[Federal Register Volume 64, Number 95 (Tuesday, May 18, 1999)]
[Proposed Rules]
[Pages 27090-27118]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-11837]



[[Page 27089]]

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Part III





National Credit Union Administration





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12 CFR Parts 702 and 747



Prompt Corrective Action; Proposed Rule

  Federal Register / Vol. 64, No. 95 / Tuesday, May 18, 1999 / Proposed 
Rules  

[[Page 27090]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 702 and 747


Prompt Corrective Action

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed Rule.

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SUMMARY: In 1998, Congress amended the Federal Credit Union Act to 
require the NCUA Board to adopt, by regulation, a system of ``prompt 
corrective action'' to be taken by NCUA and by federally-insured credit 
unions if they become undercapitalized. The new FCUA provision imposes 
a series of progressively more stringent restrictions and requirements 
indexed to five capital categories which it establishes for federally-
insured credit unions. It also mandates a separate system of prompt 
corrective action for ``new'' credit unions and an additional risk-
based net worth requirement for ``complex'' credit unions. The proposed 
rule combines the components of prompt corrective action which are 
expressly prescribed by statute (except the risk-based net worth 
requirement for ``complex'' credit unions) with those NCUA is 
responsible for developing to suit credit unions. The rule also 
establishes conforming reserve and dividend payment requirements, and 
procedures for reviewing and enforcing directives imposing prompt 
corrective action.

DATES: Comments must be received on or before August 16, 1999.

ADDRESSES: Direct comments 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. Please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Herbert S. Yolles, Deputy Director, 
Office of Examination and Insurance, at the above address or telephone 
(703) 518-6362; or Steven W. Widerman, Trial Attorney, Office of 
General Counsel, at the above address or telephone (703) 518-6557.

SUPPLEMENTARY INFORMATION:

A. Background

1. The Credit Union Membership Access Act

    On August 7, 1998, Congress enacted the Credit Union Membership 
Access Act, Public Law No. 105-219, 112 Stat. 913 (1998). Section 103 
of the statute added a new section 216 to the Federal Credit Union Act 
(FCUA), 12 U.S.C. 1790d (hereinafter referred to as ``CUMAA'' or ``the 
statute'' and cited as ``Sec. 1790d''). Section 1790d requires the NCUA 
Board to adopt by regulation a system of ``prompt corrective action'' 
(sometimes referred to as ``PCA'') to be taken by NCUA when a 
federally-insured ``natural person'' credit union becomes 
undercapitalized. The stated purpose of Sec. 1790d is to ``resolve the 
problems of insured credit unions at the least possible long-term loss 
to the [National Credit Union Share Insurance Fund (NCUSIF)].'' 
Sec. 1790d(a)(1). The system of PCA for credit unions must take into 
account the distinguishing features of credit unions: that they are 
cooperatives that do not issue capital stock, must rely on retained 
earnings to build net worth, and have primarily volunteer boards of 
directors. Sec. 1790d(b)(1)(B).
    Much of the system of PCA for credit unions is expressly prescribed 
by Sec. 1790d. This includes the five net worth categories and the net 
worth measures for each, the requirement to submit a Net Worth 
Restoration Plan, the requirement to annually transfer a portion of 
earnings to net worth, restrictions on increasing assets and on 
increasing member business loans, and conditions triggering mandatory 
conservatorship and liquidation. Secs. 1790d(c), (e), (f), (g), (i); 12 
U.S.C. 1786(h)(1)(F) and (G), 1787(a)(3)(A). The implementing 
regulations adhere to the substance of the statutory components of PCA.
    To complete the framework of PCA for credit unions, CUMAA 
authorizes NCUA to develop, by regulation, a comprehensive series of 
discretionary supervisory actions to complement the mandatory 
supervisory actions prescribed by statute. The statutory criteria for 
these discretionary actions are that they must be consistent with the 
purpose of Sec. 1790d, and must be ``comparable'' \1\ to the 
``discretionary safeguards'' which the Federal banking agencies \2\ are 
permitted to impose under section 38 of the Federal Deposit Insurance 
Act, 12 U.S.C. 1831o (FDIA Sec. 38) \3\--the statute which established 
prompt corrective action for federally-insured depository institutions. 
Sec. 1790d(b)(1)(A); S. Rep. No. 193, 105th Cong., 2d Sess. 12 (1998) 
(S. Rep.); H.R. Rep. No. 472, 105th Cong., 2d Sess. 23 (1998) (H.R. 
Rep. at 23). Accordingly, the proposed implementing regulations 
establish a series of discretionary supervisory actions indexed to the 
``undercapitalized'' and lower net worth categories. NCUA has the 
discretion to impose these restrictions and requirements to further the 
purpose of prompt corrective action. Although comparable to FDIA 
Sec. 38, these discretionary supervisory actions are tailored to suit 
the distinctive characteristics of credit unions.
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    \1\ ``Comparable'' is defined as ``parallel in substance (though 
not necessarily identical in detail) and equivalent in rigor.'' S. 
Rep. at 12.
    \2\ The Federal banking agencies consist of the Federal Reserve 
Board, the Office of Comptroller of the Currency, the Federal 
Deposit Insurance Corporation (FDIC) and the Office of Thrift 
Supervision. Sec. 1790d(o)(1) incorporating 12 U.S.C. 1813(z). Their 
Joint Final Rule establishing a system of prompt corrective action 
pursuant to 12 U.S.C. 1831o is published at 57 FR 44886 (Sept. 29, 
1992).
    \3\ Section 38 of the Federal Deposit Insurance Act, 12 U.S.C. 
1831o, was added by section 131 of the Federal Deposit Insurance 
Corporation Improvement Act, Pub. L 102-242, 105 Stat. 2236 (1991).
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    For credit unions which CUMAA defines as ``new''--those in 
operation less than ten years and which have $10 million or less in 
assets--the statute requires NCUA to develop an alternative system of 
prompt corrective action to apply in lieu of the system prescribed by 
CUMAA for all other federally-insured credit unions. 
Sec. 1790d(b)(2)(A); see U.S. Dept. of Treasury, Credit Unions 
(Washington, D.C. 1997) at 79. The alternative system of PCA must 
recognize that ``new'' credit unions initially have no net worth, need 
reasonable time to accumulate net worth, and need incentives to become 
``adequately capitalized'' by the time they are no longer ``new.'' 
Sec. 1790d(b)(2)(B). Accordingly, although it follows the ``net worth 
category'' model, the system of PCA for new credit unions has relaxed 
net worth ratios, allows regulatory forbearance, and offers incentives 
to build net worth.
    CUMAA requires NCUA to formulate the definition of a ``complex'' 
credit union according to the risk level of its portfolio of assets and 
liabilities. Sec. 1790d(d)(1). ``Well capitalized'' and ``adequately 
capitalized'' credit unions which meet that definition will be subject 
to an additional ``risk-based net worth requirement'' to compensate for 
``any material risks against which the [statutory net worth ratio for 
``adequately capitalized''] may not provide adequate protection.'' 
Sec. 1790d(d)(2). The ``risk-based net worth requirement'' for 
``complex'' credit unions will be the subject of a separate proposed 
rule to be issued by the NCUA Board in late 1999.
    CUMAA requires NCUA to implement an independent appeal process by 
which affected credit unions and certain officials can appeal to the 
NCUA Board decisions by NCUA staff to impose discretionary restrictions 
or requirements. Sec. 1790d(k). To fulfill this mandate, the proposed 
rule adds a new subpart L to part 747 of NCUA's

[[Page 27091]]

regulations, 12 CFR 747.2001, establishing procedures for issuance, 
review and enforcement of directives requiring prompt corrective 
action. Subpart L generally provides a right of notice of the decision 
to impose a discretionary restriction or requirement, and an 
opportunity to respond to the notice, an informal hearing if requested 
in certain cases, and NCUA Board review of the decision.
    Although not required by CUMAA, the proposed rule retains in 
substance certain of NCUA's current reserve and dividend payment 
requirements. In subpart C, these requirements have been modified to 
reflect repeal of FCUA Sec. 116, 12 U.S.C. 1762, and to conform to 
CUMAA's earnings retention requirement. Sec. 1790d(e).
    Finally, in formulating regulations to implement a system of PCA 
for credit unions, CUMAA required NCUA to consult with the Secretary of 
the Treasury, the Federal banking agencies, and State officials having 
jurisdiction over federally-insured, State-chartered credit unions. 
CUMAA Sec. 301(c). To that end, the proposed rule is a product of 
consultation with representatives of the Department of the Treasury, 
solicitation of comments from the Federal banking agencies, and 
collaboration with a committee of representative State credit union 
supervisors.

2. Statutory Timetable

    CUMAA set deadlines for NCUA to issue proposed rules and final 
rules on PCA, and dates for those rules to take effect. Congress 
directed NCUA to commence rulemaking by issuing an Advance Notice of 
Proposed Rulemaking (ANPR) addressing only the ``risk-based net worth 
requirement'' for ``complex'' credit unions, no later than February 3, 
1999. CUMAA Sec. 301(d)(2)(A). To fulfill that requirement, NCUA issued 
an ANPR soliciting public comment not only on the ``risk-based net 
worth requirement'' for ``complex'' credit unions, but also regarding 
PCA for ``new'' credit unions and the contents, criteria, and deadlines 
for a Net Worth Restoration Plan. 63 FR 57938 (October 29, 1998). The 
great majority of the 34 comments NCUA received by the January 27, 
1999, deadline addressed the risk-based net worth requirement for 
``complex'' credit unions, which is not the subject of this rule.
    CUMAA directs NCUA to propose rules for PCA (other than the ``risk-
based net worth requirement'' for ``complex'' credit unions) no later 
than May 4, 1999, and to adopt final rules no later than February 7, 
2000, to take effect August 7, 2000. CUMAA Sec. 301(d)(1) and (e)(1). 
While no date is prescribed for a proposed rule on the ``risk-based net 
worth requirement'' for ``complex'' credit unions, NCUA is required to 
issue the final no later than August 7, 2000, to take effect January 1, 
2001. CUMAA Sec. 301(d)(2)(B) and (e)(2). NCUA plans to issue a 
proposed rule on the ``risk-based net worth requirement'' for 
``complex'' credit unions in late 1999.

3. Report to Congress

    CUMAA requires NCUA to report to Congress twice in the rulemaking 
process for prompt corrective action---first when proposed rules are 
published, and again when final rules are adopted (February 7, 2000). 
CUMAA Sec. 301(f); S. Rep. at 19; H.R. Rep. at 23. The report must 
explain how NCUA's implementing regulations establish a system of PCA 
which is consistent with the cooperative character of credit unions. 
CUMAA Sec. 301(f)(1); see Sec. 1790d(b)(1)(B). Further, the report must 
identify how NCUA's implementing regulations differ from FDIA Sec. 38 
and the reasons for those differences. CUMAA Sec. 301(f)(2). NCUA 
expects to report that the proposed rule is comparable in nearly all 
respects to FDIA Sec. 38, i.e., that it is parallel in substance and 
equivalent in rigor.

4. Notice of Proposed Rulemaking

    Through this notice, NCUA invites public comment on all aspects of 
its proposed rule. Broad public input addressing the proposed rule will 
assist the NCUA Board in tailoring a system of prompt corrective action 
that is workable, fair and effective in light of the cooperative 
character of credit unions. See S. Rep. at 14. Although NCUA lacks 
discretion to modify the substance of components of prompt corrective 
action prescribed by statute, the proposed rule establishes a 
comprehensive array of discretionary restrictions and requirements 
adapted, with modifications, from FDIA Sec. 38. Comments addressing 
these and other non-statutory components of the proposed rule--such as 
the contents and criteria for approval of a net worth restoration plan, 
and the alternative system of PCA for new credit unions-will be most 
helpful.

B. Framework of Proposed Rule

    The proposed rule consists of four parts. Subpart A is the system 
of PCA for all federally-insured credit unions except those which meet 
the statutory definition of ``new.'' Subpart B is the alternative 
system of PCA which the statute required NCUA to develop exclusively 
for ``new'' credit unions. For ease of access, in subparts A and B, all 
of the supervisory actions which apply to a credit union in a 
particular net worth category are combined in a single section devoted 
exclusively to that category. The supervisory actions and corresponding 
net worth categories are depicted in Appendices A and B to the preamble 
of this rule. Subpart C restates certain reserve, dividend payment and 
other requirements, modified to facilitate the earnings retention 
requirement in subparts A and B. Finally, subpart L of part 747 
provides for notice, review and enforcement of certain supervisory 
actions imposed under subparts A and B.

1. Net Worth Classification

    Statutory net worth categories. Section 702.101(a) sets forth the 
five net worth categories which CUMAA establishes for all federally-
insured credit unions, other than those which are ``new,'' and the 
corresponding net worth ratio of each. Sec. 1790d(c). The range of net 
worth ratios for each net worth category (assuming no risk-based net 
worth requirement) and the percentage and number of federally-insured 
credit unions that fall within each category as of December 1998, are 
depicted as follows:

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                                                                                  Percent of all   Number of all
             Net worth category                        Net worth ratio                 FICUs           FICUs
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``Well Capitalized''.......................  7% or above........................           94.03          10,339
``Adequately Capitalized''.................  6% to 6.99%........................            2.80             308
``Undercapitalized''.......................  4% to 5.99%........................            2.06             227
``Significantly Undercapitalized''.........  2% to 3.99%........................            0.59              65
``Critically Undercapitalized''............  Less than 2%.......................            0.51              56
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    Adjustment of Net Worth Category. Part 702 incorporates the two 
statutory criteria for requiring a downward adjustment of a credit 
union's original net worth category to a lower one.\4\ 
Secs. 702.101(a)(4)(B) and (a)(1)-(2). First, a credit union classified 
as ``undercapitalized,'' and which has a net worth ratio of less than 
5%, must be downgraded to ``significantly undercapitalized'' if it 
fails to timely file or implement a Net Worth Restoration Plan.\5\ 
Sec. 1790d(c)(1)(D)(ii). See also Sec. 702.109(g). Second, credit 
unions otherwise categorized as either ``well capitalized'' or 
``adequately capitalized,'' and which meet the definition of 
``complex,'' will be subject to a risk-based net worth requirement. 
Sec. 1790d(c)(1)(A)(ii) and (c)(1)(B)(2). Credit unions which do not 
meet the risk-based requirement in either category are required to be 
reclassified ``undercapitalized.'' Sec. 1790d(c)(1)(C)(ii).
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    \4\ Apart from adjustments to net worth category classification, 
the proposed rule gives NCUA the authority to adjust a credit 
union's net worth net worth ratio to reflect the impact of certain 
accounting adjustments. Sec. 702.3(d).
    \5\ 5% falls mid-way between the 4% floor of the 
``undercapitalized'' category and its 5.99% ceiling. See 
Sec. 702.101(a)(3). An ``undercapitalized'' credit union having a 
new worth ratio of between 5% and 5.99% is not subject to a downward 
adjustment for failure to timely file or implement at New Worth 
Restoration Plan, although it would be subject to other means of 
enforcement.
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    Reclassification of Net Worth Category. Apart from statutory 
adjustment, CUMAA authorizes reclassification of a credit union on 
safety and soundness grounds, consistent with FDIA Sec. 38(g). 
Sec. 1790d(h). The proposed rule thus provides that the NCUA Board may 
reclassify to the next lower net worth category a credit union 
originally classified above ``significantly undercapitalized'' if that 
credit union is either in an unsafe or unsound condition or has failed 
to correct an unsafe or unsound practice. Secs. 702.101(b) and 
702.202(d). The authority to make a final decision to reclassify on 
these grounds cannot be delegated, Sec. 1790d(h)(2), and when 
exercised, requires notice to the credit union and an opportunity to 
respond and to request an informal hearing. Sec. 747.2003.
    The statutory criteria for mandatory adjustment of a net worth 
category and for discretionary reclassification on safety and soundness 
grounds under part 702 are summarized as follows:

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                                                                 Grounds to reclassify         Adjusted or
          Original category              Additional criterion      or adjust category     reclassified to . . .
----------------------------------------------------------------------------------------------------------------
``Well Capitalized''.................  Must be ``complex''....
``Adequately Capitalized''...........  Must be ``complex''....  Fails to meet risk-      Adjusted to
                                                                 based net worth          ``Undercapitalized''.
                                                                 Requirement.
``Undercapitalized''.................  Net worth ratio less     Fails to timely file or  ``Significantly
                                        than 5%.                 implement Net Worth      Undercapitalized''.
                                                                 Restoration Plan.
``Well Capitalized'' or ``Adequately   None...................                           Discretion to
 Capitalized''.                                                                           reclassify to next
                                                                                          lower category.
``Undercapitalized'' or                None...................  Unsafe or unsound......  Discretion to treat as
 ``significantly undercapitalized''.                                                      if in next lower
                                                                                          category.
``Well Capitalized'' or ``Adequately   must be ``new''........  condition or practice..  Discretion to
 Capitalized'' new credit union.                                                          reclassify to next
                                                                                          lower category.
``Moderately Capitalized'' or          Must be ``new''........                           Discretion to treat as
 ``Marginally Capitalized'' new                                                           if in next lower
 credit union.                                                                            category.
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    Notice and effective date of net worth classification. Section 
1790d is silent about how and when a credit union has notice of its net 
worth ratio and corresponding classification. Part 702 generally deems 
a credit union to have notice of its net worth ratio and to have become 
classified within the corresponding net worth category on a quarterly 
basis, coinciding with the end of the credit union's quarterly dividend 
period or every monthly dividend period, as the case may be. 
Sec. 702.3(b)(1). This imposes no additional burden on credit unions 
because the net worth ratio is derived from their financial statements, 
which federally- and State-chartered credit unions already prepare 
monthly.\6\ See Standard By-Law Art. VIII, Sec. 5(d). Once a credit 
union has notice that a change in its net worth places it in a lower 
net worth category, the credit union must notify NCUA in writing within 
15 days. Sec. 702.3(c). A credit union may rely on NCUA or the 
appropriate State official for notice of its net worth category only 
when it is given in an examination report, notice of reclassification 
on safety and soundness grounds, or notice of adjustment to its net 
worth ratio to reflect an accounting adjustment. Secs. 702.3(b)(2)-(3), 
747.2003(a)(1)(ii).
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    \6\ Federal depository institutions rely on quarterly Call 
Reports to determine the ``leverage ratio'' (the equivalent of a net 
worth ratio) on a quarterly basis. Part 702 does not rely on Call 
Reports to determine credit union's net worth because only credit 
unions having $50 million or more in assets file them quarterly, 12 
CFR 741.6(a); other credit unions file Call Reports semi-annually.
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2. Prompt Corrective Action by Net Worth Category

    The following is a summary of the mandatory and discretionary 
supervisory actions that apply under part 702 to each statutory net 
worth category. These are also depicted in Appendix A and B to the 
preamble of this rule. Each supervisory action is explained in greater 
detail beginning in subsequent sections:
    ``Well Capitalized''. A credit union classified ``well 
capitalized'' under part 702 is subject to no prompt corrective action.
    ``Adequately Capitalized''. A credit union classified ``adequately 
capitalized'' must comply with a single mandatory supervisory action--
an ``earnings retention requirement'' under which the credit union 
transfers to its regular reserve an amount of earnings equal to a 
proportion of the credit union's total assets. Sec. 702.104. It is not 
subject to any discretionary supervisory actions.
    ``Undercapitalized''. A credit union classified 
``undercapitalized'' must comply with four mandatory supervisory 
actions--
     Transfer of earnings to its regular reserve an amount of 
earnings equal to no less than 4/10ths percent of the credit union's 
average total assets;
     Restrict total assets to the average of the credit union's 
assets over the preceding 12 calendar months (unless

[[Page 27093]]

an approved Net Worth Restoration Plan provides for increasing assets);
     Submit and implement a Net Worth Restoration Plan; and
     Restrict the making of member business loans (unless 
primarily in the business of making such loans.
    Sec. 702.105(a). An ``undercapitalized'' credit union also is 
subject to one or more of the following discretionary supervisory 
actions which NCUA is authorized to impose to further the purpose of 
part 702: Prior approval by NCUA for acquisitions, branching, new lines 
of business.
     Restrict CUSO transactions and ownership.
     Restrict dividends paid on shares.
     Prohibit asset growth or reduce it (below the preceding 
year's average.
     Alter, terminate or reduce any activity.
     Prohibit nonmember deposits.
     Other actions no more severe than the preceding 
discretionary actions.
     Order new election of board of directors.
     Dismiss directors or senior executive officers.
     Require employment of qualified senior executive officers.

Sec. 702.105(b).

    ``Significantly Undercapitalized''. Credit unions classified 
``significantly undercapitalized'' are subject to all of the same 
mandatory and discretionary supervisory actions as an 
``undercapitalized'' credit union, except for the ``no more severe'' 
limitation on ``other actions'' taken in addition to those enumerated 
for that category. Sec. 702.106(a)-(b). A ``significantly 
undercapitalized'' credit union also is subject to the following 
additional discretionary supervisory actions:
     Restrict senior executive officers' compensation and 
bonus.
     Require merger with another financial institution if 
grounds exist for conservatorship or liquidation.

Sec. 702.106(b)(7) and (9).

    Apart from these mandatory and discretionary supervisory actions, 
the NCUA Board may place a ``significantly undercapitalized'' credit 
union into conservatorship or liquidation if it ``has no reasonable 
prospect of becoming `adequately capitalized'.''
Sec. 702.106(c); 12 U.S.C. 1786(h)(1)(f), 1787(a)(3)(A)(i).
    ``Critically Undercapitalized''. A credit union classified 
``critically undercapitalized'' is subject to all of the same mandatory 
and discretionary supervisory actions as a ``significantly 
undercapitalized'' credit union. Sec. 702.107(a)-(b). A ``critically 
undercapitalized'' credit union also is subject to the following 
additional discretionary supervisory actions:
     Restrict payments on uninsured secondary capital.
     Require NCUA prior approval for certain actions.

Sec. 702.107(b)(9)-(10).

    Apart from these mandatory and discretionary supervisory actions, 
the NCUA Board must place a ``critically undercapitalized'' credit 
union into conservatorship or liquidation within 90 days, unless the 
NCUA Board determines that other corrective action in lieu of 
conservatorship or liquidation would better achieve the purposes of 
prompt corrective action. Sec. 702.107(c)(1). That determination 
expires at the end of a period of no more than 180 days, 
Sec. 702.107(c)(1)(C), and if not affirmed within that period, the 
credit union must be conserved or liquidated. Sec. 702.107(c)(2). Even 
if that determination is renewed for another period of up to 180 days, 
the NCUA Board must conserve or liquidate a ``critically 
undercapitalized'' credit union which remains in that category on 
average for a full calendar quarter following a period of 18 months 
from the date it initially became ``critically undercapitalized, 
Sec. 702.107(c)(3)(i), unless certain statutory requirements for an 
exception are met. Sec. 702.07(c)(3)(ii).

3. Proposed Rule Provisions Applicable to All Credit Unions

    The following provisions of part 702 form the framework of prompt 
corrective action under both subparts A and B, and apply to all net 
worth categories:
    Definitions. Section 702.2 adopts the statutory definitions set 
forth in Sec. 1790d(o), with four additions. First, the term 
``appropriate State official'' is defined so as to abbreviate 
references throughout part 702. Sec. 702.2(a). Second, the definition 
of ``Credit Union Service Organization'' (CUSO) is expanded beyond the 
existing definition, 12 C.F.R. 712.3(a), which is limited to federally-
chartered credit unions. Sec. 702.2(c). This will ensure that CUSOs of 
federally-insured State-chartered credit unions are within the scope of 
discretionary restrictions on CUSO transactions and ownership. E.g., 
Sec. 702.105(b)(2). Third, the terms ``credit union'' and ``shares'' 
are defined to ensure that part 702 encompasses State-chartered credit 
unions and analogous terms for shares under applicable State law. 
Sec. 702.2(b) and (h). Finally, the term ``total assets' is defined as 
the average of total assets reported by a credit union on its most 
recent four quarterly Call Reports, or for semiannual filers, on its 
two most recent semi-annual Call Reports. Sec. 702.2(i).
    The statutory definition of ``net worth''--''retained earnings 
balance of the credit union, as determined under generally accepted 
accounting principles [GAAP]''--will in some cases distort the ``net 
worth ratio'' as a true measure of actual capital strength. 
Sec. 702.2(e); Sec. 1790d(o)(2)(A). The GAAP definition of ``retained 
earnings'' does not include items of ``other comprehensive income'' 
such as unrealized gains or losses on available-for-sale (AFS) 
securities (Call Report account 945).\7\ As a result, when the fair 
value of AFS securities falls, that reduction is not reflected in net 
worth, artificially overstating the credit union's ``net worth ratio'' 
and possibly forestalling appropriate prompt corrective action.\8\ In 
response to this dilemma, the proposed rule authorizes the NCUA Board 
to adjust a credit union's net worth ratio to reflect accounting 
adjustments such as gains and losses in the fair value of AFS 
securities. Sec. 702.203(d).
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    \7\ Under GAAP, ``retained earnings'' consists of undivided 
earnings, statutory reserves, and other appropriations as defined by 
management or regulatory authorities. AICPA, Audit & Accounting 
Guide: Audits of Credit Unions at Sec. 11.01 (1998).
    \8\ For example, assume a credit union has retained earnings 
under GAAP of $6500 and total assets of $100,000; it would have a 
net worth ratio of 6.5% and would be classified ``adequately 
capitalized.'' Assume that during the next quarter, the credit union 
experiences an $8,000 decrease in the fair value of its available-
for-sale (AFS) securities. This unrealized loss would be reflected 
in total assets (the denominator of the net worth ratio), reducing 
them to $92,000. However, under the statutory definition of ``net 
worth,'' the unrealized loss would not be reflected at all in 
retained earnings (the numerator of the net worth ratio), and would 
still be $6500. As result, the credit union would have a net worth 
ratio of 7.06% and be classified ``well capitalized'' despite having 
sustained a decline in the fair value of its AFS securities. 
Conversely, an understated net worth ratio results when the credit 
union experiences an unrealized gain in the fair value of its AFS 
securities.
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    Consultation With State Officials. Part 702 tracks the statutory 
requirement that NCUA consult with the appropriate State credit union 
official when taking prompt corrective action against a federally-
insured State-chartered credit union (FISCU). Sec. 1790d(l). Before 
placing a FISCU into conservatorship or liquidation to facilitate 
prompt corrective action, NCUA must consult with the appropriate State 
official, provide reasons for the proposed action, give the official an 
opportunity to respond, and allow the official to place the FISCU into 
conservatorship or liquidation. Sec. 702.108(a). If the State official 
does not concur in the conservatorship or liquidation decision, the 
NCUA Board cannot proceed unless it makes certain findings of risk of 
loss to the NCUSIF. Sec. 702.108(a)(3); see also 12 U.S.C. 
1786(h)(2)(C), 1787(b).

[[Page 27094]]

    To satisfy the requirement that NCUA ``consult and seek to work 
cooperatively with State officials'' when implementing prompt 
corrective action, Sec. 1790d(I)(1), part 702 generally provides 
throughout for participation by the appropriate State official in 
decisions about a FISCU on which prompt corrective action is 
predicated. Specifically, part 702 provides that NCUA ``shall notify 
the appropriate State official before taking any discretionary action'' 
concerning a FISCU and ``shall allow the appropriate State official to 
take the proposed action independently or jointly with NCUA.'' 
Sec. 702.108(c). When evaluating a FISCU's Net Worth Restoration Plan, 
NCUA must consult with State officials. Sec. 702.109(d)(2). To 
facilitate consultation, a FISCU which submits a Net Worth Restoration 
Plan to NCUA must submit a duplicate to the appropriate State official. 
Sec. 702.109(a)(1). When a FISCU, or an official who it has been 
ordered to dismiss, seeks review of a decision to impose a 
discretionary supervisory action, the appropriate State official must 
be served with a copy of all notices and decisions issued by NCUA, and 
responses and requests filed by the FISCU or its official. 
Sec. 747.2001(b).

C. Mandatory and Discretionary Supervisory Actions

1. Mandatory Actions Prescribed by Statute

    Under the proposed rule, each of the following mandatory 
supervisory actions is a self-executing legal obligation of a credit 
union once it is classified within a net worth category requires that 
action. The legal obligation is not triggered by notification from 
NCUA.
    Earnings transfer to regular reserve. The proposed rule adopts the 
mandatory ``earnings retention requirement'' under which credit unions 
classified ``adequately capitalized'' or lower must ``annually set 
aside as net worth an amount equal to not less than 0.4% of its total 
assets.'' Sec. 1790d(e)(1). However, CUMAA does not answer how or when 
a credit union's total assets should be measured for this purpose, or 
where the earnings set aside should be held. To measure ``total 
assets,'' part 702 uses the average of the credit union's total assets 
as set forth in its most recent four quarterly Call Reports or most 
recent two semi-annual Call Reports, as the case may be. Sec. 702.2(i). 
Measuring total assets on a single day, such as the last day the prior 
quarter or prior year, would not take into account seasonal 
fluctuations in asset size. The rule also directs that the resulting 
amount of earnings to be set aside over the ensuing year is to be 
transferred in installments to the credit union's regular reserve. A 
credit union having a monthly dividend period for regular shares must 
make monthly transfers of at least 8.334%, or 1/12th , of the annual 
sum. Sec. 702.104(a)(1). A credit union having a quarterly or less 
frequent dividend period for regular shares must make a quarterly 
transfer of at least 25%, or \1/4\ of the annual sum. 
Sec. 702.104(a)(2).
    Part 702 also amplifies the terms of the statutory exception to the 
0.4% minimum set aside. Sec. 1790d(e)(2). First, the NCUA Board 
interprets the phrase ``by order'' to indicate that exceptions to 0.4% 
statutory minimum are to be granted on a case-by-case basis. 
Sec. 702.104(b). Second, the proposed rule implements the mandate to 
``periodically review any order'' decreasing the 0.4% statutory minimum 
by requiring ``review and revocation no less frequently than 
quarterly,'' to coincide with the dividend period for regular shares 
which is common among credit unions. Id.
    Net Worth Restoration Plan. The requirement to implement a Net 
Worth Restoration Plan (NWRP) emerges as the hallmark of prompt 
corrective action. To restore a credit union's net worth to the 
``adequately capitalized'' level, CUMAA provides that credit unions 
classified ``undercapitalized'' or lower must timely submit to the NCUA 
Board and implement a NWRP. Sec. 1790d(f)(1). The statute requires NCUA 
to establish ``reasonable'' deadlines for submission of NWRPs; set 
``expeditious'' deadlines for NCUA to act on them; allow credit unions 
which fail to timely submit an NWRP a further opportunity to do so; and 
allow a credit union whose NWRP is not approved an opportunity to 
submit a revised NWRP. Sec. 1790d(f)(3)-(4). Further, credit unions 
having less than $10 million in assets are entitled to receive 
assistance in preparing an NWRP. Sec. 1790d(f)(2).
    To fulfill this mandate, the proposed rule sets a 45-day period for 
submitting an NWRP, and if that deadline is not met, allows an 
additional 15 days to submit an NWRP. Sec. 702.109(a)(1). The NCUA 
Board is required to act on an initial NWRP within 60 days, and to 
provide reasons in the event of disapproval. Sec. 702.109(e)(1). When 
an initial NWRP is not approved, the credit union is given 30 days to 
file a revised NWRP, on which the NCUA Board is required to act within 
30 days of receipt. Sec. 702.109(f). The periods for submission and 
review of an initial NWRP parallel those which FDIA 
Sec. 38(e)(2)(D)(ii) sets for ``capital restoration plans''--the 
federally-insured depository institutions' analog to an NWRP--and are 
consistent with comments on the topic received in response to the ANPR. 
The NCUA Board has declined to set a deadline by which a credit union 
having less than $10 million in assets must request assistance in 
preparing an NWRP; under the proposed rule, NCUA will provide 
assistance simply ``upon timely request.'' Sec. 702.109(b).
    CUMAA is silent as to the contents of an NWRP, and sets just a 
single standard for approving one. Sec. 1790d(f)(5). As comments 
received in response to the ANPR suggested, the NCUA Board has examined 
the contents and criteria that FDIA Sec. 38 prescribes for a ``capital 
restoration plan.'' With certain additions and adjustments to 
distinguish between credit unions and other depository institutions, 
the NCUA Board proposes to require for an NWRP much of the content 
information that FDIA Sec. 38(e)(2)(B) demands of a ``capital 
restoration plan.'' Accordingly, section 702.109(c) requires a proposed 
NWRP to specify--
     The steps the credit union will take to become 
``adequately capitalized'';
     A specific timetable for increasing net worth during each 
year in which the NWRP will be in effect;
     How the credit union will comply with the mandatory and 
discretionary restrictions or requirements imposed on it under this 
part;
     The types and levels of activities in which the credit 
union will engage;
     The amount of earnings the credit union will transfer to 
its regular reserve account pursuant to the earnings retention 
requirement in section 702.104; and
     In the case of a plan submitted by a credit union which 
has been reclassified under Sec. 702.101(b) on safety and soundness 
grounds, the steps the credit union will take to correct the unsafe or 
unsound practice(s) or condition(s).

Sec. 702.109(c)(1) (i)-(vi).

    Finally, an NWRP must be accompanied by pro-forma financial 
statements covering the next two years, and financial data submitted in 
connection with an NWRP must generally conform to GAAP. Sec. 702.109 
(c)(2) and (c)(4).
    Similarly, to supplement the single statutory criterion for 
approval of a NWRP--that it be ``based on realistic assumptions'' and 
be ``likely to succeed in restoring * * * net worth''--the NCUA Board 
proposes to adopt as appropriate for approving an NWRP the additional 
criteria which FDIA

[[Page 27095]]

Sec. 38(e)(2)(c) establishes for accepting a ``capital restoration 
plan,'' with significant modifications addressed below. To be approved, 
section 702.109(d) requires an NWRP to--
     Be based on realistic assumptions and likely to succeed in 
restoring net worth;
     Comply with content requirements in section 702.109(c);
     Not unreasonably increase the credit union's exposure to 
risk (including credit risk, interest-rate risk, and other types of 
risk); and be supported by appropriate assurances from the credit union 
that it will comply with the plan until it has remained ``adequately 
capitalized'' for four (4) consecutive calendar quarters.
    Whereas a ``capital restoration plan'' cannot ``appreciably 
increase'' risk exposure, an NWRP must ``not unreasonably increase the 
credit union's exposure to risk.'' (emphasis added.) Compare FDIA 
Sec. 38(e)(2)(C)(I)(III) with Sec. 702.109(d)(3). This permits a credit 
union with little or no risk exposure to incur reasonable exposure to 
improve net worth. Approval of a ``capital plan'' requires a financial 
``guarantee'' of compliance until ``the institution becomes adequately 
capitalized on average during each of 4 consecutive calendar 
quarters,'' and ``appropriate assurances'' of performance. FDIA 
Sec. 38(e)(2)(c)(ii). Section 702.109(d)(4) combines and condenses this 
pair of requirements into a single, criterion appropriate for credit 
unions--requiring ``appropriate assurances'' of compliance with the 
NWRP until the credit union ``has remained `adequately capitalized' for 
four (4) consecutive calendar quarters'' on an absolute basis rather 
than just on average. The NCUA Board may delegate to its Regional 
Directors the authority to evaluate an NWRP according to the proposed 
criteria.
    Restriction on increase in assets. Part 702 adopts CUMAA's 
limitation on increasing assets, which provides that a credit union 
classified ``undercapitalized'' or lower shall ``not generally permit 
its average total assets to increase'' unless doing so is consistent 
with the credit union's approved NWRP and the credit union increases 
assets and net worth at the rate the Plan prescribes. Sec. 1790d(g)(1); 
Sec. 702.105(a)(3). However, the statute does not specify the period 
over which ``average total assets'' should be calculated for purposes 
of limiting asset growth. Therefore, to avoid seasonal fluctuations in 
asset size, section 702.105(a)(3) relies on the definition of total 
assets in section 702.2(i).
    In many cases, at the time a credit union becomes subject to the 
limit on increasing assets, its total assets already will exceed the 
average for the preceding twelve months, raising the question whether 
it should be required to reduce assets to that level. Section 
702.105(b)(4) gives the NCUA Board discretionary authority to prohibit 
a credit union classified ``undercapitalized'' or lower from increasing 
its total assets or an individual category of assets beyond an absolute 
level, or even to require the credit union to reduce total assets or a 
category of assets. Due to the availability of this complementary 
restriction, the NCUA Board declines to interpret the statutory asset 
limitation as requiring a reduction in assets to the level of average 
total assets over the preceding 12 months.
    Restriction on increase in member business loans. CUMAA prohibits 
credit unions classified ``undercapitalized'' or lower from ``mak[ing] 
any increase in the total amount of member business loans * * * 
outstanding at that credit union at any one time * * *'' 1790d(g)(2). 
This imposes a freeze on member business lending, rather than confining 
it to an average. Part 702 incorporates within this restriction the 
exemptions Title II of CUMAA prescribes for ``a credit union chartered 
for the purpose of making, or that has a history of primarily making, 
member business loans to its members,'' or which is designated low 
income, or which participates in the Community Development Financial 
Institutions program. 12 U.S.C. 1757a(b). Applying these exemptions to 
the proposed rule's member business loan restriction will ensure that 
prompt corrective action does not defeat the net worth restoration 
efforts of credit unions which rely heavily on member business lending.
    Part 702's member business loan restriction is imposed 
``[n]otwithstanding'' the Title II maximum on member business loans--
1.75 times net worth for less than ``well capitalized'' credit unions; 
12.25% of assets for those which are ``well capitalized'' (but not 
``complex''). 12 U.S.C. 1757a(a)(1). This makes it clear that the part 
702 restriction is overriding. Thus, a credit union cannot claim to be 
entitled to increase member business loans to the Title II maximum 
before the part 702 restriction can take effect.
    Conservatorship and Liquidation. CUMAA prescribes criteria for 
allowing and for mandating conservatorship and liquidation of a credit 
union classified ``significantly undercapitalized'' or ``critically 
undercapitalized,'' Sec. 1790d(i) (1)-(2), and amends the FCUA 
accordingly. CUMAA Sec. 301(b). Section 702.106(b) faithfully reflects 
the statutory authority to place a ``significantly undercapitalized'' 
credit union into conservatorship or liquidation to facilitate prompt 
corrective action upon finding that the credit union ``has no 
reasonable prospect of becoming adequately capitalized.'' 12 U.S.C. 
1786(h)(1)(F), 1787(a)(3)(A)(i).
    In the case of a ``critically undercapitalized'' credit union, 
regardless of its prospect of becoming ``adequately capitalized,'' the 
NCUA Board must--

not later than 90 days after the date on which an insured credit 
union becomes critically undercapitalized--

(A) appoint a conservator or liquidating agent for the credit union; 
or (B) take such other action as the Board determines would better 
achieve the purpose of [Sec. 1790d], after documenting why the 
action would better achieve that purpose.

Sec. 1790d(i)(1). Section 702.107(c) restates this mandate.

    The statute provides that the determination to take other 
corrective action shall ``cease to be effective not later than the end 
of the 180-day period beginning on the date on which the determination 
is made,'' and the credit union shall be placed into conservatorship or 
liquidation ``unless the Board makes a new determination * * * before 
the end of the effective period of the prior determination'' that 
continuing other corrective action will further the purpose of 
Sec. 1790d. Sec. 1790d(d)(2). Section 702.107(c)(2) implements this 
procedure for renewing other corrective action in lieu of 
conservatorship and liquidation. The NCUA Board interprets the 
``documenting'' prerequisite for initially taking other corrective 
action as setting a standard for renewing that determination.
    Regardless whether other corrective action restores net worth, the 
NCUA Board is required by statute to place the credit union into 
liquidation ``if [it] is critically undercapitalized on average during 
the calendar quarter beginning 18 months after the date on which the 
credit union became critically undercapitalized.'' Sec. 1790d(i)(3)(A). 
An exception to mandatory liquidation is allowed, however, and other 
corrective action may continue, if the NCUA Board makes three findings:
     That the credit union has substantially complied with a 
Net Worth Restoration Plan requiring improvement in net worth since the 
date the plan was approved;

[[Page 27096]]

     That the credit union has positive net income or a 
sustainable upward trend in earnings; and
     That the credit union is viable and not expected to fail.

Sec. 1790d(i)(3)(B).

    The mandate for liquidation of a ``critically undercapitalized'' 
credit union after 18 months, and the grounds for an exception to it, 
are incorporated in section 702.107(c)(3).\9\
---------------------------------------------------------------------------

    \9\ The authority to elect among conservatorship, liquidation, 
or other action concerning a ``critically undercapitalized'' credit 
union cannot be delegated unless the credit union has less than 
$5,000,000 in assets. Sec. 1790d(l)(4)(A). If made by delegation, 
the decision is directly appealable to the NCUA Board. 
Sec. 1790d(i)(4)(B); Sec. 702.107(c)(4). Finally, a ``significantly 
undercapitalized'' or ``critically undercapitalized'' credit union 
which is placed into conservatorship or liquidation under part 702 
retains the right to challenge NCUA Board's decision in court within 
10 days. 12 U.S.C. 1786(h)(3), 1787(a)(1)(b).
---------------------------------------------------------------------------

    Although faithful to the statutory language, section 702.107(c) is 
phrased to reveal flexibility that may not be apparent. First, the 
effective period of a determination to take ``other corrective action'' 
need not extend for the maximum duration of 180 days. The NCUA Board 
has the discretion to establish a shorter effective period. Further, 
the NCUA Board may reconsider any determination periodically, and 
reverse and discontinue the ``other corrective action'' altogether. To 
continue the action beyond an effective period, the NCUA Board must 
make a new finding prior to the end of the effective period that its 
``other corrective action'' still furthers the purpose of prompt 
corrective action. If the new finding is made, the ``other corrective 
action'' can continue for a new effective period that is appropriate to 
achieve the ``other corrective action,'' which the NCUA Board may 
specify as any period of up to 180 days from the date of the 
determination. The new determination still can be reconsidered 
periodically, and renewed for an additional effective period or 
discontinued.
    Second, if the credit union first became ``critically 
undercapitalized'' at the end of a calendar quarter, the last possible 
day for ``other corrective action'' may be as soon as 18 months plus 3 
months of the next calendar quarter, for a total of 21 months. If the 
date the credit union first became ``critically undercapitalized'' was 
other than the end of a calendar quarter, the last possible day for 
``other corrective action'' would extend to the end of the calendar 
quarter following the 21 months, for a total of up to 23 months.\10\
---------------------------------------------------------------------------

    \10\ In any event, a credit union's net worth ratio need only 
average 2% or more over the full calendar quarter following 18 
months from the date the credit union was first classified 
``critically undercapitalized.''
---------------------------------------------------------------------------

2. Discretionary Actions Under Statutory Authority

    CUMAA requires NCUA to develop discretionary supervisory actions to 
complement the mandatory ones it prescribes, provided they are 
consistent with the purpose of prompt corrective action, and are 
``comparable'' to the ``discretionary safeguards'' in FDIA Sec. 38. 
Sec. 1790d(b)(1)(A). The discretionary supervisory actions NCUA 
proposes are generally allocated among the five statutory net worth 
categories in part 702 by corresponding capital category in FDIA 
Sec. 38.\11\ Throughout the proposed rule, the use of discretionary 
actions is conditioned upon furthering the purpose of part 702. 
However, NCUA is not required to give mandatory supervisory actions an 
opportunity to improve net worth before resorting to discretionary 
actions. Except as noted, there is no limit to the number or sequence 
in which the NCUA Board imposes one or more discretionary actions. Each 
discretionary requirement and restriction is adapted as follows from 
FDIA Sec. 38 with appropriate modifications to suit the distinct 
features of credit unions in the net worth categories established by 
statute and those developed for ``new'' credit unions:
---------------------------------------------------------------------------

    \11\ The Federal banking agencies' Joint Final Rule does not 
restate or establish by regulation the ``discretionary safeguards'' 
prescribed in FDIA Sec. 38; it merely incorporates them by general 
reference to the statute. See, e.g., 12 CFR 325.105(a)(2). However, 
FDIA Sec. 38(b)(1)'s five capital categories and corresponding range 
of ``leverage ratios'' (the equivalent of a net worth ratio) are the 
same as part 702's five net worth categories and corresponding range 
of net worth ratios. Compare FDIA Sec. 38(b)(1) with Sec. 1790d(c); 
see e.g., 12 CFR 325.103(b).

                                   Part 702--Discretionary Supervisory Actions
----------------------------------------------------------------------------------------------------------------
                                           Applies in which
   Discretionary supervisory action     statutory and ``new''           Comparison with FDIA Sec.  38 and
                                         net worth categories     appropriateness of discretionary actions for
---------------------------------------------------------------------------------credit unions.-----------------
1. Requiring NCUA prior approval for   Statutory:               NCUA may prohibit a credit union ``from,
 acquisitions, branching, new lines     ``Undercapitalized''     directly or indirectly, acquiring any interest
 of business.                           and lower.               in any CUSO or credit union, establishing or
                                       New: ``Moderately         acquiring any additional branch office, or
                                        Capitalized'' and        engaging in any new line of business unless the
                                        lower.                   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.'' Sec.  702.105(b)(1). This
                                                                 authority extends to ownership interests in a
                                                                 CUSO and is a discretionary supervisory action
                                                                 in part 702, whereas in FDIA Sec.  38 the
                                                                 approval plan is a mandatory supervisory
                                                                 action.
2. Restricting transactions with and   Statutory:               NCUA may restrict transactions between a credit
 ownership of CUSOs.                    ``Undercapitalized''     union and its wholly- or partially-owned
                                        and lower.               CUSO(s), and require that credit union to
                                       New: ``Moderately         reduce or divest its ownership interest in a
                                        Capitalized'' and        CUSO. Sec.  702.105(b)(2). This is an analog to
                                        lower.                   FDIA Sec.  38(f)(2)(B), which restricts a
                                                                 depository institution from transactions with
                                                                 its affiliate institutions. The authority to
                                                                 require a credit union to reduce or divest it
                                                                 ownership interest in a CUSO is appropriate
                                                                 because CUSO ownership can be a drain on the
                                                                 credit union's financial resources and
                                                                 attention at a time when both need to be
                                                                 devoted to improving net worth.
3. Restricting dividends paid........  Statutory:               NCUA may restrict the dividend rates a credit
                                        ``Undercapitalized''     union pays on shares to the prevailing rates
                                        and lower.               paid on comparable accounts and maturities in
                                       New: ``Moderately         the region where the credit union is located,
                                        Capitalized'' and        but may not apply this restriction
                                        lower.                   retroactively to dividends on shares already
                                                                 issued. Sec.  702.105(b)(3). This is an analog
                                                                 to the FDIA Sec.  38(f)(2)(c), which imposes
                                                                 the same restriction on interest rates. In
                                                                 order not to undermine the ability of a credit
                                                                 union to attract new members, the rate
                                                                 reduction is limited to ``prevailing rates paid
                                                                 on comparable accounts'' in the region, thus
                                                                 permitting a credit union to remain competitive
                                                                 in the rates it pays.

[[Page 27097]]

 
4. Prohibiting or reducing asset       Statutory:               NCUA may place an absolute limit on increases in
 growth.                                ``Undercapitalized''     assets generally or on increases in a
                                        and lower.               particular asset category, or may compel the
                                       New: ``Moderately         credit union to reduce its total assets or a
                                        Capitalized'' and        certain category of assets. Sec.
                                        lower.                   702.105(b)(4). This is a modified version of
                                                                 the FDIA provision ``restricting the
                                                                 institution's asset growth more stringently''
                                                                 than limiting increases in total average
                                                                 assets. FDIA Sec.  38(f)(2)(D). This authority
                                                                 is appropriate for credit unions because it can
                                                                 be targeted to limit growth in one or more
                                                                 specific asset categories and complements the
                                                                 mandatory action limiting assets to total
                                                                 average assets. See Sec.  702.105(a)(3).
5. Alter, reduce or terminate any      Statutory:               NCUA may compel a credit union to alter, reduce
 activity by credit union or its CUSO.  ``Undercapitalized''     or terminate any activity in which it or its
                                        and lower.               CUSO engages. Secs.  702.105(b)(5),
                                       New: ``Moderately         702.106(b)(5), 702.107(b)(5). This is adapted
                                        Capitalized'' and        from FDIA's similar restriction, but is
                                        lower.                   extended to CUSOs and is without the
                                                                 prerequisite that the subject activity poses
                                                                 ``excessive risk to the institution. `` FDIA
                                                                 Sec.  38(f)(2)(E). This is appropriate for
                                                                 credit unions because activities which may not
                                                                 be excessively risky still may distract the
                                                                 attention of management, compromise a CUSOs
                                                                 internal controls, or pose cost efficiency or
                                                                 conflict of interest problems--all of which can
                                                                 impact on net worth.
6. Prohibiting nonmember deposits....  Statutory:               NCUA may prohibit a credit union from accepting
                                        ``Undercapitalized''     all or certain nonmember deposits as otherwise
                                        and lower.               permitted under 12 U.S.C. 1757(6) and 12 CFR
                                       New: ``Moderately         701.32. Sec.  702.105(b)(6). This is an analog
                                        Capitalized'' and        to the FDIA Sec.  38 provision prohibiting
                                        lower.                   deposits from correspondent banks. FDIA Sec.
                                                                 38(f)(2)(G). This restriction may serve a
                                                                 critical purpose for credit unions when large
                                                                 nonmember depositors are unduly influential in
                                                                 credit union affairs affecting its net worth.
7. Other actions to further the        Statutory:               NCUA may ``restrict or require such other action
 purpose of part 702.                   ``Undercapitalized''     as [it] determines will carry out the purpose
                                        and lower.               of [part 702] better than any of the
                                       New: ``Moderately         [discretionary] actions prescribed [for that
                                        Capitalized'' and        category.]'' Secs.  702.106(b)(10),
                                        lower.                   702.107(b)(11). For the ``undercapitalized''
                                                                 category only, however, ``such other
                                                                 restriction or requirement [must be] no more
                                                                 severe than the [other discretionary] actions
                                                                 prescribed'' for that category. Sec.
                                                                 702.105(b)(7). FDIA Sec.  38(f)(2)(J) is
                                                                 analogous, but without the ``no more severe''
                                                                 limitation. NCUA has added the ``no more
                                                                 severe'' limitation to ensure that in the case
                                                                 of an ``undercapitalized'' credit union--whose
                                                                 net worth ratio may, for example, be just tens
                                                                 of basis points short of ``adequately
                                                                 capitalized''--that the least intrusive means
                                                                 is used to further the purpose of part 702.
                                                                 This is not the case with ``significantly
                                                                 undercapitalized'' and ``critically
                                                                 undercapitalized'' credit unions, who, by
                                                                 definition, are not near to being ``adequately
                                                                 capitalized.''
8. Ordering new election of board of   Statutory:               As one means of improving management, NCUA may
 directors.                             ``Undercapitalized''     compel a credit union to hold a new election of
                                        and lower.               its board of directors. Sec.  702.105(c)(1).
                                       New: ``Moderately         FDIA Sec.  38(f)(2)(F)(i) is identical. This
                                        Capitalized'' and        action is an appropriate means of improving
                                        lower.                   management where the board of directors is
                                                                 determined to be responsible for a net worth
                                                                 deficiency and is either unwilling or not
                                                                 capable of taking action needed to correct the
                                                                 deficiency. NCUA intervention is minimal
                                                                 because a new election gives the credit union
                                                                 membership an opportunity to change member
                                                                 representation on the board of directors,
                                                                 possibly eliminating the need for further
                                                                 action by NCUA. For ``undercapitalized'' credit
                                                                 unions only, this and other means of
                                                                 ``improving management'' may be imposed only
                                                                 after NCUA takes one or more of the
                                                                 discretionary prescribed for that category
                                                                 (i.e., Sec.  702.105(b)(1)-(7)) or determines
                                                                 that none of those actions would further the
                                                                 purpose of part 702.\12\ Sec.  702.105(c).
                                                                 Similarly to ``other actions'' in paragraph 7
                                                                 above, this is to ensure that the least extreme
                                                                 discretionary action is used in the case of a
                                                                 credit union whose net worth ratio may fall
                                                                 just short of being ``adequately capitalized.''
9. Dismissing directors or senior      Statutory:               As a second means of improving management, NCUA
 executive officers.                    ``Undercapitalized''     may require a credit union to dismiss one or
                                        and lower.               more directors or senior executive officers.
                                       New: ``Moderately         Sec.  702.105(c)(2). This action is appropriate
                                        Capitalized'' and        when a surgical approach to replacing
                                        lower.                   management is warranted. FDIA Sec.
                                                                 38(f)(2)(F)(ii) is identical, except that it
                                                                 provides a period of protection from dismissal
                                                                 for persons who have held office 180 or fewer
                                                                 days prior to the date the institution was
                                                                 classified ``undercapitalized'' or lower. The
                                                                 theory behind this period of protection from
                                                                 dismissal is that such persons have not held
                                                                 office long enough to be responsible for net
                                                                 worth problems causing the institution to be
                                                                 classified ``undercapitalized'' or lower. NCUA
                                                                 proposes to eliminate this period of protection
                                                                 so that no official who is responsible for a
                                                                 credit union's rapidly declining net worth, or
                                                                 who is incapable reversing the decline, can
                                                                 have a ``safe harbor'' from dismissal. This
                                                                 action is subject to the prerequisite only in
                                                                 the ``undercapitalized'' category that other
                                                                 discretionary actions in that category be used
                                                                 first or be determined not to further the
                                                                 purpose of part 702. Subpart L of part 747
                                                                 provides a specific review procedure for
                                                                 dismissals pursuant to this action. 12 CFR
                                                                 747.2004.
10. Employing qualified senior         Statutory:               As a third means of improving management, NCUA
 executive officers.                    ``Undercapitalized''     may require the credit union to employ
                                        and lower.               qualified senior executive officers, who may be
                                       New: ``Moderately         subject to the NCUA Board's approval. Sec.
                                        Capitalized'' and        702.105(c)(3). FDIA Sec.  38(f)(2)(F)(iii) is
                                        lower.                   identical. This action can be a means of
                                                                 supplementing existing management, or replacing
                                                                 a dismissed officer, with persons who are
                                                                 competent to deal with and to correct the
                                                                 causes of declining net worth. NCUA can
                                                                 authorize the credit union to identify and to
                                                                 hire a sufficiently qualified person, or NCUA
                                                                 may condition hiring upon its approval of the
                                                                 credit union's candidate. This action is
                                                                 subject to the prerequisite in the
                                                                 ``undercapitalized'' category only that other
                                                                 discretionary actions in that category be used
                                                                 first or be determined not to further the
                                                                 purpose of part 702.

[[Page 27098]]

 
11. Restricting senior executive       Statutory:               NCUA may limit or reduce the compensation a
 officers' compensation and bonus.      ``Significantly          credit union pays to its senior executive
                                        Undercapitalized'' and   officers; limit, reduce, or prohibit bonuses
                                        lower.                   paid to such officers; or condition payment of
                                       New: ``Marginally         either compensation or a bonus upon NCUA
                                        Capitalized'' and        approval. Secs.  702.106(b)(7), 702.107(b)(7).
                                        lower.                   FDIA Sec.  38(f)(4)(A) is similar except that
                                                                 it does not authorize unilaterally limiting,
                                                                 reducing or prohibiting compensation or
                                                                 bonuses. Instead, it provides for approval by
                                                                 the appropriate Federal banking agency for
                                                                 compensation in excess of the officer's average
                                                                 compensation over the 12 calendar months
                                                                 preceding classification of the credit union as
                                                                 ``significantly undercapitalized'' or lower,
                                                                 and for a bonus in any amount. Such approval
                                                                 for either is prohibited if an institution has
                                                                 failed to submit an acceptable ``capital
                                                                 restoration plan.'' FDIA Sec.  38(f)(4)(B).
12. Requiring merger if grounds exist  Statutory:               NCUA may require a credit union to merge with
 for conser-vatorship or liquidation.   ``Significantly          another financial institution, but only if
                                        Undercapitalized'' and   grounds exist to place the credit union into
                                        lower.                   conservatorship or liquidation. Sec.
                                       New: ``Marginally         702.106(b)(9), 702.107(b)(9). The statutory
                                        Capitalized'' and        grounds for conserving or liquidating a
                                        lower.                   ``significantly undercapitalized'' or
                                                                 ``critically undercapitalized'' credit union to
                                                                 facilitate prompt corrective action is whether
                                                                 the credit union has a reasonable prospect of
                                                                 becoming ``adequately capitalized.'' 12 U.S.C.
                                                                 1786(h)(1)(F), 1787(a)(3)(A)(i). FDIA Sec.
                                                                 38(f)(2)(A)(iii) is analogous, requiring an
                                                                 institution to be acquired by a depository
                                                                 institution holding company, or to combine with
                                                                 another depository institution if grounds exist
                                                                 for conservatorship or receivership. This
                                                                 action is appropriate for credit unions because
                                                                 NCUA's insistence on merger with another
                                                                 financial institution gives credit union
                                                                 management the opportunity to consummate a
                                                                 merger to avoid inevitable conservatorship or
                                                                 liquidation, thereby permitting the credit
                                                                 union to survive in merged form.
13. Restrict payments on uninsured     Statutory: ``Critically  NCUA may prohibit a credit union, beginning 60
 secondary capital.                     Undercapitalized''.      days after it becomes ``critically
                                       New: ``Minimally          undercapitalized'', from making payments of
                                        Capitalized'' and        principal or interest on uninsured secondary
                                        ``Uncapitalized''.       capital.'' Sec.  702.107(b)(9). This is
                                                                 analogous to FDIA Sec.  38(h)(2)'s restriction
                                                                 on payment of principal and interest on
                                                                 subordinated debt. However, for Federal banking
                                                                 agencies that restriction is a mandatory
                                                                 supervisory action, whereas in part 702 it is
                                                                 discretionary. This restriction will have
                                                                 limited effect because only low-income credit
                                                                 unions are permitted by law to accept uninsured
                                                                 secondary capital. 12 U.S.C. 1757(6).
14. Require NCUA prior approval for    Statutory: ``Critically  NCUA may require a credit union to obtain its
 certain actions.                       Undercapitalized''.      approval before engaging in certain activities
                                       New: ``Minimally          on the operational level, such as entering into
                                        Capitalized'' and        a material transaction outside the normal
                                        ``Uncapitalized''.       course of business, amending by-laws, or
                                                                 changing accounting methods. Sec.
                                                                 702.107(b)(10). FDIA Sec.  38(i) imposes a
                                                                 similar ``prior approval'' requirement which
                                                                 addresses the same actions and a few others not
                                                                 relevant to credit unions.
----------------------------------------------------------------------------------------------------------------
\12\ The ``prerequisite'' provisions in the proposed rule--Secs.  702.104(b)(7) and (c), 702.105(b)(10),
  702.106(b)(10), 702.107(b)(11)--requiring certain discretionary actions to be taken before other more
  stringent or intrusive discretionary actions, are modeled conversely to FDIA Sec.  38(f)(3), which establishes
  a ``presumption in favor of certain actions'' (requiring merger, restricting transactions with affiliates, and
  restricting interest rates) which are relatively more stringent than other available discretionary actions.

D. Alternative Prompt Corrective Action for New Credit Unions

    CUMAA charged NCUA with the responsibility of developing ``a system 
of prompt corrective action that shall apply to new credit unions'' in 
lieu of the system of statutory PCA applicable to all other federally-
insured credit unions. Sec. 1790d(b)(2)(A). The statute defines a 
``new'' credit union as having been in operation for less than 10 years 
and having $10 million or less in assets, Sec. 1790d(o)(4). In 
addition, it requires the alternative system of PCA for new credit 
unions to:
     Recognize that new credit unions initially have no net 
worth, and must be given reasonable time to accumulate net worth;
     Create adequate incentives for new credit unions to become 
``adequately capitalized'' by the time they either are in operation for 
more than 10 years or reach $10 million in total assets;
     Impose appropriate restrictions and requirements on new 
credit unions that do not make sufficient progress toward becoming 
``adequately capitalized''; and
     Prevent evasion of the purpose of part 702.

Sec. 1790d(b)(2)(B).

    In carrying out this mandate, the NCUA Board has relied upon two 
resources--comments on the topic in response to the ANPR and the advice 
of a ``new'' credit union committee assembled by NCUA for the purpose 
of studying field staff experience in dealing with new credit unions 
over the last decade. Among the members of the committee is a combined 
81 years of field experience with credit unions and 10 years of private 
sector credit union experience.
    A consensus of ANPR comments recommended that NCUA create a system 
of PCA for new credit unions which--
     Follows a modified ``net worth category'' model;
     Allows for gradual capital accumulation;
     Allows new credit unions to have no net worth in the early 
years;
     Sets no minimum on earnings transfers to the regular 
reserve; and
     Allows regulatory forbearance in imposing supervisory 
actions.
    Based on field experience with new credit unions over the last 10 
years, the ``new'' credit union committee made the following findings:
     The ability to accumulate capital through earnings is 
limited during a new credit union's early years of operation due to 
small asset size, the low ratio of loans to assets, and high fixed 
expenses;
     Historical data and field experience indicate that it 
takes between 3 and 5 years for a new credit union to accumulate a net 
worth of 2%;
     A business plan which establishes a strategy for achieving 
operational and financial objectives, and which is revised on an 
ongoing basis to reflect changing business conditions, is essential;

[[Page 27099]]

     A credit union which is unable to meet even modest net 
worth goals (established in its business plan) in its early years is 
unlikely to become ``adequately capitalized'' by the end of 10 years;
     Member business lending, although permitted for new credit 
unions, involves significant risks and requires a level of expertise 
not normally present in newly-chartered credit unions;
     Net worth categories for new credit unions should allow 
for gradual accumulation of net worth over 10 years; and
     Discretionary supervisory actions should be imposed 
commensurately with a new credit union's failure to meet net worth 
goals and the consequent increase in risk of loss to the NCUSIF.
    The NCUA Board believes that the system of prompt corrective action 
for new credit unions which it proposes in subpart B reflects the 
intent of CUMAA, while incorporating the recommendations of commenters 
and the findings of the ``new'' credit union committee.

1. Provisions Applicable to All New Credit Unions

    Section 702.2(f) adopts the statutory definition of a ``new'' 
credit union--in operation for less than 10 years and having $10 
million or less in assets--which determines which credit unions will be 
subject to the alternative system of prompt corrective action under 
subpart B. For purposes of subpart B, a new credit union begins 
``operation'' when it engages in a transaction that is required by GAAP 
to be reflected in the credit union's financial statement. The 
statutory definition significantly expands the definition in section 
116 of the FCUA, which CUMAA repeals. CUMAA Sec. 301(g)(3). The 
repealed provision defined a ``new'' credit union as having been in 
operation less than 4 years or having assets of less than $500,000. 12 
U.S.C. 1762(a)(2).
    Subpart B augments the new statutory definition. First, it makes 
clear that ``[a] credit union which exceeds $10 million in total assets 
may become ``new'', or may regain that status, ``if its total assets 
fall below $10 million while it is still in operation for less than 10 
years.'' Sec. 702.201(b). Second, it addresses the impact of a ``spin-
off'' of a group in determining whether the newly-formed or surviving 
credit union has been in operation less than 10 years. Sec. 702.201(c). 
Third, it allows the NCUA Board to deny ``new'' status under subpart B 
to any credit union formed primarily to qualify as ``new'' for purposes 
of subpart A. Sec. 702.201(d).
    Subpart B incorporates by reference the general provisions of part 
702 concerning measurement of net worth, notice to a new credit union 
of its net worth ratio and the effective date of classification in the 
corresponding net worth category, notice to NCUA of a change in net 
worth category, and adjustments to a credit union's net worth ratio to 
reflect accounting adjustments. Sec. 702.202(b) incorporating 702.3. 
Similarly to subpart A, subpart B provides for reclassification of new 
credit unions in certain net worth categories due to the existence of 
an unsafe or unsound condition or practice. Sec. 702.202(d).

2. Net Worth Categories for New Credit Unions

    Following the ``net worth category'' model of subpart A, subpart B 
establishes six net worth categories for new credit unions, denominated 
to indicate that they are building net worth anew, rather than 
restoring it from decline. Sec. 702.202(c). The net worth categories, 
corresponding net worth ratio range for each (assuming no risk-based 
net worth requirement), and corresponding number of years in which a 
new credit union is reasonably expected, but not required, to attain 
each category, are depicted below:

------------------------------------------------------------------------
  New credit union net worth       Net worth ratio     Expected by year-
           category                   (percent)         end of operation
------------------------------------------------------------------------
``Well Capitalized''..........  7 or above...........  n/a
``Adequately Capitalized''....  6 to 6.99............  10th
``Moderately Capitalized''....  3.5 to 5.99..........  7th
``Marginally Capitalized''....  2 to 3.49............  5th
``Minimally Capitalized''.....  0 to 1.99............  3rd
``Uncapitalized''.............  Less than 0..........  n/a
------------------------------------------------------------------------

    In general, the net worth categories for new credit unions are 
designed to allow gradual accumulation of net worth over a ten year 
period. The ``minimally capitalized'' and ``marginally capitalized'' 
categories reflect the finding that it generally takes up to 3 years 
for a newly-chartered credit union to develop positive net worth and 
may take up to 5 years to attain a 2% net worth. The time frame in 
which a new credit union is ``reasonably expected'' to reach a given 
net worth category is a guide only, based on NCUA field experience; it 
does not establish a mandatory deadline nor trigger any supervisory 
action. Unlike subpart A, subpart B establishes an ``uncapitalized'' 
category which permits credit unions having no net worth to continue 
operating under limited time constrains before mandatory supervisory 
action must be taken. As commenters and the ``new'' credit union 
committee have emphasized, new credit unions which eventually succeed 
in becoming ``adequately capitalized'' may suffer periods of negative 
net worth while striving toward that goal, particularly in the early 
years of operation.
    Unlike subpart A, there is no downward adjustment of a new credit 
union's net worth category if fails to comply with any particular 
supervisory action. Compare Sec. 702.101(a)(4)(ii) with 
Sec. 702.202(c)(3). However, new credit unions categorized as either 
``well capitalized'' or ``adequately capitalized,'' and which meet the 
definition of ``complex,'' will be subject to a risk-based net worth 
requirement. Sec. 1790d(c)(1)(A)(ii) and (c)(1)(B)(2). Like credit 
unions subject to subpart A, new credit unions which do not meet the 
risk-based requirement in either category will be reclassified 
``moderately capitalized.''

3. Prompt Corrective Action for New Credit Unions by Net Worth Category

    ``Well Capitalized'' and ``Adequately Capitalized''. New credit 
unions classified ``well capitalized'' and ``adequately capitalized'' 
under subpart B are treated the same as their counterparts in subpart 
A. Thus, a ``well capitalized'' new credit union is subject to no 
prompt corrective action at all. An ``adequately capitalized'' credit 
union is subject to a single mandatory supervisory action--the 
requirement to transfer to the credit union's regular reserve earnings 
equal to not less than 4/10th percent of its average total assets. 
Sec. 702.203. The alternative system of

[[Page 27100]]

prompt corrective action subjects an ``adequately capitalized'' new 
credit union to the same supervisory action as its counterpart in 
subpart A in order to facilitate a smooth transition to subpart A at 
the end of 10 years or by the time the credit union accumulates assets 
of $10 million or more.
    ``Moderately Capitalized,'' ``Minimally Capitalized'' and 
``Marginally Capitalized''. Credit unions in these categories are 
subject to three mandatory supervisory actions which are similar to 
those which apply to credit unions categorized ``undercapitalized'' or 
lower in subpart A. The first is the requirement to annually transfer 
earnings to its regular reserve; however, for new credit unions there 
is no required minimum percentage of average total assets to determine 
the amount to be transferred. Sec. 702.204(a)(1). The second is the 
restriction on increasing the credit union's total amount of member 
business loans until the credit union becomes ``adequately 
capitalized'' unless it qualifies under 12 U.S.C. 1757a(b) for any of 
the exemptions from the statutory maximum on member business loans.\13\ 
Sec. 702.204(a)(3). Third, each time a credit union fails to timely 
meet the net worth goals prescribed in its current approved business 
plan, it must submit a revised business plan to the NCUA Board for 
approval and implementation. Sec. 702.204(a)(2). Because new credit 
unions in these categories are not restoring net worth, but are 
building it, they are not required to submit Net Worth Restoration 
Plans.
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    \13\ The NCUA Board will consider, for ``new'' credit unions 
only, whether to narrow the restriction on increasing members 
business loans to the origination of such loans. In that even, a 
``new'' credit union would be prohibited from increasing member 
business loans which it originates, but would not necessarily be 
prohibited from participating in member business loans originated by 
another credit union which has expertise in originating such loans.
---------------------------------------------------------------------------

    In both subparts A and B, a credit union is subject to mandatory 
and discretionary supervisory actions when it becomes classified 
``undercapitalized'' or lower under subpart A or ``moderately 
capitalized'' or lower under subpart B. Under subpart A, a credit union 
also becomes subject to discretionary supervisory actions according to 
its classification among those net worth categories. Under subpart B, 
however, NCUA's authority to impose discretionary supervisory actions 
upon a new credit union is triggered by the failure to meet a net worth 
goal prescribed in the credit union's then-current business plan. 
Sec. 702.204(b). In that event, the credit union becomes obligated to 
comply with the mandatory supervisory action requiring it to submit a 
revised business plan to NCUA for approval (which will set new net 
worth goals and timetables). NCUA then is authorized to impose one or 
more of discretionary supervisory actions according to the new credit 
union's net worth category, which incorporates as follows the 
discretionary actions in its corresponding statutory net worth 
category:

------------------------------------------------------------------------
                              It is subject to the
                               same discretionary     Subpart A section
  If a new credit union is     actions as a credit   No. incorporated by
         classified            union in subpart A         reference
                                  classified as
------------------------------------------------------------------------
``Moderately Capitalized''..  ``Undercapitalized''  702.105(b)-(c)
``Marginally Capitalized''..  ``Significantly       702.106(b)
                               Undercapitalized''.
``Minimally Capitalized''...  ``Critically          702.107(b)
                               Undercapitalized''.
``Uncapitalized''...........  ``Critically          702.107(b)
                               Undercapitalized''.
------------------------------------------------------------------------

    Whereas a net worth restoration plan under subpart A is designed to 
restore net worth, the NCUA Board has developed the revised business 
plan (RBP) under subpart B to build net worth. While an RBP shares 
similar submission and decision deadlines and criteria for approval 
with an NWRP, the required contents of an RBP is broader in scope. 
First, the RBP calls for the credit union to progressively update the 
business plan elements originally required for charter approval, and to 
revise them as warranted by circumstances and experience since the date 
of charter. Sec. 702.208(b)(1). Second, among other information, the 
RBP must specify the amount of earnings the credit union will transfer 
to its regular reserve (in view of the fact that subpart B sets no 
minimum) and establish at least quarterly targets for increasing net 
worth in each year in which the RBP is in effect. Sec. 702.208(b)(2). 
Approval of RBP is effectively a charter to operate for the period 
covered by the plan.
    Finally, as with a ``significantly undercapitalized'' credit union 
under subpart A, subpart B gives the NCUA Board discretion to place the 
credit union into conservatorship or liquidation pursuant to 12 U.S.C. 
Secs. 1786(h)(1)(F), 1787(a)(3)(A)(i), if there is no reasonable 
prospect that the credit union will become ``adequately capitalized.'' 
Sec. 702.204(c). Providing conservatorship and liquidation as an option 
is consistent with the purpose of prompt corrective action. Regardless 
of a new credit union's inadequate net worth at present, it should be 
allowed to survive under prompt corrective action if there is a 
reasonable prospect that it will be ``adequately capitalized'' by the 
time it is in operation for 10 years. Conversely, when a new credit 
union has no prospect of eventually becoming ``adequately 
capitalized,'' it is consistent with the purpose of prompt corrective 
action to prevent that credit union from exposing the NCUSIF to greater 
risk of loss.
    ``Uncapitalized''. The net worth classification of 
``uncapitalized'' is designed to permit a new credit union to 
periodically and temporarily operate while having negative net worth. 
As commenters and NCUA's ``new'' credit union committee suggested, new 
credit unions which eventually become ``adequately capitalized'' may, 
while striving toward that goal, suffer periods when they have no net 
worth, particularly in the early years of operation. In view of this 
reality, the proposed rule treats a new credit union which is 
``uncapitalized'' when it commences operating differently than one 
which subsequently declines from a higher net worth category to 
``uncapitalized.''
    A new credit union which is classified ``uncapitalized'' when it 
commences operating need only adhere to the requirements and net worth 
goals set forth in its initial business plan, approved at the time its 
charter was granted. That business plan (in the required pro-forma 
financial statement) may set quite modest net worth goals, allowing the 
credit union to remain ``uncapitalized'' for a substantial period. The 
authority to impose discretionary supervisory actions under section 
702.207(b) is triggered only when the credit union fails to meet those 
net worth goals (as is the mandatory

[[Page 27101]]

supervisory action requiring the credit union to file a revised 
business plan).
    A new credit union classified in a net worth category above 
``uncapitalized,'' which declines to that category from a higher one 
may continue operating, but is required (like other less than 
``adequately capitalized'' credit unions) both to transfer earnings to 
its regular reserve and to not increase the total amount of member 
business loans. Sec. 702.207(a)(1) and (3). However, within a period of 
time set by the NCUA Board, but not to exceed 90 days from the date the 
credit union declined to ``uncapitalized,'' the credit union must 
submit an RBP which provides for alternative means of funding the 
credit union's earnings deficit. Sec. 702.207(a)(2). If the credit 
union fails to submit an RBP within the time prescribed by the NCUA 
Board, the credit union may be liquidated. Sec. 702.207(c)(1). If the 
credit union remains ``uncapitalized'' 90 calendar days following 
approval of that RBP, the proposed rule requires the NCUA Board to 
liquidate the credit union. Sec. 702.207(c)(2). The credit union can 
avoid mandatory liquidation at this point, however, only if it 
documents to the NCUA Board's satisfaction that it still is viable and 
has a reasonable prospect of becoming ``adequately capitalized.'' Id. 

4. Incentives for New Credit Unions

    Apart from regulatory forbearance in imposing discretionary 
supervisory actions, the NCUA Board proposes three types of incentives 
for new credit unions to become ``adequately capitalized'' before they 
are either in operation for more than 10 years or reach $10 million in 
total assets. Sec. 1790d(b)(2)(B).\14\ The first two of these 
incentives can be funded under 12 U.S.C. 1766(f)(2)(A) and (i)(3). 
First, NCUA will offer training in management, lending and product 
development for directors, officers and employees of new credit unions. 
Sec. 702.209(a). This is envisioned as classroom training to generally 
educate officials in matters of importance to a new credit union's 
long-term survival. This training may commence before a new credit 
union begins operating and should continue as needed.
---------------------------------------------------------------------------

    \14\ Once chartered and in operation, a new credit union is 
eligible to receive special assistance under FCUA Sec. 208, 12 
U.S.C. 1788, ``to prevent the closing of an insured credit union 
which the Board has determined is in danger of closing.''
---------------------------------------------------------------------------

    Second, NCUA will offer individualized guidance and training to 
directors, officers and employees of new credit unions in the 
preparation and revision of business plans. Sec. 702.209(b). The 
purpose of this incentive is to build the skills within the credit 
union that are needed to revise business plans as required under 
subpart B, so that credit union management eventually is able to do so 
without assistance. Therefore, this incentive will consist neither of 
classroom training on the one hand, nor of engaging an outside 
consultant perform the service of revising the business plan for the 
credit union, on the other hand. Instead, an expert on business plans 
will be engaged to work on-site with credit union management to revise 
the credit union's individual business plan. This experience should 
build the skills of credit union management in addressing, through the 
credit union's business plan, the causes of its inability to improve 
net worth.
    Third, a new credit union will be eligible to join and receive the 
benefits of NCUA's Small Credit Union Program. Sec. 702.209(c). Under 
this program, an economic development specialist will be assigned at 
the Regional level to train and serve as a mentor to officials and 
management, and to advise and assist in areas such as--
     Arranging to receive mentoring by another credit union or 
trade association;
     Interacting with community organizations, trade 
associations, and other government agencies that may impact the credit 
union;
     Expanding fields of membership, where appropriate;
     Developing requests for financial assistance; and
     Developing and preparing business plans, capitalization 
plans, and marketing plans, Call Reports, financial statements and 
other reports.
NCUA Instruction no. 6052.00 (March 24, 1999) at 3-4.

E. Reserve Requirements To Conform to Prompt Corrective Action

    Subpart C retains much of the substance of the current reserve 
transfer and dividend payment, modified to reflect the repeal of FCUA 
Sec. 116, 12 U.S.C. 1762, and to conform with the requirements imposed 
by CUMAA. The ``statutory reserve'' requirement has been eliminated as 
inconsistent with CUMAA. The allowance for loan losses will no longer 
be combined with the regular reserve, and the subsequent reversing of 
the current period provision will no longer be allowed. The segregated 
regular reserve is retained in a form that comports with the earnings 
retention requirement in subparts A and B, and without noted 
adjustments. Sec. 702.301(b). Reserve transfers continue to be 
reflected in the regular reserve account. Sec. 702.301(c).
    Provisions of full and fair disclosure are retained in a revised 
form. Sec. 702.302. Subpart C addresses implementation of full and fair 
disclosure but excludes references to NCUA's Accounting Manual for 
Federal Credit Unions. Sec. 702.301(b). Further, subpart C omits terms 
which may have suggested that proper full and fair disclosure 
implementation requires audited financial statements. Id.
    The requirement to maintain an allowance for loan losses was 
retained for credit unions regardless of asset size. Sec. 702.302(d). 
The allowance must provide for estimates of existing probable loses 
inherent in the loan portfolio. Sec. 702.302(d)(2). The descriptive 
language was revised to reflect current guidance under Generally 
Accepted Accounting Principles.
    The restriction on the payment of dividends was retained in 
substance. Amended language was added to address instances in which 
dividend payments cannot be made because credit union operations, 
allowance estimates, and/or reserve transfer requirements create a 
deficit condition in undivided earnings. Sec. 702.303(a). In that 
event, subpart C provides that only a credit union classified ``well 
capitalized'' may transfer of funds from its regular reserve to 
undivided earnings to pay dividends, provided that doing so will not 
cause the credit union to decline from ``well capitalized.'' 
Sec. 702.303(b)(1). Credit unions which can not meet these conditions 
may pay dividends from funds transferred from the regular reserve only 
with the permission of the appropriate Regional Director. 
Sec. 702.303(b).
    Finally, as with current section 702, subpart C will apply to 
State-as well as federally-chartered credit unions as provided under 12 
CFR 741.3(a)(2).

F. Issuance, Review and Enforcement of Directives Imposing Prompt 
Corrective Action

    Subpart L of part 747 establishes the means to challenge 
discretionary supervisory actions imposed by NCUA under authority of 
part 702. 12 C.F.R. 747.2001 et seq. CUMAA provides that ``material 
supervisory determinations, including decisions to require prompt 
corrective action, made * * * by [NCUA] officials other than the [NCUA] 
Board may be appealed to the [NCUA] Board'' through an independent 
appellate process required under 12 U.S.C. 4806(a)-(b), or ``pursuant 
to separate procedures prescribed by regulation.'' Sec. 1790d(k). The 
NCUA Board established a Supervisory Review Committee to fulfill the 
requirements of

[[Page 27102]]

Sec. 4806,\15\ but has concluded that a more expeditious process is 
needed to facilitate prompt corrective action. Therefore, the proposed 
rule incorporates, by regulation, the substance of the Federal banking 
agencies' procedure for giving notice and an opportunity to respond 
before issuing a directive imposing prompt corrective action. See, 
e.g., 12 C.F.R. 308.201. For purposes of section 747.2002, NCUA staff 
decisions to impose discretionary supervisory actions under subpart A 
or B of part 702 are considered material supervisory decisions. 
Sec. 747.2001(a).
---------------------------------------------------------------------------

    \15\ See Interpretive Ruling and Policy Statement 95-1, 60 FR 
14795 (March 20, 1995).
---------------------------------------------------------------------------

    Notice, opportunity to respond, and review of directive. Under 
section 747.2002, the NCUA Board must generally give advance notice to 
a credit union when it intends to issue a directive imposing a 
discretionary supervisory action. Sec. 747.2002(a)(1). Such a directive 
may take effect immediately only when necessary to further the purpose 
of prompt corrective action. Sec. 747.2002(a)(2). The credit union may 
then respond, explaining why the proposed action is not appropriate and 
requesting that the directive not be issued or be modified. 
Sec. 747.2002(c). However, the credit union is not entitled to a 
hearing, nor does Sec. 4806 require the opportunity to have one. The 
NCUA Board may then decide not to issue the directive or to issue it as 
proposed or as modified. Sec. 747.2002(d). The NCUA Board's decision is 
final. Under this procedure, a credit union which already is subject to 
a discretionary supervisory action may request reconsideration of a 
directive due to changed circumstances. Sec. 747.2002(f).
    Review of reclassification to lower category. CUMAA requires the 
NCUA Board to exercise its authority to reclassify a credit union on 
safety and soundness grounds ``under regulations comparable to [FDIA 
Sec. 38(g)].'' Sec. 1790d(h)(1). That provision requires that an 
institution may be reclassified on safety and soundness grounds only 
after ``notice and an opportunity for hearing.'' FDIA Sec. 38(g)(1). To 
that end, the NCUA Board has adopted in section 747.2003 a version of 
the Federal banking agencies' procedure for notice of proposed 
reclassification and an opportunity to respond and to request a 
hearing. See, e.g., 12 C.F.R. 308.202. This procedure applies to 
reclassification pursuant to section 702.101(b) or 702.202(d) of part 
702.
    Under section 747.2003, the NCUA Board must give notice of its 
intention to reclassify a credit union, or to treat it as if it were 
the next lower net worth category, on safety and soundness grounds. 
Sec. 747.2003(a). The notice must include reasons for the 
reclassification. Sec. 747.2003(a)(2)(ii). The credit union may then 
respond, explaining why it is not in an unsafe or unsound condition or 
has not corrected an unsafe or unsound practice and providing evidence 
to support its position. Sec. 747.2003(a)(3). The credit union also may 
request a hearing and the opportunity to present witnesses at the 
hearing. Sec. 747.2003(a)(4).
    If requested, a hearing shall be held before a presiding officer 
designated by the NCUA Board, but shall not be a formal adjudication 
subject to the Administrative Procedure Act, 5 U.S.C. 554-557, nor to 
the Uniform Rules of Practice and Procedure, 12 C.F.R. 747.1. 
Sec. 747.2003(a)(5) and (6)(A). At the hearing, the credit union may 
introduce relevant documents, present oral argument, and if authorized, 
present witnesses. Sec. 747.2003(a)(6)(i). At the close of the hearing 
the presiding officer shall make a recommended decision to the NCUA 
Board, Sec. 747.2003(a)(7), and the NCUA Board shall then decide 
whether to reclassify the credit union. Sec. 747.2003(a)(8). The 
decision of the NCUA Board is final. Apart from appointing a presiding 
officer to conduct a hearing and to recommend a decision, the NCUA 
Board may not delegate its authority to reclassify a credit union. 
Sec. 747.2003(c); Sec. 1790d(h)(2). Under this procedure, a credit 
union which has been reclassified may seek reconsideration. 
Sec. 747.2003(b).
    Review of dismissal of director or officer. FDIA Sec. 38 requires 
that a director or senior executive officer dismissed pursuant to a 
discretionary supervisory action ``may obtain review of that order by 
filing a written petition for reinstatement. * * *'' FDIA Sec. 38(n). 
In order to give directors and senior officers dismissed under part 702 
a comparable opportunity for review, the NCUA Board has adopted in 
section 747.2004 of this subpart a procedure similar to that developed 
by the Federal banking agencies. See, e.g., 12 C.F.R. Sec. 308.203.
    Under section 747.2004, when the NCUA Board directs the credit 
union to dismiss a director or senior executive officer, it must also 
serve that person with a copy of the directive. Sec. 747.2004(a). The 
affected person may then file a written request for reinstatement,\16\ 
which may include a request for an informal hearing before the NCUA 
Board and the opportunity to present witness testimony at the hearing. 
Sec. 747.2004(b). The dismissal shall remain in effect while the 
request for reinstatement is pending. Sec. 747.2004(b)(3).
---------------------------------------------------------------------------

    \16\ The credit union which was directed to dismiss a director 
or officer may not seek reinstatement of the dismissed director or 
officer under section 747.2004, but that credit union may challenge 
the directive under Sec. 747.2002.
---------------------------------------------------------------------------

    Under section 747.2004, the procedure for conducting an informal 
hearing before a presiding officer designated by the NCUA Board is 
identical to that which section 747.2003 provides in cases of 
reclassification, except as follows. First, the affected person may 
appear at the hearing through counsel if he or she wishes. 
Sec. 747.2004(d)(1). Second, the affected person bears the burden of 
proving that his or her continued employment would materially 
strengthen the credit union's ability to become ``adequately 
capitalized'' or to correct an unsafe or unsound condition, as the case 
may be. Sec. 747.2004(e). Third, if the NCUA Board, after hearing, 
denies reinstatement, it must provide reasons for its action. 
Sec. 747.2004(g). The NCUA Board's decision is final.
    Enforcement of supervisory actions. CUMAA amended the FCUA to 
ensure that supervisory actions imposed under part 702 to facilitate 
prompt corrective action are enforceable. 12 U.S.C. Secs. 1786(k)(1) 
and (2)(A). When a credit union fails to comply with a directive 
imposing a discretionary requirement or restriction, the NCUA Board may 
apply to the appropriate U.S. District Court to enforce that directive. 
Sec. 747.2005(a). Alternatively, the NCUA Board may assess a civil 
money penalty against a credit union (and any institution affiliated 
party acting in concert with it) which violates or fails to comply with 
a directive, or fails to implement an approved net worth restoration 
plan under subpart A or revised business plan under subpart B. 
Sec. 747.2005(b). Finally, subpart L allows the NCUA Board to enforce a 
directive under part 702 ``through any other judicial or administrative 
proceeding authorized by law.'' Sec. 747.2005(c).

BILLING CODE 7535-01-U

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Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
describing any significant economic impact a proposed regulation may 
have on a substantial number of small credit unions (primarily those 
under $1 million in assets). The NCUA Board has determined and 
certifies that the proposed rule, if adopted, will not have a 
significant economic impact on a substantial number of small credit 
unions. Thus, a Regulatory Flexibility Analysis is not required.

Paperwork Reduction Act

    NCUA has determined that five requirements of the proposed rule 
constitute collections of information under the Paperwork Reduction 
Act. The requirements are: (1) To provide written notice to the 
regional director and state supervisory authority, if appropriate, of a 
change to the credit union's net worth ratio that places the credit 
union in a lower net worth category; (2) To submit a net worth 
restoration plan if the credit union is undercapitalized, significantly 
undercapitalized, or critically undercapitalized; (3) To submit a 
revised net worth restoration plan when the initial plan is not 
approved; (4) For new credit unions, to submit a revised business plan; 
and (5) For new credit unions, to submit a new revised business plan 
when the revised business plan is not approved. NCUA is submitting a 
copy of the proposed regulation to the Office of Management and Budget 
(OMB) for its review.
    NCUA estimates that 500 federally insured credit unions would have 
to prepare a notice to the regional director and state supervisory 
authority of a change to the credit union's net worth ratio. It is 
expected that this would take 1 hour per year, resulting in a total 
burden of 500 hours. NCUA estimates that 300 federally insured credit 
unions would be required to submit a net worth restoration plan, and 
each plan would require an average of 60 hours to prepare, resulting in 
18,000 burden hours. NCUA further estimates that 30 federally insured 
credit unions' initial plans would not be approved, requiring an 
additional burden of 30 hours each and a total of 900 burden hours. 
NCUA estimates 50 new federally insured credit unions would be required 
to submit a revised business plan, and each plan would require an 
average of 80 hours to prepare, for a total burden of 4,000 hours. NCUA 
further estimates that 10 new federally insured credit unions' plans 
would not be approved, requiring an additional burden of 40 hours each, 
for a total of 400 hours. In total, the burden created by the proposed 
rule is 23,800 hours. It is NCUA's view that the additional 
requirements are necessary for affected federally insured credit unions 
to adequately address the net worth requirements of the proposed rule.
    The Paperwork Reduction Act of 1995 and OMB regulations 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. The NCUA Board invites comment on: 
(1) whether the collection of information is necessary; (2) the 
accuracy of NCUA's estimate of the burden of collecting the 
information; (3) ways to enhance the quality, utility, and clarity of 
the information to be collected; and (4) ways to minimize the burden of 
collection of information. Comments should be sent to: OMB Reports 
Management Branch, New Executive Office Building, Room 10202, 
Washington, D.C. 20503; Attention: Alex T. Hunt, Desk Officer for NCUA. 
Please send NCUA a copy of any comments you submit to OMB.

Executive Order 12612

    Executive Order 12612 requires NCUA to consider the effect of its 
actions on state interests. As prescribed by CUMAA, part 702 applies to 
all federally-insured credit unions, including federally-insured, 
State-chartered credit unions. Accordingly, it may have a direct effect 
on the States, on the relationship between the national government and 
the states, or on the distribution of power and responsibilities among 
the various levels of government. This impact is an unavoidable 
consequence of carrying out the statutory mandate to adopt a system of 
prompt corrective action for federally-insured credit unions.

Agency Regulatory Goal

    NCUA's goal is clear, understandable regulations that impose a 
minimal regulatory burden. Although much of the language of this rule 
is mandated by Congress, we request your comments on whether the 
proposed rule is understandable and minimally intrusive if implemented 
as proposed.

List of Subjects

12 CFR Part 702

    Credit unions, Reporting and recordkeeping requirements.

12 CFR Part 747

    Administrative practices and procedures, Credit unions.

    By the National Credit Union Administration Board on May 3, 
1999.
Becky Baker,
Secretary of the Board.

    Accordingly, it is proposed that 12 CFR, parts 702 and 747 be 
amended as set forth below:
    Part 702 is revised to read as follows:

PART 702--PROMPT CORRECTIVE ACTION

Sec.

702.1  Authority, purpose, scope, and other supervisory authority.
702.2  Definitions.
702.3  Measure, notice and effective date of net worth 
classification.

Subpart A--Statutory Prompt Corrective Action

702.101  Statutory net worth categories.
702.102  Complex credit unions defined [Reserved].
702.103  Risk-based net worth requirements for complex credit unions 
[Reserved].
702.104  Prompt corrective action for ``adequately capitalized'' 
credit unions.
702.105  Prompt corrective action for ``undercapitalized'' credit 
unions.
702.106  Prompt corrective action for ``significantly 
undercapitalized'' credit unions.
702.107  Prompt corrective action for ``critically 
undercapitalized'' credit unions.
702.108  Consultation with State officials on proposed prompt 
corrective action.
702.109  Net worth restoration plans.

Subpart B--Alternative Prompt Corrective Action for New Credit Unions

702.201  Scope and definition.
702.202  Net worth categories for new credit unions.
702.203  Prompt corrective action for ``adequately capitalized'' new 
credit unions.
702.204  Prompt corrective action for ``moderately capitalized'' new 
credit unions.
702.205  Prompt corrective action for ``marginally capitalized'' new 
credit unions.
702.206  Prompt corrective action for ``minimally capitalized'' new 
credit unions.
702.207  Prompt corrective action for ``uncapitalized'' new credit 
unions.
702.208  Revised business plans for new credit unions.
702.209  Incentives for new credit unions.

Subpart C--Reserves

702.301  Reserves
702.302  Full and fair disclosure of financial condition.
702.303  Payment of dividends.

    Authority: 12 U.S.C. 1766(a), 1790d.


Sec. 702.1  Authority, purpose, scope, and other supervisory authority.

    (a) Authority. This part (except for subpart C) and subpart L of 
part 747 of this chapter are issued by the National

[[Page 27108]]

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, Public Law 105-
219, 112 Stat. 913 (1998). Subpart C 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 supervisory 
requirements and restrictions designed to restore and improve the 
capital levels of federally-insured credit unions according to a credit 
union's net worth ratio.
    (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 
12 U.S.C. 1790d(b)(2); and to such credit unions defined as ``complex'' 
pursuant to 12 U.S.C. 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 forth in subpart L of Part 747 of this chapter, 12 CFR 
747.2001.
    (d) Other supervisory authority. Neither FCUA section 1790d nor 
this Part in any way limits the authority of the NCUA Board 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, 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 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.
    (b) Credit union means a federally-insured, federally-chartered or 
State-chartered, unless otherwise indicated.
    (c) CUSO means a credit union service organization defined for 
purposes of this part as a legal entity established under state law, 
which is owned in whole or in part by one of more federally-insured 
credit unions (including a state-chartered credit union) and which--
    (1) Provides services associated with the routine operations of 
credit unions; or
    (2) Engages in activities incidental to the conduct of a credit 
union; or
    (3) Engages in activities that further or facilitate the purposes 
of a credit union; or
    (4) Furnishes services to a credit union.
    (d) NCUSIF means the National Credit Union Share Insurance Fund as 
defined by 12 U.S.C. 1783.
    (e) Net worth means the retained earnings balance of the credit 
union as determined under generally accepted accounting principles. 
With respect to a credit union designated low-income (as defined in 12 
U.S.C. 1757(6)), net worth includes secondary capital accounts that are 
uninsured and subordinate to all other claims against the low-income 
credit union, including the claims of creditors, shareholders and the 
NCUSIF.
    (f) Net worth ratio means, with respect to a credit union, the 
ratio of the net worth of the credit union to the total assets of the 
credit union.
    (g) 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.
    (h) Shares means insured shares as defined in 12 CFR 741.4(b)(2).
    (i) Total assets means the average of the total assets reported 
(including those that reasonably should be reported) by the credit 
union on the line entitled ``TOTAL ASSETS'' on its most recent four (4) 
quarterly Call Reports, or for a semi-annual filer, on its most recent 
two (2) semi-annual Call Reports.


Sec. 702.3  Measures, notice and effective date of net worth 
classification.

    (a) Net worth measures. For purposes of this part, a credit union's 
net worth category classification will be determined by two measures:
    (1) The net worth ratio as defined in Sec. 702.2(f); and
    (2) The risk-based net worth requirement applicable to a credit 
union defined as ``complex'' under Sec. 702.102.
    (b) Notice and effective date of net worth classification. For 
purposes of this part, a federally-insured credit union shall have 
notice of its net worth ratio (including any applicable risk-based net 
worth requirement) and shall be classified within the corresponding net 
worth category as of the earliest to occur of:
    (1) The last day of the credit union's most recent dividend period 
for regular shares, but no less frequently than quarterly; or
    (2) The date the credit union received its most recent final report 
of examination; or
    (3) The date the credit union received written notice from the NCUA 
Board or, if State-chartered, the appropriate State official of 
reclassification based on safety and soundness grounds as provided 
under Secs. 702.101(b) and 702.202(d) of this part, or of an adjustment 
to its net worth ratio as provided under paragraph (d) of this section.
    (c) Notice by credit union of change in net worth category. A 
federally-insured credit union shall provide written notice to the NCUA 
Board and, if State-chartered, to the appropriate State official, of a 
change in its net worth ratio that places the credit union in a lower 
net worth category no later than 15 calendar days after the effective 
date of the change as determined under paragraphs (b) (1) and (2) of 
this section. Written notice to the NCUA Board shall be deemed 
effective if it is delivered to the appropriate Regional Director and, 
if State-chartered, to the appropriate State official. Failure to 
provide such notice to the NCUA Board within 15 calendar days, or 
failure to provide such notice altogether, in no way alters the 
effective date of a change of net worth classification under this 
subparagraph, nor the affected credit union's legal obligations under 
this part.
    (d) Adjustment of net worth ratio. To effectuate and further the 
purpose of this part, the NCUA Board and, in the case of a State-
chartered credit union, the NCUA Board or appropriate State official, 
may adjust a credit union's net worth ratio to reflect the impact of 
accounting adjustments made for items of ``other comprehensive income'' 
such as accumulated unrealized gains and losses on available-for-sale 
securities when the failure to do so would overstate or understate the 
credit union's net worth ratio, thereby either permitting it to evade 
appropriate prompt corrective action or subjecting it to unwarranted 
prompt corrective action.

[[Page 27109]]

Subpart A--Statutory Prompt Corrective Action


Sec. 702.101  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--
    (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 Sec. 702.102;
    (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 Sec. 702.102;
    (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 Sec. 702.102;
    (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 two percent (2%) 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 section 702.109; or
    (B) Materially fails to implement a net worth restoration plan 
accepted by the NCUA Board;

    (5) Critically undercapitalized if it has a net worth ratio of less 
than two percent (2%).
    (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 had notice of, but has not 
corrected an unsafe or unsound practice.
    (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 seek 
and consider the views of the appropriate State official before 
reclassifying a credit union under paragraph (b) of this section.


Sec. 702.102  Complex credit unions defined  [Reserved].


Sec. 702.103  Risk-based net worth requirements for complex credit 
unions [Reserved].


Sec. 702.104  Prompt corrective action for ``adequately capitalized'' 
credit unions.

    (a) Earnings transfer. If a federally-insured credit union becomes 
``adequately capitalized,'' it must annually transfer to its regular 
reserve account earnings equivalent to not less than \4/10\ths percent 
(0.4%) of its total assets as defined by Sec. 702.2(i), at the 
following rates:
    (1) In the case of a credit union having a monthly dividend period 
for regular shares, at a rate of at least eight and one-third percent 
(8.334%) per month of the annual amount; and
    (2) In the case of a credit union having a quarterly, semi-annual 
or annual dividend period for regular shares, at a rate of at least 
twenty five percent (25%) per quarter of the annual amount.
    (b) Reduction in earnings transfer. On a case-by-case basis and 
subject to review and revocation no less frequently than quarterly, the 
NCUA Board may permit the credit union to transfer an amount that is 
less than the equivalent of \4/10\ths percent (0.4%) of its total 
assets, to the extent the credit union demonstrates to the NCUA Board 
that such lesser amount--
    (1) Is necessary to avoid a significant redemption of shares; and
    (2) Would further the purpose of this part.


Sec. 702.105  Prompt corrective action for ``undercapitalized'' credit 
unions.

    (a) Mandatory action by credit union. If a federally-insured credit 
union becomes ``undercapitalized,'' it must immediately--
    (1) Earnings transfer. Transfer earnings to its regular reserve 
account as provided in Sec. 702.104;
    (2) Submit net worth restoration plan. Submit a net worth 
restoration plan pursuant to Sec. 702.109;
    (3) Restrict increase in assets. Not permit the credit union's 
assets to increase beyond its total assets as defined by Sec. 702.2(i), 
unless--

(i) The NCUA Board has approved a net worth restoration plan which 
provides for an increase in total assets; and
(ii) The assets of the credit union are increasing consistent with the 
approved plan; and
(iii) The credit union's net worth ratio is increasing at a rate that 
is consistent with the approved plan;

    (4) Restrict member business loans. Not increase the total amount 
of member business loans until the credit union becomes ``adequately 
capitalized'' unless it qualifies for an exception under 12 U.S.C. 
1757a(b).
    (b) Discretionary action 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, with respect 
to any ``undercapitalized'' credit union, or a director, officer or 
employee of such credit union, take one or more of the following 
actions, 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 CUSO or credit union, 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 dividend paid. Restrict the dividend rates the 
credit union pays on shares to the prevailing rates paid on comparable 
accounts and maturities in the region where the credit union is 
located, as determined by the NCUA Board, except that dividend rates 
already paid on shares acquired before imposing a restriction under 
this paragraph may not be retroactively restricted;
    (4) Prohibiting or reducing asset growth. Prohibit any growth 
whatsoever 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;
    (6) Prohibiting nonmember deposits. Prohibit the credit union from 
accepting all or certain nonmember deposits as

[[Page 27110]]

otherwise permitted under 12 U.S.C. 1757(6) and Sec. 701.32 of this 
chapter, or under applicable State law;
    (7) Other action no more severe. 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 (6) of this section, provided that such 
other restriction or requirement is no more severe than the actions 
prescribed in paragraphs (b) (1) through (6).
    (c) Prerequisite for improving management. The NCUA Board may take 
any of the following actions provided that it first takes one or more 
of the actions prescribed in paragraphs (b) (1) through (7) of this 
section or determines that none of those actions would further the 
purpose of this part:
    (1) New election of directors. Order a new election of the credit 
union's board of directors;
    (2) Dismissing directors or senior executive officers. 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);
    (3) Employing qualified senior executive officers. Require the 
credit union to employ qualified senior executive officers (who, if the 
NCUA Board so specifies, shall be subject to its approval).


Sec. 702.106  Prompt corrective action for ``significantly 
undercapitalized'' credit unions.

    (a) Mandatory action by credit union. Immediately upon becoming 
``significantly undercapitalized,'' a federally-insured credit union 
must--
    (1) Earnings transfer. Transfer earnings to its regular reserve 
account as provided in Sec. 702.104;
    (2) Submit net worth restoration plan. Submit a net worth 
restoration plan pursuant to Sec. 702.109;
    (3) Restrict increase in assets. Not permit the credit union's 
assets to increase beyond its total assets as defined by section 
702.2(i), except as provided in Sec. 702.105(a)(3);
    (4) Restrict member business loans. Not increase the total amount 
of member business loans except as provided in Sec. 702.105(a)(4).
    (b) Discretionary 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, with respect 
to any ``significantly undercapitalized'' credit union, or a director, 
officer or employee of such credit union, take one or more of the 
following actions 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 CUSO or credit union, establishing or 
acquiring any additional branch office, or engaging in any new line of 
business, except as provided in Sec. 702.105(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 dividend paid. Restrict the dividend rates that the 
credit union pays on shares as provided in Sec. 702.105(b)(3);
    (4) Prohibiting or reducing asset growth. Prohibit any growth 
whatsoever 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;
    (6) Prohibiting nonmember deposits. Prohibit the credit union from 
accepting all or certain nonmember deposits as otherwise permitted 
under 12 U.S.C. 1757(6) and Sec. 701.32 of this chapter, or under 
applicable State law;
    (7) Restricting senior executive officers' compensation. Limit or 
reduce payment of compensation to any senior executive officer, limit 
or prohibit payment of a bonus to such officer, or condition payment of 
compensation or a bonus to such officer upon the NCUA Board's prior 
approval;
    (8) Improving management. Order a new election of board of 
directors; dismiss directors or senior executive officers; or employ 
qualified senior executives, all as provided in Sec. 702.105(c), 
without the prerequisite that applies to that section;
    (9) 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);
    (10) Other actions. 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 (9) of this section.
    (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. 702.101(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. 702.107  Prompt corrective action for ``critically 
undercapitalized'' credit unions.

    (a) Mandatory action by credit union. Immediately upon becoming 
``critically undercapitalized,'' a federally-insured credit union 
must--
    (1) Earnings transfer. Transfer earnings to its regular reserve 
account as provided in Sec. 702.104;
    (2) Submit net worth restoration plan. Submit a net worth 
restoration plan pursuant to Sec. 702.109;
    (3) Restrict increase in assets. Not permit the credit union's 
assets to increase beyond its total assets as defined by Sec. 702.2(i), 
except as provided in Sec. 702.105(a)(3);
    (4) Restrict member business loans. Not increase the total amount 
of member business loans except as provided in Sec. 702.105(a)(4).
    (b) Discretionary 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, with respect 
to any ``critically undercapitalized'' credit union, or a director, 
officer or employee of such credit union, take one or more of the 
following actions 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 CUSO or credit union, establishing or 
acquiring any additional branch office, or engaging in any new line of 
business, except as provided by Sec. 702.105(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 dividend paid. Restrict the dividend rates that the 
credit union pays on shares as provided in Sec. 702.105(b)(3);

[[Page 27111]]

    (4) Prohibiting or reducing asset growth. Prohibit any growth 
whatsoever 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;
    (6) Prohibiting nonmember deposits. Prohibit the credit union from 
accepting all or certain nonmember deposits as otherwise permitted 
under 12 U.S.C. 1757(6) and Sec. 701.32 of this chapter, or under 
applicable State law;
    (7) Restricting senior executive officers' compensation. Limit or 
reduce payment of compensation to any senior executive officer, limit 
or prohibit payment of a bonus to such officer, or condition payment of 
compensation or a bonus to such officer upon the NCUA Board's approval;
    (8) Improving management. Order a new election of board of 
directors; dismiss directors or senior executive officers; or employ 
qualified senior executive officers, all as provided in 
Sec. 702.105(c), but without the prerequisite required in that section;
    (9) Restrictions on payments on uninsured secondary capital. 
Beginning 60 days after a credit union becomes ``critically 
undercapitalized,'' prohibit payments of principal or dividends on the 
credit union's uninsured secondary capital accounts, except that unpaid 
dividends shall continue to accrue under the terms of the account to 
the extent permitted by law;
    (10) 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 other than in the usual 
course of business, including any investment, expansion, acquisition, 
sale of assets, or other similar action with respect to which the 
credit union is required to provide notice to the NCUA Board;
(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 carry out any other requirement of any law, 
regulation, or order;
(iv) Making any material change in accounting methods;
(v) Paying dividends on new share accounts at a rate that would 
increase the credit union's weighted average cost of funds to a level 
significantly exceeding the prevailing rates of interest on insured 
deposits in its normal market areas;

    (11) Other 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;
    (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) 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 a credit union becomes 
``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.

    (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)(ii) 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 conservatorship or liquidation if 
it remains ``critically undercapitalized'' on average for a full 
calendar quarter following a period of 18 months from the date on which 
the credit union first became ``critically undercapitalized'';

(ii) Exception. Notwithstanding paragraph (c)(3)(i) of this section 
section, the NCUA Board may continue to take other corrective action in 
lieu of conservatorship or 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.

    (4) Nondelegation. The NCUA Board may not delegate its authority 
under paragraphs (c)(1) through (3) 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 
under this section by delegated authority.


Sec. 702.108  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 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(a)), and give him or her an 
opportunity to place the credit union into conservatorship or 
liquidation;
    (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;
    (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

[[Page 27112]]

placed into conservatorship or liquidation; and
(ii) Conservatorship or liquidation is necessary to reduce any loss 
that the NCUSIF either is expected to incur or risks incurring with 
respect to the credit union.

    (b) Nondelegation. The NCUA Board may not delegate any 
determination under paragraph (a)(3) of this section.
    (c) Notification when taking discretionary action. The NCUA Board 
shall seek the views of the appropriate State official before taking 
any discretionary action with respect to a federally-insured State-
chartered credit union, and shall allow the appropriate State official 
to take the proposed action independently or jointly with NCUA.


Sec. 702.109  Net worth restoration plans

    (a) Schedule for filing. (1) Generally. A federally-insured credit 
union shall file a written net worth restoration plan (Plan) with the 
appropriate Regional Director and, if State-chartered, the appropriate 
State official within 45 calendar days of becoming either 
``undercapitalized,'' ``significantly undercapitalized'' or 
``critically undercapitalized,'' unless the NCUA Board notifies the 
credit union in writing that its Plan is to be filed within a different 
period.
    (2) Exception. An ``adequately capitalized'' credit union that is 
required, on safety and soundness grounds under Sec. 702.101(b), to 
comply with supervisory actions as if it were ``undercapitalized'' is 
not required to submit a Plan solely due to the reclassification.
    (3) Filing of additional plan. Notwithstanding paragraph (a)(1) of 
this section, a credit union that has already submitted and is 
operating under a Plan approved under this section is not required to 
submit an additional Plan due to a change in net worth ratio or 
reclassification under Sec. 702.101(b), unless the NCUA Board notifies 
the credit union that it must submit a new Plan. A credit union that is 
notified to submit a new or revised Plan shall file the Plan in writing 
with the appropriate Regional Director within 45 calendar days of 
receiving such notice, unless the NCUA Board notifies the credit union 
in writing that the Plan is to be filed within a different period.
    (4) Failure to timely file plan. When a credit union fails to 
timely file a Plan pursuant to paragraph (a)(1) or (3) of this section, 
the NCUA Board shall promptly notify the credit union that it has 
failed to file a Plan and that it has 15 calendar days from receipt of 
that notice within which to file a Plan.
    (b) Assistance in preparing plan. Upon timely request by a credit 
union having total assets of less than $10 million (regardless how many 
years it has been in operation), the NCUA Board shall provide 
assistance in preparing a plan required to be filed under paragraph (a) 
of this section.
    (c) Contents of plan. A net worth restoration plan must--
    (1) Specify--

(i) The steps the credit union will take to become ``adequately 
capitalized'';
(ii) A specific timetable for increasing net worth during each year in 
which the Plan will be in effect;
(iii) The amount of earnings equivalent to not less than 4/10ths 
percent (0.4%) of its total assets that the credit union will transfer 
to its regular reserve account under section 702.104(a), or such lesser 
amount as the credit union justifies to the NCUA Board under section 
702.104(b);
(iv) How the credit union will comply with the mandatory and 
discretionary restrictions or requirements imposed on it under this 
part;
(v) the types and levels of activities in which the credit union will 
engage; and
(vi) if required to submit a plan due to reclassification under section 
Sec. 702.101(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 covering the next two 
years;
    (3) Contain such other information as the NCUA Board has required; 
and
    (4) With respect to a credit union having assets of $10 million or 
more, financial data submitted in connection with its net worth 
restoration plan must be prepared in accordance with generally accepted 
accounting principles (GAAP) unless the NCUA Board instructs otherwise.
    (d) Criteria for approval of plan. The NCUA Board shall not accept 
a net worth restoration plan unless the plan--
    (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;
    (3) Would not unreasonably increase the credit union's exposure to 
risk (including credit risk, interest-rate risk, and other types of 
risk); and
    (4) Is supported by appropriate assurances from the credit union 
that it will comply with the plan until it has remained ``adequately 
capitalized'' for four (4) consecutive calendar quarters.
    (e) Review of plan. (1) Notice of decision. Within 60 calendar days 
after receiving a Plan under this part, the NCUA Board will notify the 
credit union in writing whether the Plan has been approved, and shall 
provide reasons for its decision in the event of disapproval.
    (2) Consultation with state officials. In the case of a Plan 
submitted by a federally-insured State-chartered credit union, the NCUA 
Board shall, when evaluating the Plan, seek and consider the views of 
the appropriate State official.
    (f) Plan not approved. (1) Submission of revised plan. If a Plan is 
not approved by the NCUA Board, the credit union shall submit a revised 
Plan within 30 calendar days of receiving notice of disapproval, unless 
it is notified in writing by the NCUA Board that the revised Plan is to 
be filed within a different period. Upon receipt of notice of 
disapproval of a Plan, an ``undercapitalized'' credit union having a 
net worth ratio of less than five percent (5%) shall remain subject to 
all of the provisions of this part applicable to ``significantly 
undercapitalized'' credit unions until a new or revised Plan submitted 
by the credit union is approved by the NCUA Board.
    (2) Notice of decision on revised plan. Within 30 calendar days 
after receiving a revised Plan under paragraph (f)(1) of this section, 
the NCUA Board shall notify the credit union in writing whether the 
revised Plan is approved. The Board may extend the time within which 
notice of its decision shall be provided.
    (g) Failure to submit or implement plan. Any ``undercapitalized'' 
credit union having a net worth ratio of less than five percent (5%) 
which fails to submit a written Plan within the applicable period 
provided in this section, or which fails in any material respect to 
timely implement an approved Plan, shall be remain subject to all of 
the provisions of this part applicable to ``significantly 
undercapitalized'' credit unions.
    (h) Amendment of plan. A credit union that has filed an approved 
Plan may, after prior written notice to and approval by the NCUA Board, 
amend its Plan to reflect a change in circumstance. Until such time as 
a proposed amendment has been approved, the credit union shall 
implement the Plan as approved prior to the proposed amendment.

[[Page 27113]]

Subpart B--Alternative Prompt Corrective Action for New Credit 
Unions


Sec. 702.201  Scope and definition

    (a) Scope. This subpart B applies exclusively to credit unions 
defined in paragraph (b) of this section as ``new'' pursuant to 12 
U.S.C. 1790d(b)(2) in lieu of subpart A of this part.
    (b) New credit union defined. A ``new'' credit union for purposes 
of this section is a federally-insured credit union that has both 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 fall 
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 eligible to become ``new'' if it has been in operation less 
than 10 years.
    (d) Actions to evade statutory prompt corrective action. If the 
NCUA Board determines that a credit union was formed as a result of a 
``spin-off,'' or was expanded by merger or by the addition of a group 
to its field of membership, 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's net worth category classification will be determined by its net 
worth ratio as defined in Sec. 702.2(f), and any risk-based net worth 
requirement applicable to a new credit union defined as ``complex'' 
under Sec. 702.102.
    (b) Notice and effective date of net worth classification of new 
credit union. A new federally-insured credit union shall have notice of 
its net worth ratio (including any applicable risk-based net worth 
requirement), and shall be classified within the corresponding net 
worth category under this subpart, effective as provided in 
Sec. 702.3(b).
    (c) Net worth categories. A federally-insured 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 and also meets any applicable risk-based net worth 
requirement under Sec. 702.102;
    (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 Sec. 702.102;
    (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%), or 
fails to meet any applicable risk-based net worth requirement under 
Sec.  702.102;
    (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%);
    (6) Uncapitalized if it has a net worth ratio of less than zero 
percent (0%) (e.g., a deficit in retained earnings).
    (d) Reclassification based on supervisory criteria other than net 
worth. Subject to Sec. 702.101(c) and (d), the NCUA Board may 
reclassify a ``well capitalized'' new credit union as ``adequately 
capitalized'' and may require an ``adequately capitalized,'' 
``moderately capitalized'' or marginally capitalized'' new credit union 
to comply with certain statutory or discretionary supervisory actions 
as if it were in 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. 702.101(b).


Sec. 702.203  Prompt corrective action for ``adequately capitalized'' 
new credit unions.

    Until an ``adequately capitalized'' new credit union becomes ``well 
capitalized,'' it must annually transfer earnings to its regular 
reserve account as provided in Sec. 702.104.


Sec. 702.204  Prompt corrective action for ``moderately capitalized'' 
new credit unions.

    (a) Mandatory action by new credit union. If a new credit union 
becomes ``moderately capitalized'' (including by reclassification under 
Sec. 702.202(d)), it must immediately--
    (1) Earnings transfer. Annually transfer earnings to its regular 
reserve account in an amount and at a rate reflected in the credit 
union's initial or revised business plan;
    (2) Submit revised business plan. Submit a revised business plan 
pursuant to Sec. 702.208 if its net worth ratio has not increased 
consistent with its then-present business plan;
    (3) Restrict member business loans. Not increase the total amount 
of member business loans until the credit union becomes ``adequately 
capitalized'' unless it qualifies for an exception under 12 U.S.C. 
1757a(b).
    (b) Discretionary 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 take 
one or more of the actions prescribed in Sec. 702.105(b) and (c) if the 
credit union's net worth has not increased consistent with its then-
present business plan.
    (c) Discretionary conservatorship or liquidation. Notwithstanding 
any other actions required or permitted to be taken under this section, 
when a new credit union becomes ``moderately capitalized'' (including 
by reclassification under Sec. 702.202(d)), 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. 702.205  Prompt corrective action for ``marginally capitalized'' 
new credit unions.

    (a) Mandatory actions by new credit union. If a new credit union 
becomes ``marginally capitalized'' (including by reclassification under 
Sec. 702.202(d)), it must immediately--
    (1) Earnings transfer. Annually transfer earnings to its regular 
reserve account in an amount and at a rate reflected in the credit 
union's initial or revised business plan;
    (2) Submit revised business plan. Submit a revised business plan 
pursuant to Sec. 702.208 if its net worth ratio has not increased 
consistent with its then-present business plan; and
    (3) Restrict member business loans. Not increase the total amount 
of member business loans except as provided in Sec. 702.204(a)(3).
    (b) Discretionary 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 take 
one or more of the actions prescribed in Sec. 702.106(b) if the credit 
union's net worth has not increased consistent with its then-present 
business plan.
    (c) Discretionary conservatorship or liquidation. Notwithstanding 
any other actions required or permitted to be taken under this section, 
when a new credit union becomes ``marginally capitalized'' (including 
by reclassification under Sec. 702.202(d)), the NCUA Board may place 
the credit union into conservatorship pursuant to 12 U.S.C. 
1786(h)(1)(F), or into liquidation

[[Page 27114]]

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. 702.206  Prompt corrective action for ``minimally capitalized'' 
new credit unions.

    (a) Mandatory action by new credit union. If a new credit union 
becomes ``minimally capitalized,'' it must immediately--
    (1) Earnings transfer. Annually transfer earnings to its regular 
reserve account in an amount and at a rate reflected in the credit 
union's initial or revised business plan;
    (2) Submit revised business plan. Submit a revised business plan 
pursuant to Sec. 702.208 if its net worth ratio has not increased 
consistent with its then-present business plan; and
    (3) Restrict member business loans. Not increase the total amount 
of member business loans except as provided in Sec. 702.204(a)(3).
    (b) Discretionary 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 take one or more of the 
actions prescribed in Sec. 702.107(b) if the credit union's net worth 
has not increased consistent with its then-present business plan.
    (c) Discretionary conservatorship or liquidation. Notwithstanding 
any other actions required or permitted to be taken under this section, 
when a new credit union becomes ``minimally capitalized'' (including by 
reclassification under Sec. 702.202(d)), 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. 702.207  Prompt corrective action for ``uncapitalized'' new credit 
unions.

    (a) Mandatory action by new credit union. If a federally-insured 
new credit union either remains ``uncapitalized'' beyond the time 
period provided in its initial business plan (approved at the time the 
credit union's charter was granted), or subsequently declines to that 
category, it must--
    (1) Earnings transfer. Annually transfer earnings to its regular 
reserve account in an amount and at a rate determined reflected in the 
credit union's initial or revised business plan;
    (2) Submit revised business plan. Within the period specified by 
the NCUA Board, but not to exceed 90 days from the date the credit 
union became ``uncapitalized,'' submit a revised business plan pursuant 
to Sec. 702.208 providing for alternative means of funding the credit 
union's earnings deficit; and
    (3) Restrict member business loans. Not increase the total amount 
of member business loans except as provided in Sec. 702.204(a)(3).
    (b) Discretionary 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 take one or more of the 
actions prescribed in Sec. 702.107(b) if the credit union's net worth 
has not increased consistent with its then-present business plan.
    (c) Mandatory liquidation. Notwithstanding any other actions 
required or permitted to be taken under this section, the NCUA Board--
    (1) May place into liquidation pursuant to 12 U.S.C. 
1787(a)(3)(A)(ii) 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) Must place into liquidation pursuant to 12 U.S.C. 
1787(a)(3)(A)(ii) an ``uncapitalized'' new credit union which still is 
``uncapitalized'' ninety (90) calendar days after the date the NCUA 
Board approved the revised business plan submitted by the credit union 
pursuant to paragraph (a)(2) of this section, unless the credit union 
documents to the NCUA Board why it is viable and has a reasonable 
prospect of becoming ``adequately capitalized.''


Sec. 702.208  Revised business plans for new credit unions.

    (a) Schedule for filing. (1) Generally. A ``moderately 
capitalized,'' ``marginally capitalized'' or ``minimally capitalized'' 
new credit union 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 the date the 
credit union has notice (as provided under Sec. 702.3(b)) that its net 
worth ratio has failed to increase consistent with its then-present 
business plan, unless the NCUA Board notifies the credit union in 
writing that its RBP is to be filed within a different period, or that 
the NCUA Board is waiving the requirement that the credit union file an 
RBP. An ``uncapitalized'' new credit union must file an RBP within the 
time provided under Sec. 702.207(a)(2).
    (2) Failure to timely file plan. When a new credit union fails to 
file an RBP as provided under paragraph (a)(1) 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 section IV.D. of NCUA's Chartering and Field of 
Membership Manual (IRPS 99-1), 63 FR 71998, 72019 (Dec. 30, 1998), or 
for State-chartered credit unions under applicable State law;
    (2) Specify the steps the new credit union will take to become 
``adequately capitalized'';
    (3) Establish at least quarterly targets for increasing net worth 
during each year in which the RBP will be in effect;
    (4) Specify the amount of earnings that it will annually transfer 
to its regular reserve as provided under Sec. 702.204(a)(1);
    (5) Explain how the new credit union will comply with the 
restrictions or requirements then in effect under this subpart;
    (6) Specify the types and levels of activities in which the new 
credit union will engage;
    (7) In the case of an RBP submitted due to reclassification under 
Sec. 702.202(d), specify the steps the credit union will take to 
correct the unsafe or unsound condition or practice; and
    (8) Include such other information as the NCUA Board may require.
    (c) Review of revised business plan. (1) Consultation with State 
officials. In the case of an RBP submitted by a federally-insured 
State-chartered new credit union, the NCUA Board shall, when evaluating 
the RBP, seek and consider the views of the appropriate State official.
    (2) Criteria for approval. The NCUA Board shall not approve a new 
credit union's RBP unless it--

(i) addresses the items enumerated in paragraph (b) of this section;
(ii) is based on realistic assumptions, and is likely to succeed in 
restoring the credit union's net worth;
(iii) would not unreasonably increase the credit union's exposure to 
risk (including credit risk, interest-rate risk, and other types of 
risk); and
(iv) is supported by appropriate assurances from the credit union that 
it will comply with the approved plan until it has been ``adequately 
capitalized'' for four (4) consecutive calendar quarters.

    (3) Notice of decision. Within 30 calendar days after receiving an 
RBP under this section, the NCUA Board shall notify the credit union in 
writing

[[Page 27115]]

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.
    (d) Plan not approved. (1) Submission of new revised plan. If an 
RBP is not approved 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 (d)(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.
    (e) 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. Until such time as a 
proposed amendment has been approved, the new credit union shall 
implement its existing RBP as approved prior to the proposed amendment.


Sec. 702.209  Incentives for new credit unions.

    (a) Management training for officers and employees. At the 
discretion of the NCUA Board, NCUA (or non-profit organizations funded 
through grants or contracts under 12 U.S.C. 1766(f)(2)(A) and (i)(3)) 
will provide training in management, lending, product development and 
other areas for directors, officers and employees of new credit unions.
    (b) Assistance in preparing business plans. At the discretion of 
the NCUA Board, NCUA (or non-profit organizations funded through grants 
or contracts under 12 U.S.C. 1766(f)(2)(A) and (i)(3)) will provide 
individualized guidance and training to directors, officers and 
employees of new credit unions in the preparation of business plans 
required for charter approval and RBPs required under Sec. 702.208.
    (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 C--Reserves


Sec. 702.301  Reserves.

    (a) Special reserve. Each federally-chartered credit union shall 
establish and maintain such reserves as may be required by the FCUA, or 
by regulation, or in special cases by the NCUA Board.
    (b) Regular reserve. Each federally-chartered credit union shall 
establish and maintain a regular reserve account. Earnings required to 
be transferred annually to a credit union's regular reserve under 
subparts A or B of this part shall be held in this account.
    (c) Transfers to regular reserve. The transfer of earnings to a 
federally-chartered credit union's regular reserve when required under 
subparts A or B of this part must occur after charges for loan or other 
losses are addressed as provided in Sec. 702.302(d), but before the 
declaration or payment of any dividends to members.


Sec. 702.302  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-chartered 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, creditors or to the NCUA, shall contain a 
dual declaration by the treasurer and by the president, or in the 
absence of the president, 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 other losses. Full and fair disclosure 
demands that a credit union properly address charges for loan and other 
losses as follows:
    (1) Charges for loan and other losses shall be made in accordance 
with generally accepted accounting principles (GAAP);
    (2) The allowance for loan losses 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 allowance for loan losses will be 
recorded in the expense account ``Provision for Loan Losses'';
    (4) The maintenance of an allowance for loan losses shall not 
affect the requirement to transfer earnings to a credit union's regular 
reserve when required under subpart A or B of this part;
    (5) At a minimum, adjustments to the allowance for loan losses 
shall be made prior to the distribution or posting of any dividend to 
the accounts of members.


Sec. 702.303  Payment of dividends.

    (a) Restriction on dividends. Dividends shall be available only 
from post-closing, post-transfer, unappropriated, undivided earnings, 
if any.
    (b) Payment of dividends if undivided earnings depleted. The board 
of directors of a federally-chartered credit union which has depleted 
the post-closing, post-transfer balance of its undivided earnings 
account may authorize a transfer of funds from the credit union's 
regular reserve to undivided earnings to pay dividends, provided that 
the credit union is classified ``well capitalized'' under subpart A or 
B of this part and either--
    (1) The transfer of funds to undivided earnings will not cause the 
credit union's net worth classification to fall below ``well 
capitalized''; or
    (2) The appropriate Regional Director gives written approval for 
the transfer.

PART 747--ADMINISTRATIVE ACTIONS, ADJUDICATIVE HEARINGS, RULES OF 
PRACTICE AND PROCEDURE, AND INVESTIGATIONS

    1. The authority citation for part 747 is revised to read as 
follows:

    Authority: 12 U.S.C. 1766, 1786, 1784, 1787, 1790d and 4806(a); 
and 42 U.S.C. 4012a.

    2. Part 747 is amended by adding a new subpart L to read as 
follows:

Subpart L--Issuance, Review and Enforcement of Orders Imposing Prompt 
Corrective Action

Sec.

747.2001  Scope.
747.2002  Review of order imposing prompt corrective action.
747.2003  Review of order reclassifying a credit union based on 
safety and soundness criteria.
747.2004  Review of order to dismiss a director or senior executive 
officer.
747.2005  Enforcement of orders.

[[Page 27116]]

Subpart L--Issuance, Review and Enforcement of Orders Imposing 
Prompt Corrective Action


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), who 
are subject to discretionary supervisory actions and to 
reclassification under part 702 of this chapter to facilitate prompt 
corrective action under section 216 of the Federal Credit Union Act, 12 
U.S.C. Sec. 1790d; and 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 restrictions or requirements 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 sections 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, 
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.


Sec. 747.2002  Review of orders imposing prompt corrective action.

    (a) Notice of intent to issue directive.--(1) Generally. Whenever 
the NCUA Board intends to issue a directive imposing a discretionary 
requirement or restriction on a credit union classified 
``undercapitalized'' or lower under Secs. 702.105 (b) and (c), 
702.106(b) and 702.107(b) of this chapter, or on a new credit union 
classified ``moderately capitalized'' or lower under Secs. 702.204(b), 
702.205(b), 702.206(b) and 702.207(b) of this chapter, it must give the 
credit union prior notice of the proposed action. The credit union 
shall have such time to respond to a proposed directive as the NCUA 
Board provides under paragraph (c)(1) of this section.
    (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. The NCUA Board shall consider any such appeal, 
if timely filed, within 60 calendar days of receiving it. Unless 
ordered by the NCUA Board, the directive shall remain in effect pending 
a decision on the appeal.
    (b) Contents of notice. The NCUA Board's notice to a credit union 
of its intention to issue a directive imposing a discretionary 
restriction or requirement must state:
    (1) The credit union's net worth ratio and net worth 
classification;
    (2) The specific restrictions or requirements that the NCUA Board 
intends to impose, and the reasons therefor;
    (3) The proposed date when the restriction or requirement would 
take effect and the proposed date for completing the required action or 
terminating the restriction; and
    (4) The date by which the credit union must file its written 
response, if any, to the notice as required by paragraph (c)(1) of this 
section.
    (c) Response to notice.--(1) Time for response. A credit union must 
file a written response, if any, to a notice of intent to issue a 
directive within 14 calendar days from the date 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.
    (2) Content of response. A credit union's response to a notice of 
the NCUA Board's intention to issue a directive imposing a 
discretionary restriction or requirement must:

(i) Explain why the proposed restriction or requirement is not an 
appropriate exercise of discretion under this part;
(ii) Request that the NCUA Board not issue or modify the proposed 
directive; and
(iii) Include other relevant information, mitigating circumstances, 
documentation, or other evidence in support of the credit union's 
position regarding the proposed directive.

    (d) NCUA Board consideration of response. After considering a 
credit union's response to a notice of the NCUA Board's intention to 
issue a directive imposing a discretionary restriction or requirement, 
the NCUA Board may:
    (1) Issue the directive as originally proposed or as modified;
    (2) Determine not to issue the directive and 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 restriction or requirement, 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 a directive imposing a discretionary restriction or 
requirement 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.


Sec. 747.2003  Review of order reclassifying a credit union based on 
safety and soundness criteria.

    (a) Reclassification based on unsafe or unsound condition or 
practice. (1) Issuance of notice of proposed reclassification. (i) 
Grounds for reclassification. The NCUA Board may reclassify a credit 
union or subject it to the supervisory actions applicable to the next 
lower net worth category (each such action hereinafter referred to as 
``reclassification'') pursuant to Secs. 702.101(b) and 702.202(d) of 
this chapter;

(ii) Prior notice to credit union. Prior to reclassification, the NCUA 
Board shall issue and serve on the credit union a written notice of the 
NCUA Board's intention to reclassify it to a lower net worth category.

    (2) Contents of notice. A notice of intention to reclassify a 
credit union based on unsafe or unsound condition or practice shall 
state:

(i) The credit union's net worth ratio, net worth category 
classification, and the net worth category to which the credit union 
would be reclassified;
(ii) The reasons for reclassification of the credit union;
(iii) The date by which the credit union must file with the NCUA Board 
a

[[Page 27117]]

written response to the proposed reclassification (and 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
(iv) That failure to--
    (A) File a written response to the notice of proposed 
reclassification, within the specified time period, shall be deemed a 
waiver of the opportunity to respond and to have consented to the 
reclassification;
    (B) That failure to request a hearing shall be deemed a waiver of 
any right to a hearing; and
    (C) That failure to request the opportunity to present witness 
testimony shall be deemed a waiver of any right to present such 
testimony.

    (3) Response to notice of proposed reclassification. A credit union 
may file a written response to a notice of proposed reclassification 
within the time period set by the NCUA Board. The response should 
explain why the credit union is not in an unsafe or unsound condition 
or has not corrected an unsafe or unsound practice, or otherwise should 
not be reclassified, and include any relevant information, mitigating 
circumstances, documentation, or other evidence in support of the 
credit union's position. A credit union which fails to file a written 
response to a notice of proposed reclassification, within the specified 
time period, shall be deemed to have waived the opportunity to respond 
and to have consented to the reclassification.
    (4) Request for informal hearing and presentation of witness 
testimony. A credit union's response to a notice of proposed 
reclassification may include a request for an informal hearing before 
the NCUA Board under this section. If the credit union wishes to 
present witness testimony at the hearing, the credit union shall 
include a request to do so which specifies the names of the witnesses 
and the general nature of their expected testimony. Failure to request 
an informal hearing shall be deemed a waiver of any right to a hearing, 
and failure to request the opportunity to present witness testimony 
shall be deemed a waiver of any right to present such testimony.
    (5) Order for 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.
    (6) Procedures for informal hearing. (i) The credit union shall 
have the right to introduce relevant documents and to present oral 
argument at the hearing. The credit union 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 747.1) shall apply to an informal 
hearing under this section unless the NCUA Board orders otherwise.

(ii) 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.
(iii) 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.

    (7) Recommendation of presiding officer. 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.
    (8) Time for 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.
    (b) 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.
    (c) 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 Secs. 702.101(b) or 702.202(d) of this chapter.


Sec. 747.2004  Review of order to dismiss a director or senior 
executive officer.

    (a) Service of notice. When the NCUA Board issues and serves a 
directive on a credit union pursuant to Sec. 747.2002 requiring it to 
dismiss from office any director or senior executive officer under 
Sec. 702.105(c)(2), 702.106(b)(8), 702.107(b)(8), 702.204(b), 
702.205(b), 702.206(b) or 702.207(b) of this chapter, the NCUA Board 
shall also serve a copy of the directive (or the relevant portions, 
where appropriate) upon the person to be dismissed, and shall advise 
that person in writing that failure to--
    (1) Request reinstatement shall be deemed a waiver of any right to 
seek reinstatement;
    (2) Request a hearing shall be deemed a waiver of any right to a 
hearing; and
    (3) Request the opportunity to present witness testimony shall be 
deemed a waiver of the right to present such testimony.
    (b) Response to directive. (1) Request for reinstatement. A 
director or senior executive officer who has been served with a 
directive under paragraph (a) of this section (Respondent) may file a 
written request for reinstatement. The request for reinstatement shall 
be filed with the NCUA Board within 10 business days after the 
Respondent received the directive, unless further time is allowed by 
the NCUA Board at the request of the Respondent.
    (2) Contents of request for informal hearing. The request for 
reinstatement shall include reasons why the Respondent should be 
reinstated, and may include a request for an informal hearing before 
the NCUA Board under this section. If the Respondent wishes to present 
witness testimony at the hearing, the Respondent shall include a 
request to do so which specifies the names of the witnesses and the 
general nature of their expected testimony. Failure to request a 
hearing shall be deemed a waiver of any right to a hearing and failure 
to request the opportunity to present witness testimony shall be deemed 
a waiver of any right to present such testimony.
    (3) Effective date. Unless otherwise ordered by the NCUA Board, the 
dismissal shall remain in effect while a request for reinstatement is 
pending.

[[Page 27118]]

    (c) Order for 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 
commencing 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.
    (d) 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. 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 741.1) 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 (normally five business days) following 
completion of witness testimony or oral argument to allow additional 
written submissions to the hearing record.
    (e) Standard for review. 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--
    (1) Become ``adequately capitalized,'' to the extent that the 
directive was issued as a result of the credit union's net worth ratio 
or failure to submit or implement a net worth restoration plan or 
revised business plan; and
    (2) 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. 702.101(d) and 
702.202(d) of this chapter.
    (f) Recommendation of presiding officer. Within 20 calendar days 
following the date the hearing and the record are closed, the presiding 
officer shall make a recommendation to the NCUA Board concerning the 
Respondent's request for reinstatement with the credit union.
    (g) Time for 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 the its action. The 
decision of the NCUA Board shall be final.


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 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 against any institution-affiliated party of a credit union 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 A 
of part 702 or a revised business plan under subpart B of part 702.
    (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.

[FR Doc. 99-11837 Filed 5-17-99; 8:45 am]
BILLING CODE 7535-01-U