[Federal Register Volume 68, Number 83 (Wednesday, April 30, 2003)]
[Rules and Regulations]
[Pages 23027-23030]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-10612]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 741


Requirements for Insurance

AGENCY: National Credit Union Administration.

ACTION: Final rule.

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SUMMARY: The National Credit Union Administration (NCUA) is adopting a 
final rule that establishes the requirements for federally insured 
credit unions to branch outside the United States. The final rule 
requires a credit union to develop a business plan and receive foreign 
government and NCUA approval before establishing a branch outside the 
United States.

DATES: This regulation is effective July 1, 2003.

FOR FURTHER INFORMATION CONTACT: Michael J. McKenna, Senior Staff 
Attorney, Division of Operations, Office of General Counsel, telephone: 
(703) 518-6540.

SUPPLEMENTARY INFORMATION: On September 7, 2000, the Board issued an 
advance notice of proposed rulemaking (ANPR). (65 FR 55464, September 
14, 2000). The comment period for the ANPR ended on November 14, 2000. 
The key issues raised in the ANPR included: NCUA Board policy 
considerations, legal issues, supervision and examination 
considerations, options for insuring foreign branches of state-
chartered credit unions, and options for restricting insurance coverage 
for state-chartered credit unions operating foreign branches.
    On September 19, 2002, after carefully considering the comments and 
discussing the issue with state regulators, the NCUA Board issued a 
proposed rule that requires a credit union to obtain host country 
approval and develop a comprehensive business plan in order to obtain 
NCUA approval to establish a branch in a foreign country. (67 FR 60607, 
September 26, 2002). A federally insured, state-chartered credit union 
would also have to obtain state regulatory approval.

Comments

    Twenty-one comments were received. Comments were received from 
eight federal credit unions, three state-chartered credit unions, four 
state leagues, three credit union trade associations, two attorneys, 
and one bank trade association. In general, most commenters support the 
proposal. Six commenters applauded the Board's decision to include 
federal credit unions in this proposal.
    Three commenters opposed the proposal. Two of these commenters 
believe foreign branches inherently carry more risk than domestic 
branches. They believe that although the proposal minimizes risk, it is 
not eliminated. They suggest that foreign branches would be prime 
targets for money laundering. Finally, they believe that foreign 
branches will be costly to the National Credit Union Share Insurance 
Fund (NCUSIF) and, thus, federally insured credit unions.

Discussion

    The NCUA Board proposed a three-step process to branch outside the 
United States. Most commenters supported the three-step process but 
suggested some changes to the proposal.
    First, under the proposal, a credit union must receive written 
approval from the host country to establish the branch that explicitly 
recognizes NCUA's authority to examine and take any enforcement action 
with regard to that branch office, including conservatorship and 
liquidation actions. If a credit union is state-chartered, it must also 
obtain written approval from its state supervisory agency and submit 
the approval with the application.
    Three commenters did not support this first requirement. One 
commenter believes it may be difficult for a credit union to obtain 
host country approval recognizing NCUA's authority. All three 
commenters believe this is an issue that should be worked on between 
NCUA and the various host countries.
    One commenter requested that the rule language on host country 
approval should read ``that explicitly recognizes

[[Page 23028]]

NCUA's authority, in consultation with the host country, to examine and 
take mutually agreeable enforcement action with regard to that branch 
office.'' One commenter stated that it recognizes that NCUA is not 
seeking exclusive authority over the branch and anticipates the host 
country also will be in a position to exercise regulatory authority 
under its own regulatory framework and believes this should be stated 
in the rule. Another commenter believes NCUA should regulate the 
foreign branches of credit unions jointly with the foreign banking 
regulators. One commenter believes an enforcement conflict might occur 
if a host country requires the branch to have host country deposit 
insurance.
    The NCUA Board believes, for safety and soundness reasons, it is 
critical for a credit union to obtain host country approval and 
recognition of NCUA's authority. To require less would pose an undue 
risk to the NCUSIF. The Board is not requiring exclusive authority over 
a foreign branch and recognizes that a host country also will have some 
regulatory authority over a foreign branch office. NCUA, however, must 
have the right to examine a foreign branch and take any necessary 
enforcement actions. Finally, NCUA does not have the legal authority to 
engage in discussions or enter into agreements with foreign governments 
on the establishment of branches. The Board believes the proper party 
to obtain host country approval is the credit union seeking NCUA's 
approval. Credit unions wishing to engage in this activity also might 
want to obtain the assistance of their trade associations and state 
leagues in communicating with foreign governments.
    Second, under the proposal, a credit union must develop a detailed 
business plan that addresses the following: (1) Analysis of market 
conditions in the area where the branch is to be established; (2) the 
credit union's plan for addressing foreign currency risk; (3) operating 
facilities, including office space, equipment and supplies; (4) 
safeguarding of assets, insurance coverage, and records preservation; 
(5) written policies regarding the branch (shares, lending, capital, 
charge-offs, collections); (6) the field of membership or portion of 
the field of membership to be served through the foreign branch and the 
financial needs of the members to be served and services and products 
to be provided; (7) detailed pro forma financial statements for branch 
operations (balance sheet and income and expense projections) for the 
first and second year, including assumptions; (8) internal controls, 
including cash disbursal procedures for shares and loans at the branch; 
(9) accounting procedures used to identify branch activity and 
performance; and (10) foreign income taxation.
    Four commenters agreed with the business plan requirement. Four 
commenters stated that the services offered through the foreign branch 
should be limited to those approved by NCUA. Two commenters that 
believe all assets of a foreign branch should be required to be 
denominated in U.S. dollars stated that, if all the assets of the 
foreign branch were U.S. dollar denominated, there would be no need to 
address currency risk in the business plan. The Board is not mandating 
that all assets be denominated in U.S. dollars to provide flexibility 
in establishing a branch; however, as discussed below, if a credit 
union wants federal share insurance for the deposits in a foreign 
branch, then assets must be denominated in U.S. dollars.
    One commenter stated the business plan requirement should only be 
for federal credit unions. Four commenters believe the business plan 
requirements are excessive and suggested that it be streamlined. 
Another commenter also believes the business plan is excessive and 
should only consider the overall strength of the credit union (CAMEL 1 
or CAMEL 2) and the competency of the credit union's management. Two 
commenters stated that field of membership should not be addressed in 
the business plan. One commenter would delete the requirement for a 
market analysis. A few commenters suggested that regional directors 
should be encouraged to consider relevant employment laws of the host 
country and whether an applicant credit union is fully aware of the 
impact of such laws.
    The NCUA Board believes that the business plan requirements are 
prudent and the minimum a credit union should consider before 
establishing a foreign branch. The Board agrees that knowledge of 
foreign employment laws is also an important component in determining 
whether to establish a foreign branch and has added that to the 
business plan. The Board also clarified in the final rule that credit 
unions need to address the issue of bond coverage in the business plan.
    Third, under the proposal, a state-chartered credit union must 
submit documentation showing state regulator approval. One commenter 
supported this requirement. Four commenters believe that NCUA should 
not be involved in the approval process for state-chartered credit 
unions. Three of these commenters believe NCUA should not approve a 
branch, but only approve insurance coverage for a branch. They believe 
that, once NCUA has approved a country for federal insurance, then no 
further NCUA approval should be necessary for federally insured state-
chartered credit unions.
    A foreign branch poses significantly greater risk to the NCUSIF 
than a domestic branch. Although this rule minimizes risk, it certainly 
does not eliminate it. Therefore, whether a credit union is state-
chartered or federally-chartered, the risk to the NCUSIF is the same, 
and NCUA must have the final authority to approve or disapprove a 
foreign branch.
    Under the proposal, the regional director has 60 days to approve 
the application, but may extend the time period for good cause. The 
regional director may revoke approval of a foreign branch office for 
failure to follow the business plan in any material respect or for 
substantive and documented safety and soundness reasons. If the credit 
union wants to make a material deviation from its previously approved 
business plan, it must submit a new business plan for approval. If the 
regional director revokes the approval, a credit union has six months 
from the date of the revocation letter to terminate the operations of 
the branch. The credit union can appeal this revocation directly to the 
NCUA Board. One commenter fully supported the revocation process.
    Four commenters requested that the central office, not the regional 
directors, process the approval and revocation of foreign branches 
because they believe central office staff will be more knowledgeable 
about the issues. Two commenters request that NCUA state that the six-
month revocation period starts to run only after the regional director 
decision or after a decision on an appeal to the NCUA Board has been 
rendered, whichever is later.
    The NCUA Board is retaining in the final rule the revocation 
process as proposed. It is anticipated that regional offices will 
consult with central office staff when they believe it is necessary. 
The Board is not changing the six-month time frame for the closing of a 
branch while a decision is under appeal because of safety and soundness 
considerations. If a credit union files an appeal after receiving a 
notice of revocation from a regional director, it must continue to plan 
on closing the branch within six months. Filing an appeal will not toll 
the running of the six-month period for closure of a foreign branch. 
The Board believes it will be able to consider appeals of a revocation 
expeditiously and notes that a credit

[[Page 23029]]

union that has received a revocation and wishes to appeal to the Board 
must submit its appeal within 30 days of the revocation letter.
    Three commenters believe that the state regulator should have 
unilateral authority to approve and revoke foreign branch activity. One 
commenter wondered how coordination with the state regulator would 
occur in the event the state regulator wishes to revoke approval of the 
branch office. The NCUA Board wishes to clarify that if a state 
regulator wishes to revoke approval of a foreign branch, NCUA's 
concurrence is not necessary. The Board, however, has added a sentence 
to the rule requiring the state regulator to notify NCUA after it 
issues a notice of revocation.
    The NCUA Board decided not to propose any field of membership 
restrictions on the foreign branch or capital requirements above those 
required by NCUA's prompt corrective action rule. 12 CFR part 702. 
Three commenters agreed with the Board's decision not to propose field 
of membership restrictions or impose additional capital requirements 
for credit unions that want to branch in foreign countries. One 
commenter requested that the final rule address how a credit union can 
expand its field of membership in the foreign country. A federal credit 
union can expand its field of membership in the manner set forth in 
NCUA's Chartering and Field of Membership Manual. A state chartered 
credit union should look to applicable state law.
    The Board clarified in the proposal that a representation office or 
a liaison office is not a branch office for purposes of this 
regulation. NCUA's understanding is that such offices do not engage in 
processing loan applications and do not disburse loans. Rather loan 
documents are transferred from the liaison office to the credit union's 
main office in the United States where loan decisions are made and loan 
disbursals are made in U.S. dollars. Two commenters appreciated and 
supported this clarification. The Board concurs with the commenter who 
stated that an ATM is not a branch for purposes of this rule.
    On the issue of insurance, the NCUA Board stated that if there are 
no changes to NCUA's insurance regulation, a federally insured credit 
union that opens a branch office outside the United States would have 
its member share accounts at that branch federally insured. The NCUA 
Board also stated that the credit union's business plan would be 
required to address the insured status of member accounts and, in any 
event, accounts would be insured by the NCUSIF only if denominated in 
U.S. dollars and only if payable, by the term of the account agreement, 
at a U.S. office of the credit union. If the host country requires 
insurance from its own system, accounts would not be insured by the 
NCUSIF. The NCUA Board also requested specific comment on the insurance 
issue.
    Ten commenters agreed with NCUA's view on insurance coverage. Two 
of these commenters believe the proposal mitigates the additional risk 
to the NCUSIF that accompany foreign branch activity. One commenter 
believes that insuring accounts in branches that are not located either 
on military installations or U.S. embassies is entirely inappropriate.
    One commenter does not believe the NCUSIF should cover foreign 
branch deposits unless that is part of an agreement between the two 
countries' regulatory and insurance authorities. One commenter stated 
that NCUA should insure deposits up to the U.S. limit except in those 
countries where the NCUA has specifically negotiated other arrangements 
with the foreign government. One commenter believes NCUSIF coverage 
should be mandatory for accounts opened at the foreign branch of a 
federally-insured credit union but believes that NCUSIF coverage should 
only be secondary if the foreign branch also carries foreign share 
insurance.
    The NCUA Board believes that the proposed insurance treatment of 
foreign branches is reasonable, mitigates risks, and provides credit 
unions with significant flexibility.
    Therefore, to receive NCUA's approval for a foreign branch, a 
credit union must address in its business plan how accounts will be 
insured and agree that accounts would be insured by the NCUSIF only if 
denominated in U.S. dollars and only if payable, by the terms of the 
account agreement, at a U.S. office of the credit union. If the host 
country requires insurance from its own system, accounts will not be 
insured by the NCUSIF. To avoid any confusion on this issue the NCUA 
Board is adding a section (e) to the rule to address insurance 
treatment at foreign branches.

Miscellaneous

    One commenter encouraged the Board to amend Part 703 to allow 
additional investment tools to hedge currency risk via derivative 
instruments. Proposed revisions to Part 703 have been issued for 
comment and the NCUA Board will consider such recommended changes in 
the context of finalizing that rule. One commenter thought the phrase 
``take action'' in Sec.  741.11(a) was ambiguous and should be 
rephrased. Although the Board did not find the phrase ambiguous, it 
changed the term to ``approve or deny'' to avoid any confusion.
    Four commenters stated that credit unions with foreign branches 
should pay for any additional cost NCUA or NCUSIF might incur in 
examining their foreign branches. A few commenters believe that NCUA 
should mandate that its examiners routinely inspect the foreign 
branches at the expense of the credit unions with those branches. Two 
commenters asked for more clarification on how NCUA will carry out its 
regular examination functions of a credit union branch located in a 
foreign country. At this time, the NCUA Board is not planning on 
imposing any additional fees on credit unions with foreign branches and 
is not planning on any significant changes in the examination process. 
NCUA will continue to monitor the establishment of foreign branches and 
will revisit both issues after gaining some experience with this 
activity.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact any final regulation may 
have on a substantial number of small entities (those under one million 
dollars in assets). 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. The reason for this 
determination is that the Board believes it is very unlikely that small 
credit unions have the financial capability and experience to establish 
a branch in a foreign country. Accordingly, the NCUA Board has 
determined that a Regulatory Flexibility Analysis is not required.

Paperwork Reduction Act

    The paperwork requirements in Sec.  741.11 have been submitted to 
the Office of Management and Budget. NCUA will publish the OMB control 
number as soon as it is issued. Under the Paperwork Reduction Act of 
1995, no persons are required to respond to a collection of information 
unless NCUA displays a valid OMB number. The control number 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 actions on

[[Page 23030]]

state and local interests. In adherence to fundamental federalism 
principles, NCUA, an independent regulatory agency as defined in 44 
U.S.C. 3502(5), voluntarily complies with the executive order. The 
executive order states that: ``National action limiting the 
policymaking discretion of the states shall be taken only where there 
is constitutional and statutory authority for the action and the 
national activity is appropriate in light of the presence of a problem 
of national significance.'' The risk of loss to federally insured 
credit unions and the NCUSIF caused by the establishment of foreign 
branches is a concern of national scope. The final rule helps assure 
that proper safeguards are in place to ensure the safety and soundness 
of federally insured credit unions that establish branches in foreign 
countries.
    The final rule applies to all federally insured credit unions. NCUA 
believes that the protection of those credit unions, and ultimately the 
NCUSIF, warrants application of the final rule to all federally insured 
credit unions. The final rule does not impose additional costs or 
burdens on the states or affect the states' ability to discharge 
traditional state government functions. NCUA has determined that this 
rule may have an occasional 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. The potential risk to the NCUSIF without the rule justifies 
this action.

The Treasury and General Government Appropriations Act, 1999---
Assessment of Federal Regulations and Policies on Families

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

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 
Procedures Act. 5 U.S.C. 551. The Office of Management and Budget has 
determined that this is not a major rule.

List of Subjects in 12 CFR Part 741

    Bank deposit insurance, Credit unions.

    By the National Credit Union Administration Board on April 24, 
2003.
Becky Baker,
Secretary of the Board.

0
For the reasons set forth in the preamble, the National Credit Union 
Administration amends 12 CFR part 741 as follows:

PART 741--REQUIREMENTS FOR INSURANCE

0
1. The authority citation for part 741 continues to read as follows:

    Authority: 12 U.S.C. 1757, 1766(a), and 1781-1790; Pub. L. 101-
73.

0
2. Add Sec. 741.11 to subpart A to read as follows:


Sec.  741.11  Foreign branching.

    (a) Application and Prior NCUA Approval Required. Any credit union 
insured under Title II of the Act must apply for and receive approval 
from the regional director before establishing a credit union branch 
outside the United States unless the foreign branch is located on a 
United States military instillation or embassy outside the United 
States. The regional director will have 60 days to approve or deny the 
request.
    (b) Contents of Application. The application must include a 
business plan, written approval by the state supervisory agency if the 
applicant is a state-chartered credit union, and documentation 
evidencing written permission from the host country to establish the 
branch that explicitly recognizes NCUA's authority to examine and take 
any enforcement action, including conservatorship and liquidation 
actions.
    (c) Contents of Business Plan. The written business plan must 
address the following:
    (1) Analysis of market conditions in the area where the branch is 
to be established;
    (2) The credit union's plan for addressing foreign currency risk;
    (3) Operating facilities, including office space/equipment and 
supplies;
    (4) Safeguarding of assets, bond coverage, insurance coverage, and 
records preservation;
    (5) Written policies regarding the branch (shares, lending, 
capital, charge-offs, collections);
    (6) The field of membership or portion of the field of membership 
to be served through the foreign branch and the financial needs of the 
members to be served and services and products to be provided;
    (7) Detailed pro forma financial statements for branch operations 
(balance sheet and income and expense projections) for the first and 
second year including assumptions;
    (8) Internal controls including cash disbursal procedures for 
shares and loans at the branch;
    (9) Accounting procedures used to identify branch activity and 
performance; and
    (10) Foreign income taxation and employment law.
    (d) Revocation of Approval. A state regulator that revokes approval 
of the branch office must notify NCUA of the action once it issues the 
notice of revocation. The regional director may revoke approval of the 
branch office for failure to follow the business plan in a material 
respect or for substantive and documented safety and soundness reasons. 
If the regional director revokes the approval, the credit union will 
have six months from the date of the revocation letter to terminate the 
operations of the branch. The credit union can appeal this revocation 
directly to the NCUA Board within 30 days of the date of the revocation 
letter.
    (e) Insurance Coverage. Accounts at foreign branches are insured by 
the NCUSIF only if denominated in U.S. dollars and only if payable, by 
the terms of the account agreement, at a U.S. office of the credit 
union. If the host country requires insurance from its own system, 
accounts will not be insured by the National Credit Union Share 
Insurance Fund.

[FR Doc. 03-10612 Filed 4-29-03; 8:45 am]
BILLING CODE 7535-01-P