[Federal Register Volume 65, Number 34 (Friday, February 18, 2000)]
[Rules and Regulations]
[Pages 8560-8596]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-3276]



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Part III





National Credit Union Administration





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12 CFR Parts 702, 741 and 747



Prompt Corrective Action; Final Rule

12 CFR Part 702



Prompt Corrective Action; Risk-Based; Net Worth Requirement; Proposed 
Rule

  Federal Register / Vol. 65, No. 34 / Friday, February 18, 2000 / 
Rules and Regulations  

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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 702, 741 and 747


Prompt Corrective Action

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: In 1998, Congress amended the Federal Credit Union Act to 
establish minimum capital standards for federally-insured credit unions 
and to require the NCUA Board to adopt, by regulation, a system of 
``prompt corrective action'' to restore the capital level of credit 
unions which become inadequately capitalized. The NCUA Board issued a 
proposed rule combining the components of prompt corrective action 
expressly prescribed by statute with those the statute required NCUA to 
develop to suit the distinctive needs and characteristics of credit 
unions. As revised to reflect public comments and to incorporate other 
improvements, the final rule establishes a comprehensive framework of 
mandatory and discretionary supervisory actions indexed to five 
statutory net worth categories; an alternative system of prompt 
corrective action for credit unions which meet the statutory definition 
of ``new''; conforming reserve and dividend payment requirements; and 
procedures for reviewing and enforcing directives imposing prompt 
corrective action.

DATES: Effective August 7, 2000.

FOR FURTHER INFORMATION CONTACT: Herbert S. Yolles, Deputy Director, 
Office of Examination and Insurance, (703) 518-6360; or Steven W. 
Widerman, Trial Attorney, Office of General Counsel, (703) 518-6557, at 
National Credit Union Administration, 1775 Duke Street, Alexandria, VA 
22314-3428.

SUPPLEMENTARY INFORMATION:

I. Background

A. The Credit Union Membership Access Act

    On August 7, 1998, Congress enacted the Credit Union Membership 
Access Act, Pub. L. 105-219, 112 Stat. 913 (1998). Section 301 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'' (``PCA'') to restore the net worth of federally-insured 
``natural person'' credit unions which become inadequately capitalized. 
The purpose of PCA 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 statute designates three principal components of PCA: (1) A 
framework combining mandatory actions prescribed by statute with 
discretionary actions developed by NCUA; (2) an alternative system of 
PCA to be developed by NCUA for credit unions which CUMAA defines as 
``new''; and (3) a risk-based net worth requirement to apply to credit 
unions which NCUA defines as ``complex.'' The first and second 
principal components are the subject of this final rule. In formulating 
the rule, NCUA was required 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).
    For credit unions other than those which meet the statutory 
definition of a ``new'' credit union, CUMAA mandated a framework of 
mandatory and discretionary supervisory actions indexed to five 
statutory net worth categories. The mandatory actions and conditions 
triggering conservatorship and liquidation are expressly prescribed by 
statute. Sec. 1790d(e), (f), (g), (i); 12 U.S.C. 1786(h)(1)(F), 
1786(a)(3)(A)(1). To supplement the mandatory actions, the statute 
charged NCUA with developing discretionary actions which are 
``comparable'' \1\ to the ``discretionary safeguards'' available under 
section 38 of the Federal Deposit Insurance Act (``FDIA Sec. 38'')--the 
statute that applies PCA to other federally-insured depository 
institutions.\2\ 12 U.S.C. 1831o; 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. Rep.).
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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\ 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. No. 102-242, 105 Stat. 2236 
(1991). The Joint Final Rule implementing FDIA Sec. 38, 12 U.S.C. 
1831o, is published at 57 FR 44886 (Sept. 29, 1992).
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    For credit unions which CUMAA defines as ``new''--those which have 
been in operation less than ten years and have $10 million or less in 
assets--the statute directed NCUA to develop an alternative system of 
PCA to apply in lieu of the system of PCA for all other federally-
insured credit unions. Sec. 1790d(b)(2)(A); see also U.S. Dept. of 
Treasury, Credit Unions (Washington, D.C. 1997) at 79. Although CUMAA 
prescribes no specific attributes for this component of PCA, it 
instructs NCUA to 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 reach 
either ten years in operation or exceed $10 million in assets (i.e., no 
longer meet the definition of ``new''). Sec. 1790d(b)(2)(B).
    For credit unions which NCUA defines as ``complex'' according to 
the risk level of their portfolios of assets and liabilities, CUMAA 
directed NCUA to develop an additional, risk-based net worth (``RBNW'') 
requirement to apply to credit unions in the ``well capitalized'' and 
``adequately capitalized'' net worth categories. Sec. 1790d(d)(1). 
Credit unions which fail to meet their RBNW requirement are classified 
to the ``undercapitalized'' net worth category. 
Sec. 1790d(c)(1)(C)(ii). The RBNW requirement for ``complex'' credit 
unions is the subject of a separate proposed rule found elsewhere in 
this issue of the Federal Register.
    In addition to the principal components of PCA, CUMAA required NCUA 
to implement an independent appeal process by which credit unions and 
dismissed officials affected by PCA can challenge material supervisory 
decisions by NCUA staff, Sec. 1790d(k), and to provide notice and an 
opportunity for a hearing to challenge NCUA Board decisions to 
reclassify a credit union to a lower net worth category on safety and 
soundness grounds. Sec. 1790d(h).
    Except for the RBNW requirement (which has a separate, later 
deadline for adopting a final rule, and a later effective date), CUMAA 
set February 7, 2000, as the deadline for NCUA to adopt a final rule 
establishing a system of PCA for credit unions, and August 7, 2000, as 
the effective date of the final rule. CUMAA Sec. 301(d)(1) and (e)(1). 
With adoption of the final rule, NCUA is required to file a report with 
Congress explaining how the final rule accommodates the cooperative 
character of credit unions, CUMAA Sec. 301(f)(1), how it differs from 
FDIA Sec. 38, and the reasons for those differences. CUMAA 
Sec. 301(f)(2); S. Rep. at 19; H.R. Rep. at 23.

B. Notice of Proposed Rulemaking

    On October 29, 1998, NCUA commenced rulemaking by issuing an 
Advance Notice of Proposed Rulemaking (``ANPR'') soliciting public 
comment not only on the RBNW requirement for ``complex'' credit unions 
(as CUMAA required), but also regarding the alternative system of PCA

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for ``new'' credit unions and the contents, criteria, and deadlines for 
submission of a net worth restoration plan. 63 FR 57938 (October 29, 
1998); CUMAA Sec. 301(d)(2)(A). The great majority of the 34 comment 
letters NCUA received by the January 27, 1999, deadline addressed the 
RBNW requirement for ``complex'' credit unions.
    On May 3, 1999, NCUA issued a proposed part 702 establishing an 
overall system of PCA and an alternative system for ``new'' credit 
unions, as well as conforming reserve and dividend payment 
requirements, and an independent process for appealing decisions to 
impose PCA. 64 FR 27090 (May 18, 1999). The proposed rule reflected 
comments, which NCUA had received in response to the ANPR, regarding 
the net worth restoration plan and the alternative system of PCA for 
``new'' credit unions.
    To make PCA workable, fair and effective in light of the 
cooperative character of credit unions, see S. Rep. at 14, NCUA 
solicited broad public comment on the proposed rule, emphasizing the 
need for input on the non-statutory provisions which Congress gave NCUA 
the authority to develop, and thus, to modify--the contents and 
criteria for approval of a net worth restoration plan; deadlines for 
submitting and approving a plan; the alternative system of PCA for 
``new'' credit unions; the various discretionary supervisory actions 
comparable to FDIA Sec. 38; and the procedures for appeal. On August 
10, 1999, the NCUA Board extended the comment period on the proposed 
rule by 15 days, to and including August 31, 1999. 64 FR 44663 (August 
17, 1999).
    By the close of the comment period, NCUA received 84 public comment 
letters on the proposed rule. Comments were submitted by 33 federal 
credit unions, 19 state credit unions, 2 corporate credit unions, 4 
credit union industry trade associations, 15 state credit union 
leagues, 3 banking industry trade associations, an association of state 
credit union supervisors, a credit union service center (shared branch 
network), and a state banking commissioner. In addition, one comment 
letter each was submitted by a law firm, an accounting firm, 2 
consultants and a broker-dealer which each service credit union 
clients.
    Many of the comments advocated abandoning or departing drastically 
from provisions of the proposed rule which Congress expressly 
prescribed and which, therefore, the NCUA Board lacks discretion to 
modify.\3\ These provisions include the definition of net worth, the 
structure and corresponding net worth ratios of the five statutory net 
worth categories, the four ``mandatory supervisory actions,'' and the 
conditions triggering discretionary and mandatory conservatorship and 
liquidation. A significant number of comments also addressed the RBNW 
requirement for ``complex'' credit unions, even though that topic was 
expressly excluded as a subject for comment.
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    \3\ Examples of such comments include: (1) Impose PCA in 
response to unsafe and unsound practices rather than a decline in 
net worth; (2) judge the adequacy of net worth by CAMEL ratings; (3) 
link the prescribed net worth ratios corresponding to each net worth 
category to ``a market index''; (4) upgrade net worth category 
classification to reflect ``favorable financial performance'' 
unrelated to net worth; (5) exempt ``adequately capitalized'' credit 
unions from the statutory requirement to transfer earnings to net 
worth; (6) exempt ``undercapitalized'' credit unions from statutory 
member business loan (``MBL'') restriction; (7) exempt certain types 
of MBLs from statutory MBL restriction; (8) redefine ``new'' credit 
unions as those having either $10 million or less in assets or less 
than 10 years in operation, but not both; and (9) give ``new'' 
credit unions more than 10 years to become ``adequately 
capitalized.''
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    The preamble to the final rule does not address the comments urging 
drastic modification of the statutory provisions of the rule, nor those 
concerning the RBNW requirement.\4\ All other comments are analyzed 
generally in section II. below, except for comments of the banking 
industry trade associations, which are addressed separately in section 
H. below.
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    \4\ For this reason, references to the total number of comments 
received on a topic may not equal the number of comments 
specifically discussed in the preamble.
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C. Principal Differences Between Proposed Rule and Final Rule

    As revised to incorporate public comments and improvements 
initiated by NCUA staff, the final rule differs from the proposed rule 
in the following principal respects:
    1. Quarterly net worth determination. Under the proposed rule, a 
credit union's net worth classification was generally determined 
monthly (to coincide with most credit unions' monthly dividend period). 
The final rule determines that classification on a quarterly basis, 
primarily using data from a ``PCA Worksheet'' to be filed with the Call 
Report. Sec. 702.101.
    2. Notice of change in net worth category. Under the proposed rule, 
a credit union was required to notify NCUA whenever its net worth 
classification declined. The final rule relies on the ``PCA Worksheet'' 
filed with a credit union's Call Report to notify NCUA of a decline in 
net worth classification. Sec. 702.101(c)(1). Thus, separate notice to 
NCUA now is generally required only from semi-annual Call Report filers 
when the ``PCA Worksheet'' reveals a decline in classification in the 
first and third quarters for which they do not file a Call Report. 
Sec. 702.101(c)(2).
    3. Choice of methods to calculate total assets. To calculate total 
assets, the proposed rule used the average of total assets as reported 
on a credit unions most recent four quarterly Call Reports or two 
semiannual Call Reports, as the case may be. To compensate for seasonal 
fluctuations in assets, the average over the most recent four quarters 
is retained in the final rule, but is no longer coupled with Call 
Report filings. Sec. 702.2(j)(1)(i). To compensate for month-end 
fluctuations, the final rule adds three options for determining a 
credit union's total assets--monthly average over the quarter, daily 
average over the quarter, and quarter-end balance--to use for all 
purposes other than the RBNW requirement. Sec. 702.2(j)(1)(ii)-(iii). A 
credit union may elect a method from among the four options to apply 
for each quarter. Sec. 702.2(j)(2).
    4. Exceptions to asset growth restriction. Under the proposed rule, 
the ``mandatory supervisory action'' restricting growth in assets 
pending approval of a net worth restoration plan was an absolute bar. 
The final rule excepts from that restriction accounts receivable, 
accrued income on loans and investments, cash and cash equivalents, and 
total loans outstanding. Sec. 702.202(a)(3)(ii). However, total loans 
outstanding under this exception are limited to the sum of total assets 
plus the quarter-end balance of unused commitments to lend and unused 
lines of credit. Credit unions which avail themselves of these 
exceptions cannot offer rates on shares in excess of prevailing market 
rates, and cannot open new branches. These exceptions are intended to 
permit a credit union largely to continue normal business operations 
pending approval of its net worth restoration plan.
    5. ``First tier'' and ``second tier'' of ``undercapitalized'' 
category. To distinguish between credit unions which are nearly 
``adequately capitalized'' (6% net worth ratio) and, in contrast, those 
which are nearly ``significantly undercapitalized'' (4% net worth 
ratio), the ``undercapitalized'' category has been divided into a 
``first tier'' (5% to 5.99% net worth ratio) and a ``second tier'' (4% 
to 4.99% net worth ratio). A ``first tier'' credit union is subject to 
``discretionary supervisory actions'' (``DSAs'') applicable in the

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``undercapitalized'' category only if it fails to comply with any of 
the four ``mandatory supervisory actions'' or fails to implement an 
approved net worth restoration plan. Sec. 702.202(c). A ``second tier'' 
credit union is subject to the applicable DSAs regardless of compliance 
with other requirements of PCA. Sec. 702.202(b).
    6. ``Discretionary supervisory actions'' for ``undercapitalized'' 
credit unions. The final rule deletes from the ``undercapitalized'' 
category the discretion to order a new election of a credit union's 
board of directors, and generally revises the DSAs to more closely 
parallel the criteria and limitations in the corresponding 
``discretionary safeguards'' in FDIA Sec. 38. E.g., 
Secs. 702.202(b)(5), 702.203(b)(10). Under the final rule, NCUA is no 
longer required to exhaust the other DSAs available in that category 
before imposing the DSAs requiring dismissal of a director or senior 
officer, or hiring of a qualified senior officer. Sec. 702.202(b)(7)-
(8). In addition, the final rule now permits NCUA to impose ``other 
action to better carry out the purpose of PCA'' regardless whether that 
action is ``no more severe'' than any DSA available in that category. 
Sec. 702.202(b)(9).
    7. ``Discretionary supervisory actions'' for ``new'' credit unions. 
For ``new'' credit unions only, the final rule makes all fourteen DSAs 
available if a credit union with a net worth ratio of less than 6% 
falls short of its quarterly net worth targets, regardless of net worth 
category classification. Sec. 702.304(b).
    8. Net worth restoration plans. The proposed rule allowed 45 days 
to submit a net worth restoration plan and 60 days for NCUA to decide 
to approve it. Under the final rule, the time for submitting a plan is 
effectively extended because the 45-day period commences not at 
quarter-end, but on the effective date of a credit union's net worth 
classification--the last day of the month following the quarter-end. 
Sec. 702.206(a)(1). The time for NCUA to decide whether to approve a 
plan is reduced to 45 days from the date of receipt. 
Sec. 702.206(f)(1). If no decision is made during that time, the credit 
union's plan is deemed approved. Sec. 702.206(f)(1). Finally, in the 
event NCUA authorizes new forms of regulatory capital for credit 
unions, the availability of that capital to absorb losses is expressly 
prescribed in the final rule as a factor in evaluating a credit union's 
net worth restoration plan. Sec. 702.206(e).
    9. Ombudsman input in review of ``discretionary supervisory 
actions.'' The proposed rule required NCUA to provide a credit union 
with advance notice of its intention to issue a DSA, and the 
opportunity to persuade the NCUA Board either not to issue, or to 
modify, the proposed DSA; and if still issued, to persuade the NCUA 
Board to modify or rescind that DSA. The final rule enhances these 
opportunities by permitting credit unions to request NCUA's ombudsman 
to make a recommendation on its behalf to the NCUA Board. 
Sec. 747.2002(g).
    The final rule will first apply according to the net worth ratio 
reported in the ``PCA Worksheet'' incorporated in the Call Report due 
to be filed January 22, 2001, reflecting activity in the fourth quarter 
of 2000. To acclimate credit unions to PCA, however, a sample ``PCA 
Worksheet'' with instructions is planned for introduction in September 
2000. This will give credit unions the opportunity to determine on a 
trial basis their pre-PCA net worth classification for the third 
quarter of 2000.

II. Subpart-by-Subpart Analysis of Comments

    To enhance the final rule's user-friendliness, part 702 has been 
reorganized into five subparts, each of which follows the natural 
sequence of implementation. In addition, many individual provisions of 
each subpart have been reorganized and/or rewritten to clarify and 
simplify implementation.
    Following the general provisions which apply to all components of 
the final rule, Subpart A addresses the five statutory net worth 
categories and the means by which a credit union determines its 
classification among them. Sec. 702.101 et seq. Subpart B establishes a 
comprehensive framework of ``mandatory supervisory actions'' (``MSAs'') 
and DSAs indexed to the five net worth categories, and implements 
statutory criteria triggering discretionary conservatorship and 
liquidation, and mandatory liquidation of a ``critically 
undercapitalized'' credit union. Sec. 702.201 et seq. This subpart also 
sets forth the requirements for a net worth restoration plan. 
Sec. 702.206. For credit unions which CUMAA defines as ``new,'' subpart 
C establishes an alternative system of PCA consisting of a separate 
structure of net worth categories, corresponding MSAs and DSAs, and 
incentives for ``new'' credit unions to build net worth. Sec. 702.301 
et seq.
    In addition to the substantive components of PCA, subpart D 
restates reserve and dividend payment requirements, modified to reflect 
repeal of FCUA Sec. 116, 12 U.S.C. 1762, and to facilitate CUMAA's 
earnings retention requirement. Sec. 702.401 et seq. Finally, subpart L 
of part 747 establishes procedures for challenging and enforcing NCUA 
decisions imposing PCA. 12 CFR 747.2001 et seq.

A. General Provisions

1. Section 702.1--Authority, Purpose, Scope, et al.
    Section 702.1 establishes the statutory authority, purpose, and 
scope of the implementing regulations for PCA--part 702 and subpart L 
of part 747. Three commenters suggested expanding the scope of PCA to 
address problem resolution, unsafe and unsound practices, and 
administrative actions such as mergers. NCUA lacks the authority to 
expand the scope of PCA beyond its defining statutory objective--net 
worth restoration. \5\
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    \5\ PCA does expressly address safety and soundness in one 
respect--a credit union which fails to correct an unsafe or unsound 
practice or condition may be reclassified to the next lower net 
worth category. Sec. 1790d(h); Secs. 702.102(b), 702.302(d).
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2. Section Sec. 702.2--Definitions
    Section 702.2 of the proposed rule established definitions for 
terms used throughout part 702, to which commenters suggested a variety 
of modifications, as follows:
    ``Appropriate regional director.'' While the proposed rule defined 
an ``appropriate State official,'' 64 FR at 27108, it lacked a parallel 
definition for the NCUA regional director having jurisdiction over a 
federal credit union. In anticipation that certain authority under part 
702 will be delegated to NCUA's regional directors, the final rule 
defines an ``appropriate regional director'' as having ``jurisdiction 
over federally-insured credit unions in the state where the affected 
credit union is principally located.'' Sec. 702.2(a).
    ``Credit Union.'' One commenter indicated that readers could 
inadvertently interpret the proposed definition of a ``credit union,'' 
64 FR at 27108, to include both non-federally insured credit unions and 
corporate credit unions. NCUA agrees and has modified the definition to 
incorporate the FCUA's definition, 12 U.S.C. 1752(6), which makes clear 
that part 702 applies to federally-insured ``natural person'' credit 
unions, regardless whether State- or federally-chartered. 
Sec. 702.2(c). Corporate credit unions are excluded consistent with 
CUMAA. 12 U.S.C. 1790d(m).
    ``CUSO.'' The proposed definition of a credit union service 
organization relied on the definition of a credit union service 
contract in 12 CFR 701.26. 64 FR at 27108. One commenter predicted an

[[Page 8563]]

unintended exclusion: that CUSOs which meet a non-conforming definition 
under State law will fall outside the proposed rule's definition. To 
encompass CUSOs as defined under both federal and State law, the final 
rule is condensed to incorporate by reference 12 CFR 712, which sets 
forth the attributes of CUSOs for federally-chartered credit unions, 
and expanded to include CUSOs as defined ``under [any] state law'' for 
State-chartered credit unions. Sec. 702.2(d).
    ``Net Worth.'' For the numerator of the net worth ratio, the 
proposed rule incorporated the definition of ``net worth'' prescribed 
by CUMAA, Sec. 1790d(o)(2): retained earnings as determined under 
Generally Accepted Accounting Principles (``GAAP'').\6\ 64 FR at 27108. 
See also 12 U.S.C. 1757a(c)(2) (parallel definition of ``net worth''). 
Independent of suggestions to establish additional sources of net worth 
(addressed in section A.3. below), nine commenters recommended 
modifying the proposed definition of that term. Two commenters found 
the American Institute of Certified Public Accountants (``AICPA'') 
definition of ``net worth'' to be clearer, yet still consistent with 
CUMAA. \7\ Four commenters advocated including the allowance for loan 
and lease losses (``ALL'') in ``net worth,'' while another took no 
position but wished to know whether or not the ALL is included. Two 
commenters recommended including donated equity in net worth.
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    \6\ CUMAA allows an exception for low income-designated credit 
unions only: their net worth includes secondary capital accounts 
that are uninsured and subordinate to all other claims, including 
claims of creditors, shareholders and the NCUSIF. 
Sec. 1790d(o)(2)(B). Secondary capital accounts do not fall within 
the defintion of GAAP retained earnings.
    \7\ AICPA, Audits of Credit Unions (May 1998 ed.) at 121.
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    In response to these comments, the definition of ``net worth'' is 
amplified and revised as follows in the final rule. Sec. 702.2(f). 
First, the definition now refers to ``the retained earnings balance of 
the credit union at quarter-end'' to correspond to the quarterly 
measurement of the credit union's total assets. See Secs. 702.2(j), 
702.101. Second, the definition incorporates the AICPA definition of 
retained earnings--``undivided earnings, regular reserves and any other 
appropriations designated by management or regulatory authorities''--
and makes clear that ``net worth'' consists of ``only undivided 
earnings and appropriations of undivided earnings.'' Thus, ``net 
worth'' includes amounts the credit union had previously closed from 
net income into undivided earnings; it excludes balance sheet items 
which, because they do not meet this criterion, fall outside the GAAP 
definition of retained earnings. Third, because provisions to the ALL 
are expense items that reduce undivided earnings, and the ALL is not an 
appropriation from undivided earnings, the final rule expressly 
clarifies that ``net worth'' does not include the ALL.
    Under GAAP, donations to a credit union in the form of cash or 
other assets (e.g., fixed assets), which are reported as 
``contributions,'' are recognized as revenues of the period. The credit 
union therefore would close them from net income into undivided 
earnings. Thus, such donations already are reflected in the credit 
union's retained earnings balance, thereby satisfying the criterion for 
inclusion in net worth.\8\ In contrast, Regulatory Accounting Practice 
(``RAP'') treats donations of cash differently than tangible assets. 
Like GAAP, RAP includes cash donations reported as ``contributions'' in 
net worth. But RAP treats donations of tangible assets as ``donated 
equity,'' excluding such amounts from current income and undivided 
earnings. As a result, these donations are not reflected in retained 
earnings and cannot be included in net worth.\9\
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    \8\ A contribution is an unconditional transfer of cash or other 
assets to an entity or a settlement or cancellation of its 
liabilities in a voluntary nonreciprocal transfer by another entity 
acting other than as an owner. Other assets include securities, 
land, buildings, use of facilities or materials and supplies, 
intangible assets, services, and unconditional promises to give 
those items in the future. Statement of Financial Accounting 
Standards (``SFAS'') No. 116, ``Accounting for Contributions made 
and Contributions Received,'' provides generally that 
``contributions'' received or made are appropriately recognized as 
either revenues or expenses in the period received or made, at their 
fair values. This accounting treatment meets the criterion noted 
above for inclusion in retained earnings or ``net worth.''
    \9\ This result may influence credit unions to choose GAAP 
instead of RAP. Once a credit union which follows RAP switches to 
GAAP, it may make a prior period adjustment that would increase or 
decrease undivided earnings for the cumulative net amount of the 
contributions, thereby increasing or decreasing net worth.
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    As discussed in section B.2. below, the statutory definition of 
``net worth'' does not reflect accumulated unrealized gains and losses 
on available-for-sale securities (Call Report account no. 945) in the 
credit union's portfolio.
    ``Shares.'' The proposed rule incorporated the definition of 
``insured shares'' in 12 CFR 741.4(b)(2). 64 FR at 27108. The sole 
comment on this definition urged expanding it to encompass ``jumbo'' 
certificates of deposit as well as deposit accounts that bear 
contractual interest. NCUA concurs and has revised the definition of 
``shares'' to include any depository account authorized by federal or 
state law. Sec. 702.2(i).
    ``Total assets.'' To compensate for seasonal fluctuations in total 
assets, the proposed rule defined ``total assets''--the denominator of 
the net worth ratio-- as the average of total assets reported either in 
the most recent four quarterly Call Reports or the most recent two 
semi-annual Call Reports, as the case may be. 64 FR 27108. Two 
commenters supported the use of averaging of assets in general instead 
of relying only on the period-end balance. Referring to the ``mandatory 
supervisory action'' restricting asset growth, a commenter observed 
that averaging historical data would restrict asset growth more than a 
simple quarter-end total. In contrast, three commenters supported 
allowing credit unions to use their discretion to decide the number of 
months over which to average total assets.
    Three commenters insisted that averaging of month-end balances 
would not sufficiently offset quarter-end distortions in the share 
balance due to the influx of payroll deposits, and advocated a daily 
average balance of assets to achieve this objective. Commenters 
suggested various averaging periods--any three of the last four 
quarters, the most recent five quarterly Call Reports or most recent 
three semi-annual Call Reports, and a period of months determined by 
the credit union not to exceed 24 months.
    Two commenters pointed out that the language of two of the MSAs--
the transfer of earnings to the regular reserve, and the asset growth 
restriction--was inconsistent with the proposed definition of ``total 
assets.'' 64 FR at 27108. Another commenter objected that the proposed 
definition failed to delineate between the period used to calculate 
total assets and the effective date of the calculation.
    The final rule retains ``the average of the quarter-end balances of 
the four most recent calendar quarters'' as one option for calculating 
total assets. Sec. 702.2(j)(1)(i). This method no longer depends on the 
Call Report fling schedule, however, because all credit unions will be 
required to complete a quarterly ``PCA Worksheet,'' or otherwise 
calculate their net worth ratio, regardless whether they file Call 
Reports quarterly or semiannually. To compensate for transactional 
fluctuations at month-ends during a quarter, the final rule adds three 
options for determining a credit union's total assets--monthly average 
over the quarter, daily average over the quarter, and quarter-end 
balance-to use for all

[[Page 8564]]

purposes other than the RBNW requirement. Sec. 702.2(j)(1).
    At the end of each quarter, a credit union may elect a method of 
calculating ``total assets'' from among the four options the final rule 
offers. Sec. 702.2(j)(2). The method selected must be used uniformly 
for that quarter for all purposes under part 702 except the RBNW 
requirement for ``complex'' credit unions (Secs. 702.103-702.106). Id.
    Finally, a commenter urged NCUA to specify the Call Report accounts 
that are included in ``net worth,'' and another objected to the 
regulatory burden involved in computing net worth. To reduce that 
burden, NCUA plans to include a ``PCA Worksheet'' in the Call Report to 
facilitate calculating and applying ``total assets'' on a quarter-by-
quarter basis under the method chosen. Credit unions which file a Call 
Report semi-annually will have the option to complete and maintain 
internally a ``PCA Worksheet'' for the first and third quarters, or to 
otherwise calculate the net worth ratio. See Sec. 702.101(c)(2).
3. Alternative Sources of Capital
    By statute, the net worth of credit unions is limited to retained 
earnings under GAAP, Sec. 1790d(o)(2), which consists exclusively of 
undivided earnings, regular reserves and any other appropriations 
designated by management or regulatory authorities. Sec. 702.2(f). The 
sole exception is that uninsured secondary capital accounts are 
included in the net worth of low income-designated credit unions. 
Sec. 1790d(o)(2)(B). This led numerous commenters to urge NCUA to 
develop and authorize alternative vehicles for raising capital to 
augment the net worth of ``natural person'' credit unions. The 
commenters suggested, for example, secondary capital accounts, paid-in-
capital accounts, membership capital accounts, net worth certificates, 
perpetual debt, annual membership fees to be recorded as revenue,\10\ 
and various types of uninsured share accounts.
---------------------------------------------------------------------------

    \10\ FCUA Sec. 109(a) allows federal credit unions to charge ``a 
uniform entrance fee if required by the board of directors.'' 12 
U.S.C. 1759(a).
---------------------------------------------------------------------------

    While NCUA may have the statutory authority to permit new sources 
of capital,\11\ CUMAA's express, limited definition of net worth--
retained earnings under GAAP--clearly precludes NCUA from classifying 
such capital as net worth for PCA purposes. Sec. 1790d(o)(2). As noted 
earlier, a credit union cannot include in retained earnings items that 
it had not previously closed from net income into undivided earnings. 
Except for annual membership fees, none of the proposed alternative 
sources of capital meets this criterion.
---------------------------------------------------------------------------

    \11\ FCUA Sec. 107 permits NCUA to authorize regulatory capital 
in the form of shares and subordinated debt. NCUA may authorize a 
federal credit union to (1) ``receive from its members from other 
credit unions, from an officer, employee or agent of those nonmember 
units of Federal, Indian Tribal, or local governments and political 
subdivisions thereof, * * *  [shares, share certificates, and share 
draft accounts]; subject to such terms, rates and conditions as may 
be established by the board of directors, within limitations 
prescribed by the [NCUA] Board''; and (2) ``borrow in accordance 
with such rules as may be prescribed by the [NCUA] Board, from any 
source, in an aggregate amount not exceeding * * * 50 per centum of 
its paid-in and unimpaired capital and surplus.'' 12 U.S.C. 1757(7), 
1757(9) (emphasis added).
---------------------------------------------------------------------------

    Commenters and others contend that the reason CUMAA expressly 
includes uninsured secondary capital accounts in the net worth of low 
income-designated credit unions, Sec. 1790d(o)(2)(B), simply is to 
confirm that, at present, only those credit unions are authorized to 
offer secondary capital accounts. This exception for secondary capital, 
it is claimed, leaves the door open for NCUA to include in net worth 
other forms of regulatory capital established by NCUA, or authorized by 
State law and recognized by NCUA. NCUA's research supports the opposite 
view--that Congress intended to make an exception exclusively for low 
income-designated credit unions, not generally for yet to be 
established sources of regulatory capital. To expand the statutory 
definition of net worth to include proposed new sources of capital 
would require Congress to amend the FCUA expressly to that effect.
    Should experience under part 702 demonstrate that additional 
sources of capital would be prudent and beneficial for credit unions, 
NCUA would consider proposals to establish such new forms of 
``regulatory capital.'' In that event, NCUA also would consider whether 
to support Congressional action to include ``regulatory capital'' 
within the net worth of federally-insured credit unions.
    In the interim, NCUA recognizes that regulatory capital, if 
authorized, would be available to absorb losses which the NCUSIF 
otherwise would absorb, despite not being included in net worth. To 
that end, the final rule is revised to establish as a criterion in 
evaluating net worth restoration plans the type and amount of any forms 
of regulatory capital as may be established by NCUA regulation, or 
authorized by State law and recognized by NCUA, which a credit union 
holds, and its ability to minimize possible long-term losses to the 
NCUSIF while the credit union takes steps to become ``adequately 
capitalized.'' Sec. 702.206(e). See also Sec. 703.306(d).
    Finally, a commenter urged NCUA to establish a cooperative fund to 
which credit unions could contribute ``net worth'' to be accessed by 
other credit unions as needed. While it is not appropriate for NCUA to 
sponsor such a fund, it certainly would be an appropriate private 
sector initiative for credit unions which are authorized to contribute 
to such a fund.

B. Subpart A--Net Worth Classification

1. Section 702.3--Net Worth Measures
    CUMAA expressly prescribes the exclusive measures which determine a 
credit union's net worth category classification--a credit union's net 
worth ratio and, if ``complex,'' its RBNW requirement. Sec. 1790d(c); 
Sec. 702.101(a). One commenter nonetheless advocated making a credit 
union's income, as reflected by income simulation models, a factor in 
determining its net worth category classification, insisting that the 
net worth ratio is too narrow a measure. Although income simulation 
models are a valid tool in assessing safety and soundness independently 
of PCA, CUMAA does not give NCUA discretion to establish additional 
criteria for determining a credit union's net worth category 
classification.
2. Section 702.101--Measures and Effective Date of Net Worth 
Classification
    Effective date. The proposed rule provided that a credit union 
generally would be deemed to have notice of its net worth ratio and 
corresponding net worth category classification as of ``the last day of 
the credit union's most recent dividend period for regular shares, but 
no less frequently than quarterly.'' \12\ 64 FR at 27108. Since most 
credit unions have a monthly dividend period for regular shares, this 
effectively required monthly measurement of the net worth ratio.
---------------------------------------------------------------------------

    \12\ In infrequent cases, a credit union would have notice of a 
decline in its net worth category classification through or as a 
result of its most recent final report of examination (indicating a 
flaw in calculating in net worth ratio, for example), or when it was 
notified by NCUA that it had been reclassified to a lower net worth 
category on safety and soundness grounds. Sec. 702.101(b)(2)-(3).
---------------------------------------------------------------------------

    Twenty-five commenters addressed this provision. Two were unable to 
distinguish between ``notice'' and the ``effective date'' of 
classification, while one predicted that credit unions will find it 
difficult to determine net worth on their own. Two commenters supported 
the ``effective date'' provision while fourteen commenters opposed it. 
The opponents felt that determining net worth monthly was too frequent 
and,

[[Page 8565]]

therefore, too burdensome. Various alternatives were suggested--
quarterly net worth determination, annual net worth determination, net 
worth determination to coincide with the Call Report periods, 
modification of the Call Report to incorporate the formula for 
calculating the net worth ratio, with an abbreviated March 30 and 
September 31 version of the Call Report for semiannual filers to file. 
In addition, the commenters insisted that more time is needed between 
the period-end when net worth is determined and the effective date of 
classification, when a credit union must undertake the applicable 
``mandatory supervisory actions.''
    In response to these concerns, NCUA has modified and improved upon 
the proposed rule in two key ways. First, to reduce the frequency of 
measuring net worth, the final rule determines a credit union's net 
worth ratio at the end of each calendar quarter to coincide with the 
end of the Call Report period, without regard to the credit union's 
dividend period for regular shares. Sec. 702.101(a). Moreover, to ease 
the burden of calculating the net worth ratio, NCUA plans to 
incorporate within the Call Report a ``PCA Worksheet'' which quarterly 
and semi-annual filers may rely upon to compute the net worth ratio on 
their own. For the first and third quarters, semiannual filers will 
have the option to complete and maintain a corresponding ``PCA 
Worksheet'' (instead of filing it with NCUA) or to otherwise calculate 
their net worth ratio.
    Second, the final rule no longer deems a credit union to ``have 
notice of its net worth ratio'' as of a certain date, but instead, 
establishes an ``effective date'' of net worth classification. The 
``effective date'' of a credit union's classification within a net 
worth category--the date by which it must undertake the actions 
applicable to credit unions in that category--generally is ``the last 
day of the month following the calendar quarter'' for which the credit 
union's net worth ratio is determined. Sec. 702.101(b)(1). This extends 
to approximately thirty days the period between quarter-end and the 
effective date--more time than is permitted to file the corresponding 
Call Report.
    Notice by credit union of change in net worth category. The 
proposed rule generally gave credit unions 15 days from the last day of 
the most recent dividend period for regular shares to notify NCUA of a 
change in net worth ratio if that change ``places the credit union in a 
lower net worth category.'' 64 FR 27108. Three commenters urged a role 
reversal in this regard--that NCUA should inform credit unions when 
their net worth classification changes. This is no longer necessary 
because the final rule eases the burden on credit unions substantially 
by making the period for measuring a credit union's net worth coincide 
with the Call Report period, and incorporating the ``PCA worksheet'' in 
the Call Report which already is required to be filed with NCUA (except 
by semiannual filers for the March 31 and September 30 quarters).
    The requirements to notify NCUA of a change in category 
classification are modified accordingly. The ``PCA Worksheet'' filed 
with the Call Report will give notice to NCUA of a change in net worth 
ratio from quarter to quarter, and any resulting change in 
classification. Thus, credit unions are no longer required to give 
separate notice to NCUA of a change in net worth category for the 
quarters for which they file a Call Report. Sec. 702.101(c)(1). This 
leaves two instances where the final rule requires a credit union to 
give separate notice to NCUA--semiannual Call Report filers whose net 
worth classification declines in the first and third quarters, and 
those whose classification declines due to recalculation of their net 
worth ratio by or as a result of an examination report. 
Sec. 702.101(c)(2)-(3). In all cases, written notice to NCUA is 
required only to report a decline in net worth category, not merely a 
change in net worth ratio.
    On a related issue of ``notice,'' one commenter asked whether a 
less than ``adequately capitalized'' credit union should inform its 
membership of its net worth category classification. There is no 
requirement for a credit union to disclose its net worth 
classification. However, an independent accountant who renders an 
opinion on the credit union's financial statements, in following 
Generally Accepted Auditing Standards (GAAS), may choose to disclose 
the credit union's classification in a footnote. In addition, Call 
Report data used to calculate a credit union's net worth ratio is 
publicly available.
    Adjustment of net worth ratio. CUMAA's definition of ``net 
worth''--GAAP retained earnings--does not encompass items of ``other 
comprehensive income'' such as accumulated unrealized gains and losses 
on ``available-for-sale'' (AFS) securities in a credit union's 
investment portfolio (Call Report account no. 945). See Statement of 
Financial Accounting Standards (``SFAS'') No. 130, ``Reporting 
Comprehensive Income.'' Thus, while such unrealized gains and losses 
are not reflected in the numerator of the net worth ratio, they are 
reflected in the denominator--total assets. As a result, when the fair 
value of AFS securities falls, the credit union's net worth ratio is 
artificially overstated.\13\ See 64 FR at 27093 & n.8. To remedy this 
distortion, the proposed rule gave NCUA latitude ``to adjust a credit 
union's net worth ratio to reflect the impact of accounting adjustments 
made for items of `other comprehensive income'.'' 64 FR at 27108.
---------------------------------------------------------------------------

    \13\ 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.'' If, during the next quarter, the credit union 
experiences an $8,000 decrease in the fair value of its AFS 
securities, that unrealized loss would be reflected in total assets 
(the denominator of the net worth ratio), reducing them to $92,000, 
but would not be reflected at all in retained earnings (the 
numerator of the net worth ratio), which still would be $6500. As a 
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.
---------------------------------------------------------------------------

    While five commenters supported this remedy in whole or in part, 
seventeen predicted that the market volatility of AFS securities would 
adversely impact net worth. Credit unions wishing not to reflect 
unrealized losses in net worth, it is claimed, would be tempted to 
inappropriately classify their securities as ``held-to-maturity'' under 
SFAS No. 115.\14\ NCUA shares this concern. Moreover, its own research 
discloses that, at present, the proposed adjustment would have a 
limited impact--just a single credit union would be reclassified to a 
lower net worth category if the adjustment were applied to reflect an 
unrealized loss. Therefore, the final rule abandons the ``adjustment of 
net worth ratio'' provision, leaving the denominator of the net worth 
ratio unaffected. Yet, to not take account of the impact of material 
unrealized losses on investment securities, regardless of accounting 
classification, would pose a relevant, tangible risk to the NCUSIF. 
Accordingly, NCUA plans to address unrealized losses which are 
sufficiently material to affect a credit union's net worth 
classification as a safety and soundness concern.
---------------------------------------------------------------------------

    \14\ SFAS No. 115, ``Accounting for Certain Investments in Debt 
and Equity Securities,'' provides for classification of securities 
as either ``held-to-maturity,'' ``available-for-sale,'' or 
``trading.''
---------------------------------------------------------------------------

    Reclassification based on supervisory criteria other than net 
worth. The proposed rule gave NCUA discretion to reclassify a credit 
union to the next lower net worth category (but not lower than 
``significantly undercapitalized'') if it determined, after notice and 
opportunity for a hearing, that the credit union either was ``in an 
unsafe or

[[Page 8566]]

unsound condition'' or ``has not corrected an unsafe or unsound 
practice.'' 64 FR at 27109. Following CUMAA's mandate, this section is 
modeled on a parallel provision of FDIA Sec. 38. Sec. 1790d(h); 12 
U.S.C. 1831o(g).
    NCUA received various comments suggesting modifications to the 
grounds for reclassification under this provision. One advocated 
establishing precise criteria defining an unsafe or unsound practice or 
condition to ensure that the discretion to reclassify a credit union to 
a lower net worth category is exercised equitably. Given the 
historically subjective and sometimes unique nature of safety and 
soundness issues, NCUA prefers to review individual situations on a 
case-by-case basis, rather than to rely on objectively quantifiable 
standards which might limit the latitude to respond to an unsafe or 
unsound practice or condition.
    Another commenter urged NCUA to revise the reclassification 
provision to exempt a credit union which is complying with an approved 
net worth restoration plan. To do so would make section 702.102(b) 
inconsistent with the parallel provision of FDIA Sec. 38, which CUMAA 
instructs NCUA to follow. 12 U.S.C. 1831o(g). In addition, CUMAA is 
clear that PCA is available to address safety and soundness problems in 
addition to, not instead of, supervisory actions. Sec. 1790d(n); 
Sec. 702.1(d). In practice, however, adherence to an approved net worth 
restoration plan which provides for correcting such conditions and 
problems will mitigate against the need to exercise the discretion to 
downgrade a credit union.
    Two commenters expressed concern about abuse of the 
reclassification authority. One worried that it will be used as a 
pretext to force a supervisory assisted merger. Another noted that the 
proposed provision puts no limit on how frequently within a given 
period of time a credit union can be reclassified downward, 
theoretically permitting an ``adequately capitalized'' credit union to 
be downgraded repeatedly in a relatively short period until it is 
``significantly undercapitalized'' on the basis of the same or similar 
offending practices or conditions.
    NCUA acknowledges these concerns, but believes the opportunities 
for abuse of the reclassification authority are minimal. First, the 
opportunity to force an assisted merger by reclassification is limited 
to a single instance-- reclassification from ``undercapitalized'' to 
``significantly undercapitalized.'' The statutory authority to insist 
on merger as a last resort to spare the credit union from 
conservatorship or liquidation is available only in the ``significantly 
undercapitalized'' and ``critically undercapitalized'' categories, 
Secs. 702.203(c), 702.204(c), and part 702 does not authorize 
reclassification to the latter category on safety and soundness 
grounds. Sec. 702.102(b). Second, NCUA is prohibited from delegating 
its authority to reclassify on safety and soundness grounds. 
Sec. 1790d(h)(2); Sec. 702.102(c). Absent exceptional circumstances, 
the NCUA Board does not anticipate using its authority under 
Sec. 702.102(b) to reclassify a credit union downward by more than a 
single category in a 12-month period regardless of the variety and 
number of unsafe or unsound conditions or practices. As a final measure 
of protection against abuse, subpart L of part 747 provides a 
reclassified credit union the opportunity for a hearing to challenge 
the reclassification. Sec. 747.2003.

C. Subpart B--Mandatory Supervisory Actions

1. Section 702.201--Earnings Transfer to Regular Reserve
    The first of the four MSAs prescribed by CUMAA requires all but 
``well capitalized'' credit unions to annually transfer earnings 
equivalent to 0.4% of total assets to net worth. Sec. 1790d(e)(1). An 
exception to that minimum is allowed, subject to periodic review, if 
necessary to avoid a significant redemption of shares. 
Sec. 1790d(e)(2). For the purpose of measuring total assets, the 
proposed rule used the average of total assets as set forth in the most 
recent four quarterly Call Reports or most recent two semi-annual Call 
Reports, as the case may be. 64 FR at 27109. The annual sum was to be 
transferred to the regular reserve at a monthly or quarterly rate 
corresponding to the dividend period for regular shares, but no less 
frequently than quarterly. An exception to the 0.4% minimum was 
permitted on a case-by-case basis, subject to a minimum quarterly 
review, if the statutory prerequisites were met. Id.
    Two commenters construed the proposed provision to permit only 
``adequately capitalized'' credit unions to seek a reduction below the 
minimum amount of the earnings transfer, making the rule inconsistent 
with CUMAA. In fact, a reduction below the minimum percentage 
equivalent of total assets is available to all credit unions having a 
net worth of less than 7%. In the final rule, the criteria for approval 
and review of such a reduction are fully set forth in Sec. 702.201, 
which applies to ``adequately capitalized'' credit unions.\15\ The 
criteria are incorporated fully by reference in sections 702.202(a)(1), 
702.203(a)(1), 702.204(a)(1) which apply to ``undercapitalized,'' 
``significantly undercapitalized'' and ``critically undercapitalized'' 
credit unions, respectively.
---------------------------------------------------------------------------

    \15\ Following the practice originated under former FCUA 
Sec. 116, 12 U.S.C. 1762(b) (repealed), for seeking ``Sec. 116 
assistance,'' NCUA plans to require credit unions to apply to the 
appropriate Regional Director when seeking a reduction below the 
minimum quarterly reserve transfer. At the request of a commenter, 
the burden of preparing a request for a ``reduction in earnings 
transfer'' is addressed in the Paperwork Reduction Act notice in 
section III. below.
---------------------------------------------------------------------------

    Eleven commenters addressed the rate of transfer prescribed in the 
proposed rule. Three commenters were comfortable with a monthly reserve 
transfer, but the vast majority contended that the monthly rate was too 
frequent and too burdensome. One of these suggested that the earnings 
transfer coincide with the filing of the Call Report.
    In response to comments and on NCUA's own initiative, the final 
rule restructures this MSA to establish a single, uniform schedule for 
transferring earnings to net worth, to conform with other provisions of 
the rule. First, the required minimum earnings transfer to the regular 
reserve now takes place at a uniform quarterly rate of 0.1% of ``total 
assets for the current quarter,'' without regard to the dividend period 
for regular shares. Sec. 702.201(a). Second, as the basis for 
calculating the quarterly equivalent of 0.1% of ``total assets for the 
current quarter,'' the final rule relies on whichever method of 
calculating its total assets--the average of the most recent four 
calendar quarter-end balances, the monthly average over the quarter, 
the daily average over the quarter, or the quarter-end balance--the 
credit union has chosen under section 702.2(j).
    The final rule bases the quarterly equivalent of 0.1% of total 
assets on the credit union's ``total assets for the current quarter,'' 
not its total assets solely at the end of the quarter in which it first 
became ``adequately capitalized'' or lower. This means that the amount 
of the increase in net worth will fluctuate quarterly as the 0.1% 
equivalent of total assets is recalculated for each succeeding quarter 
in which a transfer is required (until the credit union is ``well 
capitalized''.) As total assets increase or decrease quarter by 
quarter, the amount represented by 0.1% of assets will fluctuate 
accordingly. These modifications conform to the Call Report schedule 
now used to determine

[[Page 8567]]

net worth classification on a calendar quarter basis.
    For example, as shown in Table 1 below, a credit union which 
declines to ``adequately capitalized'' in the first quarter of 2001 
makes no transfer of earnings in that quarter because the effective 
date of classification is 4/30/2001. The credit union makes the 
transfer (attributable to the first quarter classification) by the end 
of the second quarter based on total assets for the then-``current 
quarter,'' i.e., total assets as of 6/30/2001. Assuming the credit 
union remains ``adequately capitalized'' in the second and third 
quarters, the transfer (attributable to each quarter's classification) 
will be made by the end of the next quarter based on total assets for 
the then-``current quarter,'' i.e., total assets as of 9/30/2001 and 
12/31/2001, respectively.
[GRAPHIC] [TIFF OMITTED] TR18FE00.000

    Because the transfer is always attributed to the prior quarter's 
net worth classification, it makes no difference if the credit union's 
net worth ratio exceeds 7 percent during the quarter in which the 
transfer is actually made. The classification as ``well capitalized'' 
does not become effective until the last day of the month following the 
quarter, when the credit union may discontinue making the transfer.
    Finally, one commenter inquired whether the proposed rule should be 
modified to permit the transfer of the equivalent of more than 0.1% of 
its total assets per quarter, should a credit union's board of 
directors elect to do so. The final rule has been revised to indicate 
that a credit union ``must increase its net worth quarterly by an 
amount equivalent to at least 1/10th percent (0.1%) of its total assets 
for the current quarter'' and then ``must quarterly transfer that 
amount (or more by choice) to its regular reserve,'' but cannot be 
compelled to transfer more than 0.1% of its total assets. 
Sec. 702.201(a) (emphasis added).
2. Sections 702.202(a)(2), 702.206--Net Worth Restoration Plans
    Deadlines. The proposed rule generally established a period of 45 
calendar days from quarter-end to submit an NWRP; if that deadline was 
not met, an additional 15 days was allowed. Id. Fourteen commenters 
sought a longer period for filing an NWRP--four suggesting 60 days; 
three suggesting 90 days; four simply seeking more time; and three 
advocating 45 to 60 days following the end of a reasonable time period 
for closing the books and preparing financial statements. There were no 
comments on the additional 15-day period.
    The final rule effectively extends the period for filing an NWRP as 
the commenters urged. Section 702.101(b)(1) establishes that the 
effective date of net worth classification is the last day of the month 
following the quarter-end at which the net worth ratio is determined, 
thus inserting an interval of approximately 30 days. Accordingly, 
section 702.206(a) is revised to commence the original 45-day period on 
the effective date of net worth classification, rather than at quarter-
end. This gives credit unions a maximum of approximately 75 days from 
quarter-end to timely file an NWRP. With the additional 15-day period 
available to credit unions which fail to file timely, 
Sec. 702.206(a)(4), the final rule allows a maximum of approximately 90 
days to file an NWRP.
    The proposed rule established a period of 60 calendar days after 
receiving an initial NWRP for NCUA to notify the credit union of its 
approval or disapproval, and to provide reasons in the event of the 
latter. 64 FR at 27112. Three commenters urged NCUA to shorten the 
period for evaluating NWRPs. Two commenters were content to leave the 
evaluation period at 60 days, provided that the final rule allows the 
credit union to operate under a submitted NWRP pending NCUA's decision, 
and deems the NWRP approved if there is no decision within the 60-day 
period.
    In view of the need for promptness inherent in PCA, NCUA concludes 
that it is unfair to give credit unions less time to submit an NWRP 
than NCUA has to evaluate it. Therefore, the period for NCUA to 
evaluate an NWRP has been shortened to 45 calendar days from the day 
the NWRP is received. Sec. 702.206(f)(1). The credit union still may 
not operate under the submitted NWRP during this period. However, if no 
decision is made at the expiration of 45 days, however, the final rule 
provides that the NWRP is deemed approved. Sec. 702.206(f)(2).
    Finally, one commenter proposed supplementing the existing 
requirement that NCUA seek and consider the appropriate State 
official's views when evaluating an NWRP submitted by a federally-
insured, State-chartered credit union (``FISCU''). In those cases, the 
commenter urged, NCUA should be required to promptly notify the State 
official of its decision to approve or disapprove the FISCU's NWRP. The 
final rule has been modified accordingly. Sec. 702.206(f)(3).
    Assistance to small credit unions. CUMAA expressly provides that 
``upon timely request by a credit union with total assets of less than 
$10 million,'' NCUA shall ``assist that credit union in preparing [an 
NWRP].'' Sec. 1790d(f)(2). The final rule conforms to this mandate. 
Sec. 702.206(b). Similarly, assistance in the form of training to 
prepare and revise a business plan (the equivalent of an NWRP for 
``new'' credit unions) will be available to ``new'' credit unions under 
subpart C of part 702. Sec. 702.309(a). A commenter insisted that NCUA 
provide assistance in preparing an NWRP to any credit union, regardless 
of asset size. NCUA declines to exceed the statutory mandate in this 
regard absent evidence

[[Page 8568]]

that credit unions generally lack the ability to prepare an NWRP 
themselves.
    Contents: The proposed rule required an NWRP to specify: (1) The 
steps the credit union will take to become ``adequately capitalized''; 
(2) a timetable for increasing net worth annually; (3) plans to comply 
with the mandatory and discretionary supervisory actions imposed on the 
credit union; (4) the types and levels of activities in which the 
credit union will engage; (5) the projected amount of its earnings 
transfer to the regular reserve; and (6), if the credit union has been 
reclassified on safety and soundness grounds, the steps it will take to 
correct the unsafe or unsound practice(s) or condition(s). Pro-forma 
financial statements covering the next two years also were required. 64 
FR 27112.
    Eight commenters found the proposed content requirements too 
inflexible, suggesting that share growth be allowed even when it causes 
a temporary decline in net worth ratio. Compare Sec. 702.202(a)(3)(i). 
Similarly, twelve commenters suggested that an NWRP which permits asset 
growth to create earnings is preferable to one which simply shrinks the 
balance sheet to increase net worth. Another commenter discouraged 
reliance on a uniform timetable for increasing net worth that applies 
to all credit unions.
    The proposed rule required ``a timetable for increasing net worth 
for each year in which the [NWRP] will be in effect.'' 64 FR 27112. To 
allow for greater flexibility over the duration of an NWRP, the final 
rule now requires ``a quarterly timetable for the steps the credit 
union will take to increase its net worth ratio so that it becomes 
`adequately capitalized' by the end of the term of the NWRP, and to 
remain so for four (4) consecutive calendar quarters.'' 
702.206(c)(1)(i). Thus, a credit union must specify the steps it will 
take to increase its net worth ratio by the end of the term of the 
NWRP, but need not pledge to increase its net worth ratio in each 
quarter or year the NWRP is in effect. The final rule also adds the 
caveat for credit unions that qualify as ``complex'' that the RBNW 
requirement ``may require a net worth ratio higher than six percent 
(6%) to become `adequately capitalized.''' Id.
    The proposed rule required financial data accompanying an NWRP to 
comply with GAAP. 64 FR at 27112. The final rule abandons this 
requirement to conform with NCUA policy requiring only Call Reports 
submitted by credit unions having $10 million or more in assets to 
adhere to GAAP. 12 CFR 741.6(b).
    One commenter asked that NCUA enumerate in the final rule examples 
of steps for building net worth that a credit union should include in 
its NWRP. Consistent with NCUA's belief that there is no ``one size 
fits all'' prescription for restoring net worth, neither the proposed 
nor the final rule sets a standardized duration for all NWRPs, nor 
enumerates the steps that may or may not be appropriate for all credit 
unions to implement. The preferred approach is for a credit union to 
develop a unique NWRP prescribing individualized, positive steps to 
restore net worth, which NCUA will evaluate on a case-by-case basis.
    The proposed rule required an NWRP to be accompanied by pro forma 
financial statements ``covering the next 2 years.'' 64 FR at 27112. One 
commenter apparently inferred from this that NWRPs are limited to a 
term of two years, and suggested permitting a term of up to 5 years. In 
fact, neither the proposed nor the final rule set a time limit for 
NWRPs; to do so would be inconsistent with the flexible approach needed 
for an NWRP to succeed. To confirm that the term of an NWRP is not 
linked to the period covered by supporting pro forma financial 
statements, NCUA has modified the final rule to require pro forma 
financial statements for a minimum of 2 years. Sec. 702.206(c)(2). 
Ideally, the accompanying pro forma financial statements will cover the 
entire period of the NWRP.
    The proposed rule required an NWRP to specify ``how the credit 
union will comply with the mandatory and discretionary supervisory 
[actions] imposed on it under [part 702].'' 64 FR at 27112. This led 
three commenters to infer that this required an NWRP to cover all 
possible discretionary actions, rather than only those NCUA actually 
has imposed on it. The final rule is revised to confirm that an NWRP 
need only address the discretionary supervisory actions actually 
``imposed on it by the NCUA Board.'' Sec. 702.206(c)(1)(iii).
    Critria for approval. To the single criterion prescribed by CUMAA 
for approving an NWRP--that it ``is based on realistic assumptions and 
is likely to succeed in restoring * * * net worth''--the proposed rule 
added that an NWRP must (1) comply with the content requirements for an 
NWRP; (2) not unreasonably increase the credit union's risk exposure; 
and (3) be supported by appropriate assurances that the credit union 
will comply with the NWRP until the credit union has remained 
``adequately capitalized'' for four consecutive calendar quarters. 64 
FR at 27112.
    One commenter urged NCUA to add, as a criterion in evaluating an 
NWRP, ``the limited ability of credit unions to raise net worth.'' NCUA 
declines to make this an explicit criterion because the entire system 
of PCA for credit unions already reflects the distinctions between 
credit unions and other depository institutions. A principal one of 
these is the limited ability of credit unions to raise capital. 
Moreover, to maintain a flexible process for evaluating NWRPs, the 
criteria for approving an NWRP has deliberately been held to a minimum, 
and the proposed rule deliberately articulates those criteria in 
general terms.
    The final rule abandons the criterion requiring ``appropriate 
assurances from the credit union that it will comply with the plan 
until it has remained `adequately capitalized' for four consecutive 
quarters.'' 64 FR at 27112. This criterion was adapted from FDIA 
Sec. 38, which requires such ``appropriate assurances'' to be secured 
by a financial guarantee of compliance. 12 U.S.C. 1831o(e)(2)(C)(ii). 
NCUA never considered demanding a financial guarantee of compliance 
from credit unions because part 702 elsewhere provides remedies for 
failure to implement an NWRP. Sec. 747.2005(b)(2). However, the 
objective of remaining ``adequately capitalized'' for four consecutive 
quarters is valid and properly belongs in an NWRP's timetable of steps 
for increasing the net worth ratio. Therefore, the final rule inserts 
that objective as a timetable requirement among the contents of an 
NWRP. Sec. 702.206(c)(1)(i).
    One commenter asked how frequently NCUA plans to review 
implementation of an NWRP to determine material compliance by the 
credit union. See Sec. 702.102(a)(4)(ii)(B). NCUA believes that 
assessing the implementation and results of an NWRP is a supervision 
issue to be dealt with at the regional level on a case-by-case basis. 
Therefore, the final rule sets no schedule or standards for measuring 
material compliance with an NWRP.
    The final rule introduces a new criterion for evaluating an NWRP--
the impact of ``regulatory capital'' in any form that may become 
established by NCUA regulation, or authorized by State law and 
recognized by NCUA, but which is not included in net worth.\16\ 
Sec. 702.206(e). NCUA recognizes that

[[Page 8569]]

regulatory capital, if established, would be available to absorb losses 
which the NCUSIF otherwise would absorb. Thus, the final rule adds the 
following criterion: ``To minimize possible long-term losses to the 
NCUSIF while the credit union takes steps to become `adequately 
capitalized,' the NCUA Board shall, in evaluating an NWRP under 
[section 702.206], consider the type and amount of any [such] forms of 
regulatory capital * * * which the credit union holds, but which is not 
included in net worth.'' Sec. 702.206(e). This also is a criterion in 
evaluating a revised business plan submitted by a ``new'' credit union. 
Sec. 703.306(d).
---------------------------------------------------------------------------

    \16\ At present, only secondary capital accounts established for 
low-income designated credit unions under 12 CFR 701.34 qualify as 
net worth. Sec. 1790d(o)(2)(B).
---------------------------------------------------------------------------

3. Section 702.202(a)(3)--Restriction on Asset Growth
    The third of four MSAs prescribed by CUMAA requires a credit union 
having a net worth ratio of less than 6% to ``not generally permit its 
average total assets to increase,'' except as provided in an approved 
NWRP, and so long as assets and net worth increased at the rate the 
NWRP prescribes. Sec. 1790d(g)(1). To compute ``average total assets,'' 
the proposed rule used the average of total assets reported in the most 
recent four quarterly Call Reports or most recent two semi-annual Call 
Reports. 64 FR 27109. Pending approval of such an NWRP, the proposed 
rule absolutely barred asset growth, allowing no exceptions. Id.
    Seventeen comments addressed the mandatory asset growth 
restriction. Three commenters objected to basing ``average total 
assets'' on the prior four quarters. One objected that doing so would 
penalize credit unions whose assets had grown over the past year, 
compelling them to immediately reduce actual total assets to the 
average. The more a credit union's assets had increased, the greater 
the impact of a reduction to the average. As explained earlier, the 
final rule offers four options for measuring ``average total assets.'' 
The method a credit union chooses under section 702.2(j) will establish 
the asset growth ``ceiling.'' Sec. 702.202(a)(3).
    Many commenters condemned the rigidity of the asset growth 
restriction pending approval of an NWRP, observing that it is 
essentially a freeze on total assets that is detrimental to credit 
unions. For example, one commenter pointed out that the restriction, as 
proposed, prohibits the collection of interest income, which would 
increase a credit union's net worth--precisely the objective of PCA. 
Another cited revenue from lending as an ``important driver'' of return 
on average assets that should not be restricted. Another favored 
excepting U.S. Treasury securities and IRA accounts from the definition 
of ``total assets'' to allow for asset growth outside the NWRP. Eleven 
commenters advocated allowing an exception to the restriction when 
asset growth creates earnings. Allowing exceptions for this purpose, 
they urge, is preferable to shrinking the balance sheet to increase the 
net worth ratio. In this regard, NCUA recognizes that member allegiance 
to credit unions may cause member share accounts to grow even when 
rates are below prevailing market rates.
    In response to these comments and on its own initiative, NCUA 
reconsidered the statutory language which provides that a credit union 
shall ``not generally permit its average total assets to increase.'' 
Sec. 1790d(g)(1). As the Senate Banking Committee has acknowledged, 
``[t]he term `generally' allows the NCUA to make carefully delineated 
exceptions to the asset growth restrictions if the exceptions are 
consistent with the purpose of [Sec. 1790d].'' S. Rep. at 14. NCUA is 
convinced that absolute application of the asset growth restriction is 
inconsistent with the purpose of PCA because it would bring to a halt a 
credit union's normal business operations. This has led NCUA to relax 
the asset growth restriction by making carefully delineated exceptions, 
available under certain conditions, pending approval of an NWRP.
    The final rule is revised to allow total assets to increase, 
pending approval of an NWRP, by reason of increases in the following 
categories. First, total accounts receivable and accrued income on 
loans or investments. This exception allows the accrual of income 
items, which increases net worth. Sec. 702.202(a)(3)(ii)(A)(1). Second, 
cash and cash equivalents. This exception permits continued receipt of 
member deposits (for example, automated clearing house payroll 
deposits) and collection of cash payments of interest income. 
Sec. 702.202(a)(3)(ii)(A)(2). Third, total loans outstanding, subject 
to a maximum equivalent to the sum of total assets plus the quarter-end 
balance of unused commitments to lend and unused lines of credit. 
Sec. 702.202(a)(3)(ii)(A)(3). Under this exception, a credit union may 
make loans in the normal course of business from liquid assets 
available at the time it is classified ``undercapitalized'' or lower, 
and to honor unused commitments (such as unused revolving loans or 
unused commitments for member business loans) existing at that time.
    These exceptions to the asset growth restriction in section 702.202 
are available provided the credit union does not offer rates on shares 
in excess of prevailing rates on shares and deposits in its relevant 
market area, and does not open new branches. Sec. 702.202(a)(3)(ii)(B). 
A credit union which does not avail itself of the exceptions is not 
subject to the limitations on rates and branching.
4. Section 702.204(a)(4)--Restriction on Member Business Loans
    The last of the four ``mandatory supervisory actions'' prescribed 
by CUMAA prohibits credit unions having a net worth ratio of less than 
6% from ``mak[ing] any increase in the total amount of member business 
loans * * * outstanding at that credit union at any one time.'' The 
restriction takes effect regardless whether the credit union has 
reached the statutory ceiling on member business loans (``MBLs'') in 12 
U.S.C. 1757a(a)(1). Sec. 1790d(g)(2).
    The proposed rule followed Title II of CUMAA, 12 U.S.C. 1757a(b), 
in exempting from the MBL restriction credit unions chartered for the 
purpose of making, or that have a history of primarily making, MBLs, or 
which are designated low income, or which qualify as community 
development financial institutions. 64 FR at 27109. NCUA declines the 
invitation by two commenters to expand the exemption to include any 
credit union which makes MBLs. To so drastically extend the exemptions 
would neutralize this MSA in derogation of CUMAA. Sec. 1790d(n).
    The final rule is revised to clarify the MBL restriction in three 
ways. Sec. 702.202(a)(4). First, to expressly confirm that for PCA 
purposes the definition of MBLs includes unused MBL commitments, unless 
otherwise noted. Second, to impose the restriction on the dollar amount 
of member business lending, rather than linking it to an average or a 
percentage of total assets. Third, to indicate that the ``total dollar 
amount of [MBLs]'' is measured ``as of the preceding quarter-end,'' 
i.e., the quarter-end preceding the effective date of classification of 
the credit union as ``undercapitalized''' or lower.

D. Subpart B--Discretionary Supervisory Actions

    Table 1 below displays the fourteen DSAs which the final rule 
applies as indicated to the ``undercapitalized,'' ``significantly 
undercapitalized'' and ``critically undercapitalized'' net worth 
categories. All fourteen DSAs apply in the ``moderately capitalized'' 
and lower net worth categories (6% net worth ratio) of the alternative 
system of PCA for ``new'' credit unions. Sec. 702.304(b). Because DSAs 
are available only as

[[Page 8570]]

necessary to carry out the purpose of PCA, NCUA generally does not 
anticipate resorting to the DSAs available in a particular net worth 
category unless a credit union fails to timely implement or comply with 
an approved NWRP, which includes its timetable of steps to increase its 
net worth ratio.
[GRAPHIC] [TIFF OMITTED] TR18FE00.001

    Consistent with its statutory mandate, NCUA attempted in the 
proposed rule to craft DSAs which are ``comparable'' with the 
``discretionary safeguards'' available under the system of PCA that 
applies to banks, yet which suit the distinctive needs and 
characteristics of credit unions. See Sec. 1790d(b)(1)(A). The DSAs are 
allocated among the statutory net worth categories (Table 3) 
approximately as they are allocated among the net worth categories in 
FDIA Sec. 38, 12 U.S.C. 1831o.

[[Page 8571]]

[GRAPHIC] [TIFF OMITTED] TR18FE00.002

1. Section 702.204(b) and (c)--``First Tier'' and ``Second Tier'' of 
``Undercapitalized'' Category
    An overwhelming number of commenters objected, with respect to 
DSAs, that the ``undercapitalized'' category generally treats a credit 
which is just a few basis points short of a 6% net worth ratio, i.e., 
nearly ``adequately capitalized,'' as harshly as a credit union which 
is just a few basis point above a 3.99% net worth ratio, i.e., nearly 
``significantly undercapitalized.'' One commenter went further, 
observing that there was insufficient differentiation among the range 
of DSAs available in each of the three categories.
    To correct this inequity, eight commenters advocated that DSAs 
should not be available at all to be imposed on credit unions in the 
``undercapitalized'' category. Eighteen commenters urged imposing a 
moratorium on the imposition of DSAs for a period of time to allow the 
``mandatory supervisory actions'' to succeed in restoring net worth. 
Seven commenters suggested that the final rule should exempt a credit 
union from DSAs when ``normal growth'' in assets alone depresses its 
net worth ratio below 6 percent. Two commenters urged NCUA to abandon 
DSAs altogether and to rely instead on its statutory authority to 
reclassify a credit union to the next lower net worth category on 
grounds of an unsafe or unsound practice or condition. Sec. 702.102(b).
    In considering these comments, NCUA notes that the ``discretionary 
safeguards'' under the banks'' system of PCA--to which DSAs are 
required to be ``comparable''--generally do not become available until 
an institution's net worth falls below 4%.\17\ Therefore, to provide a 
degree of relief to credit unions marginally below a 6% net worth 
ratio, the final rule divides the ``undercapitalized'' category into a 
``first tier'' and a ``second tier'' only for purposes of imposing 
DSAs. The ``first tier'' consists of credit unions having a net worth 
ratio of between 5% and 5.99%, as well as those ``complex'' credit 
unions which are classified ``undercapitalized'' by reason of failing 
to meet an RBNW requirement. The ``second tier'' consists of credit 
unions having a net worth ratio of 4% to 4.99%.
---------------------------------------------------------------------------

    \17\ FDIA Sec. 38's five capital categories are denominated 
identically to CUMMA's five net worth categories. Compare 12 U.S.C. 
1831o(b)(1) with Sec. 1790d(c)(1). However, the ``leverage ratios'' 
corresponding to each capital category were established by the 
Federal banking agencies rather than by FDIA Sec. 38 itself, whereas 
CUMAA itself established the net worth ratios corresponding to each 
net worth category. Compare Joint Final Rule, 57 FR at 44867 with 
Sec. 1790d(c)(1). FDIA Sec. 38 generally classifies an institution 
as ``adequately capitalized,'' and thus no longer subject to 
``discretionary safeguards,'' when its leverage ratio reaches 4%. 57 
FR at 44867. See, e.g., 12 CFR 325.103(b)(2)(A). In contrast, CUMAA 
does not classify a credit union as ``adequately capitalized'' until 
its net worth ratio reaches 6%. Sec. 1790d(c)(1)(B). Significantly, 
CUMAA requires part 702 to be ``comparable'' to FDIA Sec. 38 itself, 
rather to the Joint Final Rule. Sec. 1790d(b)(1)(A)(ii). Thus, the 
DSAs prescribed in the final rule are ``comparable'' by 
corresponding category--rather than by equivalent leverage ratio in 
the Joint Final Rule--to the ``discretionary safeguards'' in FDIA 
Sec. 38.
---------------------------------------------------------------------------

    Under the final rule, a credit union which is in the ``first tier'' 
of the ``undercapitalized'' category is subject to the DSAs applicable 
in that category (lines 1-6 and 8-10, Table 2 above) only if it fails 
to comply with any of the four applicable MSAs (i.e., submit NWRP, 
earnings transfer to net worth, asset growth restriction, and MBL 
restriction) or fails to timely implement an approved NWRP, which 
includes meeting the timetable of steps to increase its net worth 
ratio. Sec. 702.202(c).

[[Page 8572]]

    A credit union which is in the ``second tier'' of the 
``undercapitalized'' category is subject to all of the DSAs available 
in that category regardless whether it is in compliance with the 
applicable MSAs and is timely implementing an approved NWRP. 
Sec. 702.202(b). Moreover, CUMAA expressly classifies to the 
``significantly undercapitalized'' category any credit union in the 
``second tier'' (4 to 4.99% net worth ratio) which fails to timely 
submit an NWRP for approval, or materially fails to implement an 
approved NWRP. Sec. 1790d(c)(1)(C); Sec. 702.202(a)(2).

[[Page 8573]]

[GRAPHIC] [TIFF OMITTED] TR18FE00.003

2. Revisions to Individual Discretionary Supervisory Actions.
    Comments on the DSAs in the proposed rule, 64 FR at 27096-27098, 
generally fall into two categories--those wishing that a specific DSA 
would more closely parallel its corresponding ``discretionary 
safeguard'' under the banks' system of PCA, and those wishing NCUA 
would further modify specific DSAs to suit credit unions. The final 
rule does some of both.
    Requiring prior approval for acquisitions, branching, new lines of 
business. The proposed rule gave NCUA the discretion to prohibit a 
credit union from, among other things, ``directly or indirectly, 
acquiring any interest in a CUSO or credit union'' unless it is 
``consistent with and will further the objectives of [an approved 
NWRP].'' 64 FR at 27096, line 1. Although no comments addressed this 
DSA, NCUA has decided that the limitation on acquiring interests in a 
CUSO or credit unions was too narrow, and should be expanded to 
prohibit acquiring an interest in ``any business entity or financial 
institution.'' In the final rule, this DSA has been modified 
accordingly. Sec. 702.202(b)(1).
    Prohibiting or reducing asset growth. Separately from the MSA 
restricting asset growth, the proposed rule authorized NCUA to prohibit 
growth in all or a category of assets, or require the credit union to 
reduce all or a category of assets. 64 FR 27097, line 4. Characterizing 
this DSA as a potential threat to a credit union's survival, several 
commenters encouraged NCUA to be flexible in imposing this DSA when a 
credit union is properly implementing an approved NWRP that permits 
asset growth linked with increasing net worth. This concern is well 
taken in view of the relief from the MSA that CUMAA gives to credit 
unions operating under an approved NWRP that allows assets to increase 
in tandem with net worth. Sec. 1790d(g)(1). NCUA will not permit this 
DSA to be used to effectively reinstate the MSA. Moreover, NCUA does 
not anticipate imposing this DSA when assets are growing pursuant to an 
NWRP which NCUA approved. A possible exception would be to limit or 
reduce a particular category of assets that poses an obstacle to 
restoring net worth.
    Two commenters contend that this DSA is unnecessary because it 
duplicates the MSA restricting asset growth, Sec. 702.202(a)(3). The 
MSA and this DSA are not comparable, however, because they serve 
different purposes. The MSA imposes a ceiling on asset growth to compel 
the credit union to develop a strategy for increasing its net worth 
ratio to 6% or more. Uncontrolled asset growth without attention to 
building net worth simply erodes the net worth ratio. This DSA, in 
contrast, is available to selectively limit or reduce growth in one or 
more specific asset categories, if needed to ``fine tune'' the asset 
growth that an approved NWRP allows. Sec. 702.202(b)(4).
    In lieu of limiting a credit union's asset growth, one commenter 
suggested limiting the risk on the investment of those assets by 
establishing minimum spreads, tightening lending procedures, and 
restricting investment options. NCUA prefers to retain this DSA as 
proposed because the suggested approach would necessitate an unworkable 
and intolerable level of micromanagement.
    Restricting dividends or interest paid. As proposed, this DSA 
permits NCUA to prospectively restrict the dividend or interest rates a 
credit union pays to the prevailing rates paid on comparable accounts 
and maturities in its vicinity. 64 FR at 27096, line 2. One commenter 
urged excluding this DSA altogether, condemning it as an overreaction 
to a specific problem--paying high rates to

[[Page 8574]]

attract deposits--that plagued troubled thrift institutions in the 
1980s, but does not affect credit unions now. In addition, this 
commenter claimed that this DSA adversely impacts members--depriving 
them of dividend and interest income--but would not have a disciplinary 
impact on management. NCUA disagrees because this DSA does not 
eliminate dividends and interest altogether; it merely establishes a 
reasonable ceiling on dividend and interest rates. This would prevent 
management from imprudently offering higher than prevailing rates to 
attract deposits that would inflate assets.
    As proposed, the ceiling on rates was set at ``prevailing rates * * 
* in the region where the credit union is located.'' 64 FR at 27109. In 
response to a commenter's suggestion, the final rule sets the ceiling 
at ``prevailing rates'' in the credit union's ``relevant market area.'' 
Sec. 702.202(b)(3). In addition, the scope of this DSA has been 
expanded to include interest rates because some State-chartered credit 
unions accept interest-bearing deposits not denominated as shares. See 
Sec. 702.2(i). The final rule otherwise retains this DSA as proposed.
    Alter, reduce or terminate activity of credit union or CUSO. The 
proposed rule authorized NCUA to ``[r]equire the credit union or its 
CUSO to reduce, alter or terminate any activity.'' 64 FR at 27097, line 
5. Two commenters pointed out that this DSA omits the prerequisite 
built in to the corresponding ``discretionary safeguard''--that the 
activity in question must ``pose[] excessive risk'' to the credit 
union. 12 U.S.C. 1831o(f)(2)(E). Accordingly, the final rule has been 
revised to make ``excessive risk'' a prerequisite to imposing this DSA. 
Sec. 702.202(b)(5).
    Two other commenters urged that NCUA consider, as a factor in 
imposing this DSA, the ownership structure of the CUSO. When a CUSO is 
owned by multiple credit unions, a restriction on its activities could 
have an adverse impact on credit unions which are not subject to PCA. 
NCUA declines to make this an explicit criterion for imposing this DSA, 
but acknowledges that it is a valid mitigating factor when multiple-
credit union ownership of a CUSO is involved.
    Prohibiting nonmember deposits. The proposed rule authorized NCUA 
to ``prohibit [a] credit union from accepting nonmember deposits'' as 
otherwise permitted under federal or state law. 64 FR at 27097, line 6. 
Two commenters criticized this DSA for permitting an outright ban on 
nonmember deposits, suggesting instead that nonmember deposits be 
subject to a rate ceiling, as in section 702.202(b)(3). The final rule 
retains this DSA as proposed to ensure that credit unions are operated 
by and for their members as they build net worth. Sec. 702.202(b)(6). 
This DSA is an important tool for preventing undue influence on a 
credit union by nonmembers, and overreliance on nonmembers by the 
credit union.
    New election of directors; dismissal of directors or senior 
executive officers. As a means of improving management, the proposed 
DSAs authorized NCUA ``to order a new election of the credit union's 
board of directors'' or to ``dismiss [individual] directors or senior 
executive officers.'' 64 FR at 27097, lines 8 and 9. Commenters 
overwhelmingly opposed this DSA primarily because it strikes at a 
sacred and distinctive characteristic of credit unions--the member-
elected board of directors which serves without compensation.
    On the one hand, ordering a new election of directors does not 
compel a credit union to replace its board of directors with an NCUA-
designated slate; it simply requires the membership to reconsider its 
choice of directors. On the other hand, wholesale election of the board 
of directors may be an overreaction when a credit union's net worth is 
marginally below 6%. Thus, for the ``undercapitalized'' category only 
(in both tiers), the final rule deletes the authority to order a new 
election of the board of directors; however, the unconditional 
discretion to dismiss individual directors or senior executive officers 
is retained. Sec. 702.202(b)(7). In the ``significantly 
undercapitalized'' and ``critically undercapitalized'' categories, the 
discretion to order a new election of directors, and to dismiss a 
director or senior officer, remains unrestricted. Secs. 702.203(b)(8), 
702.204(b)(8).
    In the ``undercapitalized'' category, the proposed rule allowed 
NCUA to dismiss directors or senior executive officers, and to order a 
credit union to employ qualified senior officers, only if NCUA ``first 
[took] one or more of the [DSAs prescribed for that category] or 
determined that none of those [DSAs] would further the purpose of [part 
702].'' 64 FR at 27110. One commenter criticized this prerequisite as 
depriving NCUA of tools for ``improving management'' which it may need 
above all other DSAs to target the source of net worth problems at the 
outset. NCUA concurs and has deleted this prerequisite from the final 
rule, thus permitting directors and officers of an ``undercapitalized'' 
credit union to be dismissed without regard to the other DSAs available 
in that category. Sec. 702.202(b)(7).
    Restricting senior executive officers' compensation. For 
``significantly undercapitalized'' or ``critically undercapitalized'' 
credit unions, the proposed rule gave NCUA an additional means of 
improving management--the discretion to limit or reduce compensation to 
a senior executive officer; to limit or proscribe a bonus to such 
officer; or to condition payment of compensation or a bonus upon NCUA 
approval. 64 FR at 27097, line 10. Four commenters objected that this 
DSA does not square with the parameters built in to the corresponding 
``discretionary safeguard.'' While the corresponding provision requires 
prior approval to pay a bonus of any amount, it requires prior approval 
to pay compensation only when it exceeds the officer's ``average rate 
of compensation * * * during the 12 calendar months preceding the 
calendar month in which the institution became undercapitalized.'' 12 
U.S.C. 1831o(f)(4)(A). In addition, the corresponding provision does 
not permit a reduction of compensation already set above the ceiling 
before that safeguard was imposed. Accordingly, this DSA has been 
modified in two ways. First, to require NCUA approval only to pay a 
bonus of any amount, or to compensate an officer in an amount exceeding 
his or her ``rate of compensation * * * during the four (4) calendar 
quarters preceding the effective date of classification of the credit 
union as `significantly undercapitalized.''' Second, to exclude the 
authority to reduce compensation already set above the ceiling before 
the DSA is imposed. Sec. 702.203(b)(10).
    Restricting payments on uninsured secondary capital. For 
``critically undercapitalized'' credit unions only, the proposed rule 
gave NCUA the discretion, beginning 60 days after a credit union 
becomes ``critically undercapitalized,'' to prohibit payment of 
principal or dividends on uninsured secondary capital accounts 
(although unpaid dividends would continue to accrue). 64 FR at 27098, 
line 13. The sole commenter protested that this DSA would change the 
terms of existing secondary capital account agreements, require new 
disclosures, and make these already high-risk, limited-reward 
investments (available only from low-income designated credit unions) 
unattractive to potential investors. To protect existing secondary 
capital accounts, this DSA is revised to apply only to those accounts 
established after August 7, 2000 (the effective date of the final 
rule). Sec. 702.204(b)(11). The disclosure requirements for those

[[Page 8575]]

accounts (see appendix to 12 CFR 701.34), will be modified to reflect 
the prospective application of section 702.204(b)(11). In addition, 
since uninsured secondary capital accounts of low income-designated 
credit unions are structured as interest-paying debt, the final rule 
expands this DSA to include ``interest.''
    Requiring NCUA prior approval for certain operations. For 
``critically undercapitalized'' credit unions only, the proposed rule 
gave NCUA discretion to require its prior approval before a credit 
could undertake certain routine activities. 64 FR at 27098, line 13. 
One such activity is ``[e]ntering into any material transaction other 
than in the usual course of business'' or any similar action requiring 
prior notice to NCUA. Id. The sole commenter on this DSA sought a 
definition of a ``material'' transaction. NCUA declines to define 
``material'' because it is best judged on a case-by-case basis. 
Instead, however, the final rule replaces the examples of material 
transactions enumerated in the proposed DSA with a blanket exemption 
for material transactions that fall within the scope of an approved 
NWRP. Sec. 702.204(b)(12)(i).
    Other action to carry out PCA. The proposed rule gave NCUA the 
discretion to ``restrict or require such other action * * * as [it] 
determines will carry out the purposes of [part 702] better than any of 
the [DSAs expressly ] prescribed,'' respectively, in the 
``undercapitalized'' or lower categories. 64 FR at 27097, line 7. For 
the ``undercapitalized'' category, however, the proposed rule imposed a 
prerequisite--that ``such other action'' could be imposed only if it 
were ``no more severe'' than the other DSAs available in that category. 
Id. No comments addressed the conditional or unconditional version of 
this provision. Nonetheless, NCUA has decided that the ``no more 
severe'' limitation on this DSA would be unworkable in practice because 
it is too subjective a standard of comparison. Hence, in the final 
rule, all three categories contain the identical DSA allowing ``such 
other action'' provided only that it ``carr[ies] out the purposes of 
PCA better than any of the actions prescribed'' for the 
``undercapitalized'' category. Secs. 702.202(b)(9), 702.203(b)(11), 
702.204(b)(13).
    Other DSAs. NCUA received no comments addressing two of the 
proposed DSAs: ``Restricting transactions with and ownership of a 
CUSO,'' 64 FR at 27096, line 2, and ``Requiring merger if grounds exist 
for conservatorship or liquidation.'' 64 FR at 27098, line 11. They are 
retained as proposed. Secs. 702.202(b)(2), 702.203(b)(12).
3. Conservatorship and Liquidation
    Discretionary conservatorship or liquidation. Reflecting the terms 
of CUMAA, the proposed rule gave NCUA discretion to place a 
``significantly undercapitalized'' or ``critically undercapitalized'' 
credit union into conservatorship or liquidation if that credit union 
``has no reasonable prospect of becoming `adequately capitalized.' '' 
64 FR at 27110, 27111; 12 U.S.C. 1786(h)(1)(F), 1787(a)(3)(A)(i). One 
commenter addressing this provision insisted that a credit union in 
either of these categories be permitted the option of merging with 
another credit union to avoid conservatorship or liquidation. This is 
precisely the purpose of the DSA entitled ``Requiring merger if grounds 
exist for conservatorship or liquidation'' (line 11, Table 2 above), 
available in both categories. Secs. 702.203(b)(12), 702.204(b)(14). As 
explained in the preamble to the proposed rule, ``[t]his action is 
appropriate * * * 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.'' 64 FR 
at 27908. See 12 U.S.C. 1831o(f)(2)(A)(iii) (requiring institution to 
be acquired by holding company or to combine with another institution 
if grounds exist for conservatorship or receivership). Because the DSA 
requiring merger is available as an option for a credit union to 
preempt conservatorship or liquidation, the discretionary liquidation 
and conservatorship authority is retained as proposed. 
Secs. 702.203(c).
    Mandatory conservatorship and liquidation. Following the mandate of 
CUMAA, Sec. 1790d(i)(1), the proposed rule required NCUA to place a 
``critically undercapitalized'' credit union into conservatorship or 
liquidation within 90 days, unless NCUA determines that ``other 
corrective action'' in lieu of conservatorship or liquidation would 
better achieve the purposes of PCA. 64 FR at 27111. That determination, 
which must be documented, expires at the end of a period of no more 
than 180 days. If the determination is not affirmed before the period 
ends, NCUA must conserve or liquidate the credit union. The 
determination that ``other corrective action'' would better achieve the 
purpose of PCA may be renewed for additional periods of up to 180 
days.\18\ However, renewals which extend the full 180-day period will 
be limited to two and part of a third because of a statutory 18-month 
maximum period for ``other corrective action'' to succeed.
---------------------------------------------------------------------------

    \18\ Neither the original effective period of a determination to 
take ``other corrective action,'' nor an extension of that period, 
need extend for the maximum duration of 180 days. The NCUA Board has 
the discretion to establish a shorter original or renewed effective 
period; to reconsider any determination periodically; and to reverse 
and discontinue the ``other corrective action'' altogether. To renew 
a prior effective period, the NCUA Board must make and document a 
new finding prior to expiration of the present effective period that 
its ``other corrective action'' still furthers the purpose of PCA. 
Sec. 702.204(c)(1)(iii).
---------------------------------------------------------------------------

    Under the proposed rule, NCUA must conserve or liquidate a 
surviving ``critically undercapitalized'' credit union, regardless of 
the impact of ``other corrective action,'' if that credit union is 
``critically undercapitalized'' (2% net worth ratio) on average for a 
full calendar quarter beginning 18 months from the date it first was 
classified as such. 64 FR at 27111. This is the case even if the credit 
union manages to exceed a 2 percent net worth ratio on any of the 
preceding effective dates of classification during the 18 month period. 
A credit union may evade mandatory liquidation at this point only if 
NCUA certifies that the credit union (1) has, since the date of 
approval, substantially complied with an NWRP requiring improvement in 
net worth; (2) has positive net income or a sustainable upward trend in 
earnings; and (3) is viable and not expected to fail. 
Sec. 1790d(i)(3)(B).\19\
---------------------------------------------------------------------------

    \19\ 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(i)(4)(A). if made by delegation, 
the decision is directly appealable to the NCUA Board. 
Sec. 1790d(i)(4)(B); Sec. 702.204(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).
---------------------------------------------------------------------------

    The effective date when a credit union first became ``critically 
undercapitalized'' typically will fall one month after the end of a 
calendar quarter. Thus, the last possible day for ``other corrective 
action'' will be no more than 23 months from the effective date (18 
calendar months from the effective date, plus two months to the end of 
the calendar quarter, plus the subsequent 3 months of the next calendar 
quarter), absent NCUA certification that the criteria for an exception 
to liquidation have been met.
    NCUA received no comments on this mandatory liquidation procedure. 
It is retained as proposed, Sec. 702.204(c), with

[[Page 8576]]

two exceptions. First, both the statute and the proposed rule were 
silent regarding the method for calculating whether a credit union ``is 
`critically undercapitalized' on average for a full calendar quarter'' 
beginning 18 months after the effective date of classification as such. 
The final rule now designates ``a monthly average basis'' over the 
calendar quarter as the required method. Sec. 702.204(c)(3)(i). Second, 
the statute and proposed rule are silent regarding how to treat a 
``critically undercapitalized'' credit union once it is certified as 
meeting the criteria for an exception to mandatory liquidation. 
Sec. 702.204(c)(3)(ii). The final rule now requires NCUA to review that 
certification ``at least quarterly'' and to then either recertify the 
credit union or ``promptly place [it] into liquidation * * *'' 
Sec. 702.204(c)(3)(iii).
4. Consultation With State Officials
    CUMAA requires NCUA to consult with the appropriate State official 
when imposing PCA against a FISCU. Sec. 1790d(l). Under the proposed 
rule, before conserving or liquidating a FISCU, NCUA must ``seek the 
views'' of the appropriate State official, provide reasons for the 
proposed action, give the official an opportunity to respond, and allow 
the official to implement the conservatorship or liquidation. 64 FR at 
27111. If the State official disagrees with NCUA's determination to 
conserve or liquidate, NCUA can proceed only if it makes findings of 
risk of loss to the NCUSIF. 64 FR at 27112; see also 12 U.S.C. 
1786(h)(2)(C), 1787(a)(3)(B).
    Similarly, when imposing a DSA upon a FISCU, the proposed rule 
required NCUA to first ``seek the views'' of the appropriate State 
official, and to allow the official to impose the DSA independently or 
jointly with NCUA. 64 FR at 27112. Once these prerequisites are met, 
NCUA may proceed to impose the DSA.
    NCUA received no comments regarding consultation in advance of 
conservatorship or liquidation of a FISCU. With respect to consultation 
regarding proposed DSAs, however, two commenters asked NCUA to replace 
the phrase ``seek the views of the appropriate State official'' with 
the phrase ``consult and seek to work cooperatively'' with that 
official, to conform to the specific language of Sec. 1790d(l)(1). That 
provision of the final rule has been revised accordingly, and also has 
been modified to require NCUA to ``provide prompt notice of its 
decision [whether to impose a DSA on a FISCU] to the appropriate State 
official.''. Sec. 702.205(c).

E. Subpart C--Alternative Prompt Corrective Action for New Credit 
Unions

1. Section 702.301--Scope and Definition
    This provision of the proposed rule applied subpart C in lieu of 
subpart B to ``new'' credit unions; restates the statutory definition 
of a ``new'' credit union; explained how ``spun-off'' groups can meet 
the definition; and authorized NCUA to treat as not ``new'' under 
subpart B credit unions or groups which attempt to qualify as ``new'' 
for the purpose of evading subpart B. 64 FR at 27113. Four commenters 
generally addressed the separate system of PCA for ``new'' credit 
unions--two supporting it, one claiming that it equates low capital 
with impending failure, and one concerned that it could have unintended 
adverse consequences for a healthy, growing credit union.
    Contrary to equating low capital with impending failure, subpart C 
establishes an ``uncapitalized'' net worth category which permits a 
``new'' credit union to continue operating while it has no net worth so 
long as it is making efforts to build net worth. Sec. 702.305. The 
concern that subpart C will restrict asset growth ignores a crucial 
distinction between ``new'' and non- ``new'' credit unions--that 
``new'' credit unions are not subject to an MSA restricting asset 
growth. See, e.g., Sec. 702.202(a)(3). Rather, ``new'' credit unions 
are subject only to a DSA allowing NCUA to limit or reduce assets. 
Sec. 702.304(b).
    Accordingly, the final rule retains the scope and definition 
provisions as proposed. Sec. 702.301.
2. Section 702.302--Net Worth Categories for ``New Credit Unions''
    Proposed subpart C separately established six net worth categories 
for ``new'' credit unions, notably including an ``uncapitalized'' 
category for credit unions having no net worth. 64 FR at 27113. To 
facilitate the credit union's eventual transition from subpart C to 
subpart B, the net worth ratios for the ``well capitalized'' and 
``adequately capitalized'' net worth categories are the same as those 
of the corresponding categories in subpart B. Secs. 702.302(c)(1)-(2). 
The net worth ratios for the ``moderately capitalized,'' ``marginally 
capitalized'' and ``minimally capitalized'' categories differ somewhat 
from those of the corresponding categories in subpart B to allow 
gradual, if not steady, accumulation of net worth over a ten-year 
period, in contrast to restoration of net worth over a shorter term. 
This reflects field experience and historical data indicating that 
newly-chartered credit unions generally take up to 3 years to develop 
positive net worth and may take up to 5 years to attain a 2% net worth 
ratio.
    Like the proposed rule, the preamble of the final rule suggests 
reasonable time frames (``benchmarks'') for attaining each ``new'' net 
worth category, which a ``new'' credit union should aspire to meet. See 
Table 5 below. These benchmarks are not mandatory and neither the 
proposed nor the final rule imposes them as a requirement. As first 
explained in the preamble to the proposed rule, the benchmarks 
represent only a guide as to how long it is ``reasonably expected'' to 
take a ``new'' credit union to reach a given net worth category. 64 FR 
at 27099. The benchmarks in Table 5 below do not establish mandatory 
deadlines and do not trigger any supervisory action.

[[Page 8577]]

[GRAPHIC] [TIFF OMITTED] TR18FE00.004

    In addition to the ``new'' net worth categories and corresponding 
net worth ratios, section 702.302 also incorporates from subpart A the 
``effective date'' provision (Sec. 702.101(b)); the requirement to 
notify NCUA of a change in category classification in limited 
circumstances (Sec. 702.101(c)); and the authority to reclassify a 
credit union to a lower category on grounds of an unsafe or unsound 
practice or condition (Sec. 702.102(b)).
    Benchmarks. NCUA received 4 comments on specific net worth 
benchmarks even though Table 4 is not a part of the final rule itself. 
To simplify subpart C, one commenter suggested pro-rating the 
benchmarks equally over the 10-year period subpart C covers. This would 
defeat the purpose of the benchmarks, which accommodate the need for 
greater regulatory forbearance in the early years when a ``new'' credit 
union is developing its operations and asset base. For this reason, 
NCUA declines to pro-rate the benchmarks equally to achieve simplicity.
    A second commenter supported the concept of benchmarks, but 
indicated that ``new'' credit unions would need capital ``subsidies'' 
to meet them. NCUA disagrees, believing that the alternative system of 
PCA is designed, with relaxed standards and incentives, to help ``new'' 
credit unions build capital gradually on their own, instead of relying 
on capital subsidies.
    A third commenter urged an 8-year benchmark, instead of 7 years, 
for requiring ``new'' credit union to reach a 3.5% net worth ratio and 
become ``moderately capitalized.'' In fact, none of the benchmarks 
requires reaching a particular net worth category within a particular 
period of time; the benchmarks are simply guides based on past 
experience.
    PCA criteria other than net worth. NCUA received 3 comments 
suggesting PCA criteria instead of, or in addition to, net worth for 
``new'' credit unions. One commenter advocated abandoning ``restrictive 
capital requirements'' in favor of a more flexible approach--requiring 
an approved budget and plan to guide operations, apparently resembling 
a revised business plan. While revised business plans are an essential 
element of PCA for ``new'' credit unions, Sec. 702.306, it would be 
contrary to CUMAA's intent to adopt an alternative system of PCA for 
``new'' credit unions that entirely lacks fixed net worth standards. 
Instead, NCUA has chosen to adopt relaxed net worth ratios, and even to 
permit ``new'' credit unions to operate temporarily and periodically 
without net worth.
    A second commenter suggested that a credit union's CAMEL rating is 
an appropriate measure of a ``new'' credit union's viability, and urged 
giving it as much weight in implementing PCA as net worth. However, to 
equate the CAMEL rating with net worth would dilute the focus of PCA 
because only one of the five CAMEL components is directly related to 
net worth.
    A third commenter contended that the potential short-term negative 
effect of low cost, nonmember deposits on the net worth ratio of 
``new'' low income-designated credit unions should not be grounds for 
prohibiting acceptance of such deposits. To minimize that effect, the 
commenter recommended either risk-weighting non-member deposits or 
excluding them from the net worth ratio calculation. NCUA does not 
support this proposal because there is no statutory basis for 
minimizing the impact of nonmember deposits as the commenter suggests.
3. ``Uncapitalized'' Net Worth Category
    The ``uncapitalized'' net worth category, unique to PCA for ``new'' 
credit unions, permits a ``new'' credit union which has no net worth to 
continue operating under certain constraints. 64 FR at 27114. The final 
rule, like the proposed rule, permits a ``new'' credit union to operate 
with no net worth for the time period provided in its initial business 
plan (approved at the time the credit union's charter is granted) 
without being subject to MSAs and DSAs. Sec. 702.305(a). A credit union 
which remains ``uncapitalized'' after expiration of the period approved 
for operating with no net worth will become subject to the MSAs and 
DSAs applicable to ``new'' credit unions. Id. A credit union which, 
after reaching a net worth above 0%, subsequently declines to the 
``uncapitalized'' category from any higher net worth category would 
either begin (if it had declined directly from the ``adequately 
capitalized'' or ``well capitalized'' categories) or continue to comply 
with those MSAs and DSAs. Id.
    In the ``new'' net worth categories which require submission of a 
revised business plan, the plan generally must be submitted when a 
credit union's net worth ratio has not increased consistent with the 
quarterly net worth targets prescribed in its then present business 
plan. Sec. 702.304(a)(1)(i). In contrast, a credit union in the 
``uncapitalized'' category must submit a revised business plan, 
regardless of its net worth targets, within 90 days of the effective 
date of classification as ``uncapitalized'' as a result of either 
expiration of the period allowed in its approved initial business plan, 
or a decline from a higher net worth category. Sec. 702.305(a)(2).
    Under the proposed rule, NCUA had the discretion to liquidate an 
``uncapitalized'' credit union if it failed to submit a revised 
business plan within a specified period not to exceed 90 days from the 
effective date of classification as ``uncapitalized.'' 64 FR at 27112. 
The final rule expands this discretion to include the option of 
conservatorship. Sec. 702.305(c)(1). Under the proposed rule, NCUA was 
required to liquidate an

[[Page 8578]]

``uncapitalized'' credit union which remained ``uncapitalized'' 90 days 
after NCUA approved its revised business plan unless the credit union 
documented ``why it is viable and has a reasonable prospect of becoming 
`adequately capitalized.''' The final rule makes liquidation 
discretionary instead of mandatory. Sec. 702.305(c)(2). Both of these 
modifications are intended to increase flexibility in dealing with 
``uncapitalized'' credit unions.
    NCUA received two comments regarding the ``uncapitalized'' category 
for ``new'' credit unions. The first recommended allowing an 
``uncapitalized'' credit union to avoid liquidation as long as capital 
trends are positive. The second suggested that new credit unions should 
be required to be profitable within three years, but should be allowed 
to operate while insolvent during that period, within certain limits. 
The final rule follows a middle course, establishing no fixed time 
frames to achieve profitability, but also not forbearing simply because 
a ``positive trend'' in net worth develops. Rather, the final rule 
adheres to an approach which allows ``new'' credit unions to build net 
worth gradually and to achieve profitability on an individualized 
timetable.
4. Section 702.306--Revised Business Plans for ``New'' Credit Unions
    Under the proposed rule, ``new'' credit unions in the ``moderately 
capitalized'' and lower net worth categories (i.e., net worth ratio of 
less than 6%) must file a revised business plan (``RBP'') whenever they 
timely fail to meet net worth targets in their original or present 
business plan. 64 FR at 27114.
    Whereas an NWRP under subpart B is designed to restore net worth, 
the purpose of an RBP is to build net worth. An RBP is broader in scope 
than an NWRP, essentially calling for a ``new'' credit union to 
progressively update the business plan elements originally required for 
charter approval, as well as its quarterly targets for increasing net 
worth in each year in which the RBP is in effect. Approval of an RBP is 
effectively a charter to operate for the period covered by the plan. 
The proposed rule set forth deadlines for submitting an RBP, and for 
NCUA to approve it, as well as content requirements and criteria for 
approval. 64 FR at 27114, 27115.
    NCUA received four comments regarding section 702.306. Two of these 
alluded to the time period for filing an RBP--one urging 90 days to 
file an RBP, and the other insisting that the extra 15-day period is 
too short to file an RBP once a credit union has failed to timely file 
one. In the final rule, the filing period for an RBP (as with an NWRP) 
is effectively extended because it now commences on the ``effective 
date'' of a quarterly net worth measurement--the last day of the 
calendar month following the quarter end--rather than on the last day 
of the quarter itself. Sec. 702.306(a). This adds approximately 30 days 
to the initial filing period, in addition to the extra 15-day period 
that already is available. Sec. 702.306(a)(1).
    A third commenter urged NCUA to refrain from approving an RBP which 
prohibits a ``new'' low income credit union from making dividend or 
principal payments on secondary capital accounts because it would 
discourage non-member deposits. Regardless whether imposed in an 
approved RBP or through a DSA, the authority to prohibit dividend and 
principal payments on uninsured secondary capital accounts is always 
discretionary under part 702. Sec. 702.204(b)(11). Thus, there is no 
reason to demand that prohibition as a prerequisite for approval of an 
RBP.
    Finally, a fourth commenter discouraged NCUA from intervening in 
management of a credit union once NCUA has approved the credit union's 
RBP, thus ensuring that management has the flexibility to respond to 
``changes in the marketplace.'' It would be inconsistent with the 
purpose of PCA for NCUA to approve an RBP which gives itself management 
responsibility over the credit union. On the contrary, NCUA's post-
approval role in most cases will be limited to imposing DSAs when 
warranted.
    Under the proposed rule, the requirement to file an RBP (other than 
in the ``uncapitalized'' category) was triggered when a ``new'' credit 
union's net worth ratio did not increase consistent with its then-
present approved business plan. 64 FR at 27113-27114. The proposed rule 
overlooked two instances that should trigger the requirement to file an 
RBP. First, where a ``new'' credit union has no ``then-present approved 
business plan'' to follow, which would be the case if the credit union 
declined from the ``adequately capitalized'' or ``well capitalized'' 
categories. Second, where the credit union has, and is operating under, 
a then-present business plan, but is not complying with other 
applicable MSAs. The final rule corrects these oversights accordingly. 
Sec. 702.304(a)(2)(ii)-(iii).
5. Mandatory and Discretionary Supervisory Actions for ``New'' Credit 
Unions.
    Mandatory. The final rule imposes on ``new'' credit unions 
classified ``moderately capitalized'' and below a modified version of 
three of the corresponding MSAs that CUMAA imposes in subpart B. 
Whereas subpart B required submission of an NWRP by a credit union 
classified ``undercapitalized'' or below, subpart C requires submission 
of an RBP when a ``new'' credit union classified ``moderately 
capitalized,'' ``marginally capitalized'' or ``minimally capitalized'' 
fails to meet its quarterly net worth goals. Secs. 702.304(a)(2), 
702.305(a)(2). Subpart C requires the same quarterly increase to net 
worth, and transfer from undivided earnings to the regular reserve, as 
subpart B requires, Sec. 702.303, except that subpart C imposes no 
minimum increase for ``new'' credit unions classified ``moderately 
capitalized'' or lower. Secs. 702.304(a)(1), 702.305(a)(1). The member 
business loan restriction in subpart C is identical to that in subpart 
B. Secs. 702.304(a)(3), 702.305(a)(3).
    NCUA received a single comment on the MSAs, suggesting that no 
earnings transfer whatsoever be required of a ``new'' credit union less 
than five years in operation. As explained above, below the 
``adequately capitalized'' category, subpart C sets no minimum amount 
for an increase to net worth. Thus, it is entirely possible, if 
warranted by the credit union's individual circumstances, to receive 
approval of an RBP requiring a minimal increase to net worth or no 
increase at all.
    Discretionary. The proposed rule prescribed for ``new'' credit 
unions the same fourteen DSAs as those prescribed in subpart B, and 
allocated them among the ``new'' net worth categories by corresponding 
category in subpart B.\20\
---------------------------------------------------------------------------

    \20\ Under the proposed rule, the DSAs available in the 
``undercapitalized'' category in subpart B were available in the 
``moderately capitalized'' category in subpart C; the DSAs available 
in the ``significantly undercapitalized'' category in subpart B were 
available in the ``marginally capitalized'' category in subpart C; 
and the DSAs available in the ``critically undercapitalized'' 
category in subpart B were available in the ``minimally 
capitalized'' and ``uncapitalized'' categories in subpart C. 64 FR 
at 27113.
---------------------------------------------------------------------------

    NCUA received three comments regarding the appropriateness of the 
DSAs for ``new'' credit unions. One commenter found it 
``counterproductive'' for ``new'' credit unions to share the same DSAs 
that apply to other credit unions. In view of the fact that ``new'' and 
non-``new'' credit unions alike share common

[[Page 8579]]

attributes regardless of asset size or years in operation, as well as 
the goal of becoming ``adequately capitalized'' or better, NCUA 
declines to adopt separate DSAs for ``new'' credit unions solely to 
differentiate them.
    As previously noted, the proposed rule allocated DSAs among the 
``new'' net worth categories to parallel the allocation among the 
corresponding categories in subpart B. To achieve comparability with 
FDIA Sec. 38, the DSAs were allocated among the net worth categories in 
subpart B to correspond approximately to the allocation of 
``discretionary safeguards'' among the capital categories in FDIA 
Sec. 38. This approach is appropriate because the discretion to impose 
a DSA in subpart B is triggered when a credit union falls to a lower 
net worth category. In contrast, the discretion to impose a DSA under 
subpart C is triggered when a ``new'' credit union fails to meet the 
quarterly net worth targets in its then-current RBP regardless of net 
worth category. Secs. 702.304(b), 702.305(b). In view of this 
distinction, NCUA prefers a more flexible approach for ``new'' credit 
unions. Instead of allocating slightly different sets of DSAs among the 
different ``new'' net worth categories, the final rule makes all 
fourteen DSAs (enumerated in Table 1 above) available in each of the 
``moderately capitalized,'' ``marginally capitalized,'' ``minimally 
capitalized'' and ``uncapitalized'' net worth categories. Id.
    Two commenters agreed that NCUA should apply the same DSAs to all 
``new'' credit unions. One of these urged exempting from DSAs 
altogether those ``new'' credit unions which meet the net worth 
benchmarks which NCUA has established as a guide for building net 
worth. See Table 5 above. This would be contrary to the role of the 
benchmarks as simply a guide, rather than as a mandatory trigger for 
PCA. Just as NCUA cannot use the benchmarks as a sword to impose MSAs 
or DSAs, so should ``new'' credit unions not be able to rely on them as 
a shield against such actions.
6. Incentives for ``New'' Credit Unions
    CUMAA required NCUA to develop ``adequate incentives'' for new 
credit unions to become ``adequately capitalized'' before they either 
are in operation for more than 10 years or reach $10 million in total 
assets. Sec. 1790d(b)(2)(B).\21\ The proposed rule offered three such 
incentives: (1) classroom training in management, lending and product 
development for ``new'' credit union directors, officers and employees; 
(2) non-classroom individualized guidance and training in the 
preparation and revision of business plans; (3) eligibility to join and 
receive the benefits of NCUA's Small Credit Union Program. 64 FR at 
27115.
---------------------------------------------------------------------------

    \21\ 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 [NCUA] Board has determined is in danger of closing.''
---------------------------------------------------------------------------

    NCUA received three comments generally supporting these incentives. 
One advocated making management training available to all less than 
``adequately capitalized'' credit unions rather than only to ``new'' 
credit unions. Management training is offered for a maximum of ten 
years as an incentive for ``new'' credit unions to build net worth. 
Educating all less than ``adequately capitalized'' credit unions in 
management, regardless of how long they have been in operation, simply 
because their net worth is less than 6 percent, is well beyond the role 
of PCA.
    Another commenter recommended that management training be provided 
by outside sources to avoid a perceived conflict of interest that may 
arise when NCUA actively participates in the training. For this and 
other reasons, NCUA has decided to reconsider the proposed sources for 
management training--NCUA itself and non-profit organizations--and the 
proposed means of funding them--grants and contracts pursuant to 12 
U.S.C. 1766(f)(2)(A) and (i)(3). See 64 FR at 27101. Thus, while the 
final rule continues to prescribe ``management training and other 
assistance'' as an incentive for ``new'' credit unions, it will be 
provided in accordance with policies to be developed and approved by 
NCUA. Sec. 702.307(b).
    The proposed rule offered ``new'' credit unions assistance in 
revising business plans. 64 FR at 27115. CUMAA required NCUA to provide 
assistance in preparing an NWRP to credit unions having less than $10 
million in assets. Sec. 1790d(f)(2). To provide such assistance as a 
further incentive to ``new'' credit unions, NCUA equated an RBP 
required of ``new'' credit unions with an NWRP. NCUA now recognizes, 
however, that CUMAA's mandate to provide such assistance is broader 
than its definition of a ``new'' credit union, extending assistance to 
those credit unions having assets of less than $10 million regardless 
how long they have been in operation. Sec. 1790d(f)(2). The final rule 
extends assistance in preparing RBPs accordingly, to credit unions 
having assets of less than $10 million, but which have been in 
operation for 10 years or more.\22\ Sec. 702.307(a). See also 
Sec. 702.206(b).
---------------------------------------------------------------------------

    \22\ NCUA currently provides guidance indirectly, as needed by 
any credit union in preparing its initial business plan for charter 
approval under Interpretive Ruling and Policy Statement 99-1, 63 FR 
71998, 72019 (December 30, 1998).
---------------------------------------------------------------------------

    The final rule also retains as an incentive a ``new'' credit 
union's eligibility to join NCUA's ``Small Credit Union Program.'' 
Sec. 702.307(c). See NCUA Instruction no. 6052.00 (March 24, 1999).

F. Subpart D--Reserves

    This subpart of the proposed rule retained much of the substance of 
NCUA's current reserve transfer and dividend payment requirements, 
modified to reflect the repeal of 12 U.S.C. 1762, and to conform with 
CUMAA. 64 FR at 27115. The proposed rule eliminated the ``statutory 
reserve''; retained the regular reserve, in which reserve transfers 
will be reflected; retained the requirement to maintain an allowance 
for loan losses, but decoupled it from the regular reserve; barred 
subsequent reversing of the current period provision; retained full and 
fair disclosure provisions in revised form; and retained restrictions 
on the payment of dividends when there is a deficit in undivided 
earnings.\23\ 64 FR27101.
---------------------------------------------------------------------------

    \23\ As commenters have suggested, NCUA plans to explain the new 
reserve requirements, citing specific examples, in future NCUA 
Letters to Credit Unions.
---------------------------------------------------------------------------

    Two commenters contend that there is no longer a need for a regular 
reserve because fear of a decline in net worth classification alone is 
sufficient to deter an outflow of capital through dividends. Because 
part 702 now imposes a quarterly earnings transfer requirement on 
credit unions having a net worth of less than 7%, maintaining the 
regular reserve is necessary to facilitate and measure earnings 
retention. Sec. 702.401(b). Credit unions are accustomed to relying on 
the regular reserve account as an appropriation of undivided earnings.
    The final rule imports from the former part 702 conditions for 
charging losses to the regular reserve, modified to conform to CUMAA. 
Sec. 702.401(c). Under that provision, credit unions may charge losses 
to the regular reserve, provided that the charge will not cause the 
credit union's net worth classification to fall below ``well 
capitalized.'' Otherwise, the credit union must receive the approval of 
NCUA or the appropriate State Official before charging losses to the 
regular reserve.
    Under the proposed rule, ``a dual declaration by the treasurer and

[[Page 8580]]

president'' was required to support the credit union's Statement of 
Financial Condition. 64 FR at 27115. One commenter was confused as to 
whether ``president'' refers to the person who, at some credit unions, 
serves as president of the board, or to the person who is the credit 
union's chief executive officer. This is clarified in the final rule by 
requiring ``a dual declaration by the treasurer and chief executive 
officer'' of the credit union. Sec. 702.402(c).
    Ten commenters objected to the provision regarding payment of 
dividends when undivided earnings are depleted because it effectively 
permits only ``well capitalized'' credit unions to transfer earnings 
from the regular reserve to pay dividends. 64 FR at 27115. Less than 
``well capitalized'' credit unions may do so only with approval of NCUA 
or the appropriate State official. Sec. 702.403(b). The commenters 
insist that the rule be modified to allow ``adequately capitalized'' 
credit unions to pay dividends from the regular reserve. Allowing less 
than ``well capitalized'' credit unions to pay dividends from the 
regular reserve would defeat the purpose of the earnings retention 
requirement which applies to credit unions having a net worth ratio of 
less than 7%.
    In reference to the source from which dividends must be paid, the 
final rule is amended to exclude the words ``post-closing, post-
transfer `` modifying ``undivided earnings.'' Sec. 702.403(a). 
Permitting dividends to be paid from post-closing undivided earnings 
would preclude accurate computation of net income for the period.
    Part 702 generally applies to both federally-chartered credit 
unions and FISCUs. As proposed, however, this subpart applied to 
federally-chartered credit unions expressly, but to FISCUs only through 
incorporation by reference in general terms in 12 CFR 741.3(a)(1). For 
purposes of clarity and consistency with the other subparts of part 
702, subpart C is revised in the final rule to expressly cover 
``federally-insured credit unions,'' thus combining both federally-
chartered credit unions and FISCUs. As discussed immediately below, 12 
CFR 741.3. confirms that all of part 702 (and subpart L of part 747) 
applies to FISCUs.

G. Section 741.3--Application to FISCUs

    The proposed rule failed to revise part 741.3 of chapter VII to 
indicate that FISCUs are subject to PCA as a prerequisite for 
insurance. Current section 741.3(a)(1) requires FISCUs to ``meet, at a 
minimum, the statutory reserve and full and fair disclosure 
requirements imposed on federal credit unions by [former 12 U.S.C. 1762 
and current part 702].'' Section 1762 of Title 12 was repealed by CUMAA 
and current part 702 survives pending the effective date of this final 
rule; both addressed only reserves and associated matters. To ensure 
that FISCUs, as a prerequisite of insurance, will meet the requirements 
imposed under all components of PCA, the final rule revises section 
741.3(a)(1) to read: ``State-chartered credit unions are subject to 
section 216 of the Act, 12 U.S.C. 1790d, and to part 702 and subpart L 
of part 747 of this chapter.''
    In addition, the final rule modifies the conditions in section 
741.3(a)(2) for charging losses to the regular reserve. Currently, that 
section allows losses other than loan losses to be charged without the 
approval of NCUA and the appropriate State official if the FISCU's net 
worth ratio is at least 6 percent and the charge will not cause the 
ratio to decline by more than 50 basis points. To conform to the 
requirements of CUMAA, part 702 permits loss charges without approval 
only if the credit union's net worth ratio is at least 7 percent and 
the charge will not cause the ratio to decline below 7 percent. 
Sec. 702.401(c). To ensure that FISCUs, as a prerequisite of insurance, 
will comply with the new conditions imposed in part 702 for charging 
losses to the regular reserve, the final rule revises section 
741.3(a)(2) to reflect the 7 percent minimum and to otherwise require 
the approval of the appropriate State official.

H. Subpart L of Part 747--Issuance, Review and Enforcement of Orders 
Imposing Prompt Corrective Action

1. Section 747.2001--Scope
    CUMMA 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 * * * pursuant 
to separate procedures prescribed by regulation.'' Sec. 1790d(k). 
Section 747.2001 establishes an independent process for appealing 
``material supervisory decisions'' to impose PCA under part 702 (Table 
5). For purposes of subpart L, NCUA staff decisions to impose a DSA 
(including dismissal of a director or senior executive officer) are 
considered ``material supervisory decisions.'' Sec. 747.2001(a). In the 
case of FISCUs seeking independent review under subpart L, this section 
provides that the parties (i.e.,  NCUA and credit union and/or a 
dismissed director or officer) shall serve upon the appropriate State 
official the documents filed or issued in connection with a proceeding 
under subpart L. NCUA received no comments on this section.

[[Page 8581]]

[GRAPHIC] [TIFF OMITTED] TR18FE00.005

2. Section 747.2002--Discretionary Supervisory Actions
    Section 747.2002 provides for prior notice and an opportunity to be 
heard before a DSA is imposed. The NCUA Board must give advance notice 
of its intention to impose a DSA , Sec. 747.2002(a)(1), except when 
necessary to further the purpose of PCA. Sec. 747.2002(a)(2). The 
credit union may then challenge the proposed action in writing and 
request that the DSA not be imposed or be modified. Sec. 747.2002(c). 
However, the credit union is not entitled to a hearing. The NCUA Board, 
or an independent person designated by the NCUA Board, may then decide 
not to issue the directive or to issue it as proposed or as modified, 
Sec. 747.2002(d); that decision is final. A credit union which already 
is subject to a DSA may request reconsideration and rescission due to 
changed circumstances. Sec. 747.2002(f).
    NCUA received 17 comments recommending modifications to 
Sec. 747.2002. These include expanding

[[Page 8582]]

the opportunity to be heard into a full evidentiary hearing; 
establishing a panel of credit union industry officials to review 
specific challenges to DSAs and make recommendations to NCUA; 
establishing an independent council to periodically review PCA 
implementation and recommend revisions to part 702. Nine commenters 
urged involving either a mediator or an ombudsman in the appeal process 
for DSAs. Another contended that an already-existing DSA should be 
deemed modified or withdrawn if NCUA fails to decide a request for 
modification or rescission within 60 days.
    NCUA received two comments advocating substitute alternative 
procedures. One alternative was a three-level appeal process commencing 
with a full evidentiary hearing before the appropriate Regional 
Director, followed by another full hearing before an NCUA-appointed 
presiding officer, with direct appeal of that decision to U.S. District 
Court, bypassing the NCUA Board altogether. The other alternative was a 
full evidentiary hearing in which NCUA would have the burden of 
justifying the proposed DSA, and the DSA would not take effect until 
all appeals were exhausted.
    In general, involving panels and councils in the appeal process, 
and expanding it beyond an opportunity to be heard in writing, would 
undermine the overall objective of PCA--to act promptly. On the other 
hand, involving NCUA's ombudsman in the appeal process, and setting a 
time limit for NCUA to decide requests to modify, to not issue, or to 
rescind DSAs is appropriate. Accordingly, the final rule revises 
section 747.2002(f) to provide that if NCUA fails to decide a request 
to modify or rescind an existing DSA within 60 days, that DSA shall be 
deemed modified or rescinded. In addition, a new subsection 747.2002(g) 
is introduced to permit a credit union to request the recommendation of 
NCUA's ombudsman to not issue or to modify a proposed DSA, or to 
rescind an existing DSA, as the case may be.
3. Section 747.2003--Reclassification to Lower Net Worth Category
    The NCUA Board is authorized to reclassify a credit union to the 
next lower net worth category on grounds of an unsafe or unsound 
practice or condition, provided the credit union is first given notice 
and an opportunity for a hearing. Secs. 702.102(b), 702.302(d). In such 
cases, therefore, section 747.2003 requires the NCUA Board to give 
notice of its intention to reclassify a credit union, Sec. 747.2003(a), 
and describe the practice(s) and/or condition(s) justifying 
reclassification. Sec. 747.2003(b). The credit union may then challenge 
the reclassification, provide evidence supporting its position, and 
request an informal hearing and the opportunity to present witnesses. 
Sec. 747.2003(c).
    If requested, an informal hearing is conducted by a presiding 
officer designated by the NCUA Board. Sec. 747.2003(d). At the hearing, 
the credit union may introduce relevant documents, present oral 
argument, and if authorized, present witnesses. Sec. 747.2003(e). The 
presiding officer then makes a recommended decision to the NCUA Board, 
Sec. 747.2003(e)(4), which then issues a final decision whether to 
reclassify the credit union. Sec. 747.2003(f). The NCUA Board may not 
delegate the authority to make the final decision to reclassify. 
Secs. 702.102(c), 747.2003(h); Sec. 1790d(h)(2).
    NCUA received seven comments on this section. Five sought to allow 
credit unions to be represented by counsel at an informal hearing 
challenging reclassification. NCUA concurs and has revised section 
747.2003(e)(1) accordingly. Another commenter insisted upon a formal 
evidentiary hearing instead of an informal hearing. NCUA believes that 
the length of time that a formal hearing entails would undermine the 
promptness objective of PCA. The final commenter advocated that NCUA 
delegate its authority to reclassify on safety and soundness grounds to 
an independent person outside NCUA. As mentioned earlier, however, this 
is among the few actions NCUA is forbidden to delegate. 
Sec. 702.102(c).
4. Section 747.2004--Dismissal of Director or Senior Executive Officer
    The NCUA Board is authorized to issue a DSA directing a credit 
union to dismiss a director or senior executive officer. 
Sec. 702.202(b)(7). In such cases, Sec. 747.2004 requires the NCUA 
Board to serve the dismissed person with a copy of the directive issued 
to the credit union, accompanied by a notice of the right to seek 
reinstatement by the NCUA Board. Sec. 747.2004(a)-(b). That person may 
then challenge the dismissal and request for reinstatement,\24\ and may 
request an informal hearing and the opportunity to present witness 
testimony. Sec. 747.2004(c). The dismissal remains in effect while the 
request for reinstatement is pending. Sec. 747.2004(g).
---------------------------------------------------------------------------

    \24\ 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 section 747.2002.
---------------------------------------------------------------------------

    If requested, a hearing is conducted by an NCUA Board-designated 
presiding officer under procedures identical to those which section 
747.2003 prescribes in cases of reclassification, with two exceptions. 
First, the dismissed 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)(4). Second, if 
the NCUA Board's final decision is to deny reinstatement, it must 
provide reasons for its decision. Sec. 747.2004(f).
    NCUA received two comments in response to this section. The first 
urged reversal of the burden of proof, thus requiring NCUA to prove 
that the dismissed person's continued employment would not materially 
strengthen the credit union's ability to become ``adequately 
capitalized'' or to correct an unsafe or unsound condition. NCUA 
declines to reverse the burden of proof because section 747.2004(e)(4) 
emulates FDIA Sec. 38, which imposes the burden of justifying 
reinstatement on the dismissed person. E.g., 12 CFR 308.203.
5. Section 747.2005--Enforcement of Orders Imposing Prompt Corrective 
Action
    CUMAA amended the FCUA to ensure that supervisory actions imposed 
under part 702 are enforceable. 12 U.S.C. Secs. 1786(k)(1) and (2)(A). 
When a credit union fails to comply with an MSA or DSA, NCUA may apply 
to the appropriate U.S. District Court to enforce that action. 
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 
an MSA or DSA, or fails to implement an approved NWRP under subpart B 
or revised business plan under subpart C. Sec. 747.2005(b). Finally, 
subpart L allows the NCUA Board to enforce an MSA or DSA under part 702 
``through any other judicial or administrative proceeding authorized by 
law.'' Sec. 747.2005(c). NCUA received no comments on this section. It 
is retained without modification in the final rule.
I. Banking Industry Trade Association Comments
    The three principal banking industry trade associations generally 
supported the proposed rule, agreeing that much of it is comparable to 
FDIA Sec. 38, but nonetheless recommended as follows:
    1. Incorporate benchmarks or a mandatory timetable for determining 
whether or not a new credit union is making reasonable, steady progress 
in

[[Page 8583]]

accumulating net worth. The preamble of the final rule retains the 
proposed non-mandatory benchmarks established to guide ``new'' credit 
unions in building net worth (see Table 4 above);
    2. Commence the additional 15-day period given to file an NWRP on 
the date NCUA issues its notice that the credit union has not timely 
filed its NWRP, rather than on the date the credit union receives that 
notice. NCUA continues in the final rule to use the date of receipt to 
measure the additional period because the time consumed by mailing or 
delivery could unreasonably shorten the period by several days. 
Sec. 702.206(a)(4);
    3. Decide whether to compel the sale of assets on a case-by-case 
basis as part of an NWRP. Consistent with this suggestion, part 702 
contemplates case-by-case approval of an NWRP that may provide for 
reduction in assets, and case-by-case imposition of the DSA to reduce 
assets generally or a specific category of assets (line 5, Table 1 
above);
    4. Expand the DSA requiring ``other actions to carry out PCA'' 
(line 10, Table 1 above) to enumerate examples of such ``other 
actions,'' such as limiting management fees. The final rule 
deliberately articulates this DSA in general terms to maximize 
flexibility and to avoid suggesting that the ``other actions'' 
available under this DSA are limited to the enumerated examples. E.g. 
Sec. 702.202(b)(9);
    5. Eliminate as unwarranted the ``other actions no more severe'' 
limitation on the scope of the DSA requiring ``other actions to carry 
out PCA'' (line 10, Table 1 above) in the ``undercapitalized'' 
category. NCUA concurs and the final rule abandons that limitation. 
Id.;
    6. Either eliminate the ``adjustment to net worth'' proposed to 
reflect items of ``other comprehensive income'' such as accumulated 
unrealized gains and losses on AFS securities (Call Report account no. 
945), or modify it to reflect the adjustment that applies to banks. For 
the reasons explained in section II.B. above, the ``adjustment to net 
worth'' has been deleted from the final rule;
    7. In measuring total assets, use average total assets over the 
preceding Call Report period, rather than the average of total assets 
over the preceding four quarterly Call Report periods. For all purposes 
except calculating the risk-based net worth requirement for ``complex'' 
credit unions, the final rule gives credit unions a choice of four 
methods to calculate ``total assets,'' including the average of month-
end balances over the quarter. Sec. 702.2(j);
    8. Implement two additional MSAs: prohibit payments to third 
parties which would leave the credit union ``undercapitalized''; and 
require prior approval of acquisitions, new branches, new lines of 
business until the NWRP has been approved. NCUA lacks the authority to 
implement MSAs beyond the four expressly prescribed by CUMAA, 
Sec. 702.202(a), nor to impose MSAs on ``well capitalized'' or 
``adequately capitalized'' credit unions beyond the single MSA 
(earnings transfer to net worth) CUMAA imposes on the latter. 
Sec. 702.201;
    9. Eliminate ``prerequisite for improving management'' requiring 
NCUA to resort to all other DSAs before ordering a new election of the 
board of directors, or dismissing directors or senior executive 
officers, or requiring qualified senior officers to be hired (lines 7, 
8 and 9, Table 2). NCUA concurs and has deleted this prerequisite from 
the ``undercapitalized'' category. Secs. 702.202(b)(7)-(8); and
    10. Restore to three of the DSAs (lines 5, 8 and 11, Table 2 above) 
the criterion built into the corresponding ``discretionary safeguard,'' 
to achieve comparability with FDIA Sec. 38. With regard to two of these 
DSAs, the final rule is revised accordingly. Secs. 702.202(b)(5), 
702.203(b)(10). With regard to the last DSA (line 8, Table 1), however, 
the 180-day period protecting directors and officers from dismissal 
remains omitted from the final rule because a credit union official who 
is responsible for declining net worth, or who is incapable of 
reversing the decline, is not entitled to a ``safe harbor'' from 
dismissal. Sec. 702.202(b)(7).

III. Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
describing any significant economic impact a final regulation may have 
on a substantial number of small credit unions (primarily those under 
$1 million in assets). The final rule implements the statutory 
requirements of prompt corrective action, including net worth 
parameters, expressly mandated by CUMAA.
    For the purpose of this analysis, credit unions under $1 million in 
assets will be considered small entities. As of June 30, 1999, there 
were 1,690 such entities, with a total of $807.3 million in assets, 
with an average asset size of $0.5 million. These small entities make 
up 15.6 percent of all credit unions, but only 0.2 percent of all 
credit union assets.
    The final rule requires all federally-insured credit unions to 
determine their net worth ratio (primarily using Call Report data). The 
rule sets forth additional requirements, including development of an 
NWRP or an RBP if the credit union's net worth ratio falls below 
established thresholds.
    The NCUA Board does not believe that the proposed regulation would 
impose reporting or recordkeeping burdens that require specialized 
professional skills not available to them. Further, NCUA estimates 
fewer than 100 of these small entities will meet the net worth ratios 
which trigger the requirements of the regulation.

Paperwork Reduction Act

    The reporting requirements in part 702 have been submitted to the 
Office of Management and Budget. Under the Paperwork Reduction Act of 
1995, no person is required to respond to a collection of information 
unless it displays a valid OMB number. The control number will be 
displayed in the table at 12 CFR part 795.

Executive Order 13132

    NCUA Executive Order 13132 encourages independent regulatory 
agencies to consider the impact of their regulatory actions on state 
and local interests. NCUA, an independent regulatory agency as defined 
in 44 U.S.C. 3502(5), voluntarily adheres to the fundamental federalism 
principles addressed by the executive order. This final rule will apply 
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 
PCA to apply to all federally-insured credit unions. Throughout the 
rulemaking process, NCUA staff has consulted with a committee of 
representative of state regulators regarding the impact of PCA on 
state-chartered credit unions. The committee's comments and suggestions 
are reflected in the final rule.

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) provides generally for congressional review of agency 
rules. A reporting requirement is triggered in instances where NCUA 
issues a final

[[Page 8584]]

rule as defined by section 551 of the Administrative Procedure Act, 5 
U.S.C. 551. The Office of Management and Budget has determined that 
this rule is not a major rule.

List of Subjects

12 CFR Part 702 and 741

    Credit unions, Reporting and recordkeeping requirements.

12 CFR Part 747

    Administrative practices and procedures, Credit unions.

    By the National Credit Union Administration Board on February 3, 
2000.

Becky Baker,
Secretary of the Board.

    Accordingly, 12 CFR parts 702, 741 and 747 are 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.
Subpart A--Net Worth Classification
702.101   Measure and effective date of net worth classification.
702.102   Statutory net worth categories.
702.103   Risk portfolios defined. [Reserved]
702.104   Thresholds to define complex credit unions. [Reserved]
702.105   RBNW components to calculate risk-based net worth 
requirement. [Reserved]
702.106   Alternative components to calculate risk-based net worth 
requirement. [Reserved]
Subpart B--Mandatory and Discretionary Supervisory Actions
702.201   Prompt corrective action for ``adequately capitalized'' 
credit unions.
702.202   Prompt corrective action for ``undercapitalized'' credit 
unions.
702.203   Prompt corrective action for ``significantly 
undercapitalized'' credit unions.
702.204   Prompt corrective action for ``critically 
undercapitalized'' credit unions.
702.205   Consultation with State officials on proposed prompt 
corrective action.
702.206   Net worth restoration plans.
Subpart C--Alternative Prompt Corrective Action for New Credit Unions
702.301   Scope and definition.
702.302   Net worth categories for new credit unions.
702.303   Prompt corrective action for ``adequately capitalized'' 
new credit unions.
702.304   Prompt corrective action for ``moderately capitalized,'' 
``marginally capitalized'' and ``minimally capitalized'' new credit 
unions.
702.305   Prompt corrective action for ``uncapitalized'' new credit 
unions.
702.306   Revised business plans for new credit unions.
702.307   Incentives for new credit unions.
Subpart D--Reserves
702.401   Reserves.
702.402   Full and fair disclosure of financial condition.
702.403   Payment of dividends.

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


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

    (a) Authority. Subparts A, B and C of this part and subpart L of 
part 747 of this chapter are issued by the National Credit Union 
Administration pursuant to section 216 of the Federal Credit Union Act 
(FCUA), 12 U.S.C. 1790d (section 1790d), as added by section 301 of the 
Credit Union Membership Access Act, Pub. L. No. 105-219, 112 Stat. 913 
(1998). Subpart D of this part is issued pursuant to FCUA section 120, 
12 U.S.C. 1766.
    (b) Purpose. The express purpose of prompt corrective action under 
section 1790d is to resolve the problems of federally-insured credit 
unions at the least possible long-term loss to the National Credit 
Union Share Insurance Fund. This part carries out the purpose of prompt 
corrective action by establishing a framework of mandatory and 
discretionary supervisory actions, applicable according to a credit 
union's net worth ratio, designed primarily to restore and improve the 
net worth of federally-insured credit unions.
    (c) Scope. This part implements the provisions of section 1790d as 
they apply to federally-insured credit unions, whether federally- or 
state-chartered; to such credit unions defined as ``new'' pursuant to 
section 1790d(b)(2); and to such credit unions defined as ``complex'' 
pursuant to section 1790d(d). Certain of these provisions also apply to 
officers and directors of federally-insured credit unions. This part 
does not apply to corporate credit unions. Procedures for issuing, 
reviewing and enforcing orders and directives issued under this part 
are set forth in subpart L of part 747 of this chapter, 12 CFR 747.2001 
et seq.
    (d) Other supervisory authority. Neither Sec. 1790d nor this part 
in any way limits the authority of the NCUA Board or appropriate State 
official under any other provision of law to take additional 
supervisory actions to address unsafe or unsound practices or 
conditions, or violations of applicable law or regulations. Action 
taken under this part may be taken independently of, in conjunction 
with, or in addition to any other enforcement action available to the 
NCUA Board or appropriate State official, including issuance of cease 
and desist orders, orders of prohibition, suspension and removal, or 
assessment of civil money penalties, or any other actions authorized by 
law.


Sec. 702.2  Definitions

    Except as provided below, the terms used in this part have the same 
meanings as set forth in FCUA sections 101 and 216, 12 U.S.C. 1752, 
1790d.
    (a) Appropriate regional director means the director of the NCUA 
regional office having jurisdiction over federally-insured credit 
unions in the state where the affected credit union is principally 
located.
    (b) Appropriate State official means the commission, board or other 
supervisory authority having jurisdiction over credit unions chartered 
by the State which chartered the affected credit union.
    (c) Credit union means a federally-insured, natural person credit 
union, whether federally- or State-chartered, as defined by 12 U.S.C. 
1752(6).
    (d) CUSO means a credit union service organization as described in 
12 CFR 712 et seq. for federally-chartered credit unions, and as 
defined under State law for State-chartered credit unions.
    (e) NCUSIF means the National Credit Union Share Insurance Fund as 
defined by 12 U.S.C. 1783.
    (f) Net worth means the retained earnings balance of the credit 
union at quarter end as determined under generally accepted accounting 
principles. Retained earnings consists of undivided earnings, regular 
reserves, and any other appropriations designated by management or 
regulatory authorities. This means that only undivided earnings and 
appropriations of undivided earnings are included in net worth. For low 
income-designated credit unions, net worth also includes secondary 
capital accounts that are uninsured and subordinate to all other 
claims, including claims of creditors, shareholders and the NCUSIF. For 
any credit union, net worth does not include the allowance for loan and 
lease losses account.
    (g) Net worth ratio means the ratio of the net worth of the credit 
union (as defined in paragraph (f) of this section to the total assets 
of the credit union (as defined by a measure chosen under paragraph (j) 
of this section.
    (h) New credit union means a federally-insured credit union which 
both has been in operation for less than ten (10) years and has 
$10,000,000 or less in total assets.

[[Page 8585]]

    (i) Shares means deposits, shares, share certificates, share 
drafts, or any other depository account authorized by federal or state 
law.
    (j) Total assets
    (1) Total assets means a credit union's total assets as measured by 
either--
    (i) Average quarterly balance. The average of quarter-end balances 
of the four most recent calendar quarters; or
    (ii) Average monthly balance. The average of month-end balances 
over the three calendar months of the calendar quarter; or
    (iii) Average daily balance. The average daily balance over the 
calendar quarter; or
    (iv) Quarter-end balance. The quarter-end balance of the calendar 
quarter as reported on the credit union's Call Report, and for semi-
annual filers as calculated for the quarters ending March 31 and 
September 30.
    (2) For each quarter, a credit union must elect a measure of total 
assets from paragraph (j)(1) of this section to apply for all purposes 
under this part except Secs. 702.103 through 702.106 [risk-based net 
worth requirement].

Subpart A--Net Worth Classification


Sec. 702.101  Measures and effective date of net worth classification

    (a) Net worth measures. For purposes of this part, a credit union 
must determine its net worth category classification at the end of each 
calendar quarter using two measures:
    (1) The net worth ratio as defined in Sec. 702.2(g); and
    (2) If defined as ``complex'' under Sec. 702.104, the applicable 
risk-based net worth requirement.
    (b) Effective date of net worth classification. For purposes of 
this part, the effective date of a federally-insured credit union's net 
worth category classification shall be the most recent to occur of:
    (1) The last day of the calendar month following the end of the 
calendar quarter; or
    (2) The date the credit union's net worth ratio is recalculated by 
or as a result of its most recent final report of examination; or
    (3) The date the credit union received written notice from NCUA or, 
if State-chartered, the appropriate State official, of reclassification 
on safety and soundness grounds as provided under Secs. 702.102(b) or 
702.302(d).
    (c) Notice by credit union of change in net worth category.
    (1) When filing a quarterly or semi-annual Call Report, a 
federally-insured credit union need not otherwise notify the NCUA Board 
of a change in its net worth ratio that places the credit union in a 
lower net worth category;
    (2) A federally-insured credit union which files its Call Reports 
semi-annually shall give written notice to the NCUA Board and, if 
State-chartered, to the appropriate State official, of a change in its 
net worth ratio for the quarters ending March 31 and September 30, if 
that change places the credit union in a lower net worth category, 
provided however, that this paragraph does not apply when a credit 
union has been notified by NCUA or, if State-chartered, by the 
appropriate State official, of a change in its net worth ratio that 
places the credit union in a lower net worth category;
    (3) Written notice as required under paragraph (c)(2) of this 
section shall be given no later than 15 calendar days after the 
effective date of the change in net worth category, and shall be deemed 
given upon receipt by the appropriate Regional Director and, if State-
chartered, by the appropriate State official.
    (4) Failure to timely file a Call Report or to timely provide 
notice as required under this section in no way alters the effective 
date of a change in net worth classification under this subparagraph, 
or the affected credit union's corresponding legal obligations under 
this part.


Sec. 702.102  Statutory net worth categories.

    (a) Net worth categories. Except for credit unions defined as 
``new'' under subpart B of this part, a federally-insured credit union 
shall be classified (Table 1)--
    (1) Well capitalized if it has a net worth ratio of seven percent 
(7%) or greater and also meets any applicable risk-based net worth 
requirement under Secs. 702.105 and 702.106; or
    (2) Adequately capitalized if it has a net worth ratio of six 
percent (6%) or more but less than seven percent (7%), and also meets 
any applicable risk-based net worth requirement under Secs. 702.105 and 
702.106 below; or
    (3) Undercapitalized if it has a net worth ratio of four percent 
(4%) or more but less than six percent (6%), or fails to meet any 
applicable risk-based net worth requirement under Secs. 702.105 and 
702.106; or
    (4) Significantly undercapitalized if it
    (i) Has a net worth ratio of two percent (2%) or more but less than 
four percent (4%); or
    (ii) Has a net worth ratio of four percent (4%) or more but less 
than five percent (5%), and either--
    (A) Fails to submit an acceptable net worth restoration plan within 
the time prescribed in Sec. 702.206; or
    (B) Materially fails to implement a net worth restoration plan 
approved by the NCUA Board; or
    (5) Critically undercapitalized if it has a net worth ratio of less 
than two percent (2%).

[[Page 8586]]

[GRAPHIC] [TIFF OMITTED] TR18FE00.006

    (b) Reclassification based on supervisory criteria other than net 
worth. The NCUA Board may reclassify a ``well capitalized'' credit 
union as ``adequately capitalized'' and may require an ``adequately 
capitalized'' or ``undercapitalized'' credit union to comply with 
certain mandatory or discretionary supervisory actions as if it were in 
the next lower net worth category (each of such actions hereinafter 
referred to generally as ``reclassification'') in the following 
circumstances:
    (1) Unsafe or unsound condition. The NCUA Board has determined, 
after notice and opportunity for hearing pursuant to Sec.  747.2003 of 
this chapter, that the credit union is in an unsafe or unsound 
condition; or
    (2) Unsafe or unsound practice. The NCUA Board has determined, 
after notice and opportunity for hearing pursuant to Sec. 747.2003 of 
this chapter, that the credit union has not corrected a material unsafe 
or unsound practice of which it was, or should have been, aware.
    (c) Non-delegation. The NCUA Board may not delegate its authority 
to reclassify a credit union under paragraph (b) of this section.
    (d) Consultation with State officials. The NCUA Board shall consult 
and seek to work cooperatively with the appropriate State official 
before reclassifying a federally-insured State-chartered credit union 
under paragraph (b) of this section, and shall promptly notify the 
appropriate State official of its decision to reclassify.


Sec. 702.103  Risk portfolios defined. [Reserved]


Sec. 702.104  Thresholds to define complex credit unions. [Reserved]


Sec. 702.105  RBNW components to calculate risk-based net worth 
requirement. [Reserved]


Sec. 702.106  Alternative components to calculate risk-based net worth 
requirement. [Reserved]

Subpart B--Mandatory and Discretionary Supervisory Actions


Sec. 702.201  Prompt corrective action for ``adequately capitalized'' 
credit unions

    (a) Earnings transfer. Beginning the effective date of 
classification as ``adequately capitalized'' or lower, a federally-
insured credit union must increase its net worth quarterly by an amount 
equivalent to at least \1/10\th percent (0.1%) of its total assets for 
the current quarter, and must quarterly transfer that amount (or more 
by choice) from undivided earnings to its regular reserve account, 
until it is ``well capitalized.''
    (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 quarterly transfer an amount 
that is less than the equivalent of 1/10th percent (0.1%) of its total 
assets, to the extent the NCUA Board determines that such lesser 
amount--
    (1) Is necessary to avoid a significant redemption of shares; and
    (2) Would further the purpose of this part.


Sec. 702.202  Prompt corrective action for ``undercapitalized'' credit 
unions

    (a) Mandatory supervisory actions by credit union. A federally-
insured credit union which is ``undercapitalized'' must--
    (1) Earnings transfer. Increase net worth and transfer earnings to 
its regular reserve account in accordance with Sec. 702.201;
    (2) Submit net worth restoration plan. Submit a net worth 
restoration plan pursuant to Sec. 702.206, provided however, that a 
credit union in this category having a net worth ratio of less than 
five percent (5%) which fails to timely submit such a plan, or which 
materially fails to implement an approved plan, is classified 
``significantly undercapitalized'' pursuant to Sec. 702.102(a)(4)(ii) 
above;
    (3) Restrict increase in assets. Beginning the effective date of 
classification as ``undercapitalized'' or lower, not permit the credit 
union's assets to increase beyond its total assets (per Sec. 702.2(j)) 
for the preceding quarter unless--
    (i) Plan approved. The NCUA Board has approved a net worth 
restoration plan which provides for an increase in total assets and--
    (A) The assets of the credit union are increasing consistent with 
the approved plan; and
    (B) The credit union is implementing steps to increase the net 
worth ratio consistent with the approved plan;
    (ii) Plan not approved. The NCUA Board has not approved a net worth 
restoration plan and total assets of the credit union are increasing 
because of increases since quarter-end in balances of:

[[Page 8587]]

    (A) Total accounts receivable and accrued income on loans and 
investments; or
    (B) Total cash and cash equivalents; or
    (C) Total loans outstanding, not to exceed the sum of total assets 
(per Sec. 702.2(j)) plus the quarter-end balance of unused commitments 
to lend and unused lines of credit provided however that a credit union 
which increases a balance as permitted under paragraphs (A), (B) or (C) 
cannot offer rates on shares in excess of prevailing rates on shares in 
its relevant market area, and cannot open new branches;
    (4) Restrict member business loans. Beginning the effective date of 
classification as ``undercapitalized'' or lower, not increase the total 
dollar amount of member business loans (defined as loans outstanding 
and unused commitments to lend) as of the preceding quarter-end unless 
it is granted an exception under 12 U.S.C. 1757a(b).
    (b) ``Second tier'' discretionary supervisory actions by NCUA. 
Subject to the applicable procedures for issuing, reviewing and 
enforcing directives set forth in subpart L of part 747 of this 
chapter, the NCUA Board may, by directive, take one or more of the 
following actions with respect to an ``undercapitalized'' credit union 
having a net worth ratio of less than five percent (5%), or a director, 
officer or employee of such a credit union, if it determines that those 
actions are necessary to carry out the purpose of this part:
    (1) Requiring prior approval for acquisitions, branching, new lines 
of business. Prohibit a credit union from, directly or indirectly, 
acquiring any interest in any business entity or financial institution, 
establishing or acquiring any additional branch office, or engaging in 
any new line of business, unless the NCUA Board has approved the credit 
union's net worth restoration plan, the credit union is implementing 
its plan, and the NCUA Board determines that the proposed action is 
consistent with and will further the objectives of that plan;
    (2) Restricting transactions with and ownership of CUSO. Restrict 
the credit union's transactions with a CUSO, or require the credit 
union to reduce or divest its ownership interest in a CUSO;
    (3) Restricting dividends or interest paid. Restrict the dividend 
or interest rates the credit union pays on shares to the prevailing 
rates paid on comparable accounts and maturities in the relevant market 
area, as determined by the NCUA Board, except that dividend rates 
already declared on shares acquired before imposing a restriction under 
this paragraph may not be retroactively restricted;
    (4) Prohibiting or reducing asset growth. Prohibit any growth in 
the credit union's assets or in a category of assets, or require the 
credit union to reduce its assets or a category of assets;
    (5) Alter, reduce or terminate activity. Require the credit union 
or its CUSO to alter, reduce, or terminate any activity which poses 
excessive risk to the credit union;
    (6) Prohibiting nonmember deposits. Prohibit the credit union from 
accepting all or certain nonmember deposits;
    (7) Dismissing director or senior executive officer. Require the 
credit union to dismiss from office any director or senior executive 
officer, provided however, that a dismissal under this clause shall not 
be construed to be a formal administrative action for removal under 12 
U.S.C. 1786(g);
    (8) Employing qualified senior executive officer. Require the 
credit union to employ qualified senior executive officers (who, if the 
NCUA Board so specifies, shall be subject to its approval); and
    (9) Other action to carry out prompt corrective action. Restrict or 
require such other action by the credit union as the NCUA Board 
determines will carry out the purpose of this part better than any of 
the actions prescribed in paragraphs (b)(1) through (8) of this 
section.
    (c) ``First tier'' application of discretionary supervisory 
actions. An ``undercapitalized'' credit union having a net worth ratio 
of five percent (5%) or more, or which is classified 
``undercapitalized'' by reason of failing to satisfy a risk-based net 
worth requirement under Sec. 702.105 or 702.106, is subject to the 
discretionary supervisory actions in paragraph (b) of this section if 
it fails to comply with any mandatory supervisory action in paragraph 
(a) of this section or fails to timely implement an approved net worth 
restoration plan under Sec. 702.206, including meeting its prescribed 
steps to increase its net worth ratio.


Sec. 702.203  Prompt corrective action for ``significantly 
undercapitalized'' credit unions.

    (a) Mandatory supervisory actions by credit union. A federally-
insured credit union which is ``significantly undercapitalized'' must--
    (1) Earnings transfer. Increase net worth and transfer earnings to 
its regular reserve account in accordance with Sec. 702.201;
    (2) Submit net worth restoration plan. Submit a net worth 
restoration plan pursuant to Sec. 702.206;
    (3) Restrict increase in assets. Not permit the credit union's 
total assets to increase except as provided in Sec. 702.202(a)(3) and
    (4) Restrict member business loans. Not increase the total dollar 
amount of member business loans (defined as loans outstanding and 
unused commitments to lend) as provided in Sec. 702.202(a)(4).
    (b) Discretionary supervisory actions by NCUA. Subject to the 
applicable procedures for issuing, reviewing and enforcing directives 
set forth in subpart L of part 747 of this chapter, the NCUA Board may, 
by directive, take one or more of the following actions with respect to 
any ``significantly undercapitalized'' credit union, or a director, 
officer or employee of such credit union, if it determines that those 
actions are necessary to carry out the purpose of this part:
    (1) Requiring prior approval for acquisitions, branching, new lines 
of business. Prohibit a credit union from, directly or indirectly, 
acquiring any interest in any business entity or financial institution, 
establishing or acquiring any additional branch office, or engaging in 
any new line of business, except as provided in Sec. 702.202(b)(1);
    (2) Restricting transactions with and ownership of CUSO. Restrict 
the credit union's transactions with a CUSO, or require the credit 
union to divest or reduce its ownership interest in a CUSO;
    (3) Restricting dividends or interest paid. Restrict the dividend 
or interest rates that the credit union pays on shares as provided in 
Sec. 702.202(b)(3);
    (4) Prohibiting or reducing asset growth. Prohibit any growth in 
the credit union's assets or in a category of assets, or require the 
credit union to reduce assets or a category of assets;
    (5) Alter, reduce or terminate activity. Require the credit union 
or its CUSO(s) to alter, reduce, or terminate any activity which poses 
excessive risk to the credit union;
    (6) Prohibiting nonmember deposits. Prohibit the credit union from 
accepting all or certain nonmember deposits;
    (7) New election of directors. Order a new election of the credit 
union's board of directors;
    (8) Dismissing director or senior executive officer. Require the 
credit union to dismiss from office any director or senior executive 
officer, provided however, that a dismissal under this clause shall not 
be construed to be a formal administrative action for removal under 12 
U.S.C. 1786(g);

[[Page 8588]]

    (9) Employing qualified senior executive officer. Require the 
credit union to employ qualified senior executive officers (who, if the 
NCUA Board so specifies, shall be subject to its approval);
    (10) Restricting senior executive officers' compensation. Except 
with the prior written approval of the NCUA Board, limit compensation 
to any senior executive officer to that officer's average rate of 
compensation (excluding bonuses and profit sharing) during the four (4) 
calendar quarters preceding the effective date of classification of the 
credit union as ``significantly undercapitalized,'' and prohibit 
payment of a bonus or profit share to such officer;
    (11) Other actions to carry out prompt corrective action. Restrict 
or require such other action by the credit union as the NCUA Board 
determines will carry out the purpose of this part better than any of 
the actions prescribed in paragraphs (b)(1) through (10) of this 
section; and
    (12) Requiring merger. Require the credit union to merge with 
another financial institution if one or more grounds exist for placing 
the credit union into conservatorship pursuant to 12 U.S.C. 
1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 
1787(a)(3)(A)(i).
    (c) Discretionary conservatorship or liquidation if no prospect of 
becoming ``adequately capitalized.'' Notwithstanding any other actions 
required or permitted to be taken under this section, when a credit 
union becomes ``significantly undercapitalized'' (including by 
reclassification under section 702.102(b) above), the NCUA Board may 
place the credit union into conservatorship pursuant to 12 U.S.C. 
1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 
1787(a)(3)(A)(i), provided that the credit union has no reasonable 
prospect of becoming ``adequately capitalized.''


Sec. 702.204  Prompt corrective action for ``critically 
undercapitalized'' credit unions

    (a) Mandatory supervisory actions by credit union. A federally-
insured credit union which is ``critically undercapitalized'' must--
    (1) Earnings transfer. Increase net worth and transfer earnings to 
its regular reserve account in accordance with Sec. 702.201;
    (2) Submit net worth restoration plan. Submit a net worth 
restoration plan pursuant to Sec. 702.206;
    (3) Restrict increase in assets. Not permit the credit union's 
total assets to increase except as provided in Sec. 702.202(a)(3); and
    (4) Restrict member business loans. Not increase the total dollar 
amount of member business loans (defined as loans outstanding and 
unused commitments to lend) as provided in Sec. 702.202(a)(4).
    (b) Discretionary supervisory actions by NCUA. Subject to the 
applicable procedures for issuing, reviewing and enforcing directives 
set forth in subpart L of part 747 of this chapter, the NCUA Board may, 
by directive, take one or more of the following actions with respect to 
any ``critically undercapitalized'' credit union, or a director, 
officer or employee of such credit union, if it determines that those 
actions are necessary to carry out the purpose of this part:
    (1) Requiring prior approval for acquisitions, branching, new lines 
of business. Prohibit a credit union from, directly or indirectly, 
acquiring any interest in any business entity or financial institution, 
establishing or acquiring any additional branch office, or engaging in 
any new line of business, except as provided by Sec. 702.202(b)(1);
    (2) Restricting transactions with and ownership of CUSO. Restrict 
the credit union's transactions with a CUSO, or require the credit 
union to divest or reduce its ownership interest in a CUSO;
    (3) Restricting dividends or interest paid. Restrict the dividend 
or interest rates that the credit union pays on shares as provided in 
Sec. 702.202(b)(3);
    (4) Prohibiting or reducing asset growth. Prohibit any growth in 
the credit union's assets or in a category of assets, or require the 
credit union to reduce assets or a category of assets;
    (5) Alter, reduce or terminate activity. Require the credit union 
or its CUSO(s) to alter, reduce, or terminate any activity which poses 
excessive risk to the credit union;
    (6) Prohibiting nonmember deposits. Prohibit the credit union from 
accepting all or certain nonmember deposits;
    (7) New election of directors. Order a new election of the credit 
union's board of directors;
    (8) Dismissing director or senior executive officer. Require the 
credit union to dismiss from office any director or senior executive 
officer, provided however, that a dismissal under this clause shall not 
be construed to be a formal administrative action for removal under 12 
U.S.C. 1786(g);
    (9) Employing qualified senior executive officer. Require the 
credit union to employ qualified senior executive officers (who, if the 
NCUA Board so specifies, shall be subject to its approval);
    (10) Restricting senior executive officers' compensation. Reduce 
or, with the prior written approval of the NCUA Board, limit 
compensation to any senior executive officer to that officer's average 
rate of compensation (excluding bonuses and profit sharing) during the 
four (4) calendar quarters preceding the effective date of 
classification of the credit union as ``critically undercapitalized,'' 
and prohibit payment of a bonus or profit share to such officer;
    (11) Restrictions on payments on uninsured secondary capital. 
Beginning 60 days after the effective date of classification of a 
credit union as ``critically undercapitalized,'' prohibit payments of 
principal, dividends or interest on the credit union's uninsured 
secondary capital accounts established after August 7, 2000, except 
that unpaid dividends or interest shall continue to accrue under the 
terms of the account to the extent permitted by law;
    (12) Requiring prior approval. Require a ``critically 
undercapitalized'' credit union to obtain the NCUA Board's prior 
written approval before doing any of the following:
    (i) Entering into any material transaction not within the scope of 
an approved net worth restoration plan (or approved revised business 
plan under subpart C of this part);
    (ii) Extending credit for transactions deemed highly leveraged by 
the NCUA Board or, if State-chartered, by the appropriate State 
official;
    (iii) Amending the credit union's charter or bylaws, except to the 
extent necessary to comply with any law, regulation, or order;
    (iv) Making any material change in accounting methods; and
    (v) Paying dividends or interest on new share accounts at a rate 
exceeding the prevailing rates of interest on insured deposits in its 
relevant market area;
    (13) Other action to carry out prompt corrective action. Restrict 
or require such other action by the credit union as the NCUA Board 
determines will carry out the purpose of this part better than any of 
the actions prescribed in paragraphs (b)(1) through (12) of this 
section; and
    (14) Requiring merger. Require the credit union to merge with 
another financial institution if one or more grounds exist for placing 
the credit union into conservatorship pursuant to 12 U.S.C. 
1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 
1787(a)(3)(A)(i).
    (c) Mandatory conservatorship, liquidation or action in lieu 
thereof--(1) Action within 90 days. Notwithstanding

[[Page 8589]]

any other actions required or permitted to be taken under this section 
(and regardless of a credit union's prospect of becoming ``adequately 
capitalized''), the NCUA Board must, within 90 calendar days after the 
effective date of classification of a credit union as ``critically 
undercapitalized''--
    (i) Conservatorship. Place the credit union into conservatorship 
pursuant to 12 U.S.C. 1786(h)(1)(G); or
    (ii) Liquidation. Liquidate the credit union pursuant to 12 U.S.C. 
1787(a)(3)(A)(ii); or
    (iii) Other corrective action. Take other corrective action, in 
lieu of conservatorship or liquidation, to better achieve the purpose 
of this part, provided that the NCUA Board documents why such action in 
lieu of conservatorship or liquidation would do so.
    (2) Renewal of other corrective action. A determination by the NCUA 
Board to take other corrective action in lieu of conservatorship or 
liquidation under paragraph (c)(1)(iii) of this section shall expire 
after an effective period ending no later than 180 calendar days after 
the determination is made, and the credit union shall be immediately 
placed into conservatorship or liquidation under paragraphs (c)(1)(i) 
and (ii), unless the NCUA Board makes a new determination under 
paragraph (c)(1)(iii) of this section before the end of the effective 
period of the prior determination;
    (3) Mandatory liquidation after 18 months--(i) Generally. 
Notwithstanding paragraphs (c)(1) and (2) of this section, the NCUA 
Board must place a credit union into liquidation if it remains 
``critically undercapitalized'' for a full calendar quarter, on a 
monthly average basis, following a period of 18 months from the 
effective date the credit union was first classified ``critically 
undercapitalized.''
    (ii) Exception. Notwithstanding paragraph (c)(3)(i) of this 
section, the NCUA Board may continue to take other corrective action in 
lieu of liquidation if it certifies that the credit union--
    (A) Has been in substantial compliance with an approved net worth 
restoration plan requiring consistent improvement in net worth since 
the date the net worth restoration plan was approved;
    (B) Has positive net income or has an upward trend in earnings that 
the NCUA Board projects as sustainable; and
    (C) Is viable and not expected to fail.
    (iii) Review of exception. The NCUA Board shall, at least 
quarterly, review the certification of an exception to liquidation 
under paragraph (c)(3)(ii) of this section and shall either--
    (A) Recertify the credit union if it continues to satisfy the 
criteria of paragraph (c)(3)(ii) of this section; or
    (B) Promptly place the credit union into liquidation, pursuant to 
12 U.S.C. 1787(a)(3)(A)(ii), if it fails to satisfy the criteria of 
paragraph (c)(3)(ii) of this section.
    (4) Nondelegation. The NCUA Board may not delegate its authority 
under paragraph (c) of this section, unless the credit union has less 
than $5,000,000 in total assets. A credit union shall have a right of 
direct appeal to the NCUA Board of any decision made by delegated 
authority under this section.


Sec. 702.205  Consultation with State officials on proposed prompt 
corrective action.

    (a) Consultation on proposed conservatorship or liquidation. Before 
placing a federally-insured State-chartered credit union into 
conservatorship (pursuant to 12 U.S.C. 1786(h)(1)(F) or (G)) or 
liquidation (pursuant to 12 U.S.C. 1787(a)(3)) as permitted or required 
under subparts B or C of this part to facilitate prompt corrective 
action--
    (1) The NCUA Board shall seek the views of the appropriate State 
official (as defined in Sec. 702.2(b), and give him or her an 
opportunity to 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; and
    (3) If the appropriate State official makes a timely written 
response that disagrees with the proposed conservatorship or 
liquidation and gives reasons for that disagreement, the NCUA Board 
shall not place the credit union into conservatorship or liquidation 
unless it first considers the views of the appropriate State official 
and determines that--
    (i) The NCUSIF faces a significant risk of loss if the credit union 
is not placed into conservatorship or liquidation; and
    (ii) Conservatorship or liquidation is necessary either to reduce 
the risk of loss, or to reduce the expected loss, to the NCUSIF with 
respect to the credit union.
    (b) Nondelegation. The NCUA Board may not delegate any 
determination under paragraph (a)(3) of this section.
    (c) Consultation on proposed discretionary action. The NCUA Board 
shall consult and seek to work cooperatively with the appropriate State 
official before taking any discretionary supervisory action under 
Secs. 702.201(b), 702.202(b), 702.203(b), 702.204(b), 702.304(b) and 
702.305(b) with respect to a federally-insured State-chartered credit 
union; shall provide prompt notice of its decision to the appropriate 
State official; and shall allow the appropriate State official to take 
the proposed action independently or jointly with NCUA.


Sec. 702.206  Net worth restoration plans.

    (a) Schedule for filing--(1) Generally. A federally-insured credit 
union shall file a written net worth restoration plan (NWRP) with the 
appropriate Regional Director and, if State-chartered, the appropriate 
State official, within 45 calendar days of the effective date of 
classification as either ``undercapitalized,'' ``significantly 
undercapitalized'' or ``critically undercapitalized,'' unless the NCUA 
Board notifies the credit union in writing that its NWRP is to be filed 
within a different period.
    (2) Exception. An otherwise ``adequately capitalized'' credit union 
that is reclassified ``undercapitalized'' on safety and soundness 
grounds under Sec. 702.102(b) is not required to submit a NWRP solely 
due to the reclassification, unless the NCUA Board notifies the credit 
union that it must submit an NWRP.
    (3) Filing of additional plan. Notwithstanding paragraph (a)(1) of 
this section, a credit union that has already submitted and is 
operating under a NWRP approved under this section is not required to 
submit an additional NWRP due to a change in net worth category 
(including by reclassification under Sec. 702.102(b)), unless the NCUA 
Board notifies the credit union that it must submit a new NWRP. A 
credit union that is notified to submit a new or revised NWRP shall 
file the NWRP in writing with the appropriate Regional Director within 
30 calendar days of receiving such notice, unless the NCUA Board 
notifies the credit union in writing that the NWRP is to be filed 
within a different period.
    (4) Failure to timely file plan. When a credit union fails to 
timely file an NWRP pursuant to this paragraph, the NCUA Board shall 
promptly notify the credit union that it has failed to file an NWRP and 
that it has 15 calendar days from receipt of that notice within which 
to file an NWRP.
    (b) Assistance to small credit unions. Upon timely request by a 
credit union having total assets of less than $10 million (regardless 
how long it has been in operation), the NCUA Board shall provide 
assistance in preparing an

[[Page 8590]]

NWRP required to be filed under paragraph (a) of this section.
    (c) Contents of NWRP. An NWRP must--
    (1) Specify--
    (i) A quarterly timetable of steps the credit union will take to 
increase its net worth ratio so that it becomes ``adequately 
capitalized'' by the end of the term of the NWRP, and to remain so for 
four (4) consecutive calendar quarters. If ``complex,'' the credit 
union is subject to a risk-based net worth requirement that may require 
a net worth ratio higher than six percent (6%) to become ``adequately 
capitalized'';
    (ii) The projected amount of earnings to be transferred to the 
regular reserve in each quarter of the term of the NWRP equivalent to 
not less than \1/10\ percent (0.1%) of its total assets under 
Sec. 702.201(a), or such lesser amount as the NCUA Board may permit 
under Sec. 702.201(b);
    (iii) How the credit union will comply with the mandatory and 
discretionary supervisory actions imposed on it by the NCUA Board under 
this subpart;
    (iv) The types and levels of activities in which the credit union 
will engage; and
    (v) If reclassified to a lower category under Sec. 702.102(b), the 
steps the credit union will take to correct the unsafe or unsound 
practice(s) or condition(s);
    (2) Include pro forma financial statements, including any off-
balance sheet items, covering a minimum of the next two years; and
    (3) Contain such other information as the NCUA Board has required.
    (d) Criteria for approval of NWRP. The NCUA Board shall not accept 
a NWRP plan unless it--
    (1) Complies with paragraph (c) of this section;
    (2) Is based on realistic assumptions, and is likely to succeed in 
restoring the credit union's net worth; and (3) Would not unreasonably 
increase the credit union's exposure to risk (including credit risk, 
interest-rate risk, and other types of risk).
    (e) Consideration of regulatory capital. To minimize possible long-
term losses to the NCUSIF while the credit union takes steps to become 
``adequately capitalized,'' the NCUA Board shall, in evaluating an NWRP 
under this section, consider the type and amount of any form of 
regulatory capital which may become established by NCUA regulation, or 
authorized by State law and recognized by NCUA, which the credit union 
holds, but which is not included in its net worth.
    (f) Review of NWRP--(1) Notice of decision. Within 45 calendar days 
after receiving an NWRP under this part, the NCUA Board shall notify 
the credit union in writing whether the NWRP has been approved, and 
shall provide reasons for its decision in the event of disapproval.
    (2) Delayed decision. If no decision is made within the time 
prescribed in paragraph (f)(1) of this section, the NWRP is deemed 
approved.
    (3) Consultation with State officials. In the case of an NWRP 
submitted by a federally-insured State-chartered credit union (whether 
an original, new, additional, revised or amended NWRP), the NCUA Board 
shall, when evaluating the NWRP, seek and consider the views of the 
appropriate State official, and provide prompt notice of its decision 
to the appropriate State official.
    (g) NWRP not approved  (1) Submission of revised NWRP. If an NWRP 
is rejected by the NCUA Board, the credit union shall submit a revised 
NWRP within 30 calendar days of receiving notice of disapproval, unless 
it is notified in writing by the NCUA Board that the revised NWRP is to 
be filed within a different period.
    (2) Notice of decision on revised NWRP. Within 30 calendar days 
after receiving a revised NWRP under paragraph (g)(1) of this section, 
the NCUA Board shall notify the credit union in writing whether the 
revised NWRP is approved. The Board may extend the time within which 
notice of its decision shall be provided.
    (3) Disapproval of reclassified credit union's NWRP. A credit union 
which has been classified ``significantly undercapitalized'' under 
Sec. 702.102(a)(4)(ii) shall remain so classified pending NCUA Board 
approval of a new or revised NWRP.
    (h) Amendment of NWRP. A credit union that is operating under an 
approved NWRP may, after prior written notice to, and approval by the 
NCUA Board, amend its NWRP to reflect a change in circumstance. Pending 
approval of an amended NWRP, the credit union shall implement the NWRP 
as originally approved.

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


Sec. 702.301  Scope and definition.

    (a) Scope. This subpart C applies in lieu of subpart B of this part 
exclusively to credit unions defined in paragraph (b) of this section 
as ``new'' pursuant to 12 U.S.C. 1790d(b)(2).
    (b) New credit union defined. A ``new'' credit union for purposes 
of this subpart is a federally-insured credit union that both has been 
in operation for less than ten (10) years and has total assets of not 
more than $10 million. A credit union which exceeds $10 million in 
total assets may become ``new'' if its total assets subsequently 
decline below $10 million while it is still in operation for less than 
10 years.
    (c) Effect of spin-offs. A credit union formed as the result of a 
``spin-off'' of a group from the field of membership of an existing 
credit union is deemed to be in operation since the effective date of 
the ``spin-off.'' A credit union whose total assets decline below $10 
million because a group within its field of membership has been ``spun-
off'' is deemed ``new'' if it has been in operation less than 10 years.
    (d) Actions to evade prompt corrective action. If the NCUA Board 
determines that a credit union was formed, or was reduced in asset size 
as a result of a ``spin-off,'' or was merged, primarily to qualify as 
``new'' under this subpart, the credit union shall be deemed subject to 
prompt corrective action under subpart A of this part.


Sec. 702.302  Net worth categories for new credit unions.

    (a) Net worth measures. For purposes of this part, a new credit 
union must determine its net worth category classification quarterly 
according to its net worth ratio as defined in Sec. 702.2(g), and any 
risk-based net worth requirement applicable to a new credit union 
defined as ``complex'' under Secs. 702.103 through 702.106.
    (b) Effective date of net worth classification of new credit union. 
For purposes of subpart C, the effective date of a new federally-
insured credit union's classification within a net worth category in 
paragraph (c) of this section shall be determined as provided in 
Sec. 702.101(b); and written notice to the NCUA Board of a decline in 
net worth category in paragraph (c) of this section shall be given as 
required by section 702.101(c).
    (c) Net worth categories. A federally-insured credit union defined 
as ``new'' under this section shall be classified (Table 2)--
    (1) Well capitalized if it has a net worth ratio of seven percent 
(7%) or greater and also meets any applicable risk-based net worth 
requirement under Secs. 702.105 and 702.106;
    (2) Adequately capitalized if it has a net worth ratio of six 
percent (6%) or more but less than seven percent (7%), and also meets 
any applicable risk-based net worth requirement under Secs. 702.105 and 
702.106;
    (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

[[Page 8591]]

applicable risk-based net worth requirement under Secs.  702.105 and 
702.106;
    (4) Marginally capitalized if it has a net worth ratio of two 
percent (2%) or more but less than three and one-half percent (3.5%);
    (5) Minimally capitalized if it has a net worth ratio of zero 
percent (0%) or greater but less than two percent (2%); and
    (6) Uncapitalized if it has a net worth ratio of less than zero 
percent (0%) (e.g., a deficit in retained earnings).
[GRAPHIC] [TIFF OMITTED] TR18FE00.007

    (d) Reclassification based on supervisory criteria other than net 
worth. Subject to Sec. 702.102(b) and (c), the NCUA Board may 
reclassify a ``well capitalized,'' ``moderately capitalized'' or 
``marginally capitalized'' new credit union to the next lower net worth 
category (each of such actions is hereinafter referred to generally as 
``reclassification'') in either of the circumstances prescribed in 
Sec. 702.102(b).
    (e) Consultation with State officials. The NCUA Board shall consult 
and seek to work cooperatively with the appropriate State official 
before reclassifying a federally-insured State-chartered credit union 
under paragraph (d) of this section, and shall promptly notify the 
appropriate State official of its decision to reclassify.


Sec. 702.303  Prompt corrective action for ``adequately capitalized'' 
new credit unions.

    Beginning on the effective date of classification as ``adequately 
capitalized'' or lower, an ``adequately capitalized'' new credit union 
must increase its net worth and transfer earnings to its regular 
reserve account in accordance with Sec. 702.201, until it is ``well 
capitalized.''


Sec. 702.304  Prompt corrective action for ``moderately capitalized,'' 
``marginally capitalized'' or ``minimally capitalized'' new credit 
unions.

    (a) Mandatory supervisory actions by new credit union. A new credit 
union which is ``moderately capitalized,'' ``marginally capitalized,'' 
or ``minimally capitalized'' (including by reclassification under 
Sec. 702.302(d) must--
    (1) Earnings transfer. Beginning on the effective date of 
classification as ``moderately capitalized'' or lower, increase net 
worth and quarterly transfer earnings to the credit union's regular 
reserve account in an amount reflected in the credit union's approved 
initial or revised business plan;
    (2) Submit revised business plan. Submit a revised business plan 
pursuant to Sec. 702.306 if either--
    (i) The credit union's net worth ratio has not increased consistent 
with its then-present approved business plan; or
    (ii) The credit union has no then-present approved business plan; 
or
    (iii) The credit union has failed to undertake any mandatory 
supervisory action prescribed in this paragraph; and
    (3) Restrict member business loans. Beginning the effective date of 
classification as ``moderately capitalized'' or lower, not increase the 
total dollar amount of member business loans (defined as loans 
outstanding and unused commitments to lend) as provided in 
Sec. 702.202(a)(4).
    (b) Discretionary supervisory actions by NCUA. Subject to the 
applicable procedures set forth in subpart L of part 747 of this 
chapter for issuing, reviewing and enforcing directives, the NCUA Board 
may, by directive, take one or more of the actions prescribed in 
Sec. 702.204(b) if the credit union's net worth ratio has not increased 
consistent with its then-present business plan, or the credit union has 
failed to undertake any mandatory supervisory action prescribed in 
paragraph (a) of this section.
    (c) Discretionary conservatorship or liquidation. Notwithstanding 
any other actions required or permitted to be taken under this section, 
the NCUA Board may place a new credit union which is ``moderately 
capitalized,'' ``marginally capitalized'' or ``minimally capitalized'' 
(including by reclassification under Sec. 702.302(d)) into 
conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), or into 
liquidation pursuant to 12 U.S.C. 1787(a)(3)(A)(i), provided that the 
credit union has no reasonable prospect of becoming ``adequately 
capitalized.''


Sec. 702.305  Prompt corrective action for ``uncapitalized'' new credit 
unions.

    (a) Mandatory supervisory actions 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 from a higher category after the expiration 
of that period, it must--
    (1) Earnings transfer. Increase net worth and quarterly transfer 
earnings to the credit union's regular reserve account in an amount 
reflected in the credit union's approved initial or revised business 
plan;
    (2) Submit revised business plan. Within 90 days of the effective 
date of

[[Page 8592]]

classification as ``uncapitalized'' as provided in paragraph (a) of 
this section, or such shorter period as the NCUA Board specifies, 
submit a revised business plan pursuant to Sec. 702.306 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 (defined as loans outstanding and unfunded 
commitments to lend) as provided in Sec. 702.202(a)(4).
    (b) Discretionary supervisory actions by NCUA. Subject to the 
procedures set forth in subpart L of part 747 of this chapter for 
issuing, reviewing and enforcing directives, the NCUA Board may, by 
directive, take one or more of the actions prescribed in 
Sec. 702.204(b) if the credit union's net worth ratio has not increased 
consistent with its then-present business plan, or the credit union has 
failed to undertake any mandatory supervisory action prescribed in 
paragraph (a) of this section.
    (c) Mandatory liquidation or conservatorship. Notwithstanding any 
other actions required or permitted to be taken under this section, the 
NCUA Board--
    (1) Plan not submitted. May place into liquidation pursuant to 12 
U.S.C. 1787(a)(3)(A)(ii), or conservatorship pursuant to 12 U.S.C. 
1786(h)(1)(F), an ``uncapitalized'' new credit union which fails to 
submit a revised business plan within the time provided under paragraph 
(a)(2) of this section; or
    (2) ``Uncapitalized'' after 90 days. Must place into liquidation 
pursuant to 12 U.S.C. 1787(a)(3)(A)(ii), or conservatorship pursuant to 
12 U.S.C. 1786(h)(1)(F), an ``uncapitalized'' new credit union which 
remains ``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. 702.306  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 following the 
effective date (per Sec. 702.101(b)) of the credit union's failure to 
meet a quarterly net worth target prescribed in 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. 702.305(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 Chapter 1, section IV.D. of NCUA's Chartering 
and Field of Membership Manual (IRPS 99-1), 63 FR 71998, 72019 (Dec. 
30, 1998), or its successor(s), or for State-chartered credit unions 
under applicable State law;
    (2) Establish a timetable of quarterly targets for net worth during 
each year in which the RBP is in effect so that the credit union 
becomes ``adequately capitalized'' and remains so for four (4) 
consecutive calendar quarters. If ``complex,'' the credit union is 
subject to a risk-based net worth requirement that may require a net 
worth ratio higher than six percent (6%) to become ``adequately 
capitalized'';
    (3) Specify the projected amount of earnings to be transferred 
quarterly to its regular reserve as provided under Sec. 702.304(a)(1) 
or 702.305(a)(1);
    (4) Explain how the new credit union will comply with the mandatory 
and discretionary supervisory actions imposed on it by the NCUA Board 
under this subpart;
    (5) Specify the types and levels of activities in which the new 
credit union will engage;
    (6) In the case of a new credit union reclassified to a lower 
category under Sec. 702.302(d), specify the steps the credit union will 
take to correct the unsafe or unsound condition or practice; and
    (7) Include such other information as the NCUA Board may require.
    (c) Criteria for approval. The NCUA Board shall not approve a new 
credit union's RBP unless it--
    (1) Addresses the items enumerated in paragraph (b) of this 
section;
    (2) Is based on realistic assumptions, and is likely to succeed in 
building the credit union's net worth; and
    (3) Would not unreasonably increase the credit union's exposure to 
risk (including credit risk, interest-rate risk, and other types of 
risk).
    (d) Consideration of regulatory capital. To minimize possible long-
term losses to the NCUSIF while the credit union takes steps to become 
``adequately capitalized,'' the NCUA Board shall, in evaluating an RBP 
under this section, consider the type and amount of any form of 
regulatory capital which may become established by NCUA regulation, or 
authorized by State law and recognized by NCUA, which the credit union 
holds, but which is not included in its net worth.
    (e) Review of revised business plan-- (1) Notice of decision. 
Within 30 calendar days after receiving an RBP under this section, the 
NCUA Board shall notify the credit union in writing whether its RBP is 
approved, and shall provide reasons for its decision in the event of 
disapproval. The NCUA Board may extend the time within which notice of 
its decision shall be provided.
    (2) Delayed decision. If no decision is made within the time 
prescribed in paragraph (e)(1) of this section, the RBP is deemed 
approved.
    (3) Consultation with State officials. When evaluating an RBP 
submitted by a federally-insured State-chartered new credit union 
(whether an original, new or additional RBP), the NCUA Board shall seek 
and consider the views of the appropriate State official, and provide 
prompt notice of its decision to the appropriate State official.
    (f) Plan not approved--(1) Submission of new revised plan. If an 
RBP is rejected by the NCUA Board, the new credit union shall submit a 
new RBP within 30 calendar days of receiving notice of disapproval of 
its initial RBP, unless it is notified in writing by the NCUA Board 
that the new RBP is to be filed within a different period.
    (2) Notice of decision on revised plan. Within 30 calendar days 
after receiving an RBP under paragraph (f)(1) of this section, the NCUA 
Board shall notify the credit union in writing whether the new RBP is 
approved. The Board may extend the time within which notice of its 
decision shall be provided.
    (g) Amendment of plan. A credit union that has filed an approved 
RBP may, after prior written notice to and approval by the NCUA Board, 
amend it to reflect a change in circumstance. Pending approval of an 
amended RBP, the new credit union shall implement its existing RBP as 
originally approved.

[[Page 8593]]

Sec. 702.307  Incentives for new credit unions.

    (a) Assistance in revising business plans. Upon timely request by a 
credit union having total assets of less than $10 million (regardless 
how long it has been in operation), the NCUA Board shall provide 
assistance in preparing a revised business plan required to be filed 
under Sec. 702.306.
    (b) Assistance. Management training and other assistance to new 
credit unions will be provided in accordance with policies approved by 
the NCUA Board.
    (c) Small credit union program. A new credit union is eligible to 
join and receive comprehensive benefits and assistance under NCUA's 
Small Credit Union Program.

Subpart D--Reserves


Sec. 702.401  Reserves.

    (a) Special reserve. Each federally-insured credit union shall 
establish and maintain such reserves as may be required by the FCUA, by 
state law, by regulation, or in special cases by the NCUA Board or 
appropriate State official.
    (b) Regular reserve. Each federally-insured credit union shall 
establish and maintain a regular reserve account for the purpose of 
absorbing losses that exceed undivided earnings and other 
appropriations of undivided earnings, subject to paragraph (c) of this 
section. Earnings required to be transferred annually to a credit 
union's regular reserve under subparts B or C of this part shall be 
held in this account.
    (c) Charges to regular reserve. The board of directors of a 
federally-insured credit union may authorize charges to the regular 
reserve for losses, provided that the authorization states the amount 
and provides an explanation of the need for the charge, and either--
    (1) The charge will not cause the credit union's net worth 
classification to fall below ``well capitalized'' under subparts B or C 
of this part; or
    (2) The appropriate Regional Director or, if State-chartered, the 
appropriate State official, has given written approval for the charge.
    (d) Transfers to regular reserve. The transfer of earnings to a 
federally-insured credit union's regular reserve account when required 
under subparts B or C of this part must occur after charges for loan or 
other losses are addressed as provided in paragraph (c) of this section 
and Sec. 702.402(d), but before payment of any dividends to members.


Sec. 702.402  Full and fair disclosure of financial condition.

    (a) Full and fair disclosure defined. ``Full and fair disclosure'' 
is the level of disclosure which a prudent person would provide to a 
member of a federally-insured credit union, to NCUA, or, at the 
discretion of the board of directors, to creditors to fairly inform 
them of the financial condition and the results of operations of the 
credit union.
    (b) Full and fair disclosure implemented. The financial statements 
of a federally-insured credit union shall provide for full and fair 
disclosure of all assets, liabilities, and members' equity, including 
such valuation (allowance) accounts as may be necessary to present 
fairly the financial condition; and all income and expenses necessary 
to present fairly the statement of income for the reporting period.
    (c) Declaration of officials. The Statement of Financial Condition, 
when presented to members, to creditors or to the NCUA, shall contain a 
dual declaration by the treasurer and the chief executive officer, or 
in the latter's absence, by any other officer designated by the board 
of directors of the reporting credit union to make such declaration, 
that the report and related financial statements are true and correct 
to the best of their knowledge and belief and present fairly the 
financial condition and the statement of income for the period covered.
    (d) Charges for loan losses. Full and fair disclosure demands that 
a credit union properly address charges for loan losses as follows:
    (1) Charges for loan losses shall be made in accordance with 
generally accepted accounting principles (GAAP);
    (2) The allowance for loan and lease losses (ALL) established for 
loans must fairly present the probable losses for all categories of 
loans and the proper valuation of loans. The valuation allowance must 
encompass specifically identified loans, as well as estimated losses 
inherent in the loan portfolio, such as loans and pools of loans for 
which losses have been incurred but are not identifiable on a specific 
loan-by-loan basis;
    (3) Adjustments to the valuation ALL will be recorded in the 
expense account ``Provision for Loan and Lease Losses'';
    (4) The maintenance of an ALL shall not affect the requirement to 
transfer earnings to a credit union's regular reserve when required 
under subparts B or C of this part; and
    (5) At a minimum, adjustments to the ALL shall be made prior to the 
distribution or posting of any dividend to the accounts of members.


Sec. 702.403  Payment of dividends.

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

PART 741--REQUIREMENTS FOR INSURANCE

    1. The authority citation for part 741 is revised to read as 
follows:

    Authority: 12 U.S.C. 1757, 1766, 1781-1790, and 1790d. Section 
741.4 is also authorized by 31 U.S.C. 3717.

    2. Section 741.3 is amended by revising paragraphs (a)(1) and 
(a)(2) to read as follows:


Sec. 741.3  Criteria

* * * * *
    (a) Adequacy of reserves--(1) General rule. State-chartered credit 
unions are subject to section 216 of the Act, 12 U.S.C. 1790d, and to 
part 702 and subpart L of part 747 of this chapter.
    (2) Charges against reserves. State-chartered credit unions may 
charge losses, including losses other than loan losses, against the 
regular reserve in accordance with either state law or procedures 
established by the appropriate State official. The board of directors 
of a credit union may authorize charges to the regular reserve for 
losses, provided that the authorization states the amount and provides 
an explanation of the need for the charge, and either--
    (i) The charge will not cause the credit union's net worth 
classification to fall below ``well capitalized'' under subparts B or C 
of part 702; or
    (ii) The appropriate State official has given written approval for 
the charge.
* * * * *

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:


[[Page 8594]]


    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 discretionary supervisory action.
747.2003  Review of order reclassifying a credit union on safety and 
soundness criteria.
747.2004  Review of order to dismiss a director or senior executive 
officer.
747.2005  Enforcement of orders.
Subpart 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), 
which are subject to discretionary supervisory actions under part 702 
of this chapter, and to reclassification under Secs. 702.102(b) and 
702.302(d) of this chapter, to facilitate prompt corrective action 
under section 216 of the Federal Credit Union Act, 12 U.S.C. 1790d; and 
to senior executive officers and directors of such credit unions who 
are dismissed pursuant to a discretionary supervisory action imposed 
under part 702. NCUA staff decisions to impose discretionary 
supervisory actions under part 702 shall be considered material 
supervisory determinations for purposes of 12 U.S.C. 1790d(k). Section 
747.2002 of this subpart provides an independent appellate process to 
challenge such decisions.
    (b) Notice to State officials. With respect to a federally-insured 
State-chartered credit union under Secs. 747.2002, 747.2003 and 
747.2004 of this subpart, notices, directives and decisions on appeal 
served upon a credit union, or a dismissed director or officer thereof, 
by the NCUA Board shall also be served upon the appropriate State 
official. Responses, requests for a hearing and to present witnesses, 
requests to modify or rescind a discretionary supervisory action and 
requests for reinstatement served upon the NCUA Board by a credit 
union, or dismissed director or officer thereof, shall also be served 
upon the appropriate State official.


Sec. 747.2002  Review of orders imposing discretionary supervisory 
action.

    (a) Notice of intent to issue directive.--
    (1) Generally. Whenever the NCUA Board intends to issue a directive 
imposing a discretionary supervisory action under Secs. 702.202(b), 
702.203(b) and 702.204(b) of this chapter on a credit union classified 
``undercapitalized'' or lower, or under Secs. 702.304(b) or 702.305(b) 
of this chapter on a new credit union classified ``moderately 
capitalized'' or lower, it must give the credit union prior notice of 
the proposed action and an opportunity to respond.
    (2) Immediate issuance of directive without notice. The NCUA Board 
may issue a directive to take effect immediately under paragraph (a)(1) 
of this section without notice to the credit union if the NCUA Board 
finds it necessary in order to carry out the purposes of part 702 of 
this chapter. A credit union that is subject to a directive which takes 
effect immediately may appeal the directive in writing to the NCUA 
Board. Such an appeal must be received by the NCUA Board within 14 
calendar days after the directive was issued, unless the NCUA Board 
permits a longer period. Unless ordered by the NCUA Board, the 
directive shall remain in effect pending a decision on the appeal. The 
NCUA Board shall consider any such appeal, if timely filed, within 60 
calendar days of receiving it.
    (b) Contents of notice. The NCUA Board's notice to a credit union 
of its intention to issue a directive imposing a discretionary 
supervisory action must state:
    (1) The credit union's net worth ratio and net worth category 
classification;
    (2) The specific restrictions or requirements that the NCUA Board 
intends to impose, and the reasons therefor;
    (3) The proposed date when the discretionary supervisory action 
would take effect and the proposed date for completing the required 
action or terminating the action; and
    (4) That a credit union must file a written response to a notice 
within 14 calendar days from the date of the notice, or within such 
shorter period as the NCUA Board determines is appropriate in light of 
the financial condition of the credit union or other relevant 
circumstances.
    (c) Contents of response to notice. A credit union's response to a 
notice under paragraph (b) of this section must:
    (1) Explain why it contends that the proposed discretionary 
supervisory action is not an appropriate exercise of discretion under 
this part;
    (2) Request the NCUA Board to modify or to not issue the proposed 
directive;
    (3) Include other relevant information, mitigating circumstances, 
documentation, or other evidence in support of the credit union's 
position regarding the proposed directive; and
    (4) If desired, request the recommendation of NCUA's ombudsman 
pursuant to paragraph (g) of this section.
    (d) NCUA Board consideration of response. The NCUA Board, or an 
independent person designated by the NCUA Board to act on its behalf, 
after considering a response under paragraph (c) of this section, may:
    (1) Issue the directive as originally proposed or as modified;
    (2) Determine not to issue the directive and to so notify the 
credit union; or
    (3) Seek additional information or clarification from the credit 
union or any other relevant source.
    (e) Failure to file response. A credit union which fails to file a 
written response to a notice of the NCUA Board's intention to issue a 
directive imposing a discretionary supervisory action, within the 
specified time period, shall be deemed to have waived the opportunity 
to respond, and to have consented to the issuance of the directive.
    (f) Request to modify or rescind directive. A credit union that is 
subject to an existing directive imposing a discretionary supervisory 
action may request in writing that the NCUA Board reconsider the terms 
of the directive, or rescind or modify it, due to changed 
circumstances. Unless otherwise ordered by the NCUA Board, the 
directive shall remain in effect while such request is pending. A 
request under this paragraph which remains pending 60 days following 
receipt by the NCUA Board is deemed granted.
    (g) Ombudsman. A credit union may request in writing the 
recommendation of NCUA's ombudsman to modify or to not issue a proposed 
directive under paragraph (b) of this section, or to modify or rescind 
an existing directive due to changed circumstances under paragraph (f) 
of this section. A credit union which fails to request the ombudsman's 
recommendation in a response under paragraph (c) of this section, or in 
a request under paragraph (f) of this section, shall be deemed to have 
waived the opportunity to do so. The ombudsman shall promptly notify 
the credit union and the NCUA Board of his or her recommendation.

[[Page 8595]]

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

    (a) Notice of proposed reclassification based on unsafe or unsound 
condition or practice. When the NCUA Board proposes to reclassify a 
credit union or subject it to the supervisory actions applicable to the 
next lower net worth category pursuant to Secs. 702.102(b) and 
702.302(d) of this chapter (each such action hereinafter referred to as 
``reclassification''), the NCUA Board shall issue and serve on the 
credit union reasonable prior notice of the proposed reclassification.
    (b) Contents of notice. A notice of intention to reclassify a 
credit union based on unsafe or unsound condition or practice shall 
state:
    (1) The credit union's net worth ratio, current net worth category 
classification, and the net worth category to which the credit union 
would be reclassified;
    (2) The unsafe or unsound practice(s) and/or condition(s) 
justifying reasons for reclassification of the credit union;
    (3) The date by which the credit union must file a written response 
to the notice (including a request for a hearing), which date shall be 
no less than 14 calendar days from the date of service of the notice 
unless the NCUA Board determines that a shorter period is appropriate 
in light of the financial condition of the credit union or other 
relevant circumstances; and
    (4) That a credit union which fails to--
    (i) File a written response to the notice of reclassification, 
within the specified time period, shall be deemed to have waived the 
opportunity to respond, and to have consented to reclassification;
    (ii) Request a hearing shall be deemed to have waived any right to 
a hearing; and
    (iii) Request the opportunity to present witness testimony shall be 
deemed have waived any right to present such testimony.
    (c) Contents of response to notice. A credit union's response to a 
notice under paragraph (b) of this section must:
    (1) Explain why it contends that the credit union should not be 
reclassified;
    (2) Include any relevant information, mitigating circumstances, 
documentation, or other evidence in support of the credit union's 
position;
    (3) If desired, request an informal hearing before the NCUA Board 
under this section; and
    (4) If a hearing is requested, identify any witness whose testimony 
the credit union wishes to present and the general nature of each 
witness's expected testimony.
    (d) Order to hold informal hearing. Upon timely receipt of a 
written response that includes a request for a hearing, the NCUA Board 
shall issue an order commencing an informal hearing no later than 30 
days after receipt of the request, unless the credit union requests a 
later date. The hearing shall be held in Alexandria, Virginia, or at 
such other place as may be designated by the NCUA Board, before a 
presiding officer designated by the NCUA Board to conduct the hearing 
and to recommend a decision.
    (e) Procedures for informal hearing.--(1) The credit union may 
appear at the hearing through a representative or through counsel. The 
credit union shall have the right to introduce relevant documents and 
to present oral argument at the hearing. The credit union may introduce 
witness testimony only if expressly authorized by the NCUA Board or the 
presiding officer. Neither the provisions of the Administrative 
Procedure Act (5 U.S.C. 554-557) governing adjudications required by 
statute to be determined on the record nor the Uniform Rules of 
Practice and Procedure (12 CFR part 747) shall apply to an informal 
hearing under this section unless the NCUA Board orders otherwise.
    (2) The informal hearing shall be recorded, and a transcript shall 
be furnished to the credit union upon request and payment of the cost 
thereof. Witnesses need not be sworn, unless specifically requested by 
a party or by the presiding officer. The presiding officer may ask 
questions of any witness.
    (3) The presiding officer may order that the hearing be continued 
for a reasonable period following completion of witness testimony or 
oral argument to allow additional written submissions to the hearing 
record.
    (4) Within 20 calendar days following the closing of the hearing 
and the record, the presiding officer shall make a recommendation to 
the NCUA Board on the proposed reclassification.
    (f) Time for final decision. Not later than 60 calendar days after 
the date the record is closed, or the date of receipt of the credit 
union's response in a case where no hearing was requested, the NCUA 
Board will decide whether to reclassify the credit union, and will 
notify the credit union of its decision. The decision of the NCUA Board 
shall be final.
    (g) Request to rescind reclassification. Any credit union that has 
been reclassified under this section may file a written request to the 
NCUA Board to reconsider or rescind the reclassification, or to modify, 
rescind or remove any directives issued as a result of the 
reclassification. Unless otherwise ordered by the NCUA Board, the 
credit union shall remain reclassified, and subject to any directives 
issued as a result, while such request is pending.
    (h) Non-delegation. The NCUA Board may not delegate its authority 
to reclassify a credit union into a lower net worth category or to 
treat a credit union as if it were in a lower net worth category 
pursuant to Secs. 702.102(b) or 702.302(d) of this chapter.


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

    (a) Service of directive to dismiss and notice. When the NCUA Board 
issues and serves a directive on a credit union requiring it to dismiss 
from office any director or senior executive officer under 
Secs. 702.202(b)(7), 702.203(b)(8), 702.204(b)(8), 702.304(b) or 
702.305(b) of this chapter, the NCUA Board shall also serve upon the 
person the credit union is directed to dismiss (Respondent) a copy of 
the directive (or the relevant portions, where appropriate) and notice 
of the Respondent's right to seek reinstatement.
    (b) Contents of notice of right to seek reinstatement. A notice of 
a Respondent's right to seek reinstatement shall state:
    (1) That a request for reinstatement (including a request for a 
hearing) shall be filed with the NCUA Board within 14 calendar days 
after the Respondent receives the directive and notice under paragraph 
(a) of this section, unless the NCUA Board grants the Respondent's 
request for further time;
    (2) The reasons for dismissal of the Respondent; and
    (3) That the Respondent's failure to--
    (i) Request reinstatement shall be deemed a waiver of any right to 
seek reinstatement;
    (ii) Request a hearing shall be deemed a waiver of any right to a 
hearing; and
    (iii) Request the opportunity to present witness testimony shall be 
deemed a waiver of the right to present such testimony.
    (c) Contents of request for reinstatement. A request for 
reinstatement in response to a notice under paragraph (b) of this 
section must:
    (1) Explain why the Respondent should be reinstated;
    (2) Include any relevant information, mitigating circumstances, 
documentation, or other evidence in support of the Respondent's 
position;
    (3) If desired, request an informal hearing before the NCUA Board 
under this section; and

[[Page 8596]]

    (4) If a hearing is requested, identify any witness whose testimony 
the Respondent wishes to present and the general nature of each 
witness's expected testimony.
    (d) Order to hold informal hearing. Upon receipt of a timely 
written request from a Respondent for an informal hearing on the 
portion of a directive requiring a credit union to dismiss from office 
any director or senior executive officer, the NCUA Board shall issue an 
order directing an informal hearing to commence no later than 30 days 
after receipt of the request, unless the Respondent requests a later 
date. The hearing shall be held in Alexandria, Virginia, or at such 
other place as may be designated by the NCUA Board, before a presiding 
officer designated by the NCUA Board to conduct the hearing and 
recommend a decision.
    (e) Procedures for informal hearing.-- (1) A Respondent may appear 
at the hearing personally or through counsel. A Respondent shall have 
the right to introduce relevant documents and to present oral argument 
at the hearing. A Respondent may introduce witness testimony only if 
expressly authorized by the NCUA Board or by the presiding officer. 
Neither the provisions of the Administrative Procedure Act (5 U.S.C. 
554-557) governing adjudications required by statute to be determined 
on the record nor the Uniform Rules of Practice and Procedure (12 CFR 
part 747) apply to an informal hearing under this section unless the 
NCUA Board orders otherwise.
    (2) The informal hearing shall be recorded, and a transcript shall 
be furnished to the Respondent upon request and payment of the cost 
thereof. Witnesses need not be sworn, unless specifically requested by 
a party or the presiding officer. The presiding officer may ask 
questions of any witness.
    (3) The presiding officer may order that the hearing be continued 
for a reasonable period following completion of witness testimony or 
oral argument to allow additional written submissions to the hearing 
record.
    (4) A Respondent shall bear the burden of demonstrating that his or 
her continued employment by or service with the credit union would 
materially strengthen the credit union's ability to--
    (i) Become ``adequately capitalized,'' to the extent that the 
directive was issued as a result of the credit union's net worth 
category classification or its failure to submit or implement a net 
worth restoration plan or revised business plan; and
    (ii) Correct the unsafe or unsound condition or unsafe or unsound 
practice, to the extent that the directive was issued as a result of 
reclassification of the credit union pursuant to Secs. 702.102(b) and 
702.302(d) of this chapter.
    (5) Within 20 calendar days following the date of closing of the 
hearing and the record, the presiding officer shall make a 
recommendation to the NCUA Board concerning the Respondent's request 
for reinstatement with the credit union.
    (f) Time for final decision. Not later than 60 calendar days after 
the date the record is closed, or the date of the response in a case 
where no hearing was requested, the NCUA Board shall grant or deny the 
request for reinstatement and shall notify the Respondent of its 
decision. If the NCUA Board denies the request for reinstatement, it 
shall set forth in the notification the reasons for its decision. The 
decision of the NCUA Board shall be final.
    (g) Effective date. Unless otherwise ordered by the NCUA Board, the 
Respondent's dismissal shall take and remain in effect pending a final 
decision on the request for reinstatement.


Sec. 747.2005  Enforcement of orders.

    (a) Judicial remedies. Whenever a credit union fails to comply with 
a directive imposing a discretionary supervisory action, or enforcing a 
mandatory supervisory action under part 702 of this chapter, the NCUA 
Board may seek enforcement of the directive in the appropriate United 
States District Court pursuant to 12 U.S.C. 1786(k)(1).
    (b) Administrative remedies--(1) Failure to comply with directive. 
Pursuant to 12 U.S.C. 1786(k)(2)(A), the NCUA Board may assess a civil 
money penalty against any credit union that violates or otherwise fails 
to comply with any final directive issued under part 702 of this 
chapter, or against any institution-affiliated party of a credit union 
(per 12 U.S.C. 1786(r)) who participates in such violation or 
noncompliance.
    (2) Failure to implement plan. Pursuant to 12 U.S.C. 1786(k)(2)(A), 
the NCUA Board may assess a civil money penalty against a credit union 
which fails to implement a net worth restoration plan under subpart B 
of part 702 or a revised business plan under subpart C 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. 00-3276 Filed 2-17-00; 8:45 am]
BILLING CODE 7535-01-P