[Federal Register Volume 61, Number 23 (Friday, February 2, 1996)]
[Rules and Regulations]
[Pages 3788-3792]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2018]



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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 701, 709 and 741


Organization and Operations of Federal Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Interim final rule with request for comments.

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SUMMARY: This interim rule authorizes credit unions serving 
predominantly low-income members to raise secondary capital from 
foundations and other philanthropic-minded institutional investors. 
Increased capital will in turn enable these credit unions to make more 
loans and improve other financial services for the limited income 
groups and communities they serve.
    This rule establishes a new section in NCUA's Regulations providing 
authority for secondary capital accounts and amending existing 
regulatory provisions concerning designation of low-income status. The 
rule also amends an existing rule to address the authority of federally 
insured state credit unions to issue secondary capital accounts, and 
amends another rule to establish that secondary capital accounts are 
paid after all other claims in the event of liquidation.
    Secondary capital accounts will not be issued as share accounts and 
will not establish voting or ownership rights. The applicability of 
this rule is limited to credit unions having a low-income designation 
from NCUA or the appropriate state regulator.

DATES: The interim rule is effective January 25, 1996. Comments must be 
received on or before April 1, 1996.

ADDRESSES: Comments should be directed to Becky Baker, Secretary of the 
Board. Mail or hand-deliver comments to National Credit Union 
Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. Fax 
comments to (703) 518-6319. Post comments on NCUA's electronic bulletin 
board by dialing (703) 518-6480. Please send comments by one method 
only.

FOR FURTHER INFORMATION CONTACT: Joyce Jackson, Special Assistant, 
Office of Community Development Credit Unions, at the above address or 
telephone (703) 518-6610, or David Marquis, Director, Office of 
Examination and Insurance, or Stephen Austin, Director of the 
Department of Supervision, Office of Examination and Insurance, both at 
the above address or telephone (703) 518-6360, or Robert M. Fenner, 
General Counsel, at the above address or telephone (703) 518-6540.

SUPPLEMENTARY INFORMATION:

Background

    As of November, 1995, there were 260 federally insured credit 
unions designated by NCUA or the appropriate state regulator as serving 
predominantly low-income members. Like other credit unions serving 
members of limited financial means, these credit unions perform an 
important mission of providing loans and other financial services to 
individuals and communities who most need these services and most often 
do not have them available from other sources. Like all insured credit 
unions, the low-income designated credit unions are, as a group, quite 
healthy and financially strong. For example, the average net capital 
ratio for low-income designated credit unions as of May, 1995 was 9.8 
percent.
    Individual low-income designated credit unions find it difficult, 
however, in view of the limited resources of their members, to 
accumulate capital. (As cooperatives, credit unions build their primary 
capital--statutory reserves--solely by setting aside a portion of their 
income each accounting period.) To ease this burden, and to facilitate 
an additional opportunity for low-income designated credit unions to 
build capital that will support greater lending and financial services 
in their communities, the NCUA Board is issuing this interim final rule 
authorizing secondary capital accounts. These capital accounts, to the 
extent that low-income designated credit unions choose to offer them, 
will supplement rather than reduce existing statutory reserve 
requirements.

Overview

    The Board has established certain key safety and soundness elements 
in this interim rule to ensure both that secondary capital accounts 
serve the purpose of capital--i.e. that they are available to absorb 
loss and thus prevent losses to members or the failure of the 
institution--and that there is no misunderstanding on the part of 
investors as to the nature of the accounts and the risks involved. 
Included are the following:
     The accounts may be offered only to organizational 
investors, not to natural person members or other natural person 
investors.
     The accounts are subordinate to all other claims on the 
assets of the credit union.
     The accounts are not insured by the National Credit Union 
Share Insurance Fund or any other government entity, and may not be 
offered as share accounts. It is anticipated that credit unions will 
issue these accounts as a form of subordinated debt.
     Funds in the accounts must be available to cover losses, 
after depletion of reserves and undivided earnings, but prior to 
liquidation of the credit union.
     The accounts must have a minimum maturity of five years.
     These and other key provisions must be reflected in an 
account agreement and in disclosures prescribed as an Appendix to the 
interim rule.
     When the remaining maturity of a secondary capital account 
is less than five years, the credit union will reflect through a 
footnote to its financial statement, and NCUA will recognize, the 
capital value of the account as a percentage of the account's face 
value, on a sliding scale ranging from 80% of face value (four years to 
less than five years remaining maturity) to zero (less than one year 
remaining maturity).

Additional Explanation of Amendments

    This interim rule contains four separately numbered amendments. The 
following is an additional explanation of each.
    Amendment 1 removes from Section 701.32 of NCUA's rules the 
provisions concerning designation of low-income status. Those 
provisions are now placed in new Section 701.34. As a result, Section 
701.32 now deals solely with the limitations on federally insured 
credit unions receiving nonmember shares above certain levels without 
prior NCUA approval. Such shares include public unit shares in all 
federally insured credit unions and other nonmember shares in the case 
of low-income designated credit unions. Section 701.34 contains the 
provisions related solely to low-income designated credit unions: The 
rules concerning designation of low-income status and the new 
provisions concerning receipt of secondary capital accounts.
    Because secondary capital accounts are not share accounts, they are 
not subject to the Section 701.32 limitations. A reference in Section 
701.32(b)(1) to ``accounts'' is replaced 

[[Page 3789]]
with ``shares'' to eliminate any possible confusion over the fact that 
Section 701.32 is limited in its applicability to nonmember share 
accounts.
    Amendment 2 establishes the new Section 701.34. Section 701.34(a) 
contains the provisions concerning designation of low-income status, 
Section 701.34(b) contains the provisions authorizing secondary capital 
accounts and setting forth the terms and conditions for these accounts, 
and Section 701.34(c) establishes the sliding scale capital values for 
accounts with remaining maturities of less than five years.
    As previously discussed, the Board has established a number of 
requirements in this interim rule to ensure both that these accounts 
actually serve as capital and that there is no misunderstanding on the 
part of investors as to the risks involved. A credit union offering 
these accounts must adopt a written plan addressing how the credit 
union will use the funds and how the credit union will meet liquidity 
needs to repay the funds upon maturity. The plan must be submitted to 
the appropriate NCUA Regional Director. The submission is for purposes 
of notice to NCUA; the credit union need not await NCUA approval.
    Other requirements include that the accounts may be offered only to 
nonnatural person investors, that the accounts have a minimum maturity 
of five years, that they are not insured, that they may not be provided 
as security on other obligations of the accountholder, that the 
accounts will not ``carry over'' in the event of merger into a credit 
union that is not low-income designated, that claims represented by 
these accounts are subordinate to all other claims on the credit union, 
and that they are available to cover losses. The accounts may not be 
offered as share accounts. Lowincome designated Federal credit unions 
that choose to offer these accounts will do so pursuant to their 
borrowing authority, and this will presumably be the case for 
federally-insured state chartered credit unions as well, depending on 
their authority under state law.
    Funds in secondary capital accounts must be available to cover 
losses in an operating credit union, i.e. the funds are available 
without having to liquidate the credit union. The funds must be 
available to cover losses that exceed available ``reserves and 
undivided earnings''. For this purpose, reserves and undivided earnings 
are exclusive of all allowance accounts for loan and investment losses, 
inasmuch as such allowance accounts are already earmarked to cover 
other anticipated losses.
    To avoid overreliance on the availability of these temporary 
accounts to cover future operating losses, the rule establishes a 
declining scale for the capital value of accounts with less than five 
years remaining maturity. (All of the funds, however, will continue to 
be at risk to cover losses that exceed reserves and undivided 
earnings.) Accounts with remaining maturities of at least four years 
but less than five are counted as capital at 80 percent of face value, 
remaining maturities of at least three but less than four years are 
counted at 60 percent, and so on, to the point of less than one year 
remaining maturity, where the account reflects no capital value. In 
addition to preventing overstatement of the true value of these 
accounts as continuing capital, this feature will encourage credit 
unions to continually replenish their sources of maturing secondary 
capital to the extent such funds are needed to support ongoing lending 
programs and other operations. The reduced capital value of the 
accounts will be shown through a footnote to the credit union's 
financial statement.
    The interim rule sets forth prescribed disclosures, as Appendix A 
to section 701.34, that must be provided to investors in secondary 
capital accounts, and requires that signed originals of the disclosure 
and account agreement be retained by the credit union at least for the 
life of the agreement.
    Amendment 3 updates NCUA's regulatory provisions for federally 
insured state credit unions related to low-income designation and 
receipt of secondary capital accounts. This amendment revises Part 741 
Requirements for Insurance by adding a new 741.204(c) and making 
conforming amendments to Section 741.204(b). The new 741.204(c) 
establishes that state chartered federally insured credit unions may 
offer secondary capital accounts on the same terms and conditions as 
Federal credit unions, as long as the credit union has a low-income 
designation pursuant to 741.204(b) and the accounts are not 
inconsistent with state law or regulation. State chartered credit 
unions must submit their plan to both the Regional Director and their 
state supervisor, and should coordinate with the state supervisor to 
confirm that these accounts are permissible under state law and to 
determine whether preapproval of the state supervisor is required.
    Amendment 4 revises Section 709.5 Payout Priorities in Involuntary 
Liquidation by adding a new Section 709.5(b)(8) to establish that 
secondary capital accounts in low-income designated credit unions are 
paid after all other claims in the event of involuntary liquidation. 
Also, Section 709.5(e) is revised to specify that, in the unlikely 
event of a liquidation surplus, secondary capital holders would be 
repaid before payment of a liquidation dividend.

Effective Date; Interim Rule; Comment Period

    Although this amendment is being issued as an interim final rule 
and is effective immediately, the NCUA Board encourages credit unions 
to submit comments. Comments may be submitted on or before April 1, 
1996.
    Because this rule provides a new authority to low-income designated 
credit unions and use of the authority is voluntary, the NCUA Board 
finds that good cause exists for an immediate effective date. Moreover, 
the Board finds it necessary and appropriate to act quickly in this 
matter in order to allow credit unions an additional avenue to meet the 
matching fund requirements established by the Community Development 
Financial Institutions (CDFI) Fund. 60 FR 54110, 54112 (October 19, 
1995).
    Institutions, including credit unions, seeking funds under the CDFI 
Program are to submit applications to CDFI by January 29, 1996. NCUA is 
aware of several low-income credit unions that have submitted or will 
submit applications to CDFI. CDFI will in turn grant funding in the 
form of loans, deposits/shares, or capital grants to qualifying 
institutions. However, one of the major qualifications of the CDFI 
Program is the requirement that the institution ``obtain matching funds 
from sources other than the Federal government.'' 60 FR at 54112. 
Institutions must have ``firm commitments for the matching funds 
requirements * * * not later than July 1, 1996.'' 60 FR 54136.
    This interim rule will provide low-income credit unions that have 
applied for CDFI funds with a method of raising secondary capital that 
may be counted as matching funds for either capital grants or loans, 
depending on the approach ultimately followed by the CDFI Fund. If this 
was a proposed rule and not an interim rule with an immediate effective 
date, federally-insured credit unions would have a very limited window 
of opportunity from the date of a final rule to solicit secondary 
capital funds. Any delay in the effective date of this rule is contrary 
to the best interests of federally-insured credit 

[[Page 3790]]
unions which qualify under the CDFI Program.

Request for Comments

    Although this interim rule is effective immediately, the NCUA Board 
welcomes comment on any aspect of the rule. After the close of the 
comment period and analysis of the comments, the Board will determine 
whether any changes in the rule are necessary or appropriate.

Regulatory Procedures

Regulatory Flexibility Act

    The NCUA Board certifies that this rule will not have a significant 
impact on a substantial number of small credit unions. The rule affects 
only low-income designated credit unions, and imposes no mandatory 
regulatory burden on those credit unions. Rather, it increases 
flexibility by providing a new method of raising capital through 
secondary capital accounts. Accordingly, a Regulatory Flexibility 
Analysis is not required.

Paperwork Reduction Act

    NCUA has determined that the requirements that low-income 
designated credit unions choosing to offer secondary capital accounts 
must adopt a written plan, send a copy of the plan to their NCUA 
Regional Director, and have account contract documents and disclosure 
forms constitute collection of information requirements under the 
Paperwork Reduction Act of 1995. The Paperwork Reduction Act and 
regulations of the Office of Management and Budget (OMB) require that 
the public be provided an opportunity to comment on information 
collection requirements, including an agency's estimate of the burden 
of the collection of information. NCUA believes that these requirements 
are essential both to ensure the safe and sound operation of a 
secondary capital program and to ensure that account holders fully 
understand the nature of their investment in the credit union and the 
risks involved.
    NCUA estimates that the increase in paperwork requirements will 
affect less than 50 credit unions. The requirements will affect only 
those credit unions that have a low-income designation and voluntarily 
choose to offer secondary capital accounts. NCUA estimates that it 
should reasonably take no more than three hours to comply with the 
paperwork requirements. This translates to 150 burden hours. The NCUA 
Board invites comment on: (1) Whether the collection of information is 
necessary for the proper performance of the functions of NCUA, 
including whether the information will have practical utility; (2) the 
accuracy of NCUA's estimate of the burden of the collection of 
information; (3) ways to enhance the quality, utility, and clarity of 
the information to be collected; and (4) ways to minimize the burden of 
the collection on respondents, including through the use of automated 
collection techniques or other forms of information technology. Send 
comments to Suzanne Beauchesne, National Credit Union Administration, 
1775 Duke Street, Alexandria, VA 22314-3428. Comments should be 
postmarked by April 2, 1996.
    NCUA will, after 60 days from the effective date of the interim 
rule, submit the paperwork requirements to OMB for review under the 
Paperwork Reduction Act and publish a notice to that effect in the 
Federal Register. NCUA will also publish a notice in the Federal 
Register once OMB takes action on the submission. Federally insured 
credit unions are not required, pursuant to the terms of the Paperwork 
Reduction Act, to comply with paperwork requirements until OMB approval 
and an OMB control number are received. Low-income designated credit 
unions that choose to offer secondary capital accounts will be 
expected, however, as a matter of safety and soundness, to adopt 
written plans, forward a copy of the credit union's plan to the 
Regional Director (and state supervisor in the case of state credit 
unions) and use account contract documents and disclosure forms that 
meet the requirements of this rule in every respect. Failure to do so 
may jeopardize the ability of low-income designated credit unions to 
use this authority pending completion of the rulemaking process.

Executive Order 12612

    Executive Order 12612 requires NCUA to consider the effects of its 
actions on state interests. This rule has no adverse effects on state 
interests. The rule provides additional authority for federally insured 
state chartered credit unions, but only to the extent not inconsistent 
with state law and regulations. The NCUA Board, however, specifically 
requests the comments of State credit union regulators to obtain their 
guidance in how the rule may affect their credit unions.

List of Subjects in 12 CFR Parts 701, 709 and 741

    Bank deposit insurance, Credit unions, Reporting and recordkeeping 
requirements.

    By the National Credit Union Administration Board on January 25, 
1996.
Becky Baker,
Secretary of the Board.

    Accordingly, NCUA amends 12 CFR chapter VII as follows:

PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS

    1. The authority citation for part 701 continues to read as 
follows:

    Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a, 
1761b, 1766, 1767, 1782, 1784, 1787, 1789 and Public Law 101-73. 
Section 701.6 is also authorized by 31 U.S.C. 3717. Section 701.31 
is also authorized by 12 U.S.C. 1601, et seq., 42 U.S.C. 1981 and 42 
U.S.C. 3601-3610. Section 701.35 is also authorized by 12 U.S.C. 
4311-4312.

    2. Section 701.32 is amended by revising the section heading and 
paragraphs (a) and (b)(1) to read as follows:


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 $1.5 million, whichever is 
greater.
* * * * *
    3. Section 701.34 is added by redesignating paragraph (d) of 
Sec. 701.32 as paragraph (a) of Sec. 701.34, by revising the third 
sentence of newly designated paragraph (a)(1) and by adding new 
paragraphs (b) and (c) and an Appendix as follows:


Sec. 701.34  Designation of low-income status; receipt of secondary 
capital accounts by low-income designated credit unions.

    (a) Designation of low-income status. (1) * * * The designation may 
be removed by the Regional Director upon notice to the federal credit 
union if the definitions set forth in paragraphs (a)(2) 

[[Page 3791]]
and (3) of this section are no longer met. * * *
* * * * *
    (b) Receipt 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 offer 
secondary capital accounts to nonnatural person members and nonnatural 
person nonmembers on the following conditions:
    (1) Prior to offering secondary capital accounts, the credit union 
shall adopt, and forward to the appropriate NCUA Regional Director, a 
written plan for use of the funds in the secondary capital accounts and 
subsequent liquidity needs to meet repayment requirements upon maturity 
of the accounts.
    (2) The secondary capital account must be established as a 
subordinated debt account or other form of non-share account.
    (3) The maturity of the secondary capital account must be for a 
minimum of five years.
    (4) The secondary capital account must not be redeemable prior to 
maturity.
    (5) The secondary capital account shall not be insured by the 
National Credit Union Share Insurance Fund or any governmental or 
private entity.
    (6) The secondary capital account holder's claim against the credit 
union must be subordinate to all other claims including those of 
shareholders, creditors and the National Credit Union Share Insurance 
Fund.
    (7) Funds in the secondary capital account (including both 
principal and interest) must be available to cover operating losses 
realized by the credit union that exceed its net available reserves and 
undivided earnings (i.e., reserves and undivided earnings exclusive of 
allowance accounts for loan and investment losses), and to the extent 
funds are so used, the credit union shall under no circumstances 
restore or replenish the account. Losses shall be distributed pro-rata 
among all secondary capital accounts held by the credit union at the 
time the losses are realized.
    (8) The secondary capital account may not be pledged or provided by 
the account-holder as security on a loan or other obligation with the 
credit union or any other party.
    (9) In the event of merger or other voluntary dissolution of the 
credit union, other than merger into another low-income designated 
credit union, the secondary capital accounts will, to the extent they 
are not needed to cover losses at the time of merger or dissolution, be 
closed and paid out to the account-holder.
    (10) A secondary capital account contract agreement must be 
executed between an authorized representative of the account holder and 
the credit union accurately establishing the terms and conditions of 
this section and containing no provisions inconsistent therewith.
    (11) A disclosure and acknowledgment as set forth in the Appendix 
to this section must be provided to and executed by an authorized 
representative of the secondary capital account holder at the time of 
entering into the account agreement, and original copies of the account 
agreement and the disclosure and acknowledgment must be retained by the 
credit union for the term of the agreement.
    (c) Accounting treatment; weighted value for purposes of 
recognizing capital value of secondary capital accounts. A low-income 
designated credit union that issues secondary capital accounts pursuant 
to paragraph (b) of this section shall record the funds on its balance 
sheet in an equity account entitled ``secondary capital account''. For 
such accounts with remaining maturities of less than five years, the 
credit union shall reflect the capital value of the accounts in a 
footnote to its financial statement in accordance with the following 
scale:
    1. Four to less than five years remaining maturity--80 percent.
    2. Three to less than four years remaining maturity--60 percent.
    3. Two to less than three years remaining maturity--40 percent.
    4. One to less two years remaining maturity--20 percent.
    5. Less than one year remaining maturity--0 percent

Appendix to Sec. 701.34

    Disclosures and acknowledgment in the following form must be 
provided to any investor in secondary capital accounts in a low-
income designated credit union.
    An original, signed copy must be retained by the credit union.

Disclosure and Acknowledgment

    I, ________ (name of signatory), hereby acknowledge and agree to 
the following in my capacity as ________ (official position or 
title) of ________ (name of institutional investor):
     ________ (name of institutional investor) has committed 
________ (amount of funds) to a secondary capital account with 
________ (name of credit union).
     The funds committed to the secondary capital account 
are committed for a period of ____ years and are not redeemable 
prior to ________.
     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.
    The funds committed to the secondary capital account and any 
interest paid to the account may be used by ________ (name of credit 
union) to cover any and all operating losses that exceed the credit 
union's net available reserves and undivided earnings (i.e., 
reserves and undivided earnings exclusive of allowance accounts for 
loan and investment losses), and in the event the funds are so used 
________ (name of credit union) will under no circumstances restore 
or replenish those funds to ________ (organization).
     In the event of liquidation of ________ (name of credit 
union), the funds committed to the secondary capital account shall 
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.

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(signature)

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(official title)

PART 709--INVOLUNTARY LIQUIDATION OF FEDERAL CREDIT UNIONS AND 
ADJUDICATION OF CREDITOR CLAIMS INVOLVING FEDERALLY INSURED CREDIT 
UNIONS IN LIQUIDATION

    4. The authority citation for part 709 continues to read as 
follows:

    Authority: 12 U.S.C. 1766; Public Law 101-73, 103 Stat. 183, 530 
(1989) (12 U.S.C. 1787 et seq.).

    5. Section 709.5 is amended by revising paragraphs (b)(6) and 
(b)(7), by adding a new paragraph (b)(8) and by revising the last 
sentence of paragraph (e) to read as follows:


Sec. 709.5  Payout priorities in involuntary liquidation.

    (a) * * *
    (b) * * *
    (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, 
membership capital share deposits of corporate credit unions; and
    (8) In a case involving liquidation of a low-income designated 
credit union, any outstanding secondary capital accounts issued 
pursuant to the authority of Secs. 701.34 or 741.204(c) of this 
chapter.
* * * * *
    (e) * * * If a surplus remains after making distribution in full on 
all allowed claims described in paragraphs (b)(1) through (b)(8) of 
this section, such 

[[Page 3792]]
surplus shall be distributed pro rata to the credit union's 
shareholders.

PART 741--REQUIREMENTS FOR INSURANCE

    6. The authority citation for part 741 continues to read as 
follows:

    Authority: 12 U.S.C. 1757, 1766, and 1781-1790.

    7. Section 741.204 is amended by revising the third sentence of 
paragraph (b) and adding a new paragraph (c) to read as follows:


Sec. 741.204  Maximum public unit and nonmember accounts, and low-
income designation.

* * * * *
    (a) * * *
    (b) * * * 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. * * *
    (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 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 to both 
the state supervisory authority and the NCUA Regional Director.

[FR Doc. 96-2018 Filed 2-1-96; 8:45 am]
BILLING CODE 7535-01-P