[Federal Register Volume 64, Number 247 (Monday, December 27, 1999)]
[Rules and Regulations]
[Pages 72269-72270]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-33274]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701


Organization and Operations of Federal Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: The NCUA is issuing a final rule that amends its regulation 
regarding secondary capital accounts in low-income designated credit 
unions to specify that interest on these accounts may be accrued in the 
account, paid directly to the investor, or paid into a separate account 
from which an investor may make withdrawals. The NCUA believes that 
these amendments will clarify the permissible alternatives and provide 
additional flexibility for low-income designated credit unions.

DATES: This rule is effective January 26, 2000.

FOR FURTHER INFORMATION CONTACT: Frank S. Kressman, Staff Attorney, 
Division of Operations, Office of General Counsel, at the above address 
or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION:

Background

    Federal credit unions that serve predominantly low-income members 
may be designated by NCUA as low-income credit unions (LICUs). LICUs 
play an important role in providing financial services to low-income 
individuals and communities for whom these services are often 
unavailable. LICUs often find it difficult, however, to accumulate 
capital due to the limited resources of their members. In response to 
this obstacle, Sec. 701.34 of NCUA's regulations permits LICUs to offer 
secondary capital accounts to nonnatural person members and nonnatural 
person nonmembers.
    Section 701.34 makes it clear that funds in the secondary capital 
account, including accrued interest paid into the account, must be 
available to cover operating losses realized by the credit union that 
exceed its net available reserves and undivided earnings. Section 
701.34 may not have clearly stated, however, that although interest 
paid into the secondary capital account must remain there until account 
maturity, credit unions have flexibility to use other permissible 
alternatives for disposing of accrued interest. To clarify this, NCUA 
issued a proposed rule that specified that in addition to depositing 
accrued interest into the secondary capital account, a credit union may 
pay the interest directly to the investor or deposit it into a separate 
account from which the investor could make withdrawals. 64 FR 40786 
(July 28, 1999). The proposed rule also clarified that net available 
reserves and undivided earnings, as discussed above, are reserves and 
undivided earnings exclusive of allowance accounts for loan losses. 
Allowance accounts for investment losses used to be considered in 
determining net available reserves and undivided earnings, but are no 
longer as they are no longer recognized by generally accepted 
accounting principles or NCUA's regulatory accounting practices.

Summary of Comments

    The NCUA Board received five comment letters in response to the 
proposed rule: four from credit union trade associations and one from a 
federal credit union. All of the commenters generally supported the 
proposed rule and made other specific recommendations.
    Two commenters suggested that secondary capital accounts, or 
similar programs, should be made available to all credit unions not 
just LICUs. Secondary capital accounts are presently and have 
historically been intended to address the specific needs of LICUs, 
especially the difficulty many have in accumulating capital. Any change 
in this approach is not a matter

[[Page 72270]]

before the Board in consideration of this proposal.
    One commenter suggested that credit unions and their investors with 
existing secondary capital account agreements should be able to 
voluntarily modify those agreements to alter the manner in which 
interest accrued in the future is treated. NCUA does not object to this 
so long as the secondary capital agreements are properly amended and it 
only applies to future interest to be accrued and not to interest 
already paid into the secondary capital account.
    Two commenters stated that the disclosures and acknowledgment 
required in the Appendix to Sec. 701.34 should be modified. 
Specifically, they suggested including language that would indicate 
which method of paying accrued interest has been agreed to by the LICU 
and its investor. We agree and have incorporated this suggestion into 
the Appendix to Sec. 701.34.
    One commenter stated that an investor should have the option of 
having interest payments directed to accounts outside of the LICU if it 
wishes. The proposed rule permits interest payments to be directed to a 
separate account from which an investor may make withdrawals. NCUA 
intends for this option to include accounts outside of the LICU.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact any regulation may have on 
a substantial number of small credit unions, meaning those under $1 
million in assets.
    The NCUA has determined and certifies that this rule will not have 
a significant economic impact on a substantial number of small credit 
unions. The reason for this determination is that the amendments to 
Sec. 701.34 only clarify the permissible alternatives LICUs have in 
disposing of accrued interest on secondary capital accounts. The 
amendments provide LICUs with additional flexibility without imposing 
any costs or significant regulatory requirements. Accordingly, the NCUA 
has determined that a Regulatory Flexibility Analysis is not required.

Paperwork Reduction Act

    NCUA has determined that the amendments to Sec. 701.34 do not 
increase paperwork requirements under the Paperwork Reduction Act of 
1995 and regulations of the Office of Management and Budget.

Executive Order 12612

    Executive Order 12612 requires NCUA to consider the effect of its 
actions on state interests. It states that: ``Federal action limiting 
the policy-making discretion of the states should be taken only where 
constitutional authority for the action is clear and certain, and the 
national activity is necessitated by the presence of a problem of 
national scope.'' This rule will not 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. NCUA has determined that this rule does 
not constitute a significant regulatory action for purposes of the 
executive order.

List of Subjects in 12 CFR Part 701

    Credit unions, Reporting and recordkeeping requirements.

    By the National Credit Union Administration Board on December 16, 
1999.
Becky Baker,
Secretary of the Board.

    For the reasons set forth above 12 CFR part 701 is amended as 
follows:

PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS

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

    Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a, 
1761b, 1766, 1767, 1782, 1784, 1787, and 1789. Section 701.6 is also 
authorized by 31 U.S.C. 3717. Section 701.31 is also authorized by 
15 U.S.C. 1601 et seq., 42 U.S.C. 1861 and 42 U.S.C. 3601-3610. 
Section 701.35 is also authorized by 42 U.S.C. 4311-4312.

    2. Section 701.34 is amended by revising paragraph (b)(7) to read 
as follows:


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

* * * * *
    (b) * * *
    (7) Funds deposited into the secondary capital account, including 
interest accrued and paid into the secondary capital account, must be 
available to cover operating losses realized by the credit union that 
exceed its net available reserves and undivided earnings (i.e., 
reserves and undivided earnings exclusive of allowance accounts for 
loan losses), and to the extent funds are so used, the credit union 
shall under no circumstances restore or replenish the account. The 
credit union may, in lieu of paying interest into the secondary capital 
account, pay interest accrued on the secondary capital account directly 
to the investor or into a separate account from which the secondary 
capital investor may make withdrawals. Losses shall be distributed pro-
rata among all secondary capital accounts held by the credit union at 
the time the losses are realized.
* * * * *
    3. The Appendix to Sec. 701.34 is amended by revising the second 
paragraph of the next to last bulleted section and adding a third 
paragraph to that section to read as follows:

Appendix to Sec. 701.34

* * * * *
    The funds committed to the secondary capital account and any 
interest paid into the account may be used by __________ (name of 
credit union) to cover any and all operating losses that exceed the 
credit union's reserves and undivided earnings exclusive of 
allowance accounts for loan losses, and in the event the funds are 
so used ________ (name of credit union) will under no circumstances 
restore or replenish those funds to ________ (name of institutional 
investor).
    By initialing below, ________ (name of credit union) ________ 
and (name of institutional investor) agree that accrued interest 
will be:

______  ______ paid into and become part of the secondary capital 
account;
______  ______ paid directly to the investor;
______  ______ paid into a separate account from which the investor 
may make withdrawals; or
______  ______ any combination of the above provided the details are 
specified and agreed to in writing.
* * * * *
[FR Doc. 99-33274 Filed 12-23-99; 8:45 am]
BILLING CODE 7535-01-U