.51  (a) through (d) revised....................................32547

                                  2014

12 CFR
                                                                   79 FR
                                                                    Page
Chapter VI
Policy statement...................................................63033
602  Regulation at 78 FR 77562 eff. date confirmed.................10661
602.2  Regulation at 78 FR 77562 eff. date confirmed...............10661
611.100  (a) removed; (b) through (h) redesignated as new (a) 
        through (g); interim (eff. date pending)...................17856
    Regulation at 79 FR 17856 confirmed............................34622
611.360  Removed; interim (eff. date pending)......................17856
    Regulation at 79 FR 17856 confirmed............................34622
611.410  Removed; interim (eff. date pending)......................17856
    Regulation at 79 FR 17856 confirmed............................34622
618.8300  Regulation at 78 FR 77562 eff. date confirmed............10661
618.8310  Regulation at 78 FR 77562 eff. date confirmed............10661
618.8320  Regulation at 78 FR 77562 eff. date confirmed............10661
620.2  (e) correctly reinstated; CFR correction....................30005

[[Page 1282]]

620.5  (a)(11) removed; (a)(12) redesignated as new (a)(11); 
        interim (eff. date pending)................................17856
    Regulation at 79 FR 17856 confirmed............................34622
620.6  (c)(6) removed; (c)(7) redesignated as new (c)(6); interim; 
        (eff. date pending)........................................17856
    Regulation at 79 FR 17856 confirmed............................34622
621  Regulation at 78 FR 77562 eff. date confirmed.................10661
621.2  Regulation at 78 FR 77562 eff. date confirmed...............10661
621.12--621.14 (Subpart D)  Regulation at 78 FR 77562 eff. date 
        confirmed..................................................10661
621.12  Regulation at 78 FR 77562 eff. date confirmed..............10661
621.15  Regulation at 78 FR 77562 eff. date confirmed..............10661
    (b)(1) through (6) compliance date.............................63033
630.20  (i) amended; interim (eff. date pending)...................17856
    (i) correctly revised; CFR correction..........................21598
    Regulation at 79 FR 17856 confirmed............................34622
652  Regulation at 78 FR 65552 eff. date confirmed.................29074
652.5  Correctly amended (eff. date pending).......................28811
    Regulation at 78 FR 65552 eff. date confirmed..................29074
    Correctly revised..............................................53127
652.35  Regulation at 78 FR 65553 eff. date confirmed..............29074
652.40  Regulation at 78 FR 65553 eff. date confirmed..............29074
652.60  Regulation at 78 FR 65149 eff. date confirmed...............3071
652.61  Regulation at 78 FR 65149 eff. date confirmed...............3071
652.62  Regulation at 78 FR 65149 eff. date confirmed...............3071
Chapter VII
701.21  (c)(7)(iii) amended........................................59629
701.31  (a)(1) and (c)(5) amended; eff. 1-20-15....................75748
702  Heading revised...............................................24315
702.501--702.506 (Subpart E)  Added................................24315
703.1--703.20 (Subpart A)  Designated as Subpart A..................5241
703.2  Amended......................................................5241
703.14  (k) added...................................................5241
703.16  (a) removed; (b), (c) and (d) redesignated as (a), (b) and 
        (c).........................................................5241
703.100--703.114 (Subpart B)  Added.................................5241
706  Removed.......................................................59629
710.5  (a)(1) and (2) revised; (a)(3) amended......................36198
710.6  (a), (b) and (c) revised....................................36198
715.5  (a) revised..................................................5247
722.3  (a)(5) introductory text, (i) and (ii) amended; eff. 1-20-
        15.........................................................75748
741  Authority citation revised.....................................5247
741.219  Revised....................................................5247
750.1  (a), (b)(2) introductory text, (ii), (3) introductory text, 
        (i), (ii), (v), (d)(1)(ii)(C), (iii), (2)(ii), (iii) and 
        (v) correctly amended......................................12658
750.4  (a)(2) and (4)(ii) correctly amended........................12658
750.5  (a)(2)(ii) and (3) correctly amended........................12658
750.6  (a) correctly amended.......................................12658
790.2  (b)(4), (6), (15) and (c)(1)(i) revised; (b)(17) added......59629

                                  2015

12 CFR
                                                                   80 FR
                                                                    Page
Chapter VI
Policy statement...................................................67277
600.1  Revised (eff. date pending).................................68428
600.2  (b) revised (eff. date pending)......................15680, 40897
    Regulation at 80 FR 15680 eff. date confirmed..................32294
    Regulation at 80 FR 40897 eff. date confirmed..................60275
600.4  Revised (eff. date pending).................................68428
603.350  Amended; CFR correction...................................78649
606.670  Amended (eff. date pending)...............................68429
611.100  (b) through (g) redesignated as (c) through (h); new (b), 
        (i) and (j) added (eff. date pending)......................51116
    Regulation at 80 FR 51116 eff. date confirmed..................67277
611.340  Revised (eff. date pending)...............................30335

[[Page 1283]]

    Regulation at 80 FR 30335 eff. date confirmed..................44258
611.1000  Revised (eff. date pending)..............................51116
    Regulation at 80 FR 51116 eff. date confirmed..................67277
611.1010  Revised (eff. date pending)..............................51116
    Regulation at 80 FR 51116 eff. date confirmed..................67277
611.1020  Revised (eff. date pending)..............................51116
    Regulation at 80 FR 51116 eff. date confirmed..................67277
611.1040  Amended (eff. date pending)..............................51116
    Regulation at 80 FR 51116 eff. date confirmed..................67277
611.1120  (b) amended; (c) revised (eff. date pending).............51116
    Regulation at 80 FR 51116 eff. date confirmed..................67277
611.1121  Revised (eff. date pending)..............................51116
    Regulation at 80 FR 51116 eff. date confirmed..................67277
611.1122  Revised (eff. date pending)..............................51117
    Regulation at 80 FR 51117 eff. date confirmed..................67277
611.1123  Heading, (a) introductory text and (b) revised; (a)(3), 
        (4), (5), (7) introductory text, (iv), (9) and (10) 
        amended; (c) removed (eff. date pending)...................51119
    Regulation at 80 FR 51119 eff. date confirmed..................67277
611.1124  Revised (eff. date pending)..............................51119
    Regulation at 80 FR 51119 eff. date confirmed..................67277
611.1125  (a), (b) introductory text, (1) through (4) and (c) 
        amended (eff. date pending)................................51121
    Regulation at 80 FR 51121 eff. date confirmed..................67277
611.1126  Added (eff. date pending)................................51121
    Regulation at 80 FR 51121 eff. date confirmed..................67277
614.4920--614.4960 (Subpart S)  Revised............................43254
614.4935  Revised..................................................43256
614.4955  (b) revised..............................................43257
614.4920--614.4960 (Subpart S)  Appendix A revised; Appendix B 
        added......................................................43258
620.6  (c)(2)(i) revised (eff. date pending).......................10326
    Regulation at 80 FR 10326 eff. date confirmed..................26822
624  Added; nomenclature changes; eff. 4-1-16......................74913
624.1  (a), (b) and (c) added; eff. 4-1-16.........................74913
    (d) added; interim; eff. 4-1-16................................74924
624.2  Amended; eff. 4-1-16........................................74913
624.6  Amended; eff. 4-1-16........................................74913
624.12  Added; eff. 4-1-16.........................................74913
652.50--652.100 (Subpart B)  Appendix A amended; CFR correction....78650
Chapter VII
700.2  Amended; eff. 1-1-19........................................66706
701.21  (h)(4)(iv) amended; eff. 1-1-19............................66706
701.23  (b)(2) amended; eff. 1-1-19................................66706
701.34  (b)(12), (d)(1)(i) and Appendix amended; eff. 1-1-19.......66706
701.36  (b) amended; (c) removed; (d) and (e) redesignated as new 
        (c) and (d); heading, (a), new (c)(2), new (d)(2) and (4) 
        revised....................................................45850
701  Appendix B amended............................................25931
702.1  Revised; eff. 1-1-19........................................66706
702.2  Revised; eff. 1-1-19........................................66706
702.101--702.114 (Subpart A)  Revised; eff. 1-1-19.................66706
702.201--702.210 (Subpart B)  Revised; eff. 1-1-19.................66706
702.301--702.307 (Subpart C)  Removed; eff. 1-1-19.................66722
    Redesignated from 702.501--702.506 (Subpart E); eff. 1-1-19....66722
702.401--702.403 (Subpart D)  Removed; eff. 1-1-19.................66722
702.501--702.506 (Subpart E)  Redesignated as 702.301--702.306 
        (Subpart C); eff. 1-1-19...................................66722
702.502  Amended...................................................48012
702.504  (a) revised...............................................48012
    (b)(4) amended; eff. 1-1-19 (should be 702.304?)...............66722
702.505  (a), (b)(5) and (d) revised...............................48012
    (b)(4) amended; eff. 1-1-19 (should be 702.305?)...............66722

[[Page 1284]]

702.506  (a) amended; (d) removed; (e) through (i) redesignated as 
        new (d) through (h); (c) and new (d) through (g) revised 
                                                                   48012
702  Appendix A added; eff. 1-1-19.................................66722
703.14  (i) and (j)(4) amended; eff. 1-1-19........................66722
704.2  Amended..............................................25936, 57284
704.3  (b)(5), (c)(3) and (e)(3)(i) revised; (f)(4) removed........25937
704.5  (j) revised.................................................25937
704.6  (c), (d) and (e) revised....................................25937
704.7  (c) revised.................................................25938
    (c)(1)(i) and (d)(1) revised...................................57284
704.8  (j) revised.................................................25938
704.9  (b) revised.................................................25938
704.11  (b)(1), (2) and (e)(1) introductory text revised; (e)(2) 
        removed; (e)(3) and (g)(4) through (7) redesignated as new 
        (e)(2) and (g)(5) through (8); new (g)(4) added............25938
704.14  (a)(2), (9) amd (e)(2) revised.............................25938
704.15  (a)(2)(iii) introductory text revised; (b)(2) and (d)(1) 
        amended....................................................25939
704.18  (e)(1) introductory text and table amended.................25939
704.21  (c) revised................................................25939
704  Appendices A, B and C  amended................................25939
713.6  (a)(1) table revised; (c) amended; eff. 1-1-19..............66723
723.1  (d) and (e) amended; eff. 1-1-19............................66723
723.7  (c)(1) amended; eff. 1-1-19.................................66723
740.4  (f) revised.................................................57288
741.4  (k)(4)(i) revised...........................................57288
745.14  Added; eff. 1-27-16........................................80642
    Removed; CFR correction........................................81738
747  Authority citation revised....................................57288
747.616  Amended; CFR correction...................................78650
747.1001  Revised..................................................57288
747.2001  (a) amended; eff. 1-1-19.................................66723
747.2002  (a) amended; eff. 1-1-19.................................66723
747.2003  (a) amended; eff. 1-1-19.................................66723
760  Revised.......................................................43259
760.5  Revised.....................................................43261
760.9  (b) revised.................................................43262
760  Appendix A revised............................................43262
    Appendix B added...............................................43263
791.8  (a) revised.................................................57517
796.5  (a)(2) revised..............................................57289

                                  2016

12 CFR
                                                                   81 FR
                                                                    Page
Chapter VI
Policy statement...................................................70925
600.1  Regulation at 80 FR 68428 eff. date confirmed................3941
600.2  (b) amended (eff. date pending).............................47691
    Regulation at 81 FR 47691 eff. date confirmed..................69663
600.4  Regulation at 80 FR 68428 eff. date confirmed................3941
    Revised (eff. date pending)....................................47691
    Regulation at 81 FR 47691 eff. date confirmed..................69663
602.8  (a), (b) and (c) amended (eff. date pending)................47692
    (a) revised; (d) added (eff. date pending).....................63366
    Regulation at 81 FR 47692 eff. date confirmed..................69663
    Regulation at 81 FR 63366 eff. date confirmed..................88975
602.12  (f), (g) and (h) added (eff. date pending).................63366
    Regulation at 81 FR 63366 eff. date confirmed..................88975
602.16  Revised (eff. date pending)................................63366
    Regulation at 81 FR 63366 eff. date confirmed..................88975
602.25  Amended....................................................47692
    Regulation at 81 FR 47692 eff. date confirmed..................69663
603.340  (a) and (b) amended.......................................47692
    Regulation at 81 FR 47692 eff. date confirmed..................69663
606.670  Regulation at 80 FR 68429 eff. date confirmed..............3941
    (c) amended....................................................47692
    Regulation at 81 FR 47692 eff. date confirmed..................69663
607.2  (b) introductory text revised...............................49772
611.1265  (e) revised..............................................49772
614.4351  (a)(2) removed; (a)(3) redesignated as new (a)(2) and 
        revised....................................................49772
615  Authority citation revised....................................49772
615.5143  (a)(3) and (b)(4) revised................................49773
615.5200  Revised..................................................49773
615.5201  Revised..................................................49773
615.5206  Revised..................................................49774
615.5207  Revised..................................................49774
615.5208  Revised..................................................49774
615.5209  Removed..................................................49775
615.5210  Removed..................................................49775

[[Page 1285]]

615.5211  Removed..................................................49775
615.5212  Removed..................................................49775
615.5220  Revised..................................................49775
615.5240  Revised..................................................49776
615.5250  Revised..................................................49776
615.5255  Revised..................................................49776
615.5270  Revised..................................................49777
615.5290  Revised..................................................49777
615.5295  (c) revised..............................................49777
615.5301--615.5336 (Subpart K)  Removed............................49777
615.5350  (a) revised..............................................49777
615.5352  (a) revised..............................................49778
615.5354  Revised..................................................49778
615.5355  (a) introductory text revised............................49778
620.5  (d)(1)(ix), (f)(2)(ii), (iii), (iv), (3)(ii), (iii) and 
        (g)(4)(ii) revised; (f)(2)(v), (3)(iv) and (4) added.......49778
620.17  Revised....................................................49778
622.61  Revised....................................................32635
624.1  Regulation at 80 FR 74924 confirmed.........................50613
624.12  (b) revised................................................49779
627.2710  (b)(3)(i) and (iv) removed...............................49779
628  Added.........................................................49779
650  Authority citation revised....................................49151
    Regulation at 81 FR 49151 eff. date confirmed..................71356
650.1  Redesignated as 650.13 (eff. date pending)..................49151
    Regulation at 81 FR 49151 eff. date confirmed..................71356
650.5  Redesignated as 650.14 (eff. date pending)..................49151
    Regulation at 81 FR 49151 eff. date confirmed..................71356
650.1--650.6 (Subpart A)  Added (eff. date pending)................49151
    Regulation at 81 FR 49151 eff. date confirmed..................71356
650.13--650.80 (Subpart B)  Added (eff. date pending)..............49151
    Regulation at 81 FR 49151 eff. date confirmed..................71356
650.13  Redesignated from 650.1 (eff. date pending)................49151
Regulation  at 81 FR 49151 eff. date confirmed.....................71356
650.14  Redesignated from 650.5 (eff. date pending)................49151
    Regulation at 81 FR 49151 eff. date confirmed..................71356
650.15  Moved to Subpart B (eff. date pending).....................49151
    Regulation at 81 FR 49151 eff. date confirmed..................71356
650.20  Moved to Subpart B (eff. date pending).....................49151
    Regulation at 81 FR 49151 eff. date confirmed..................71356
650.25  Moved to Subpart B (eff. date pending).....................49151
    Regulation at 81 FR 49151 eff. date confirmed..................71356
650.30  Moved to Subpart B (eff. date pending).....................49151
    Regulation at 81 FR 49151 eff. date confirmed..................71356
650.35  Moved to Subpart B (eff. date pending).....................49151
    Regulation at 81 FR 49151 eff. date confirmed..................71356
650.40  Moved to Subpart B (eff. date pending).....................49151
    Regulation at 81 FR 49151 eff. date confirmed..................71356
650.45  Moved to Subpart B (eff. date pending).....................49151
    Regulation at 81 FR 49151 eff. date confirmed..................71356
650.50  Moved to Subpart B (eff. date pending).....................49151
    Regulation at 81 FR 49151 eff. date confirmed..................71356
650.55  Moved to Subpart B (eff. date pending).....................49151
    Regulation at 81 FR 49151 eff. date confirmed..................71356
650.60  Moved to Subpart B (eff. date pending).....................49151
    Regulation at 81 FR 49151 eff. date confirmed..................71356
650.65  Moved to Subpart B (eff. date pending).....................49151
    Regulation at 81 FR 49151 eff. date confirmed..................71356
650.70  Moved to Subpart B (eff. date pending).....................49151
    Regulation at 81 FR 49151 eff. date confirmed..................71356
650.75  Moved to Subpart B (eff. date pending).....................49151
    Regulation at 81 FR 49151 eff. date confirmed..................71356
650.80  Moved to Subpart B (eff. date pending).....................49151
    Regulation at 81 FR 49151 eff. date confirmed..................71356

[[Page 1286]]

651  Revised (eff. date pending)...................................49152
    Regulation at 81 FR 49152 eff. date confirmed..................71356
653  Added (eff. date pending).....................................49154
    Regulation at 81 FR 49154 eff. date confirmed..................71356
655  Revised (eff. date pending)...................................49155
    Regulation at 81 FR 49155 eff. date confirmed..................71356
Chapter VII
701  Authority citation revised....................................93580
701.22  Amended....................................................13553
701.36  (b) amended; (c)(1) removed; (c)(2) and (3) redesignated 
        as new (c)(1) and (2); heading, (a) and new (c)(1) 
        revised; eff. 1-20-17......................................93580
701  Appendix B revised; eff. 2-6-17...............................88424
702.504  (a) correctly revised......................................7198
703.14  (f)(5) amended.............................................17602
705.1  (c), (d) and (e) revised....................................85112
705.2  Revised.....................................................85112
705.5  Heading and (b) revised; (h) amended........................85112
705.6  Redesignated as 705.7; added................................85112
705.7  Redesignated as 705.8; redesignated from 705.6; (a), 
        (c)(4), (f) and (g) revised................................85112
705.8  Removed; redesignated from 705.7............................85112
705.9  (b) revised.................................................85113
705.10  Revised....................................................85113
708a.101  Amended..................................................76496
708b.2  Amended....................................................76496
721.3  (e) revised; eff. 1-20-17...................................93580
722  Policy statement..............................................75315
723  Revised.......................................................13554
723.7  (f) added...................................................13554
741.203  (a) revised...............................................13559
747  Authority citation revised....................................40157
    Regulation at 81 FR 40157 confirmed............................78029
747.1001  Revised; interim.........................................40157
    Regulation at 81 FR 40157 confirmed............................78029
790.2  (b)(6) and (13) revised......................................4576
    (b)(15)(i) introductory text and (ii) revised..................76496
792  Authority citation revised....................................93794
792.02  Introductory text and (d) revised; interim.................93794
792.03  Introductory text and (c) revised; interim.................93794
792.10  (e) revised; interim.......................................93794
792.11  (a)(5) revised; interim....................................93794
792.15  (b)(2) revised; interim....................................93794
792.16  (c) revised; interim.......................................93794
792.17  Revised; interim...........................................93795
792.28  Introductory text revised; interim.........................93795


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