[Federal Register Volume 67, Number 230 (Friday, November 29, 2002)]
[Rules and Regulations]
[Pages 71078-71094]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-30091]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 702, 741 and 747


Prompt Corrective Action

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: Pursuant to Congressional mandate, the National Credit Union 
Administration (NCUA) adopted a comprehensive system of prompt 
corrective action consisting of minimum capital standards and 
corresponding remedies to restore the net worth of federally-insured 
credit unions. After six quarters of implementation, the NCUA Board 
issued a proposed rule consisting of revisions and adjustments intended 
to improve and simplify the system of prompt corrective action. As 
revised to reflect public comments, the NCUA Board now issues a final 
rule incorporating these improvements.

DATES: Effective January 1, 2003.

FOR FURTHER INFORMATION CONTACT: Legal: Steven W. Widerman, Trial 
Attorney, Office of General Counsel, National Credit Union 
Administration, 1775 Duke St., Alexandria, VA 22314. Telephone: 703/
518-6557; Technical: Jon Flagg, Loss/Risk Analysis Officer, Office of 
Examination and Insurance, at the address above. Telephone: 703/518-
6378.

SUPPLEMENTARY INFORMATION: 
A. Background
    1. Development of Part 702
    2. Where Credit Unions Stand Today
    3. Comments on Proposed Rule
B. Section-by-section Analysis of Final Rule
    1. Section 702.2--Definitions
    2. Section 702.101--Measure and effective date of net worth 
classification
    3. Section 702.106--Standard calculation of RBNW requirement
    4. Section 702.107--Alternative component for loans sold with 
recourse
    5. Section 702.108--Risk mitigation credit
    6. Section 702.201--PCA for ``Adequately Capitalized'' credit 
unions
    7. Section 702.204--PCA for ``Critically Undercapitalized'' 
credit unions
    8. Section 702.205--Consultation with State officials on 
proposed PCA
    9. Section 702.206--Net worth restoration plans
    10. Section 702.303--PCA for ``Adequately Capitalized'' new 
credit unions
    11. Section 702.304--PCA for ``Moderately Capitalized,'' 
``Marginally Capitalized'' and ``Minimally Capitalized'' new credit 
unions
    12. Section 702.305--PCA for ``Uncapitalized'' new credit unions
    13. Section 702.306--Revised business plans for new credit 
unions
    14. Section 702.401--Charges to the regular reserve
    15. Section 702.403--Payment of dividends
    16. Section 741.3--Adequacy of reserves
    17. 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

    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. Development of Part 702

    In 1998, Congress enacted the Credit Union Membership Access Act 
(``CUMAA''), Pub. L. 105-219, 112 Stat. 913 (1998). CUMAA amended the 
Federal Credit Union Act (``the Act'') to require NCUA to adopt by 
regulation a system of ``prompt corrective action'' (``PCA'') 
consisting of minimum capital standards and corresponding remedies to 
improve the net worth of federally-insured ``natural person'' credit 
unions. 12 U.S.C. 1790d et seq. In February 2000, the NCUA Board 
adopted part 702 and subpart L of part 747, establishing a 
comprehensive system of PCA that combines mandatory supervisory actions 
prescribed by statute with discretionary supervisory actions developed 
by NCUA, all indexed to five statutory net worth categories. 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 five statutory net 
worth categories. 12 CFR 702.101-108. Also included in subpart A is a 
separate risk-based net worth (``RBNW'') component that 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; 65 FR 44950 (July 20, 2000). Subpart B combines mandatory and 
discretionary supervisory actions indexed to the five categories, as 
well as PCA-based conservatorship and liquidation. Sec. Sec.  702.201-
206. Subpart C consists of a system of PCA for ``new'' credit unions. 
Sec. Sec.  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. Sec. Sec.  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).
    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 by the adoption of a 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

[[Page 71079]]

44964. This final rule is the result of those recommendations, as 
modified to reflect public comments. The final rule takes effect 
January 1, 2003, and first applies to activity in the first quarter of 
2003 as reflected in the Call Report for that period.

2. Where Credit Unions Stand Today

    a. Net worth classification. As of June 30, 2002, federally-insured 
credit unions are classified as follows within the PCA net worth 
categories:
[GRAPHIC] [TIFF OMITTED] TR29NO02.064

    b. RBNW requirement. As of June 30, 2002, 448 federally-insured 
credit unions--4 percent of the total--were required to meet an RBNW 
requirement. Of these, 446 met the requirement using the ``standard 
calculation.'' Sec.  702.106. The two that failed under the ``standard 
calculation'' succeeded in meeting their RBNW requirements 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. Comments on Proposed Rule

    On June 4, 2002, NCUA issued a proposed rule consisting of 
revisions and adjustments intended to improve and simplify the system 
of PCA. 67 FR 38431 (June 4, 2002). By the close of the comment period 
for the proposed rule, August 5, 2002, NCUA received 26 comment 
letters. Comments were received from seven federal credit unions, four 
state credit unions, eight state credit union leagues, two credit union 
industry trade associations, an association of state credit union 
supervisors, two banking industry trade associations, and a Federal 
Home Loan Bank. Nearly all of the comments supported the series of 
proposed revisions and adjustments to part 702.
    This rulemaking will not address the few comments that suggested 
modifications to part 702 that exceed the scope of NCUA's statutory 
authority or that are completely unsupported. Comments on the concept 
of ``safe harbor'' approval of a net worth restoration plan are 
addressed in a separate proposed rule found elsewhere in this volume of 
the Federal Register. All other comments are analyzed generally in 
section B. below.

B. Section-by-Section Analysis of Final Rule

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. Sec. Sec.  
702.403, 702.401(d), 702.402(d)(5). To extend these restrictions and 
requirements to interest that many State-chartered credit unions pay on 
shares and deposits, the proposed rule introduced a definition of 
``dividend'' that included ``a payment of interest on a deposit by a 
State-chartered credit union.'' 67 FR at 38433. While one commenter 
supported the definition as proposed, two others pointed out that 
State-chartered credit unions pay interest on non-share deposits 
pursuant to a contractual obligation, and that restricting the payment 
of interest would cause a credit union to breach its deposit contract 
with the member. By comparison, dividends paid on shares entail no such 
contractual obligation. NCUA concurs with the commenters' point. 
Accordingly, the final rule omits the proposed definition of 
``dividends'' and, further, eliminates the reference to ``interest'' in 
the discretionary supervisory action (``DSA'') restricting the payment 
of dividends. Sec. Sec.  702.202(b)(3), 702.203(b)(3), 702.204(b)(3). 
As a result, the term ``dividends'' as used in part 702 excludes only 
those payments on shares and deposits that meet a statutory or other 
legal definition of contractual interest, regardless of the label a 
credit union gives to such payments.

[[Page 71080]]

    b. Senior executive officer. Part 702 neglected to define who is a 
``senior executive officer'' for purposes of the DSAs that authorize 
dismissing ``a director or senior executive officer,'' Sec. Sec.  
702.202(b)(7), 702.203(b)(8), 702.204(b)(8); hiring of a ``qualified 
senior executive officer,'' Sec. Sec.  702.202(b)(8), 702.203(b)(9), 
702.204(b)(9); and limiting compensation paid to a ``senior executive 
officer,'' Sec. Sec.  702.203(b)(10), 702.204(b)(10). See also 12 CFR 
747.2004(a) (review of dismissal of senior executive officer). To 
correct this oversight, NCUA proposed incorporating by reference the 
definition of a ``senior executive officer'' in 12 CFR 701.14(b)(2). 67 
FR at 38433. Apart from a misquotation in the preamble to the proposed 
rule, the sole commenter supported the proposed definition. 
Accordingly, the final rule adds a new subsection (i) to Sec.  702.2 
that incorporates by reference the definition of ``senior executive 
officer'' in 12 CFR 701.14(b)(2).
    c. Total assets. The ``average quarterly balance'' definition of 
``total assets'' was ambiguous as to whether the phrase ``[t]he average 
of quarter-end balances of the four most recent calendar quarters,'' 
Sec.  702.2(j)(1)(i), refers to the four consecutive quarters preceding 
the then-current quarter, or to the then-current quarter plus the 
preceding three consecutive quarters. The proposed rule revised the 
definition to adopt the latter meaning. 67 FR at 38433. Apart from a 
misquotation in the preamble to the proposed rule, the two comments on 
the definition favored the latter meaning. Accordingly, the final rule 
redefines the ``average quarterly balance'' as the average of quarter-
end balances of ``the current and three preceding calendar quarters.'' 
In addition, the final rule deletes the reference to semiannual first 
and third quarter Call Reports from the ``quarter end balance'' 
definition of ``total assets,'' Sec.  702.2(l)(1)(iv), to reflect the 
adoption of a uniform quarterly schedule for filing Call Reports. 67 FR 
12457 (March 19, 2002).

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

    For nearly all credit unions, the effective date of net worth 
classification 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). Occasionally, however, an interim effective date between 
quarter-ends applies instead because ``the credit union's net worth 
ratio is recalculated by or as a result of its most recent final report 
of examination.'' Sec.  702.101(b)(2). This typically results when an 
NCUA examination that takes place after the quarter-end effective date 
discloses that the credit union erred in calculating its net worth 
ratio and the corrected ratio puts it in a different net worth 
category. In that case, the date the credit union receives the final 
examination report becomes the new effective date of classification to 
the proper net worth category.
    Several flaws have made it difficult to implement subsection 
(b)(2). First, it extended to instances where there was no error or 
misstatement in calculating net worth, but rather, data or conditions 
simply had changed since the date of the Call Report (which would be 
reflected in the next quarter's Call Report). Second, notice to the 
credit union to correct its net worth ratio had to await the ``most 
recent report of final examination'' even when an earlier supervision 
contact disclosed a calculating error or misstatement. Third, 
postponing such notice may deprive the credit union of the opportunity 
to take corrective action sooner. To rectify these flaws, the proposed 
rule revised subsection (b)(2) to define the effective date of 
classification to a ``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.'' 67 FR 38434. NCUA received 
three comments on this section, all favoring these revisions. 
Therefore, the final rule adopts them as proposed.

3. Section 702.106--Standard Calculation of RBNW Requirement

    The proposed rule suggested no modifications to the standard 
component for ``member business loans outstanding'' (``MBLs''). Sec.  
702.106(b). However, one commenter contended that the 12.25 percent 
risk-weighting threshhold in that component was arbitrarily based on 
CUMAA's restriction on member business lending, 12 U.S.C. 1757a(a)(2), 
and proposed that the threshhold be increased to 25 percent. After 
considering this suggestion, the NCUA Board has determined that the 
existing 12.25 percent threshold warrants reconsideration in connection 
with its review of the current MBL regulation, 12 CFR 723. Pending 
reconsideration, a credit union has two alternatives if it finds that 
the 12.25 percent threshhold distinguishes risk weightings among MBLs 
imprecisely. First, to resort to the corresponding alternative 
component for MBLs, Sec.  702.107(b), which measures finer increments 
of risk among fixed- and variable rate MBLs. And second, to seek a risk 
mitigation credit, Sec.  702.108, to moderate the impact of the 
standard risk-weightings. Accordingly, the existing 12.25 percent 
threshold is retained at this time.

4. Section 702.107--Alternative Components for Standard Calculation

    a. Alternative component for long-term real estate loans callable 
in 5 years or less. For long-term real estate loans, part 702 features 
both a ``standard component'' and an ``alternative component'' for the 
RBNW calculation. Sec. Sec.  702.106(a), 702.107(a). The longer the 
maturity of the loan, the greater the interest rate risk and credit 
risk exposure, justifying a correspondingly greater risk-weighting. See 
65 FR at 44960-44961. Both components scheduled loans by contractual 
maturity date regardless whether there is a ``call'' feature permitting 
the lender to redeem the loan before the maturity date. The NCUA Board 
declined to propose scheduling ``callable'' loans by ``call'' date, 
rather than by maturity date, for reasons explained in the proposed 
rule. 67 FR at 38435. Instead, the NCUA Board suggested than an 
offsetting risk mitigation credit under Sec.  702.108 was well suited 
to recognize when a credit union's program and history of efficiently 
exercising ``call'' options truly mitigates risk.
    Six commenters objected that the NCUA Board's position denies them 
a reduced risk-weighting even though a ``call'' feature gives them the 
flexibility to shorten the term of real estate loans, thereby 
mitigating interest rate risk, and credit risk due to deterioration of 
the borrower's ability to repay or the collateral's value. One 
commended the ``call'' feature as a risk management tool. Another 
advocated allowing use of the ``call'' date, in lieu of the maturity 
date, on a credit union-by-credit union basis. And finally, a commenter 
recommended categorizing ``callable'' and non-``callable'' loans 
separately and assigning lower risk weightings to the ``callable'' 
category to reflect its reduced interest rate risk. In light of these 
comments, the NCUA Board has reconsidered its position and now 
recognizes that a ``call'' feature, when exercised in good faith, 
provides some measure of risk mitigation for real estate loans.\2\
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    \2\ The alternative component for MBLs continues to categorize 
MBLs by fixed- and variable-rate and then schedules the loans in 
each category for risk-weighting by remaining maturity. Sec.  
702.107(b). The NCUA Board is not scheduling MBLs by ``call'' date 
at this time out of concern for credit risk upon exercise of the 
``call'' feature. However, this issue also may receive further 
consideration in connection with NCUA's review of the current MBL 
regulation, 12 CFR.

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[[Page 71081]]

    Accordingly, the final rule expands the existing alternative 
component for ``long-term real estate loans'' to add a separate 
schedule for loans that are ``callable'' within a maximum period of 5 
years. Sec.  702.107(a)(2). The schedule consists of three maturity 
buckets that correspond to the buckets in the non-``callable'' 
schedule. See new Table 5(a) and new Appendixes C in rule text below. A 
loan that is ``callable'' within 5 years, and that has remaining 
maturity of less than 5 years, receives the same six percent risk-
weighting that the existing alternative component gives to a non-
``callable'' loan with a remaining maturity of less than 5 years. A 
loan that is ``callable'' within 5 years, and that has a remaining 
maturity of more than 5 years, receives a risk weighting that is two 
percentage points lower than the weighting for the corresponding non-
``callable'' maturity bucket. To qualify for the ``callable'' schedule, 
the ``call'' feature must be contractually specified in the loan 
documents and the credit union must maintain records documenting the 
breakdown of ``callable'' loans by maturity bucket.
    b. Alternative component for loans sold with recourse. The standard 
component for loans sold with recourse assigns a uniform risk-weighting 
of 6 percent to the entire balance, Sec.  702.106(f), regardless 
whether it includes loans sold with only partial recourse against the 
seller. Since part 702 was adopted, recourse loan activity among credit 
unions has nearly doubled, and loan programs have emerged that 
contractually limit the extent of the purchaser's recourse to the 
seller.\3\ Thus, credit unions have gained the ability to cap their 
credit risk exposure from the sale of recourse loans.
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    \3\ For example, documentation for the loan sale transaction may 
provide for recourse in the form of a contractually-specified 
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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    In view of these developments, the proposed rule added a fourth 
alternative component to Sec.  702.107 that would allow variable risk-
weighting according to the actual credit risk exposure of loans sold 
with a contractual recourse obligation of less than 6 percent. 67 FR at 
38434. The proposed alternative component is the sum of two risk-
weighting buckets. The first bucket consists of the balance of loans 
sold with contractual recourse obligations of six percent or greater; 
it is risk-weighted at a uniform six percent. Sec.  702.107(d)(1). The 
second bucket consists of the balance of loans sold with contractual 
recourse obligations of less than six percent; it is risk-weighted 
according to the weighted average recourse percent of its contents, as 
computed by the credit union.\4\ Sec.  702.107(d)(2); see new Table 
5(d) and new Appendixes F and G in rule text below. Eight comments 
addressed the proposed ``alternative component'' for loans sold with 
recourse, all supporting it. Therefore, the final rule adopts the new 
alternative component in Sec.  702.107(d) as proposed.
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    \4\ To caluate 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 total dollars of 
recourse. Divide the total dollars of recourse by the total dollar 
balance of loans sold with <6% recourse to derive the alternative 
risk weighting. See Appendix G in rule text below.
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    c. Alternative component for short-term government obligations. 
Although the proposed rule did not reference government obligations, a 
single commenter proposed an alternative component for government 
obligations with maturity of one year or less. Under the proposal, 
these obligations, up to a total equivalent to 25 percent of a credit 
union's total assets, would receive a zero risk weighting. The NCUA 
Board is unsympathetic to this proposal because the existing standard 
component for ``investments'' gives a risk-weighting of three 3 
percent-half the six percent risk weighting assigned to average risk 
assets--to government obligations with a maturity of one year or less. 
Sec.  702.106(c)(1). Government obligations are not completely risk 
free, as a zero risk-weighting suggests. On the contrary, they carry 
interest rate risk and transaction risk that justify a three percent 
risk weighting. Accordingly, the commenter's proposal is not adopted.

5. Section 702.108--Risk Mitigation Credit

    Part 702 permits a credit union that fails an applicable RBNW 
requirement under both the ``standard calculation'' and the 
``alternative components'' to apply for a ``risk mitigation credit'' 
(``RMC''). Sec.  702.108(a). If granted, an RMC will reduce the RBNW 
requirement that must be met.\5\ But NCUA will not consider an 
application for this relief until after the effective date that a 
credit union fails its RBNW requirement. Submission Guidelines Sec.  
I.3. This forces a failing credit union to remain classified 
``undercapitalized'' while its RMC application is pending, id. 
Sec. Sec.  I.4, I.8, even when it reasonably expects to fail because it 
either failed or barely passed in a preceding quarter.
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    \5\ 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 for 8508). The 
Submission Guidelines will be modified to reflect the revisions to 
Sec.  702.108 adopted in this final rule.
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    To spare credit unions that are genuinely in danger of failing an 
RBNW requirement from the ``fail first'' prerequisite, the proposed 
rule allowed 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. 67 FR at 38434. As revised, Sec.  
702.108 would 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 basis 
points. An RMC granted preemptively would allow a credit union 
genuinely at risk of failing an RBNW requirement to seamlessly maintain 
its initial classification as either ``adequately capitalized'' or 
``well capitalized.'' The nine commenters who addressed this endorsed 
the proposed relaxation of the RMC application prerequisites. 
Therefore, the final rule adopts the revisions to Sec.  702.108 as 
proposed.

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

    a. Earnings retention. The proposed rule identified two flaws in 
the operation of the quarterly earnings retention requirement that 
applies to credit unions classified ``adequately capitalized'' or 
lower. First, that subsection (a) failed to specify that it is the 
dollar amount of net worth that must increase by the equivalent of 0.1 
percent of assets per quarter, not the net worth ratio itself. (Changes 
in the net worth ratio will not match changes in the dollar amount of 
net worth unless net worth and total assets were to increase or 
decrease by exactly the same percentage.) Second, that subsection (a) 
technically does not allow credit unions to meet the statutory annual 
minimum transfer of the equivalent of 0.4 percent of total assets on an 
average basis over four quarters. As originally written, that 
subsection 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 address both flaws, the proposed rule revised subsection (a) to 
specify that it is the ``the dollar amount'' of net

[[Page 71082]]

worth that must be increased, not the net worth ratio itself, and to 
permit the minimum increase to be made ``either in the current quarter, 
or on average over the current and three preceding quarters.'' None of 
the commenters addressed these revisions. Therefore, the final rule 
adopts them as proposed.
    b. Decrease in retention. Subsection (b) authorized NCUA, on a 
case-by-case basis, to permit a credit union to increase net worth by 
an amount that is less than the quarterly minimum (equivalent of 0.1 
percent of assets) when necessary to avoid a significant redemption of 
shares and to further the purpose of PCA. Sec.  702.201(b); 12 U.S.C. 
1790d(e)(2). Since the adoption of part 702, however, some credit 
unions have decreased their quarterly earnings retention, either 
without seeking NCUA's permission at all, or prior to seeking NCUA's 
permission, in order to pay dividends as they deem necessary. To 
prevent unilateral decreases in earnings retention, the proposed rule 
revised subsection (b) to add the requirement that a request to 
decrease earnings retention must be submitted in writing no later than 
14 days before the quarter end. NCUA would be under no obligation to 
grant applications submitted after the 14-day deadline expires or after 
the quarter-end. Further, NCUA would be 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.
    Two commenters advocated a more flexible approach--making the 
application period negotiable, and accepting verbal applications after 
the deadline, both on a case-by-case basis. The NCUA Board continues to 
believe that a documented request submitted within a ``bright line'' 
time frame is necessary for two reasons. First, to give credit unions 
clear notice of when they must apply for a decrease. Second, to 
facilitate uniform discipline of credit unions that unilaterally pay 
dividends without advance permission to decrease their earnings 
retention. A third commenter objected that a request to decrease 
earnings retention should not be required when a credit union is 
operating under an approved net worth restoration plan (``NWRP'') that 
projects quarterly earnings retention that is less than the minimum. 
See Sec.  702.206(c)(1)(ii). In fact, a separate request for a decrease 
is not required under these circumstances because, as explained below, 
earnings retention is effectively subject to quarterly evaluation as a 
function of the NWRP. For these reasons, the final rule adopts the 
revisions to subsection (b) as proposed.
    c. Decrease by FISCU. 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 
originally located in Sec.  702.205(c), where it was misidentified as a 
DSA. Because Sec.  702.205(c) applies only to DSAs, the final rule 
relocates the ``consult and work cooperatively'' requirement to a new 
subsection (c) of Sec.  702.201.
    d. Periodic review. Part 702 provides that a decision permitting a 
decrease in earnings retention is ``subject to review and revocation no 
less frequently than quarterly.'' Sec.  702.201(b); 12 U.S.C. 
1790d(e)(2)(B). In practice, the ``no less frequently than quarterly'' 
timetable is too vague to indicate when such a review must take place. 
To coincide with the quarterly Call Reporting schedule that drives part 
702, the proposed rule added a new subsection (d) to require uniform 
``quarterly review and revocation,'' except when a credit union 
classified ``undercapitalized'' or lower is operating under an approved 
NWRP. NCUA received no comments on this modification.
    For ``adequately capitalized'' credit unions (for whom earnings 
retention is the only MSA), quarterly review is implicit because a 
request to decrease earnings retention already must be renewed on a 
quarter-by-quarter basis. However, for credit unions classified 
``undercapitalized'' or lower, separate quarterly review would be 
redundant when an approved NWRP is in place. To be approved, an NWRP 
must, in addition to prescribing quarterly net worth targets, Sec.  
702.206(c)(1)(i), 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 NWRPs permit decreases in 
earnings retention extending for successive quarters over the term of 
the plan. These decreases 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 likely would be no reason to 
discontinue the decreased earnings retention approved in its NWRP.
    Because quarterly review is effectively built-in to the NWRP, 
proposed new subsection (d) exempted credit unions operating under an 
NWRP from the quarterly review that Sec.  702.201 imposes on 
``adequately capitalized'' credit unions. NCUA received no comments on 
this exemption. Accordingly, the final rule adopts new subsection (d) 
as proposed.

7. 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. But when a credit 
union has been both implementing the steps in its NWRP and timely 
achieving its net worth targets, demanding further action is 
superfluous, if not punitive. NCUA has found it difficult to fashion 
OCA that is more than a makeweight in these circumstances.
    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. No. 193, 105th Cong., 2d Sess. 15 
(1998). The NCUA Board has determined that the purpose of PCA--building 
net worth to minimize share insurance losses--is not undermined 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 would be no reason to demand more than complete success from a 
credit union that, so far, is completely successful in building net 
worth.

[[Page 71083]]

    To implement a more flexible approach to imposing OCA in lieu of 
conservatorship and liquidation, the proposed rule revised subsection 
(c)(1)(iii) to provide 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 would permit, but 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. NCUA received two 
comments; both supported this shift in approach to implementing OCA. 
Accordingly, the final rule adopts revised subsection (c)(1)(iii) as 
proposed.
    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 Act nor part 741 sets a 
deadline by which a credit union must appeal a delegated decision to 
the NCUA Board. 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.
    To impose similar finality upon the unfolding timetable of 
decisions that starts when a credit union becomes ``critically 
undercapitalized,'' the proposed rule revised subsection (c)(4) to set 
a deadline of ten calendar days in which to appeal a delegated 
decision. Objecting that 10 days is too few for small credit unions 
with unsophisticated management, the one commenter who addressed this 
section advocated a 30-day appeal period instead. However, the final 
rule adopts the proposed 10-day appeal period for two reasons. First, 
it parallels the 10-day window that the Act provides for seeking 
judicial review of any statutory conservatorship or liquidation. 12 
U.S.C. 1786(h)(3), 1787(a)(1)(B). Second, a longer appeal period would 
unreasonably delay the payout of shares to members that must promptly 
follow a liquidation.
    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 the option of an 
insolvency-based liquidation. To clarify that this option is available, 
new subsection (d) to Sec.  702.204 provides 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)].''

8. Section 702.205--Consultation With State Officials on Proposed PCA

    As explained above in reference to new subsection (c) of Sec.  
702.201, a cross-reference in Sec.  702.205(c) misidentified the 
decision whether to permit a decrease in a FISCU's quarterly earnings 
retention as a DSA. To correct this error, the final rule deletes the 
erroneous cross-reference and relocates the ``consult and seek to work 
cooperatively'' requirement in Sec.  702.201(c).

9. 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.\6\ Among the items an NWRP must address 
is how the credit union will comply with MSAs and DSAs. Sec.  
702.206(c)(1)(iii). Some credit unions that were not subject to a DSA 
interpreted that requirement as a demand either to consent to a DSA, or 
to explain prospectively how the credit union would comply with DSAs if 
the NCUA Board were to impose any. The proposed rule revised subsection 
(c)(1)(iii) to clarify that an NWRP need only address whatever DSAs, if 
any, the NCUA Board already has imposed on the credit union. The one 
commenter who addressed this revision supported it. The final rule 
adopts revised subsection (c)(1)(iii) as proposed.
---------------------------------------------------------------------------

    \6\ As noted earlier in this preamble, the comments on the 
concept of ``safe harbor'' approval of an NWRP are addressed in a 
separate proposed rule found elsewhere in this volume of the Federal 
Register.
---------------------------------------------------------------------------

    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 some to assume 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 has determined 
that publication would expose the credit union to reputation risk that 
would be contrary to the public interest. Therefore, the proposed rule 
added 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.'' NCUA received two comments on the 
clarification and both supported it. Therefore, the final rule adopts 
new subsection (i) as proposed.
    c. Alternative capital. The proposed rule did not reference 
subsection (e), which permits consideration of any ``regulatory 
capital'' a credit union may have in evaluating an NWRP. Nonetheless, 
NCUA received three comments urging the adoption of some form of 
alternative capital not only to be considered in evaluating an NWRP, 
but also to offset an applicable RBNW requirement. A fourth commenter 
opposed alternative capital in any form. The final rule does not 
address these comments because this rulemaking was not intended by the 
NCUA Board to be a forum for exploring or introducing alternative forms 
of capital.

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

    Under the original alternative system of PCA for new credit unions, 
a credit union that managed to become ``adequately capitalized'' while 
still new was subject to the same minimum earnings retention that 
applies to non-new credit unions that are ``adequately capitalized.'' 
\7\ Sec.  702.201(a). In contrast, ``new'' credit unions that stayed 
classified below ``adequately capitalized'' were not subject to minimum 
earnings retention; they had to increase net worth only ``by an amount 
reflected in the credit union's

[[Page 71084]]

approved initial or revised business plan.'' Sec.  702.304(a)(1). This 
created a disincentive for a ``new'' credit union to become 
``adequately capitalized'' because the reward for keeping its net worth 
ratio below 6 percent is that it is relieved from complying with a 
minimum earnings retention amount.
---------------------------------------------------------------------------

    \7\ The final rule corrects the wording of Sec.  702.303, which 
inadvertently extended that section to ``new'' credit unions 
classified lower than ``adequately capitalized.'' Sections 702.304 
and 702.305 continue to prescribe PCA for new credit unions in those 
net worth categories.
---------------------------------------------------------------------------

    To eliminate the disincentive, the proposed rule put all new credit 
unions having a net worth lower than 7 percent in parity for purposes 
of earnings retention. 67 FR at 38437. An ``adequately capitalized'' 
new credit union would no longer be subject to the same minimum 
earnings retention as a non-new counterpart. 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.
    Two commenters supported parity among new credit unions for 
earnings retention purposes. Advocating a far less flexible approach, a 
third commenter (a banking industry trade association) objected that 
exempting any new credit unions from the statutory minimum earnings 
retention is not in accordance with CUMAA. That commenter overlooks the 
fact that CUMAA applies a minimum earnings retention requirement to 
non-new credit unions; it prescribed no earnings retention requirement 
at all for new credit unions. 12 U.S.C. 1790d(e)(1). Instead, CUMAA 
gave NCUA discretion in developing an alternative system of PCA, 
provided that it recognized that new credit unions initially have no 
net worth; need reasonable time to accumulate net worth; and need 
incentives to become ``adequately capitalized'' by the time they no 
longer qualify as ``new.'' 12 U.S.C. 1790d(b)(2)(B). See 64 FR 27090, 
27098 (May 18, 1999) (justification for flexible approach). It is 
entirely consistent with this last statutory criterion to eliminate any 
disincentive--such as minimum earnings retention--for a new credit 
union to reach ``adequately capitalized'' while it is still ``new.''
    11. Section 702.304--PCA for ``Moderately Capitalized,'' 
``Marginally Capitalized'' and ``Minimally Capitalized'' New Credit 
Unions
    As explained above, the final rule modifies Sec.  702.201(a) to 
specify that earnings retention must increase the ``the dollar amount'' 
of net worth, not simply the net worth ratio itself. To conform to that 
modification, Sec.  702.304(a)(1) is revised accordingly.

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

    a. Member business loan restriction. Part 702 originally gave an 
``uncapitalized'' new credit union full relief from all MSAs while it 
was operating within the period allowed by its initial business plan to 
have no net worth. Sec.  702.305(a). An unintended consequence of this 
forbearance was that ``uncapitalized'' credit unions were free of the 
MSA restricting MBLs; that restriction applied only when a credit union 
managed to attain some net worth and rise to the ``minimally 
capitalized'' net worth category.\8\ Yet a ``minimally capitalized'' 
credit union arguably is better suited to expand its MBL portfolio than 
one that remains ``uncapitalized.'' Further, 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 extended subsection (a) 
to include an ``uncapitalized'' new credit union that is operating with 
no net worth as permitted by an initial business plan. 67 FR at 38437. 
As a result, ``uncapitalized'' new credit unions are all subjected to 
the MBL restriction, Sec.  702.305(a)(3), regardless whether they are 
operating with no net worth under an initial business plan, or have 
declined to ``uncapitalized'' after reaching a higher net worth 
category. NCUA received no comments on this section. Accordingly, the 
final rule adopts revised subsection (a) as proposed.
---------------------------------------------------------------------------

    \8\ 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 
required 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 an unduly 
long filing period given that an ``uncapitalized'' credit union faces 
mandatory conservatorship or liquidation if it fails to increase net 
worth to at least two percent. 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 put all new credit unions that must file an RBP 
in parity. First, it deleted 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. 67 FR at 38438. 
Second, it reorganized subsection (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 required 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.
    The sole commenter on this topic supported the 30-day window for 
filing an RBP, while also urging NCUA to relieve the burden on new 
credit unions by providing assistance in preparing RBPs. See Sec.  
702.307(a) (assistance in preparing RBPs). For the reasons set forth 
above in this section, the revisions to subsection (a)(2) are adopted 
as proposed.
    c. Liquidation or conservatorship if ``uncapitalized'' after 120 
days. Subsection (c)(2) generally required the NCUA Board to conserve 
or liquidate an ``uncapitalized'' new credit union that remains 
``uncapitalized'' 90 days after its RBP is approved. It was silent, 
however, regarding conservatorship or liquidation of a credit union 
whose RBP is rejected. To correct this oversight, the proposed rule 
mandated conservatorship or liquidation of an ``uncapitalized'' new 
credit union after a 120-day period regardless whether an RBP has been 
approved or rejected. 67 FR at 38438. 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 develop sufficient positive 
earnings to avoid conservatorship and liquidation. 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

[[Page 71085]]

calendar month after it expires parallels the calendar month that 
separates the quarter-end and the effective date of classification as 
``undercapitalized.''
    NCUA received no comments on the revisions to subsection (c)(2) 
and, therefore, they are adopted as proposed. In addition, the final 
rule relocates to a new subsection (c)(3) the existing 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 
new subsection (d) of 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). To clarify that 
this option is available, the final rule adds new subsection (d) to 
Sec.  702.305, providing that ``an `uncapitalized' federal credit union 
may be placed into liquidation on grounds of insolvency pursuant to 
[Sec.  1787(a)(1)(A)].''

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

    a. Filing schedule. Subsection (a)(1) required ``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 final rule eliminates the 90-day filing window for 
``uncapitalized'' credit unions. Sec.  702.305(a)(2). To conform to 
that modification, the final rule also modifies subsection (a)(1) 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. Sec. Sec.  702.304(a)(3), 702.305(a)(3).
    The original rule's 30-day filing period ran 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). Even as revised, however, Sec.  
702.101(b), which addresses the effective date of classification among 
the net worth categories, 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 further 
revised 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. Finally, the proposed rule revised subsection 
(a)(1) still further to clarify 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). NCUA received no comments on the 
revisions to the filing schedule for RBPs. Accordingly, revised 
subsection (a)(1) is adopted as proposed.
    b. Timetable of net worth targets. Subsection (b)(2) prescribed 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 warned 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 rectified 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,'' \9\ rather than by the end of the term of the 
plan. 65 FR at 8578; 64 FR 27090, 27099 (May 18, 1999) (chart). The 
proposed rule revised 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.'' 67 FR at 
38438. Second, under part 702 new credit unions cannot be ``complex'' 
or 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 deleted the warning to new credit unions that are 
``complex.'' NCUA received no comments on either of these revisions. 
Accordingly, revised subsection (b)(2) is adopted as proposed.
---------------------------------------------------------------------------

    \9\ A credit union remains ``new'' as long as it is in operation 
less than 10 years and has assets of $10 million or less. 12 U.S.C. 
1790d(o)(4); Sec.  702.301(b).
---------------------------------------------------------------------------

    c. Publication of RBP. As explained above, the final rule adds a 
new subsection (i) to Sec.  702.206, to clarify that 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 12 U.S.C. 
1786(s)(1)(A), the NCUA Board does not intend to publish RBPs because 
it has determined that publication would expose the credit union to 
reputation risk that would be contrary to the public interest. 
Therefore, the final 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

    a. Regular reserve. Although the proposed rule did not reference 
subsection (b), which requires credit unions ``to establish and 
maintain a regular reserve account,'' four commenters criticized it as 
obsolete. The NCUA Board prefers to retain the regular reserve at this 
time primarily for two reasons. First, it facilitates the statutory 
earnings retention requirement, 12 U.S.C. 1790d(e), by holding the 
earnings that credit unions classified ``adequately capitalized'' or 
lower are required to ``set aside.'' Sec.  702.201. And second, it 
continues to function as an early warning signal of safety and 
soundness problems because, as explained below, regulatory review and 
approval is required before a credit union can take certain actions--
charging losses to, and paying dividends from, the regular reserve--
that would cause its net worth to decline below 6 percent.
    b. Minimum net worth to charge losses without approval. Subsection 
(c)(1) originally allowed the board of directors of a federally-insured 
credit union that had depleted the balance of its undivided earnings 
and other reserves to charge losses to the regular reserve account 
without regulatory approval so long as the charge did 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. However, the proposed rule lowered the 
minimum category to ``adequately capitalized'' (i.e., 6 percent net 
worth ratio) in order to give credit unions the flexibility to decide 
for

[[Page 71086]]

themselves whether charging losses is worth triggering the single MSA 
that applies to that category--the quarterly earnings retention. Sec.  
702.201(a); 67 FR at 38439. In addition, the proposed rule expressly 
reminded credit unions that they must deplete their undivided earnings 
balance before making any charge to the regular reserve. All seven of 
the commenters who addressed these proposed revisions supported them. 
Thus, revised subsection (c)(1) is adopted as proposed.
    c. Dual approval to charge losses. Subsection (c)(2) originally 
required 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 was 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., Sec. Sec.  
702.206(a)(1), 702.306(a)(1). To correct this inconsistency, the 
proposed rule modified Sec.  702.401(c)(2) to require the concurrence 
of both the ``appropriate State official'' and ``the appropriate 
Regional Director'' to permit a State-chartered credit union to charge 
losses to the regular reserve. In addition, the proposed rule clarified 
that written approval may consist of an approved NWRP that allows such 
charges.
    The sole commenter on the revisions proposed for subsection (c)(2) 
objected that the dual approval requirement would unnecessarily 
overburden NCUA with the oversight of State officials. On the contrary, 
the NCUA Board does not consider its approval to be a function of 
overseeing State officials. Rather, its approval for a State-chartered 
credit union to charge losses to the regular reserve is integral to PCA 
because of NCUA's independent role as insurer of the shares and 
deposits of federally-insured State-chartered credit unions. 
Accordingly, revised subsection (c)(2) is adopted as proposed.

15. Section 702.403--Payment of Dividends

    a. Minimum net worth to pay dividends without approval. Subsection 
(b)(1) originally allowed the board of directors of a federally-insured 
credit union that had depleted the balance of undivided earnings to pay 
dividends out of the regular reserve account without regulatory 
approval so long as it did not cause the credit union to decline below 
``well capitalized.'' Sec.  702.403(b)(1). As explained above in regard 
to Sec.  702.401(c)(1), the proposed rule similarly lowered to 
``adequately capitalized'' the minimum net worth category in which 
credit unions may pay dividends out of the regular reserve without 
regulatory approval. This would give credit unions that have depleted 
undivided earnings the flexibility to decide for themselves 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).
    b. Dual approval to pay dividends. As with Sec.  702.401(c)(2) 
discussed above, subsection (b)(2) originally required 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) makes it unnecessary 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 corrected 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. In addition, the proposed rule clarified that 
written approval may consist of an approved NWRP that allows such 
dividend payments. The two commenters who addressed the revisions 
proposed for subsections (b)(1) and (b)(2) supported them. Accordingly, 
they are adopted as proposed.

Subpart A of Part 741--Requirements for Insurance

16. Section 741.3--Adequacy of Reserves

    Subsection (a)(2) originally allowed 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 did not cause the credit union to 
decline below ``well capitalized.'' 12 CFR 741.3(a)(2). The preceding 
subsection (a)(1) 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 
subsection (a)(2) prescribes for an insured credit union seeking to 
charge losses to the regular reserve. Because this makes subsection 
(a)(2) redundant, the final rule eliminates it from Sec.  741.3.
    The final rule's removal of subsection (a)(2) does not mean that 
Sec.  702.401(c) preempts ``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. Further, an appropriate State official would 
retain complete discretion to withhold approval of such charges, under 
Sec.  702.401(c)(2), on grounds that they would violate State law or 
procedures.

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

17. 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). As explained above, 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 Sec. Sec.  702.206 and 
702.306 are modified accordingly. The final rule makes a conforming 
modification to Sec.  747.2005(b)(2) to provide that a civil money 
penalty may be assessed for failure to implement a plan ``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 final rule will not 
have a significant economic impact on a substantial number of small 
credit unions and, therefore, a Regulatory Flexibility Analysis is not 
required.

[[Page 71087]]

Paperwork Reduction Act

    The reporting requirements in this final rule have been submitted 
to the Office of Management and Budget. Under the Paperwork Reduction 
Act of 1995, no person is required to respond to a collection of 
information unless it displays a valid OMB number. 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 final 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.

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) provides generally for congressional review of agency 
rules. A reporting requirement is triggered in instances where NCUA 
issues a final rule as defined by section 551 of the Administrative 
Procedure Act, 5 U.S.C. 551. The Office of Management and Budget has 
determined that this rule is not a major rule.

List of Subjects

12 CFR 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 November 
21, 2002.
Becky Baker,
Secretary of the Board.

    For the reasons set forth above, 12 CFR parts 702, 741 and 747 are 
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 
(j) through (l) respectively.
    b. Add new paragraph (i) to read as set forth below;
    c. Revise newly designated paragraph (k)(1)(i) to read as set forth 
below;
    d. Revise newly designated paragraph (k)(1)(iv) to read as set 
forth below; and
    e. Remove from newly designated paragraph (k)(2) the cross-
reference to ``paragraph (j)(1)'' and add in its place a cross-
reference to ``paragraph (k)(1)''.


Sec.  702.2  Definitions.

* * * * *
    (i) Senior executive officer means a senior executive officer as 
defined by 12 CFR 701.14(b)(2).
* * * * *
    (k) 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.

* * * * *

[[Page 71088]]

[GRAPHIC] [TIFF OMITTED] TR29NO02.065

* * * * *


Sec.  702.103  [Amended]

    5. Amend Sec.  702.103 as follows:
    a. Remove the heading from paragraph (a);
    b. Remove paragraph (b); and
    c. Redesignate current paragraph (a) as the sectional introductory 
text, and paragraphs (a)(1) and (a)(2) as paragraphs (a) and (b), 
respectively.


Sec.  702.104  [Amended]

    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
    b. Redesignate Table 1 immediately following paragraph (h) as Table 
2.


Sec.  702.105  [Amended]

    7. Amend Sec.  702.105 as follows:
    a. Remove the number ``2'' from the parenthetical ``(Table 2)'' in 
the introductory text and add in its place the number ``3'';
    b. Remove the citation ``Sec.  702.2(k)'' in the introductory text 
and add in its place the citation ``Sec.  702.2(m)''; and
    c. Redesignate Table 2 immediately following paragraph (b) as Table 
3.


Sec.  702.106  [Amended]

    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. Revise paragraph (a) to read as set forth below;
    c. Add new paragraph (d) immediately after paragraph (c)(6) to read 
as set forth below;
    d. Redesignate Table 4 immediately following new paragraph (d) as 
Table 5;
    e. Revise section (a) to Table 5 to read as set forth below; and
    f. Add new section (d) to Table 5 as follows:


Sec.  702.107  Alternative components for standard calculation.

* * * * *
    (a) Long-term real estate loans. The sum of:
    (1) Non-callable. Non-callable long-term real estate loans as 
follows:
    (i) Eight percent (8%) of the amount of such loans with a remaining 
maturity of greater than 5 years, but less than or equal to 12 years;
    (ii) Twelve percent (12%) of the amount of such loans with a 
remaining maturity of greater than 12 years, but less than or equal to 
20 years; and
    (iii) Fourteen percent (14%) of the amount of such loans with a 
remaining maturity greater than 20 years;
    (2) Callable. Long-term real estate loans callable in 5 years or 
less as follows:
    (i) Six percent (6%) of the amount of such loans with a documented 
call provision of 5 years or less and with a remaining maturity of 
greater than 5 years, but less than or equal to 12 years;
    (ii) Ten percent (10%) of the amount of such loans with a 
documented call provision of 5 years or less and with a remaining 
maturity of greater than 12 years, but less than or equal to 20 years; 
and
    (iii) Twelve percent (12%) of the amount of such loans with a 
documented call provision of 5 years or less and with a remaining 
maturity of greater than 20 years;
* * * * *
    (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.

[[Page 71089]]

[GRAPHIC] [TIFF OMITTED] TR29NO02.066


    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 
Sec. Sec.  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. Revise Appendix C to Subpart A to read as follows:

[[Page 71090]]

[GRAPHIC] [TIFF OMITTED] TR29NO02.067

    13. Redesignate Appendix F to Subpart A as Appendix H.

    14. Add new Appendixes F and G to Subpart A to read as follows:
    [GRAPHIC] [TIFF OMITTED] TR29NO02.068
    

[[Page 71091]]


[GRAPHIC] [TIFF OMITTED] TR29NO02.069


    15. Revise newly designated Appendix H to Subpart A to read as 
follows:
[GRAPHIC] [TIFF OMITTED] TR29NO02.070


    16. 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/
10th 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 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).

[[Page 71092]]

Sec.  702.202  [Amended]

    17. Amend Sec.  702.202 as follows:
    a. Remove the word ``transfer'' from the heading of paragraph 
(a)(1) and add in its place the word ``retention.''
    b. Remove the words ``or interest'' from the heading and from the 
text of paragraph (b)(3).


Sec.  702.203  [Amended]

    18. Amend Sec.  702.203 as follows:
    a. Remove the word ``transfer'' from the heading of paragraph 
(a)(1) and add in its place the word ``retention.''
    b. Remove the words ``or interest'' from the heading and from the 
text of paragraph (b)(3).

    19. Amend Sec.  702.204 as follows:
    a. Revise the heading of paragraph (a)(1) to read as set forth 
below;
    b. Revise paragraph (b)(3) to read as set forth below;
    c. Revise paragraph (c)(1)(iii) to read as set forth below;
    d. Revise paragraph (c)(4) to read as set forth below; and
    e. Add new paragraph (d) to read as follows:


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

    (a) * * *
    (1) Earnings retention. * * *
* * * * *
    (b) * * *
    (3) Restricting dividends paid. Restrict the dividend rates that 
the credit union pays on shares as provided in Sec.  702.202(b)(3).
* * * * *
    (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).


Sec.  702.205  [Amended]

    20. Amend Sec.  702.205 as follows:
    a. Remove from paragraph (a)(1) the words ``place the credit union 
into conservatorship or liquidation'' and add in their place the words 
``take the proposed action''; and
    b. Remove from paragraph (c) the citation ``702.201(b)''.

    21. 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.

    22. 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  Networth categories for new credit unions.

* * * * *
[GRAPHIC] [TIFF OMITTED] TR29NO02.071

    (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).
* * * * *

    23. 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.''

[[Page 71093]]


    24. 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
    (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).
* * * * *

    25. 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 paragraphs (c)(3) and (d) as follows:


Sec.  702.305  Prompt corrective action for ``uncapitalized'' 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).

    26. 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.  702.301(b);
* * * * *
    (h) Publication. An RBP need not be published to be enforceable 
because publication would be contrary to the public interest.

    27. 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.
* * * * *

    28. Amend Sec.  702.403 by revising paragraph (b) to read as 
follows:


Sec.  702.403  Payment of dividends.

* * * * *

[[Page 71094]]

    (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:

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


Sec.  741.3.  [Amended]

    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. 02-30091 Filed 11-27-02; 8:45 am]
BILLING CODE 7535-01-P