[Federal Register Volume 67, Number 107 (Tuesday, June 4, 2002)]
[Proposed Rules]
[Pages 38431-38445]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-13931]


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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: Proposed rule.

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SUMMARY: In 2000, the National Credit Union Administration (NCUA) 
adopted a comprehensive system of prompt corrective action consisting 
of minimum capital standards for federally-insured credit unions and 
corresponding remedies for restoring net worth. After six quarters of 
implementation experience, NCUA requests public comment on proposed 
revisions and adjustments intended to improve and simplify the system 
of prompt corrective action.

DATES: Comments must be received on or before August 5, 2002.

ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail 
or hand-deliver comments to: National Credit Union Administration, 1775 
Duke Street, Alexandria, Virginia 22314-3428. You are encouraged to fax 
comments to (703) 518-6319 or e-mail comments to [email protected]

[[Page 38432]]

instead of hand-delivering them. Whichever method you choose, please 
send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Technical: Herbert S. Yolles, Deputy 
Director, Office of Examination and Insurance, at the above address or 
by telephone (703) 518-6360. Legal: Steven W. Widerman, Trial Attorney, 
Office of General Counsel, at the above address or by telephone (703) 
518-6557.

SUPPLEMENTARY INFORMATION:

A. Background
    1. Existing Part 702
    2. Where Credit Unions Stand Today
    3. Request for Comments
B. Section-by-Section Analysis of Proposed Revisions
    1. Section 702.2--Definitions
    2. Section 702.101--Measure and effective date of net worth 
classification
    3. Section 702.107--Alternative component for loans sold with 
recourse
    4. Section 702.108--Risk mitigation credit
    5. Section 702.201--PCA for ``Adequately Capitalized'' credit 
unions.
    6. Section 702.204--PCA for ``Critically Undercapitalized'' 
credit unions
    7. Section 702.205--Consultation with State officials on 
proposed PCA.
    8. Section 702.206--Net worth restoration plans
    9. Section 702.303--PCA for ``Adequately Capitalized'' new 
credit unions
    10. Section 702.304--PCA for ``Moderately Capitalized,'' 
``Marginally Capitalized'' and ``Minimally Capitalized'' new credit 
unions
    11. Section 702.305--PCA for ``Uncapitalized'' new credit unions
    12. Section 702.306--Revised business plans for new credit 
unions
    13. Section 702.401--Charges to the regular reserve
    14. Section 702.403--Payment of dividends
    15. Section 741.3--Adequacy of reserves
    16. Section 747.2005--Enforcement of orders

    The following acronyms are used throughout:

CUMAA  Credit Union Membership Access Act
DSA  Discretionary Supervisory Action
MBL  Member Business Loan
MSA  Mandatory Supervisory Action
NWRP  Net Worth Restoration Plan
OCA  Other Corrective Action
PCA  Prompt Corrective Action
RBNW  Risk-Based Net Worth
RBP  Revised Business Plan
RMC  Risk Mitigation Credit
ROA  Return on assets

    Throughout the Supplementary Information section, citations to part 
702 refer to the current version of 12 CFR 702 et seq. (2002) and are 
abbreviated to the section number only.

A. Background

1. Existing Part 702

    In 1998, the Credit Union Membership Access Act (``CUMAA''), Pub. 
L. No. 105-219, 112 Stat. 913 (1998), amended the Federal Credit Union 
Act (``the Act'') to require NCUA to adopt by regulation a system of 
minimum capital standards for federally-insured ``natural person'' 
credit unions. 12 U.S.C. 1790d et seq. This system, known as ``prompt 
corrective action'' (``PCA''), is indexed to five statutory net worth 
categories.
    In February 2000, the NCUA Board adopted part 702 and subpart L of 
part 747, establishing a comprehensive system of PCA. 65 FR 8560 (Feb. 
18, 2000). Subpart A of part 702 consists of standards for calculating 
a credit union's net worth and classifying it among the five statutory 
net worth categories. 12 CFR 702.101-108. Subpart B combines mandatory 
and discretionary supervisory actions indexed to the five categories, 
as well as PCA-based conservatorship and liquidation. Secs. 702.201-
206. Subpart C consists of a system of PCA for ``new'' credit unions. 
Secs. 702.301-307. Subpart D prescribes reserve accounts, requirements 
for full and fair disclosure of financial condition, and prerequisites 
for paying dividends consistent with the earnings retention requirement 
in subpart B. Secs. 702.401-403. In addition to these substantive 
provisions, subpart L of part 747 established an independent review 
process allowing affected credit unions and officials to challenge PCA 
decisions. 12 CFR 747.2001 et seq. (2000).
    In July 2000, the NCUA Board integrated a risk-based net worth 
(``RBNW'') component into part 702, as CUMAA mandated. 65 FR 44950 
(July 20, 2000). The RBNW requirement applies to non-``new'' credit 
unions, Sec. 702.102(a)(1)-(2), that satisfy minimum RBNW and asset 
size requirements, Sec. 702.103, and whose portfolios of assets and 
liabilities carry above average risk exposure. Sec. 702.104. A credit 
union whose net worth ratio does not meet its RBNW requirement under 
any of three methods (standard calculation, alternative components, 
risk mitigation credit) is classified to the ``undercapitalized'' net 
worth category. 12 U.S.C. 1790d(c)(1)(C)(ii); Sec. 702.102(a)(3).
    Part 702 and subpart L of part 747 were effective August 7, 2000, 
and first applied to activity in the fourth quarter of 2000 as 
reflected in the Call Report for that period. The RBNW component of 
part 702 was effective January 1, 2001, and first applied (for 
quarterly Call Report filers) to activity in the first quarter of 2001 
as reflected in the Call Report for that period.\1\
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    \1\ Part 702 has since been amended twice--once to incorporate 
limited technical corrections, 65 FR 55439 (Sept. 14, 2000), and 
once to delete sections made obsolete (Secs. 702.101(c)(2)-(3) and 
702.103(b)) by the recently adopted uniform quarterly schedule for 
filing Call Reports regardless of asset size. 67 FR 12459 (March 19, 
2002).
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    At the conclusion of the initial PCA rulemaking process, the NCUA 
Board directed the ``PCA Oversight Task Force'' (a working group 
consisting of NCUA staff and State regulators) to review at least a 
full year of PCA implementation and recommend necessary modifications. 
65 FR at 44964. The proposed revisions presented below for comment are 
a product of that review.

2. Where Credit Unions Stand Today

a. Net worth classification
    As of December 31, 2001, federally-insured credit unions are 
classified as follows within the PCA net worth categories:

                             Table A.--Net Worth Classification of Non-``New'' FICUs
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                                                                          of
         Net worth category                    Net worth ratio            non-``new''     Percent of all non-
                                                                             FICUs           ``new'' FICUs
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``Well Capitalized''................  7% or greater                              9634  96.96%
``Adequately Capitalized''..........  6% to 6.99%                                 210  2.11%
``Undercapitalized''................  4% to 5.99%                                  53  0.53%
``Significantly Undercapitalized''..  2% to 3.99%                                  23  0.24%
``Critically Undercapitalized''.....  Less than 2%                                 15  0.15%
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[[Page 38433]]


                               Table B.--Net Worth Classification of ``New'' FICUs
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                                                                          of
     ``New'' net worth category                Net worth ratio              ``new''      Percent of all ``new''
                                                                             FICUs               FICUs
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``Well Capitalized''................  7% or greater                                 0  0
``Adequately Capitalized''..........  6% to 6.99%                                   6  12.50%
``Moderately Capitalized''..........  3.5% to 5.99%                                19  39.58%
``Marginally Capitalized''..........  2% to 3.49%                                   8  16.67%
``Minimally Capitalized''...........  0% to 1.99%                                  10  20.83%
``Uncapitalized''...................  Less than 0%                                  5  10.42%
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b. RBNW requirement
    As of December 31, 2001, 399 federally-insured credit unions--4 
percent of the total--were required to meet an RBNW requirement. Of 
these, 393 met the requirement using the ``standard calculation.'' 
Sec. 702.106. The six that failed under the ``standard calculation'' 
met their RBNW requirement using the ``alternative components.'' 
Sec. 702.107. To date, no credit union has completely failed its RBNW 
requirement, and no credit union has applied for a ``Risk Mitigation 
Credit.'' Sec. 702.108.

3. Request for Comments

    Through this notice, NCUA invites public comment on a series of 
proposed revisions to part 702 prompted by six quarters of experience 
implementing PCA. To facilitate consideration of the public's views, we 
ask commenters to organize and identify their comments by corresponding 
part 702 section number and/or topic and to include general comments, 
if any, in a separate section at the end. Also, for purposes of this 
rulemaking, please confine your comments to the NCUA regulations that 
implement PCA--part 702 and subpart L of part 747.
    In addressing the proposed revisions, we urge commenters to 
recognize that, while given substantial discretion in certain areas of 
PCA, NCUA lacks the authority to override or expand by regulation the 
requirements, limitations and definitions that CUMAA expressly 
prescribed. See 12 U.S.C. 1790d(n) (forbidding action ``in derogation'' 
of what CUMAA prescribes). For example, NCUA lacks the statutory 
authority to expand CUMAA's express, limited definition of ``net 
worth'' for PCA purposes. 12 U.S.C. 1790d(o)(2)(A). This rulemaking 
will not address comments advocating modifications to part 702 that 
exceed the scope of NCUA's statutory authority.
    To ensure that the system of PCA for federally-insured credit 
unions is ``workable, fair and effective in light of the cooperative 
character of credit unions,'' S. Rep. No. 193, 105th Cong., 2d Sess. 14 
(1998), the NCUA Board welcomes broad public input addressing the 
revisions proposed below.

B. Section-by-Section Analysis of Proposed Revisions

PART 702--PROMPT CORRECTIVE ACTION

1. Section 702.2--Definitions

    a. Dividend. Subpart D of part 702 sets various restrictions and 
requirements regarding the payment of dividends to members. 
Secs. 702.403, 702.401(d), 702.402(d)(5). However, that subpart 
overlooks the fact that many State-chartered credit unions pay interest 
on shares rather than dividends. To correct this oversight, the 
proposed rule adds to Sec. 702.2 a new subsection (e) defining a 
``dividend'' as ``a distribution of earnings by a federally-insured 
credit union and a payment of interest on a deposit by a State-
chartered credit union.''
    b. Senior executive officer. The authority to dismiss a director or 
senior executive officer is a discretionary supervisory action 
(``DSA'') available when a credit union is classified 
``undercapitalized'' or lower. Secs. 702.202(b)(8), 702.203(b)(8), 
702.204(b)(8). See also 12 CFR 747.2004(a) (review of dismissal of 
senior executive officer). The authority to order the hiring of a 
``qualified senior executive officer,'' Secs. 702.204(b)(9), and to 
limit the compensation paid to a senior executive officer, 
Sec. 702.204(b)(10), are both DSAs available when a credit union is 
classified ``critically undercapitalized.'' However, none of these 
provisions defines who is a ``senior executive officer.'' To correct 
this oversight, the proposed rule adds a new subsection (j) to 
Sec. 702.2, incorporating by reference the definition of a ``senior 
executive officer'' in 12 CFR 701.14(b)(2). That section defines a 
``senior executive officer'' as ``a credit union's chief executive 
officer * * *, any assistant chief executive officer (e.g., any 
assistant president, any assistant vice president or any assistant 
treasurer/manager) and the chief financial officer.''
    c. Total assets. Among the methods available to measure a credit 
union's total assets for PCA purposes is ``[t]he average of quarter-end 
balances of the four most recent calendar quarters.'' 
Sec. 702.2(l)(1)(i). In practice, this has been a source of confusion 
to credit unions; some think ``the four most recent calendar quarters'' 
refers to the four consecutive quarters preceding the then-current 
quarter, while others think it means the then-current quarter plus the 
preceding three consecutive quarters. To end this confusion, the 
proposed rule redefines the ``average quarterly balance'' as the 
average of quarter-end balances of ``the four most recent calendar 
quarters.''
    Another of the methods available to measure a credit union's total 
assets is the ``quarter end balance of the calendar quarter as reported 
in the credit union's Call Report, and for semi-annual filers as 
calculated for the quarters ending March 31 and September 30.'' 
Sec. 702.2(l)(1)(iv). The proposed rule deletes the exception for the 
two quarters in which Call Reports are not filed because semiannual 
Call Reporting has been abolished by the recently adopted uniform 
quarterly schedule for filing Call Reports regardless of asset size. 67 
FR 12457 (March 19, 2002).

2. Section 702.101--Measures and Effective Date of Net Worth 
Classification

    On the effective date of a credit union's net worth classification, 
it must begin to comply with the mandatory supervisory actions 
(``MSAs''), if any, applicable to its net worth category, e.g., 
Sec. 702.202(a). The effective date also triggers part 702's timetables 
for whatever further action is required in the case of a ``critically 
undercapitalized'' credit union. Secs. 702.204(c)(1), 702.204(c)(3), 
702.206(a)(1). Relying on the quarter-end calculation of net worth, the 
effective date of classification in nearly all cases is the ``quarter-
end effective date''--``the last day of the calendar month following 
the end of the calendar quarter.'' Sec. 702.101(b)(1). However, 
Sec. 702.101(b)(2) presently allows for an

[[Page 38434]]

interim effective date between quarter-ends when ``the credit union's 
net worth ratio is recalculated by or as a result of its most recent 
final report of examination.''
    An interim effective date has occasionally replaced the quarter-end 
effective date when an NCUA examination is conducted after the quarter-
end effective date and it discloses not only that the credit union 
erred in calculating its net worth ratio, but that the corrected ratio 
puts it in a different net worth category. Classification to the proper 
net worth category is not retroactive to the prior quarter-end 
effective date. Rather, the date the credit union receives the final 
examination report becomes the new effective date of classification to 
the proper net worth category, triggering the corresponding MSAs.\2\
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    \2\ A corrected net worth ratio that reduces a credit union to a 
lower worth category typically has the greatest impact when a ``well 
capitalized'' or ``adequately capitalized'' credit union declines to 
``undercapitalzied'' or lower (and must submit an NWRP for the first 
time) and when a credit union declines to ``critically 
undercapitalized'' from a higher net worth category (and becomes 
subject to mandatory liquidation of net worth fails to improve). In 
comparison, when an already ``undercapitalized'' credit union 
declines to ``significantly undercapitalized,'' the MSAs are the 
same in both categories and only the range of availabale DSAs 
expands.
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    Section 702.101(b)(2) has been difficult to implement for several 
reasons. First, it lacks standards that limit recalculation of net 
worth to instances of error or misstatement, and that preclude 
recalculation based simply on changed data or conditions occurring 
since the last Call Report (which changes will be reflected in the next 
quarter's Call Report). Second, experience shows that an error or 
misstatement in calculating net worth may emerge from a supervision 
contact other than an examination, yet notice to the credit union to 
correct its net worth ratio must await the ``most recent report of 
final examination.'' Third, postponing notice of the corrected net 
worth ratio until receipt of the final report of examination may 
deprive the credit union of the opportunity to take corrective action 
sooner. To rectify these flaws, subsection (b)(2) is revised to define 
the ``corrected net worth category'' as ``the date the credit union 
receives subsequent written notice * * * of a decline in net worth 
category due to correction of an error or misstatement in the credit 
union's most recent Call Report.''

3. Section 702.107--Alternative Component for Loans Sold With Recourse

    Among the eight risk portfolios used to calculate an applicable 
RBNW requirement is the portfolio of ``loans sold with recourse,'' 
generally consisting of the outstanding balance of loans sold or 
swapped with full or partial recourse. Sec. 702.104(f). In the 
``standard calculation'' of the RBNW requirement, the entire balance of 
the ``loans sold with recourse'' risk portfolio is assigned a single, 
uniform risk-weighting of 6 percent, Sec. 702.106(f), regardless 
whether it includes loans sold with only partial recourse against the 
seller. There is no ``alternative component'' for adjusting the risk-
weighting of this portfolio to reflect the limited credit risk 
associated with loans sold with partial recourse.\3\
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    \3\ Currently, the RBNW requirement can be reduced to reflect 
partial recourse only when a credit union that initially fails its 
RBNW requirement applies for and receives a ``risk mitigatin 
credit'' based upon proof of mitigation of credit risk. 
Sec. 702.108(a)(1); 65 FR at 44963.
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    Since the adoption of part 702, recourse loan activity among credit 
unions has nearly doubled, and loan programs have emerged that allow a 
credit union that sells fixed-rate mortgage loans, for example, to 
contractually limit the extent of the purchaser's recourse to the 
seller.\4\ This enables credit unions to readily cap their credit risk 
exposure from the sale of recourse loans. In view of these 
developments, a single, uniform risk-weighting that assumes maximum 
credit risk exposure is inequitable.
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    \4\ For example, documentation for the loan sale transaction may 
provide for recourse in the form of a contractually-spaced recourse 
obligation measured either by a designated dollar amount that is 
fixed for the life of the loan, or by a designated percentage of the 
unpaid balance of a pool of loans.
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    Therefore, the NCUA Board proposes to add a fourth ``alternative 
component'' to Sec. 702.107 that would allow variable risk-weighting 
that corresponds to the actual credit risk exposure of loans sold with 
a contractual recourse obligation of less than 6 percent. The 
``alternative component'' proposed in new Sec. 702.107(d) is the sum of 
two risk-weighted buckets. The first bucket consists of the amount of 
loans sold with contractual recourse obligations of six percent or 
greater and is risk-weighted at a uniform six percent. 
Sec. 702.107(d)(1). The second bucket consists of the amount of loans 
sold with contractual recourse obligations of less than six percent and 
is risk-weighted according to the weighted average recourse percent of 
its contents, as computed by the credit union.\5\ Sec. 702.107(d)(2); 
see new Table 5(a) and new Appendixes F and G in rule text below. Like 
the existing ``alternative components,'' if the ``alternative 
component'' proposed for loans sold with recourse reduces the RBNW 
requirement initially determined under the ``standard calculation,'' 
the credit union could then substitute it for the corresponding 
``standard component.'' Sec. 702.106(f).
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    \5\ To calculate the ``weighted average recourse percent'' of 
the bucket of loans sold with recourse <6%, multiply each percentage 
of contractual recourse obligation by the corresponding balance of 
loans sold with that recourse to derive the dollar weighted percent. 
Divide the total dollar weighted percent by the total dollar balance 
of loans with <6% recourse to derive the alternative risk weighting. 
See Appendix G in rule text below.
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4. Section 702.108--Risk Mitigation Credit

    a. Who may apply. Section 702.108(a) presently permits a credit 
union that fails an applicable RBNW requirement to apply for a ``risk 
mitigation credit'' (``RMC'') that, if granted, will reduce the RBNW 
requirement it must meet.\6\ But NCUA will not consider an application 
for this relief until after the effective date that a credit union 
fails under both the ``standard calculation'' and the ``alternative 
components.'' Submission Guidelines Sec. I.3. In practice, this ``fail 
first'' prerequisite forces a failing credit union to remain classified 
``undercapitalized'' while its RMC application is pending. Id. 
Secs. I.4, I.8. This is true even when a credit union reasonably 
anticipates failing an RBNW requirement because, in a preceding 
quarter, it either failed or barely passed.
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    \6\ To aid credit unions seeking a ``Risk Mitigation Credit,'' 
NCUA has released two publications: Guidelines for Submission of an 
Application for PCA ``Risk Mitigation Credit'' (NCUA form 8507) 
(``Submission Guidelines'') and Guidelines for Evaluation of an 
Application for PCA ``Risk Mitigation Credit'' (NCUA form 8508).
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    To spare credit unions that are genuinely in danger of failing an 
RBNW requirement from this ``fail first'' prerequisite, the NCUA Board 
proposes to allow them to apply for an RMC preemptively--that is, to 
apply in advance of the quarter-end so that the credit union receives 
any RMC for which it qualifies before the approaching effective date 
when it would fail its RBNW requirement. To that end, the proposed rule 
revises Sec. 702.108 to allow a credit union to apply for an RMC at any 
time before the next quarter-end effective date if on any of the 
current or three preceding effective dates of classification it has 
either failed an applicable RBNW requirement, or met it by less than 
100

[[Page 38435]]

basis points. The Submission Guidelines would be modified accordingly.
    A credit union that has met its RBNW requirement by more than 100 
basis points in each of the preceding four quarters would not be able 
to apply for an RMC until it subsequently fails its RBNW requirement or 
meets it by less than 100 basis points. The proposed revision will 
enable credit unions that are genuinely at risk of failing an RBNW 
requirement to preemptively qualify for and timely receive an RMC that 
may permit them to seamlessly maintain their initial classification as 
either ``adequately capitalized'' or ``well capitalized.''
    b. Recognizing ``call'' feature of loans. The RBNW calculation 
features both a ``standard component'' and an ``alternative component'' 
for long-term real estate loans and for member business loans 
outstanding. Secs. 702.106(a)-(b), 702.107(a)-(b). The longer the 
maturity of the loan, the greater the interest rate risk and credit 
risk exposure, justifying a commensurately higher risk-weighting. See 
65 FR at 44960-44961. The components for both types of loans schedule 
them by contractual maturity date regardless whether a loan has a call 
feature permitting the lender to redeem it before the maturity date. A 
few credit unions contend that permitting them to schedule such 
``callable'' loans by call date, rather than by maturity date, may 
reduce their RBNW requirement.
    The NCUA Board declines for the following reasons to schedule 
``callable'' loans by call date for purposes of calculating the RBNW 
requirement. First, the call feature is not a contractual requirement, 
but rather an option that credit unions may be reluctant to exercise in 
periods of rising interest rates, when members may lack the capacity to 
repay or refinance loans at a higher rate. Second, allowing reliance on 
the call date would be an incentive for credit unions to include a call 
feature in their loans solely to reduce the RBNW requirement, and with 
no good faith intention of exercising the option. Third, allowing 
reliance on the call date would be an incentive to use a call feature 
as a pretext for refinancing a loan on substantially the same terms 
except with a later maturity, to circumvent statutory maturity limits. 
12 U.S.C. 1757(5).
    Without modifying the present RBNW components, however, an RMC is 
perfectly suited to recognize mitigation of risk when, in practice, a 
call feature truly reduces a loan's maturity or resets its interest 
rate. When a credit union's RMC application demonstrates a program and 
history of efficiently exercising call options on its loans, NCUA staff 
will evaluate the interplay between credit risk and interest rate risk-
-something that the simple structure of the ``standard calculation'' 
and the ``alternative components'' is not well suited to address. An 
RMC reflecting the true risk mitigation impact of a call feature may be 
granted to offset a credit union's RBNW requirement as calculated in 
the absence of an RMC.

5. Section 702.201--PCA for ``Adequately Capitalized'' Credit Unions

    a. Earnings retention. CUMAA requires credit unions having a net 
worth ratio of less than 7 percent to ``annually set aside as net worth 
an amount equal to not less than 0.4 percent of its total assets.'' 12 
U.S.C. 1790d(e)(1). To implement this statutory ``earnings retention 
requirement,'' credit unions classified ``adequately capitalized'' or 
lower are generally required to increase their net worth quarterly by 
an amount equivalent to 0.1 percent of total assets and to transfer 
that amount to the regular reserve account until the credit union 
becomes ``well capitalized.'' Sec. 702.201(a).
    In practice, some credit unions have not understood that it is the 
dollar amount of net worth that they must increase by the equivalent of 
0.1 percent of assets per quarter, not the net worth ratio itself. 
Changes in the dollar amount of net worth will not match changes in the 
net worth ratio unless net worth and total assets were to increase or 
decrease by exactly the same percentage. Other credit unions are making 
earnings transfers to the regular reserve in the absence of increases 
in net worth. Still others have pointed out that, as presently written, 
Sec. 702.201 prevents them from meeting the statutory annual minimum of 
0.4 percent of total assets on an average basis over four quarters. 
Instead, it requires that the equivalent of 0.1 percent of assets be 
set aside in each and every quarter of the year, regardless whether the 
credit union has set aside more than the quarterly minimum in prior 
quarters. To clarify how the earnings retention requirement operates, 
the proposed rule revises subsection (a) in two ways. First, it 
indicates that it is the ``the dollar amount'' of net worth that must 
be increased, and permits the minimum increase to be made ``either in 
the current quarter, or on average over the current and three preceding 
quarters.''
    b. Decrease in retention. As CUMAA directs, NCUA may, on a case-by-
case basis, permit a credit union to increase net worth by an amount 
that is less than the quarterly minimum (0.1 percent of assets) when 
necessary to avoid a significant redemption of shares and to further 
the purpose of PCA. 12 U.S.C. 1790d(e)(2); Sec. 702.201(b). In some 
cases, credit unions have decreased their quarterly earnings retention, 
in violation of the earnings retention requirement, in order to pay 
dividends as they deem necessary, either without seeking NCUA's 
permission at all or prior to seeking NCUA's permission. Once earnings 
that should have been retained to build net worth have been paid out in 
dividends, they cannot be recovered. The proposed rule addresses this 
problem by revising subsection (b) to provide that NCUA will consider 
requests to decrease earnings retention only if they are submitted in 
writing no later than 14 days before the quarter end. NCUA will be 
under no obligation to grant applications submitted after the 14-day 
deadline or after the quarter-end. Furthermore, NCUA is entitled to 
take supervisory or other enforcement action against credit unions that 
either decrease their earnings retention without permission, or persist 
in failing to timely apply for permission.
    c. Decrease by FISCU. NCUA is generally required to consult with 
the appropriate State official on PCA decisions affecting State-
chartered credit unions. 12 U.S.C. 1790d(l). The requirement to 
``consult and seek to work cooperatively'' with State officials when 
deciding whether a State-chartered credit union may decrease its 
earnings retention was previously located in Sec. 702.205(c), where it 
was misidentified as a DSA. The proposed rule inserts the ``consult and 
work cooperatively'' requirement into a new subsection (c) of 
Sec. 702.201.
    d. Periodic review. CUMAA requires the NCUA Board to ``periodically 
review'' any decision permitting a decrease in earnings retention. 12 
U.S.C. 1790d(e)(2)(B). Section 702.201, which implements that 
requirement, states that such decisions are ``subject to review and 
revocation no less frequently than quarterly.'' Sec. 702.201(b). The 
``no less frequently than quarterly'' timetable is flawed because it 
simply is too vague to indicate when a decision permitting a decrease 
must be reviewed. Since part 702 operates almost completely on a 
quarterly timetable (coinciding with the quarterly Call Reporting 
schedule), proposed new subsection (d) specifies that ``a decision . . 
. to permit a credit union to decrease its earnings retention is 
subject to quarterly review and revocation.''
    For ``adequately capitalized'' credit unions (for whom earnings 
retention is the only MSA), quarterly review will be implicit because 
their requests to

[[Page 38436]]

decrease earnings retention are decided on a quarter-by-quarter basis. 
However, for credit unions classified ``undercapitalized'' or lower, it 
is difficult to reconcile periodic review with CUMAA's and part 702's 
reliance on net worth restoration plans (``NWRPs''). To be approved, an 
NWRP must prescribe ``a quarterly timetable of steps the credit union 
will take to increase its net worth ratio.'' Sec. 702.206(c)(1)(i). It 
also must project the amount of earnings retention, decreased as 
permitted by NCUA, for each quarter of the term of the NWRP. 
Sec. 702.206(c)(1)(ii). Typically, approved plans permit decreases in 
earnings retention extending for successive quarters over the term of 
the plan.
    Independently of the review requirement in Sec. 702.201, these 
decreases in earnings retention are effectively subject to quarterly 
review and revocation as a function of the NWRP. A credit union that 
falls to a lower net worth category because it failed to implement the 
steps or to meet the quarterly net worth targets in its NWRP may be 
required to file a new NWRP, Sec. 702.206(a)(3), thereby revoking the 
then-current NWRP approving future decreases in earnings retention. See 
also 12 CFR 747.2005(b)(3) (civil money penalty for failure to 
implement NWRP). In contrast, when a credit union is implementing the 
prescribed steps and meeting its net worth targets, there would be no 
reason to discontinue the decreased earnings retention approved in its 
NWRP. Because quarterly review is effectively built-in to the NWRP 
component of PCA, Sec. 702.201's quarterly review requirement is 
redundant when applied to credit unions operating under an NWRP. For 
that reason, the proposed rule exempts such credit unions from the 
quarterly review that Sec. 702.201 imposes on ``adequately 
capitalized'' credit unions.

6. Section 702.204--PCA for ``Critically Undercapitalized'' Credit 
Unions.

    a. ``Other corrective action''. When a credit union becomes 
``critically undercapitalized'' (net worth ratio <2%), part 702 gives 
the NCUA Board 90 days in which to either place the credit union into 
conservatorship, liquidate it, or impose ``other corrective action * * 
* to better achieve the purpose of [PCA].'' 12 U.S.C. 1790d(i)(1); 
Sec. 702.204(c)(1). NCUA so far has interpreted the option to impose 
``other corrective action'' (``OCA'') as requiring some further action 
in addition to complying with the steps prescribed in an approved NWRP 
for meeting quarterly net worth targets. Some further action would seem 
appropriate when a credit union either is not complying with its 
approved NWRP, or is implementing the prescribed action steps but still 
failing to achieve its quarterly net worth targets. In contrast, 
demanding further action is superfluous, if not punitive, when a credit 
union is both implementing the steps in its NWRP and timely achieving 
its net worth targets. NCUA has found it difficult to fashion OCA that 
is more than a makeweight in these situations.
    Congress left it entirely to the NCUA Board to ``take such other 
action'' in lieu of conservatorship and liquidation ``as the Board 
determines would better achieve the purpose of [PCA], after documenting 
why the action would better achieve that purpose.'' 12 U.S.C. 
1790d(i)(1)(b). See also S. Rep. at 15. The NCUA Board has determined 
that the purpose of PCA--building net worth to minimize share insurance 
losses--is not compromised by declining to impose OCA when it is 
documented that a credit union already is achieving the purpose of PCA 
by complying with an approved NWRP and achieving its prescribed net 
worth targets. In other words, there is no reason to demand more than 
complete success from a credit union that, so far, is completely 
successful in building net worth.
    To implement a more flexible approach to imposing OCA in lieu of 
conservatorship and liquidation, the proposed rule provides that 
``[OCA] may consist, in whole or in part, of complying with the 
timetable of quarterly steps and meeting quarterly net worth targets 
prescribed in an approved [NWRP].'' Sec. 702.204(c)(1)(iii). This 
permits, but does not require, NCUA to limit OCA to directing a credit 
union that already is in compliance with its approved NWRP to simply 
continue to comply, without undertaking any further action beyond what 
the NWRP already requires.
    b. 10-day appeal period. The NCUA Board's authority to decide 
whether to conserve a ``critically undercapitalized'' credit union, 
liquidate it, or allow OCA may be delegated only in the case of credit 
unions having assets of less than $5 million. 12 U.S.C. 1790d(i)(4); 
Sec. 702.204(c)(4). In such cases, the credit union has a statutory 
``right of direct appeal to the NCUA Board of any decision made by 
delegated authority.'' Id. However, neither the FCUA nor part 747 sets 
a deadline by which a credit union must appeal a delegated decision to 
the NCUA Board.
    The NCUA Board has in fact delegated to its Regional Directors the 
authority to impose and renew OCA for credit unions having assets of 
less than $5 million. See Delegation of Authority SUP-32. However, the 
lack of a deadline for exercising the right to appeal delegated 
decisions to the NCUA Board gives ``critically undercapitalized'' 
credit unions at least the appearance of an unlimited opportunity to 
challenge a Regional Director's decision. The Act itself generally 
limits credit unions to a 10-day window in which to seek judicial 
review of any NCUA Board decision to conserve or liquidate. 12 U.S.C. 
1786(h)(3), 1787(a)(1)(B). To impose reasonable finality upon the 
unfolding timetable of decisions the Act requires when a credit union 
becomes ``critically undercapitalized,'' the proposed rule likewise 
sets a deadline of ten calendar days in which to appeal a delegated 
decision to the NCUA Board.
    c. Insolvent FCU. The NCUA Board generally must liquidate a credit 
union eventually if it remains ``critically undercapitalized.'' 
Sec. 702.204(c). Independently of PCA, however, the Act directs that 
``[u]pon its finding that a Federal credit union . . . is insolvent, 
the Board shall close such credit union for liquidation.'' 12 U.S.C. 
1787(a)(1)(A). Therefore, in the case of a ``critically 
undercapitalized'' federal credit union that is insolvent (i.e., has a 
net worth ratio of less than zero), NCUA has two separate statutory 
liquidation optionsa PCA--based liquidation, as described in the 
preceding section, or an insolvency-based liquidation. To clarify that 
insolvency-based liquidation is an option, the proposed rule adds a new 
subsection (d) to Sec. 702.204 clarifying that ``a 'critically 
undercapitalized' federal credit union that has a net worth ratio of 
less than zero percent (0%) may be placed into liquidation on grounds 
of insolvency pursuant to [Sec. 1787(a)(1)(A)].''

7. Section 702.205--Consultation with State Officials on Proposed PCA

    NCUA is generally required to consult with the appropriate State 
official before imposing a PCA remedy on a State-chartered credit 
union. 12 U.S.C. 1790d(l). Subsection (c) of Sec. 702.205 requires NCUA 
to ``consult and seek to work cooperatively with the appropriate State 
official'' before imposing a DSA upon a State-chartered credit union 
classified ``undercapitalized'' or lower. However, this provision 
misidentifies as a DSA the decision whether to permit a decrease in the 
quarterly earnings retention. Sec. 702.201(b). The proposed rule 
deletes this erroneous reference to Sec. 702.201(b) and inserts in 
Sec. 702.201 the requirement for NCUA to consult the appropriate State 
official before decreasing a State-chartered credit union's earnings 
retention.

[[Page 38437]]

8. Section 702.206--Net Worth Restoration Plans

    a. Contents of NWRP. Section 702.206 prescribes the contents of an 
NWRP that must be submitted for approval by credit unions classified 
``undercapitalized'' or lower. Among the items an NWRP must address is 
how the credit union will comply with MSAs and DSAs. 
Sec. 702.206(c)(1)(iii). As presently drafted, Sec. 702.206(c)(1)(iii) 
has been misinterpreted as a demand to either consent to, or 
prospectively explain how the credit union would comply with, DSAs in 
the event the NCUA Board were to impose any. The proposed rule revises 
this section to clarify that an NWRP need only address whatever DSAs, 
if any, the NCUA Board already has imposed on the credit union.
    b. Publication of NWRP. Publication of an NWRP is not a 
prerequisite to enforcing its provisions as authorized in 12 CFR 
747.2005, but this fact is not expressly stated in Sec. 702.206 itself. 
The omission has led to the misimpression that an NWRP, like a ``Letter 
of Understanding and Agreement,'' must be published in order to 
subsequently be enforceable. The Act mandates that a ``written 
agreement or other written statement'' must be published in order for a 
violation to be enforceable ``unless the Board, in its discretion, 
determines that publication would be contrary to the public interest.'' 
12 U.S.C. 1786(s)(1)(A). To the extent an NWRP qualifies as a ``written 
agreement or other written statement'' under Sec. 1786(s)(1)(A), the 
NCUA Board does not intend to publish NWRPs because it believes that 
publication would expose the credit union to reputation risk that would 
be contrary to the public interest. Therefore, the proposed rule adds 
new subsection (i) to Sec. 702.206, clarifying that ``An NWRP need not 
be published to be enforceable because publication would be contrary to 
the public interest.''
    c. ``Safe harbor'' approval of NWRP. To assist credit unions that 
fall marginally below ``adequately capitalized'' primarily because 
asset growth outstrips income growth, the NCUA Board is seeking comment 
on the concept of ``safe harbor'' approval of an NWRP--that is, notice 
of certain criteria established by regulation that, when met, will 
ensure approval. Only credit unions above a certain minimum net worth 
ratio (i.e., maximum number of basis points short of being ``adequately 
capitalized'') would be eligible. Under the concept of ``safe harbor'' 
approval, an eligible credit union would agree in its NWRP to achieve a 
minimum quarterly return on assets (``ROA'')--to be set by regulation 
according to the number of basis points needed to attain a 6 percent 
net worth ratio--that would offset abundant asset growth sufficiently 
to improve its net worth ratio quarterly over the term of the plan. The 
NWRP must specify the means by which the credit union plans to achieve 
the minimum quarterly ROA while controlling exposure to interest rate 
risk and credit risk. As CUMAA requires, NCUA would evaluate those 
plans to determine whether they are ``based on realistic assumptions 
and [are] likely to succeed in restoring the net worth of the credit 
union.'' 12 U.S.C. 1790d(f)(5). An NWRP determined by NCUA to satisfy 
this criterion would be assured of approval.\7\ That approval would be 
revoked automatically if and when the credit union failed either to 
achieve its quarterly minimum ROA or to improve its net worth ratio, as 
pledged in the NWRP. Public comment will help the NCUA Board decide 
whether to pursue the concept of ``safe harbor'' approval of an NWRP 
for credit unions that become marginally ``undercapitalized'' primarily 
due to asset growth.
---------------------------------------------------------------------------

    \7\ ``Safe harbor'' approval would not exempt a credit union 
from the statutory requirement to comply with the three other MSAs--
earnings retention, the freeze on assets, and the freeze on MBLs, 12 
U.S.C. 1790d(e) and (g)--nor from any otherwise applicable DSAs. 
E.g., Sec. 702.202(c). The asset freeze would end only when the NWRP 
is approved. 12 U.S.C. 1790d(g)(1)(A).
---------------------------------------------------------------------------

9. Section 702.303--PCA for ``Adequately Capitalized'' New Credit 
Unions

    Under the alternative system of PCA for new credit unions, a credit 
union that manages to become ``adequately capitalized'' while still new 
must comply with the same minimum earnings retention that applies to 
non-new credit unions that are ``adequately capitalized.'' \8\ 
Sec. 702.201(a). In contrast, ``new'' credit unions that stay 
classified below ``adequately capitalized'' are not subject to minimum 
earnings retention; they must quarterly increase net worth only ``by an 
amount reflected in the credit union's approved initial or revised 
business plan.'' Sec. 702.304(a)(1). This creates a disincentive for 
``new'' credit unions to become ``adequately capitalized'' because the 
reward for maintaining a net worth ratio below 6 percent is that they 
are relieved from complying with a minimum earnings retention amount.
---------------------------------------------------------------------------

    \8\ The proposed rule corrects the wording of current 
Sec. 702.303, which inadvertently applied that section to ``new'' 
credit unions classified lower than ``adequately capitalized.'' In 
fact, Secs. 702.304 and 702.305 prescribe PCA for new credit unions 
classified lower than ``adequately capitalized''.
---------------------------------------------------------------------------

    To eliminate the disincentive, the proposed rule revises 
Sec. 702.303 to put all ``new'' credit unions having a net worth lower 
than 7 percent in parity for purposes of earnings retention. An 
``adequately capitalized'' new credit union would no longer be subject 
to minimum earnings retention as non-new credit unions. Instead, like 
new credit unions in lower categories, it would be required to increase 
net worth quarterly by ``an amount reflected in its approved initial or 
revised business plan'' until it becomes ``well capitalized.'' In the 
absence of such a plan, however, the credit union would remain subject 
to the same quarterly minimum earnings retention as non-``new'' credit 
unions.

10. Section 702.304--PCA for ``Moderately Capitalized,'' ``Marginally 
Capitalized'' and ``Minimally Capitalized'' New Credit Unions

    As explained above, Sec. 702.201(a) was modified to specify that 
earnings retention must increase ``the dollar amount'' of net worth, 
not simply the net worth ratio itself. To conform to that modification, 
the proposed rule revises Sec. 702.304(a)(1) accordingly.

11. Section 702.305--PCA for ``Uncapitalized'' New Credit Unions

    a. Member business loan restriction. An ``uncapitalized'' new 
credit union presently enjoys full relief from all MSAs while it is 
operating within the period allowed by its initial business plan to 
have no net worth. An unintended consequence of this forbearance is 
that ``uncapitalized'' credit unions are free of the MSA restricting 
member business loans (``MBLs''); the restriction is triggered only 
when a credit union manages to attain some net worth and rise to the 
``minimally capitalized'' net worth category.\9\ Yet a ``minimally 
capitalized'' credit union arguably is better suited to expand its MBL 
portfolio than one that remains ``uncapitalized.'' Moreover, making PCA 
more demanding as a credit union's net worth and category 
classification improve, rather than relaxing it, is contrary to the 
purpose of PCA. To rectify this unintended consequence, the proposed 
rule treats all ``uncapitalized'' new credit unions equally, so that 
the MBL restriction applies regardless whether a new credit union is 
operating with no net worth as

[[Page 38438]]

permitted by its initial business plan or has declined to 
``uncapitalized'' from a higher net worth category.
---------------------------------------------------------------------------

    \9\ The earnings retention requirement, Sec. 702.305(a)(1), is 
ineffective against an ``uncapitalized'' credit union because a 
credit union that has an undivided earnings deficit has no net worth 
to retain.
---------------------------------------------------------------------------

    b. Filing of revised business plan. Subsection (a)(2) generally 
requires an ``uncapitalized'' new credit union to submit a revised 
business plan (``RBP'') within 90 days following either of two events--
expiration of the period that the credit union's initial business plan 
allows it to operate with no net worth, or the effective date that it 
declined to ``uncapitalized'' from a higher net worth category. This 
contrasts with the 30-day period that ``moderately capitalized,'' 
``marginally capitalized'' and ``minimally capitalized'' credit unions 
are given to file an RBP. Sec. 702.306(a)(1). Ninety days is, in and of 
itself, an unduly long filing period given that an ``uncapitalized'' 
credit union faces mandatory conservatorship or liquidation if it fails 
to generate some net worth. Furthermore, it is counterintuitive to give 
a credit union that has a net worth deficit three times as long to 
devise a plan for generating positive earnings than is given to credit 
unions that already have net worth.
    The proposed rule puts all new credit unions that must file an RBP 
in parity. First, it deletes the 90-day filing window for 
``uncapitalized'' credit unions, thereby limiting them to the general 
30-day window, once they are required to file an RBP. Second, it 
reorganizes Sec. 702.305(a)(2) to parallel the conditions that trigger 
other less than ``adequately capitalized'' new credit unions to revise 
their business plans, Sec. 702.304(a)(2), even though only 
``uncapitalized'' credit unions are initially allowed to operate with 
no net worth. To that end, the proposed rule requires an 
``uncapitalized'' credit union to submit an RBP if it either: fails to 
increase net worth (i.e., reduce its earnings deficit) as its existing 
business plan provides; has no approved business plan; or has violated 
the MSA restricting MBLs.
    c. Liquidation or conservatorship if ``uncapitalized'' after 120 
days. Section 702.305(c)(2) generally requires the NCUA Board to 
conserve or liquidate an ``uncapitalized'' new credit union that 
remains ``uncapitalized'' 90 days after its RBP is approved. It is 
silent, however, regarding conservatorship or liquidation of a credit 
union whose RBP is rejected. To correct this oversight, the proposed 
rule mandates conservatorship or liquidation of an ``uncapitalized'' 
new credit union after a 120-day period regardless whether an RBP has 
been approved or rejected. This period combines the 30-day window for 
submitting an RBP, Sec. 702.306(a)(1), and the original 90-day period 
allowed for the credit union to avoid conservatorship and liquidation 
by developing positive earnings. The 120-day period runs from the later 
of either the effective date of classification as ``uncapitalized'' or, 
if a credit union is operating with no net worth in the period 
prescribed by its initial business plan, the last day of the calendar 
month after expiration of that period. Because the period for operating 
with no net worth typically runs on a quarterly basis, the last day of 
the calendar month after it expires parallels the calendar month that 
separates the quarter-end and the effective date of classification as 
``undercapitalized.'' Finally, a new subsection (c)(3) is added to 
preserve the exception to mandatory conservatorship or liquidation for 
a credit union that is able to demonstrate that it is viable and has a 
reasonable prospect of becoming ``adequately capitalized.''
    d. ``Uncapitalized'' new FCU. As explained above in reference to 
the new subsection (d) proposed for Sec. 702.204, there are two options 
for liquidating a federal credit union that has no net worth--a PCA-
based liquidation, 12 U.S.C. 1787(a)(3)(A)(ii), or an insolvency-based 
liquidation. 12 U.S.C. 1787(a)(1)(A). Both are available when a new 
federal credit union either fails to timely submit an RBP, 
Sec. 702.305(c)(1), or remains ``uncapitalized'' 120 days after the 
effective date of classification, Sec. 702.305(c)(2). The proposed rule 
adds a new subsection (d) to Sec. 702.305 to clarify that ``an 
`uncapitalized' federal credit union may be placed into liquidation on 
grounds of insolvency pursuant to [Sec. 1787(a)(1)(A)].''

12. Section 702.306--Revised Business Plans for New Credit Unions

    a. Filing schedule. Section 702.306(a)(1) presently requires 
``moderately capitalized,'' ``marginally capitalized'' and ``minimally 
capitalized'' credit unions to file an RBP within 30 days after failing 
to meet a quarterly net worth target prescribed in an existing business 
plan. As discussed above, the proposed rule eliminates the 90-day 
filing window for ``uncapitalized'' credit unions. Sec. 702.305(a)(2). 
To conform to that modification, this section is revised to apply the 
30-day filing window uniformly to all new credit unions classified less 
than ``adequately capitalized'' or that have violated the MSA 
restricting MBLs. Secs. 702.304(a)(3), 702.305(a)(3).
    The current rule's 30-day filing period runs from ``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.'' Sec. 702.306(a)(1). However, Sec. 702.101(b) addresses the 
effective date of classification among the net worth categories; it 
says nothing to determine when a quarterly net worth target is met. The 
subtlety of this distinction may confuse credit unions that have no 
then-present approved business plan or have violated the MSA 
restricting MBLs. Therefore, the proposed rule revises subsection 
(a)(1) to effectively give new credit unions that fail to meet a 
quarterly target 60 days following the quarter-end to file an RBP. 
Sec. 702.306(a)(1)(i). The 60-day period combines the calendar month 
that separates the quarter-end from the effective date of 
classification, with the uniform 30-day filing period that commences on 
the effective date. The proposed rule further clarifies that, for new 
credit unions that either have no approved business plan or that have 
violated the MBL restriction, the effective date of classification as 
less than ``adequately capitalized'' triggers the 30-day window for 
filing an RBP. Sec. 702.306(a)(1)(ii)-(iii).
    b. Timetable of net worth targets. Section 702.306(b)(2) prescribes 
the contents of an RBP, which must include a timetable of quarterly net 
worth targets extending for the term of the plan ``so that the credit 
union becomes `adequately capitalized' and remains so for four 
consecutive quarters.'' It also warns that a ``complex'' new credit 
union that is subject to an RBNW requirement may need to attain a net 
worth ratio higher than 6 percent to become ``adequately capitalized.'' 
The proposed rule rectifies two flaws in this section. First, in 
contrast to an NWRP, the objective of an RBP is to build net worth so 
that a new credit union becomes ``adequately capitalized'' by the time 
it no longer is ``new,'' not by the end of the term of the plan. 65 FR 
at 8578; 64 FR 27090, 27099 (May 18, 1999) (chart). A credit union 
remains ``new'' as long as it is in operation less than 10 years or has 
assets of $10 million or less. Sec. 702.301(b). The proposed rule 
revises subsection (b)(2) so that an RBP's net worth targets ensure the 
new credit union will become ``adequately capitalized'' by the time it 
no longer qualifies as ``new.'' Second, under part 702 new credit 
unions cannot be ``complex'' nor subject to an RBNW requirement 
because, by definition, they do not meet the $10 million asset minimum, 
Sec. 702.103(a)(1). Therefore, the proposed rule deletes the warning to 
new credit unions that are ``complex.''
    c. Publication of RBP. As explained above in proposing to add a new

[[Page 38439]]

subsection (i) to Sec. 702.206, publication of an NWRP is not a 
prerequisite to enforcing its provisions as authorized in 12 CFR 
747.2005. The same is true of an RBP, but this fact was similarly 
omitted from Sec. 702.306. To the extent an RBP qualifies as a 
``written agreement or other written statement'' under 
Sec. 1786(s)(1)(A), the NCUA Board does not intend to publish RBPs 
because it believes that publication would expose the credit union to 
reputation risk that would be contrary to the public interest. 
Therefore, the proposed rule adds new subsection (h) to Sec. 702.306, 
clarifying that ``An RBP need not be published to be enforceable 
because publication would be contrary to the public interest.''

13. Section 702.401--Charges to Regular Reserve

    The board of directors of a federally-insured credit union that has 
depleted the balance of its undivided earnings and other reserves may 
authorize losses to be charged to the regular reserve account without 
regulatory approval so long as the charges do not reduce the credit 
union's net worth classification below ``well capitalized'' (i.e., net 
worth ratio of 7 percent or greater). Sec. 702.401(c)(1). That net 
worth category was established as the minimum for charging losses 
without regulatory approval because the categories below ``well 
capitalized'' trigger MSAs. The proposed rule lowers the minimum 
category to ``adequately capitalized'' (e.g., 6 percent net worth 
ratio), giving credit unions the flexibility to decide whether charging 
losses is worth triggering the single MSA that applies to that 
category--the quarterly earnings retention. Sec. 702.201(a). In 
addition, the proposed rule expressly reminds credit unions that they 
must deplete their undivided earnings balance before making any charge 
to the regular reserve.
    Subsection (c)(2) presently requires the prior approval of the 
``appropriate State official,'' but not the approval of the 
``appropriate Regional Director,'' when a State-chartered credit union 
seeks to charge losses that would cause it to decline below the minimum 
category. Omitting the approval of NCUA Regional Directors is 
inconsistent with the protocol applied elsewhere in part 702 requiring 
joint State and Federal approval of PCA decisions affecting State-
chartered credit unions, e.g., Secs. 702.206(a)(1), 702.306(a)(1). To 
correct this inconsistency, the proposed rule modifies 
Sec. 702.401(c)(2) to require the concurrence of both the ``appropriate 
State official'' and ``the appropriate Regional Director'' for a State-
chartered credit union to charge losses to the regular reserve. In 
addition, the proposed rule clarifies that written approval may consist 
of an approved NWRP that allows such charges.

14. Section 702.403--Payment of Dividends

    Section 702.403 presently allows the board of directors of a 
federally-insured credit union that has depleted the balance of 
undivided earnings to pay dividends out of the regular reserve account 
without regulatory approval so long as it does not cause the credit 
union to decline below ``well capitalized.'' Sec. 702.403(b)(1). As 
explained in the preceding section regarding approval to charge losses 
to the regular reserve under Sec. 702.401, the proposed rule lowers to 
``adequately capitalized'' the minimum net worth category in which 
credit unions may pay dividends out of the regular reserve without 
regulatory approval. This will give credit unions that have depleted 
undivided earnings the flexibility to decide whether drawing down the 
regular reserve to pay dividends is worth triggering the quarterly 
earnings retention requirement that applies to ``adequately 
capitalized'' credit unions. Sec. 702.201(a).
    Like Sec. 702.401(c)(2), subsection (b)(2) presently requires the 
prior approval of the ``appropriate State official,'' but not the 
approval of the ``appropriate Regional Director,'' when paying 
dividends out of the regular reserve would cause a State-chartered 
credit union to decline below the minimum net worth category. In 
addition, omitting Regional Director approval may suggest, incorrectly, 
that a State official's approval to pay dividends from the regular 
reserve under Sec. 702.401(b) overrides the need to independently 
obtain both the State official's and the Regional Director's approval 
under Sec. 702.201(b) for a State-chartered credit union to decrease 
its earnings retention in order to pay dividends. For this reason and 
the reason explained in the preceding section, the proposed rule 
corrects this omission by revising subsection (b)(2) to require the 
concurrence of both the ``appropriate State official'' and ``the 
appropriate Regional Director'' for a State-chartered credit union to 
pay dividends out of its regular reserve. Finally, the proposed rule 
clarifies that written approval may consist of an approved NWRP that 
allows such dividend payments.

Subpart A of Part 741--Requirements for Insurance

15. Section 741.3--Adequacy of Reserves

    Part 741 presently allows State-chartered credit unions to charge 
losses other than loan losses to the regular reserve in accordance with 
State law or procedures, but without regulatory approval, provided that 
the charges do not cause the credit union to decline below ``well 
capitalized.'' 12 CFR 741.3(a)(2). The subsection that precedes it 
already incorporates by reference all of part 702 as a prerequisite for 
insurability of State-chartered credit unions. As discussed above, 
Sec. 702.401(c) already imposes on State-chartered credit unions the 
same conditions for regulatory approval that Sec. 741.3(a)(2) 
prescribes for an insured credit union seeking to charge losses to the 
regular reserve. For this reason, Sec. 741.3(a)(2) is redundant and the 
proposed rule eliminates it.
    The absence of Sec. 741.3(a)(2) does not mean that Sec. 702.401(c) 
would preempt ``either state law or procedures established by the 
appropriate State official'' that restrict a State-chartered credit 
union's ability to charge losses to the regular reserve. On the 
contrary, such charges would independently remain subject to applicable 
State laws and procedures. Moreover, an appropriate State official 
would retain complete discretion to withhold approval, under 
Sec. 702.401(c)(2), of such charges on grounds that they would violate 
State law or procedures.

Subpart L of Part 747--Issuance, Review and Enforcement of Orders 
Imposing PCA

16. Section 747.2005--Enforcement of Orders

    The NCUA Board is authorized to ``assess a civil money penalty 
against a credit union which fails to implement a net worth restoration 
plan * * * or a revised business plan under * * * part 702.'' 12 CFR 
747.2005(b)(2). Publication of either type of plan is not a 
prerequisite to seeking a civil money penalty against an offending 
credit union, but this fact is not expressly stated in Sec. 747.2005. 
The NCUA Board has determined that it is not in the public interest to 
require publication of an NWRP or an RBP in order for either to be 
enforceable and, as explained above, proposes to modify Secs. 702.206 
and 702.306 accordingly. To conform to those modifications, the 
proposed rule revises Sec. 747.2005(b)(2) to provide that a civil money 
penalty may be assessed for failure to implement a plan

[[Page 38440]]

``regardless whether the plan was published.''

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
describing any significant economic impact a proposed regulation may 
have on a substantial number of small credit unions (primarily those 
under $1 million in assets). The proposed rule improves and simplifies 
the existing system of PCA mandated by Congress. 12 U.S.C. 1790d. The 
NCUA Board has determined and certifies that the proposed rule, if 
adopted, will not have a significant economic impact on a substantial 
number of small credit unions. Thus, a Regulatory Flexibility Analysis 
is not required.

Paperwork Reduction Act

    NCUA has determined that the proposed rule would not increase 
paperwork requirements under the Paperwork Reduction Act of 1995 and 
regulations of the Office of Management and Budget. Control number 
3133-0161 has been issued for part 702 and will be displayed in the 
table at 12 CFR part 795.

Executive Order 13132

    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 proposed rule will 
apply to all federally-insured credit unions, including State-chartered 
credit unions. Accordingly, it may have a direct effect on the States, 
on the relationship between the national government and the States, or 
on the distribution of power and responsibilities among the various 
levels of government. This impact is an unavoidable consequence of 
carrying out the statutory mandate to adopt a system of prompt 
corrective action to apply to all federally-insured credit unions. NCUA 
staff has consulted with a committee of representative State regulators 
regarding the impact of the proposed revisions on State-chartered 
credit unions. Their comments and suggestions are reflected in the 
proposed rule.

Treasury and General Government Appropriations Act, 1999

    NCUA has determined that the proposed rule will not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 2681 
(1998).

Agency Regulatory Goal

    NCUA's goal is clear, understandable regulations that impose a 
minimal regulatory burden. A purpose of the proposed rule is to improve 
and simplify the existing system of PCA. We request your comments on 
whether the proposed rule is understandable and minimally intrusive if 
implemented as proposed.

List of Subjects

12 CFR Parts 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 May 16, 
2002.
Becky Baker,
Secretary of the Board.

    For the reasons set forth above, 12 CFR parts 702, 741 and 747 are 
proposed to be amended as follows:

PART 702--PROMPT CORRECTIVE ACTION

    1. The authority citation for part 702 continues to read as 
follows:

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

    2. Amend Sec. 702.2 as follows:
    a. Redesignate current paragraphs (i) through (k) as new paragraphs 
(k) through (m) respectively, and redesignate current paragraphs (e) 
through (h) as new paragraphs (f) through (i) respectively.
    b. Add new paragraphs (e) and (j) to read as set forth below;
    c. Revise newly designated paragraph (l)(1)(i) to read as set forth 
below; and
    d. Revise newly designated paragraph (l)(1)(iv) to read as set 
forth below.


Sec. 702.2  Definitions.

* * * * *
    (e) Dividend means a dividend paid by a federal credit union and 
interest paid by a State-chartered credit union.
* * * * *
    (j) Senior executive officer means a senior executive officer as 
defined by 12 CFR 701.14(b)(2).
* * * * *
    (l) Total assets. (1) * * *
    (i) Average quarterly balance. The average of quarter-end balances 
of the current and three preceding calendar quarters; or
* * * * *
    (iv) Quarter-end balance. The quarter-end balance of the calendar 
quarter as reported on the credit union's Call Report.
* * * * *
    3. Amend Sec. 702.101 as follows:
    a. Add a heading to paragraph (b)(1) to read as set forth below;
    b. Revise paragraph (b)(2) to read as set forth below;
    c. Add a heading to paragraph (b)(3) to read as set forth below; 
and
    d. Revise the heading of paragraph (c), and paragraph (c)(1), to 
read as follows:


Sec. 702.101  Measures and effective date of net worth classification.

* * * * *
    (b) * * *
    (1) Quarter-end effective date. * * *
    (2) Corrected net worth category. The date the credit union 
received subsequent written notice from NCUA or, if State-chartered, 
from the appropriate State official, of a decline in net worth category 
due to correction of an error or misstatement in the credit union's 
most recent Call Report; or ]
    (3) Reclassification to lower category. * * *
    (c) Notice to NCUA by filing Call Report. (1) Other than by filing 
a Call Report, a federally-insured credit union need not notify the 
NCUA Board of a change in its net worth ratio that places the credit 
union in a lower net worth category;
* * * * *
    4. Amend Sec. 702.102 by revising Table 1 immediately preceding 
paragraph (b) to read as follows:


Sec. 702.102  Statutory net worth categories.

* * * * *

                              Table 1.--Statutory Net Worth Category Classification
----------------------------------------------------------------------------------------------------------------
    A credit union's net worth     If its net worth ratio is-
          category is--                        -                  And subject to the following condition(s)--
----------------------------------------------------------------------------------------------------------------
Well Capitalized''...............  7% or above..............  Meets applicable risk-based net worth (RBNW)
                                                               requirement.
Adequately Capitalized''.........  6% to 6.99%..............  Meets applicable RBNW requirement.

[[Page 38441]]

 
Undercapitalized''...............  4% to 5.99%..............  Or fails applicable RBNW requirement.
Significantly Undercapitalized''.  2% to 3.99%..............  Or if ``undercapitalized'' at <5% net worth ratio
                                                               and fails to timely submit or materially
                                                               implement Net Worth Restoration Plan.
Critically Undercapitalized''....  Less than 2%.............  None.
----------------------------------------------------------------------------------------------------------------

* * * * *
    5. Amend Sec. 702.103 as follows:
    a. Remove the heading from paragraph (a);
    b. Remove paragraph (b);
    c. Redesignate current paragraph (a) introductory text as the 
sectional introductory text, and paragraphs (a)(1) and (a)(2) as (a) 
and (b), respectively.
    6. Amend Sec. 702.104 as follows:
    a. Remove the number ``1'' from the parenthetical ``(Table 1)'' in 
the introductory text and add in its place the number ``2''; and
    d. Redesignate Table 1 immediately following paragraph (h) as Table 
2.
    7. Amend Sec. 702.105 as follows:
    e. Remove the number ``2'' from the parenthetical ``(Table 2)'' in 
the introductory text and add in its place the number ``3'';
    f. Remove the citation ``Sec. 702.2(k)'' in the introductory text 
and add in its place the citation ``Sec. 702.2(m)''; and
    g. Redesignate Table 2 immediately following paragraph (h) as Table 
3.
    8. Amend Sec. 702.106 as follows:
    a. Remove the number ``3'' from the parenthetical ``(Table 3)'' in 
the introductory text and add in its place the number ``4''; and
    b. Redesignate Table 3 immediately following paragraph (h) as Table 
4.
    9. Amend Sec. 702.107 as follows:
    a. Remove the number ``4'' from the parenthetical ``(Table 4)'' in 
the introductory text and adding in its place the number ``5'';
    b. Add new paragraph (d) to read as set forth below; and
    c. Redesignate Table 4 immediately following new paragraph (d) as 
Table 5; and
    d. Add new section (d) to Table 5 as follows:


Sec. 702.107  Alternative Components for Standard Calculation.

* * * * * * *
    (d) Loans sold with recourse. The alternative component is the sum 
of:
    (1) Six percent (6%) of the amount of loans sold with contractual 
recourse obligations of six percent (6%) or greater; and
    (2) The weighted average recourse percent of the amount of loans 
sold with contractual recourse obligations of less than six percent 
(6%), as computed by the credit union.

 Table 5.--Sec.  702.107 Alternative Components For Standard Calculation
 
 
 
 
*                  *                  *                  *
                  *                  *                  *
 


                      (d) Loans Sold With Recourse
------------------------------------------------------------------------
    Amount of loans by recourse           Alternative risk weighting
------------------------------------------------------------------------
Recourse 6% or greater               .06
------------------------------------------------------------------------
Recourse <6%                         Weighted average recourse percent
------------------------------------------------------------------------
The ``alternative component'' is the sum of each amount of the ``loans
 sold with recourse'' risk portfolio by level of recourse (as a percent
 of quarter-end total assets) times its alternative factor. The
 alternative factor for loans sold with recourse of less than 6% is
 equal to the weighted average recourse percent on such loans. A credit
 union must compute the weighted average recourse percent for its loans
 sold with recourse of less than six percent (6%). Substitute for
 corresponding standard component if smaller.
------------------------------------------------------------------------

    10. Amend Sec. 702.108 as follows:
    a. Revise the section heading to read as set forth below;
    b. Redesignate current paragraphs (a) and (b) as paragraphs (b) and 
(c), respectively;
    c. Add a new paragraph (a) as set forth below; and
    d. Revise newly designated paragraph (b) to read as set forth 
below.


Sec. 702.108  Risk mitigation credit.

    (a) Who may apply. A credit union may apply for a risk mitigation 
credit if on any of the current or three preceding effective dates of 
classification it either failed an applicable RBNW requirement or met 
it by less than 100 basis points.
    (b) Application for credit. Upon application pursuant to guidelines 
duly adopted by the NCUA Board, the NCUA Board may in its discretion 
grant a credit to reduce a risk-based net worth requirement under 
Secs. 702.106 and 702.107 upon proof of mitigation of:
    (1) Credit risk; or
    (2) Interest rate risk as demonstrated by economic value exposure 
measures.
* * * * *
    11. Revise the heading of Appendixes A-F to Subpart A of Part 702 
to read as follows:

Appendixes A--H to Subpart A of Part 702

    12. Redesignate Appendix F to Subpart A as Appendix H;
    13. Add new Appendixes F and G to Subpart A as follows:

[[Page 38442]]



              Appendix F--Example Loans Sold With Recourse Alternative Component, Sec.  702.107(d)
                                          [Example calculation in bold]
----------------------------------------------------------------------------------------------------------------
                                           Dollar balance                                          Alternative
     Percent of contractual recourse        of loans sold   Percent of total  Alternative risk      component
               obligation                   with recourse   assets (percent)      weighting         (percent)
----------------------------------------------------------------------------------------------------------------
Recourse 6% or greater..................         5,000,000            2.5000               .06            0.1500
Recourse <6%............................        35,000,000           17.5000            \a\.05            0.8750
                                                                                               -----------------
Sum of above equals Alternative           ................  ................  ................             1.03
 component*.............................
----------------------------------------------------------------------------------------------------------------
*Substitute for corresponding standard component if lower.
a The credit union must calculate this alternative risk weighting for loans sold with recourse of less than 6%.
  For an example computation, see worksheet in Appendix G below.


Appendix G--Worksheet for Alternative Risk Weighting of Loans Sold With Contractual Recourse Obligations of Less
                                                     Than 6%
                                          [Example Calculation in Bold]
----------------------------------------------------------------------------------------------------------------
                                                         Dollar balance of                      Alternative risk
Percent of contractual recourse obligation less than 6%   loans sold with       Dollars of         weighting
                                                              recourse           recourse          (percent)
----------------------------------------------------------------------------------------------------------------
5.50%..................................................          5,000,000            275,000  .................
5.00%..................................................         25,000,000          1,250,000  .................
4.50%..................................................          5,000,000          2,250,000  .................
Sum of above equals....................................         35,000,000          1,750,000  .................
Dollar of recourse divided by dollar balance equals      .................  .................               5.00
 (expressed as %)......................................
----------------------------------------------------------------------------------------------------------------

    14. Revise newly designated Appendix H to Subpart A to read as 
follows:

                        Appendix H--Example RBNW Requirement Using Alternative Components
                                          [Example Calculation in Bold]
----------------------------------------------------------------------------------------------------------------
                                                                     Standard   Alternative   Lower of standard
                          Risk portfolio                            component    component      or alternative
                                                                    (percent)    (percent)   component (percent)
----------------------------------------------------------------------------------------------------------------
(a) Long-term real estate loans..................................         2.20         2.85                2.20
(b) MBLs outstanding.............................................         0.77         0.95                0.77
(c) Investments..................................................         1.51         1.37
(f) Loans sold with recourse.....................................         1.20         1.03                1.03
                                                                                              Standard component
(d) Low-risk assets..............................................                                          0
(e) Average-risk assets..........................................                                          1.83
(g) Unused MBL commitments.......................................                                          0.15
(h) Allowance....................................................                                         (1.02)
RBNW requirement*--Compare to Net Worth Ratio....................                                          6.33
----------------------------------------------------------------------------------------------------------------
*A credit union is ``undercapitalized'' if its net worth ratio is less than its applicable RBNW requirement.

    15. Revise Sec. 702.201 to read as follows:


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

    (a) Earnings retention. Beginning the effective date of 
classification as
    ``adequately capitalized'' or lower, a federally-insured credit 
union must increase the dollar amount of its net worth quarterly either 
in the current quarter, or on average over the current and three 
preceding quarters, by an amount equivalent to at least \1/10\th 
percent (0.1%) of its total assets, and must quarterly transfer that 
amount (or more by choice) from undivided earnings to its regular 
reserve account until it is ``well capitalized.''
    (b) Decrease in retention. Upon written application received no 
later than 14 days before the quarter end, the NCUA Board, on a case-
by-case basis, may permit a credit union to increase the dollar amount 
of its net worth and quarterly transfer an amount that is less than the 
amount required under paragraph (a) of this section, to the extent the 
NCUA Board determines that such lesser amount--
    (1) Is necessary to avoid a significant redemption of shares; and
    (2) Would further the purpose of this part.
    (c) Decrease by FISCU. The NCUA Board shall consult and seek to 
work cooperatively with the appropriate State official before 
permitting a federally-insured State-chartered credit union to decrease 
its earnings retention under paragraph (b) of this section.
    (d) Periodic review. A decision under paragraph (b) of this section 
to permit a credit union to decrease its earnings retention is subject 
to quarterly review

[[Page 38443]]

and revocation except when the credit union is operating under an 
approved net worth restoration plan that provides for decreasing its 
earnings retention as provided under paragraph (b).
    16. Amend Sec. 702.202 by removing the word ``transfer'' from the 
heading of paragraph (a)(1) and adding in its place the word 
``retention.''
    17. Amend Sec. 702.203 by removing the word ``transfer'' from the 
heading of paragraph (a)(1) and adding in its place the word 
``retention.''
    18. Amend Sec. 702.204 as follows:
    a. Revise the heading of paragraph (a)(1) to read as set forth 
below;
    b. Revise paragraph (c)(1)(iii) to read as set forth below;
    c. Revise paragraph (c)(4) to read as set forth below; and
    d. Add new paragraph (d) to read as follows:


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

    (a) * * *
    (1) Earnings retention. * * *
* * * * *
    (c) * * *
    (1) * * *
    (iii) Other corrective action. Take other corrective action, in 
lieu of conservatorship or liquidation, to better achieve the purpose 
of this part, provided that the NCUA Board documents why such action in 
lieu of conservatorship or liquidation would do so, provided however, 
that other corrective action may consist, in whole or in part, of 
complying with the quarterly timetable of steps and meeting the 
quarterly net worth targets prescribed in an approved net worth 
restoration plan. * * *
    (4) Nondelegation. The NCUA Board may not delegate its authority 
under paragraph (c) of this section, unless the credit union has less 
than $5,000,000 in total assets. A credit union shall have a right of 
direct appeal to the NCUA Board of any decision made by delegated 
authority under this section within ten (10) calendar days of the date 
of that decision.
    (d) Mandatory liquidation of insolvent federal credit union. In 
lieu of paragraph (c) of this section, a ``critically 
undercapitalized'' federal credit union that has a net worth ratio of 
less than zero percent (0%) may be placed into liquidation on grounds 
of insolvency pursuant to 12 U.S.C. 1787(a)(1)(A).
    19. Amend Sec. 702.205 by removing from paragraph (c) the citation 
``702.201(b)''.
    20. Amend Sec. 702.206 as follows:
    a. Revise paragraph (c)(1)(ii) to read as set forth below;
    b. Revise paragraph (c)(1)(iii) to read as set forth below; and
    c. Add new paragraph (i) to read as follows:


Sec. 702.206  Net worth restoration plans.

* * * * *
    (c) * * *
    (1) * * *
    (ii) The projected amount of earnings to be transferred to the 
regular reserve account in each quarter of the term of the NWRP as 
required under Sec. 702.201(a), or as permitted under Sec. 702.201(b);
    (iii) How the credit union will comply with the mandatory and any 
discretionary supervisory actions imposed on it by the NCUA Board under 
this subpart;
* * * * *
    (i) Publication. An NWRP need not be published to be enforceable 
because publication would be contrary to the public interest.
    21. Amend Sec. 702.302 as follows:
    a. Remove the number ``2'' from the parenthetical ``table 2)'' in 
the introductory text of paragraph (c) and add in its place the number 
``6'';
    b. Revise the table immediately preceding paragraph (d) to read as 
set forth below; and
    c. Revise paragraph (d) to read as follows:


Sec. 702.302  Net worth categories for new credit unions.

* * * * *

  Table 6.--Net Worth Category Classification for ``New'' Credit Unions
------------------------------------------------------------------------
   A ``new'' credit union's net worth
           category is . . .             if its net worth ratio is . . .
------------------------------------------------------------------------
``Well Capitalized''...................  7% or above
``Adequately Capitalized''.............  6% to 6.99%
``Moderately Capitalized''.............  3.5% to 5.99%
``Marginally Capitalized''.............  2% to 3.49%
``Minimally Capitalized''..............  0% to 1.99%
``Uncapitalized''......................  Less than 0%
------------------------------------------------------------------------

    (d) Reclassification based on supervisory criteria other than net 
worth. Subject to Sec. 702.102(b) and (c), the NCUA Board may 
reclassify a ``well capitalized,'' ``adequately capitalized'' or 
``moderately 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).
* * * * *
    22. Revise Sec. 702.303 to read as follows:


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

    Beginning on the effective date of classification, an ``adequately 
capitalized'' new credit union must increase the dollar amount of its 
net worth by the amount reflected in its approved initial or revised 
business plan in accordance with Sec. 702.304(a)(2), or in the absence 
of such a plan, in accordance with Sec. 702.201, and quarterly transfer 
that amount from undivided earnings to its regular reserve account, 
until it is ``well capitalized.''
    23. Amend Sec. 702.304 by revising paragraph (a) to read as 
follows:


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

    (a) Mandatory supervisory actions by new credit union. Beginning on 
the date of classification as ``moderately capitalized,'' ``marginally 
capitalized'' or ``minimally capitalized'' (including by 
reclassification under Sec. 702.302(d)), a new credit union must--
    (1) Earnings retention. Increase the dollar amount of its net worth 
by the amount reflected in its approved initial or revised business 
plan and quarterly transfer that amount from undivided earnings to its 
regular reserve account;
    (2) Submit revised business plan. Submit a revised business plan 
within the time provided by Sec. 702.306 if the credit union either:
    (i) Has not increased its net worth ratio consistent with its then-
present approved business plan;
    (ii) Has no then-present approved business plan; or

[[Page 38444]]

    (iii) Has failed to comply with paragraph (a)(3) of this section; 
and
    (3) Restrict member business loans. Not increase the total dollar 
amount of member business loans (defined as loans outstanding and 
unused commitments to lend) as of the preceding quarter-end unless it 
is granted an exception under 12 U.S.C. 1757a(b).
* * * * *
    24. Amend Sec. 702.305 as follows:
    a. Revise paragraph (a) as set forth below;
    b. Revise paragraph (c)(2) as set forth below; and
    c. Add new paragraph (d) as follows:


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

    (a) Mandatory supervisory actions by new credit union. Beginning on 
the effective date of classification as ``uncapitalized,'' a new credit 
union must--
    (1) Earnings retention. Increase the dollar amount of its net worth 
by the amount reflected in the credit union's approved initial or 
revised business plan;
    (2) Submit revised business plan. Submit a revised business plan 
within the time provided by Sec. 702.306, providing for alternative 
means of funding the credit union's earnings deficit, if the credit 
union either:
    (i) Has not increased its net worth ratio consistent with its then-
present approved business plan;
    (ii) Has no then-present approved business plan; or
    (iii) Has failed to comply with paragraph (a)(3) of this section; 
and
    (3) Restrict member business loans. Not increase the total dollar 
amount of member business loans as provided in Sec. 702.304(a)(3).
* * * * *
    (c) * * *
    (2) Plan rejected, approved, implemented. Except as provided in 
paragraph (c)(3) of this section, must place into liquidation pursuant 
to 12 U.S.C. 1787(a)(3)(A)(ii), or conservatorship pursuant to 12 
U.S.C. 1786(h)(1)(F), an ``uncapitalized'' new credit union that 
remains ``uncapitalized'' one hundred twenty (120) calendar days after 
the later of:
    (i) The effective date of classification as ``uncapitalized''; or
    (ii) The last day of the calendar month following expiration of the 
time period provided in the credit union's initial business plan 
(approved at the time its charter was granted) to remain 
``uncapitalized,'' regardless whether a revised business plan was 
rejected, approved or implemented.
    (3) Exception. The NCUA Board may decline to place a new credit 
union into liquidation or conservatorship as provided in paragraph 
(c)(2) of this section if the credit union documents to the NCUA Board 
why it is viable and has a reasonable prospect of becoming ``adequately 
capitalized.''
    (d) Mandatory liquidation of ``uncapitalized'' federal credit 
union. In lieu of paragraph (c) of this section, an ``uncapitalized'' 
federal credit union may be placed into liquidation on grounds of 
insolvency pursuant to 12 U.S.C. 1787(a)(1)(A).
    25. Amend Sec. 702.306 as follows:
    a. Revise paragraph (a) to read as set forth below;
    b. Revise paragraph (b)(2) to read as set forth below; and
    c. Add new paragraph (h) to read as follows:


Sec. 702.306  Revised business plans for new credit unions.

    (a) Schedule for filing. (1) Generally. Except as provided in 
paragraph (a)(2) of this section, a new credit union classified 
``moderately capitalized'' or lower must file a written revised 
business plan (RBP) with the appropriate Regional Director and, if 
State-chartered, with the appropriate State official, within 30 
calendar days of either:
    (i) The last of the calendar month following the end of the 
calendar quarter that the credit union's net worth ratio has not 
increased consistent with its the-present approved business plan;
    (ii) The effective date of classification as less than ``adequately 
capitalized'' if the credit union has no then-present approved business 
plan; or
    (iii) The effective date of classification as less than 
``adequately capitalized'' if the credit union has increased the total 
amount of member business loans in violation of Sec. 702.304(a)(3).
    (2) Exception. The NCUA Board may notify the credit union in 
writing that its RBP is to be filed within a different period or that 
it is not necessary to file an RBP.
    (3) Failure to timely file plan. When a new credit union fails to 
file an RBP as provided under paragraphs (a)(1) or (a)(2) of this 
section, the NCUA Board shall promptly notify the credit union that it 
has failed to file an RBP and that it has 15 calendar days from receipt 
of that notice within which to do so.
    (b) * * *
    (2) Establish a timetable of quarterly targets for net worth during 
each year in which the RBP is in effect so that the credit union 
becomes ``adequately capitalized'' by the time it no longer qualifies 
as ``new'' per Sec. 702.310(b);
* * * * *
    (h) Publication. An RBP need not be published to be enforceable 
because publication would be contrary to the public interest.
    26. Amend Sec. 702.401 by revising paragraph (c) to read as 
follows:


Sec. 702.401  Reserves.

* * * * *
    (c) Charges to regular reserve after depleting undivided earnings. 
The board of directors of a federally-insured credit union may 
authorize losses to be charged to the regular reserve after first 
depleting the balance of the undivided earnings account and other 
reserves, provided that the authorization states the amount and 
provides an explanation of the need for the charge, and either--
    (1) The charge will not cause the credit union's net worth 
classification to fall below ``adequately capitalized'' under subparts 
B or C of this part; or
    (2) If the charge will cause the net worth classification to fall 
below ``adequately capitalized,'' the appropriate Regional Director 
and, if State-chartered, the appropriate State official, have given 
written approval (in an NWRP or otherwise) for the charge.
* * * * *
    27. Amend Sec. 702.403 by revising paragraph (b) to read as 
follows:


Sec. 702.403  Payment of dividends.

* * * * *
    (b) Payment of dividends if undivided earnings depleted. The board 
of directors of a ``well capitalized'' federally-insured credit union 
that has depleted the balance of its undivided earnings account may 
authorize a transfer of funds from the credit union's regular reserve 
account to undivided earnings to pay dividends, provided that either--
    (1) The payment of dividends will not cause the credit union's net 
worth classification to fall below ``adequately capitalized'' under 
subpart B or C of this part; or
    (2) If the payment of dividends will cause the net worth 
classification to fall below ``adequately capitalized,'' the 
appropriate Regional Director and, if State-chartered, the appropriate 
State official, have given prior written approval (in an NWRP or 
otherwise) to pay a dividend.

PART 741--REQUIREMENTS FOR INSURANCE

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


[[Page 38445]]


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

    2. Amend Sec. 741.3 as follows:
    a. Remove from the heading of paragraph (a) the words ``Adequacy 
of''.
    b. Remove paragraph (a)(2); and
    c. Redesignate current paragraph (a)(3) as paragraph (a)(2).

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

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

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

    2. Amend Sec. 747.2005 of subpart L by revising paragraph (b)(2) to 
read as follows:


Sec. 747.2005  Enforcement of orders.

* * * * *
    (b) * * *
    (2) Failure to implement plan. Pursuant to 12 U.S.C. 1786(k)(2)(A), 
the NCUA Board may assess a civil money penalty against a credit union 
which fails to implement a net worth restoration plan under subpart B 
of part 702 of this chapter or a revised business plan under subpart C 
of part 702, regardless whether the plan was published.
* * * * *
[FR Doc. 02-13931 Filed 6-3-02; 8:45 am]
BILLING CODE 7535-01-P