[Federal Register Volume 70, Number 100 (Wednesday, May 25, 2005)]
[Proposed Rules]
[Pages 30017-30020]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-10380]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 713 and 741


Fidelity Bond and Insurance Coverage for Federal Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: NCUA proposes to amend its fidelity bond rule to increase the 
maximum allowable deductible, presently $200,000, and change the 
minimum required coverage. NCUA also proposes to discontinue listing 
approved bonds in the rule but continue to list and update them on its 
website. NCUA believes these changes modernize the rule and provide 
flexibility while addressing safety and soundness concerns. NCUA 
solicits comment on whether to rescind its approval of Blanket Bond 
Standard Form 23, which has not changed since 1950 and is no longer 
widely used. NCUA solicits suggestions on factors credit unions should 
consider in determining whether to raise their bond coverage above the 
regulatory requirements. Finally, NCUA is proposing a technical 
correction in the regulation that requires fidelity bond coverage for 
federally insured, state chartered credit unions.

DATES: Comments must be received on or before July 25, 2005.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web site: http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs. html. Follow the 
instructions for submitting comments.
     E-mail: Address to [email protected]. Include ``[Your 
name] Comments on Proposed Rule 713, Fidelity Bonds,'' in the e-mail 
subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for e-mail.
     Mail: Address to Mary F. Rupp, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.

FOR FURTHER INFORMATION CONTACT: Ross P. Kendall, Staff Attorney, 
Office of General Counsel, at the above address or telephone (703) 518-
6540.

SUPPLEMENTARY INFORMATION: NCUA's policy is to review regulations 
periodically to ``update, clarify and simplify existing regulations and 
eliminate redundant and unnecessary provisions.'' Interpretive Ruling 
and Policy Statement (IRPS) 87-2, Developing and Reviewing Government 
Regulations. NCUA notifies the public about the review, which is 
conducted on a rolling basis so that a third of its regulations are 
reviewed each year. The changes in this proposed rule are the result of 
NCUA's staff review and public comments.

Proposed Changes

Increase in Maximum Deductible and Changes in Coverage Amounts

    The rule currently provides a sliding scale, based on asset size, 
for both the maximum allowable deductible and coverage amounts in a 
fidelity bond. The maximum deductible is currently $2,000 plus one one-
thousandth of total assets, up to a maximum of $200,000. 12 CFR 
713.6(a). The result of this formula is that credit unions with assets 
in excess of $198 million are limited to a $200,000 deductible. Asset 
size is currently the only consideration affecting the amount of the 
deductible.
    The Board is proposing to keep the current formula based on asset 
size but raise the maximum deductible to $1,000,000 for credit unions 
that qualify under NCUA's Regulatory Flexibility Program. 12 CFR part 
742. The proposed amendment provides that credit unions qualifying 
under the Regulatory Flexibility Program with assets over $200 million 
will be able to purchase bonds with greater deductibles than is 
permitted under the current rule. The proposed maximum deductible of 
$1,000,000 is reached when a qualifying credit union has assets over 
$998 million.
    The Board notes that many credit unions have had a substantial 
growth in assets since the maximum deductible was last increased in 
1981, and inflation in the economy since then also supports making an 
adjustment. The Board believes large, well-run credit unions with 
substantial net worth can absorb financial risk greater than $200,000. 
The Board notes, for example, that a credit union with assets of one 
billion dollars and sufficient net worth to qualify under the 
Regulatory Flexibility Program would have a net worth of at least $90 
million, which is more than adequate to absorb a million dollar 
deductible.
    The Board invites comment on whether different criteria, such as 
the capital standards in NCUA's Prompt Corrective Action regulation, 
would be a more appropriate measure to link to the higher permissible 
deductible. 12 CFR part 702. In any event, the Board intends to 
maintain, as reflected in the proposal, the current deductible limits 
for credit unions that do not qualify under the additional criteria.
    With regard to status changes, the proposal provides that a credit 
union initially meeting the criterion but subsequently failing to meet 
the criterion for a larger deductible must get the required coverage 
within thirty days. The proposal would also require that a credit union 
in these circumstances to give written notice to the appropriate NCUA 
regional office. A credit union's notice will only need to state that 
its status has changed and confirm that it has secured the required 
coverage.
    The NCUA Board believes the current risk environment for credit 
unions calls for increases in bond coverage at both ends of the range 
in asset size. Currently, the maximum required coverage is $5 million 
and applies to all credit unions with assets greater than $295 million. 
The rule notes that credit unions with substantial amounts of cash on 
hand or in transit may require greater coverage. 12 CFR 713.5.
    The $5 million maximum coverage requirement has not changed since 
1977 and, in addition to inflation, at least two additional factors 
support raising this limit. Since 1999, the number of federally insured 
credit unions with

[[Page 30018]]

assets greater than $500 million has increased from 121 to 245. During 
the same period, assets held by these credit unions have grown from 
$129 billion to $313 billion and now represent almost half of all 
assets held by all federally insured credit unions. Moreover, the rate 
of growth in assets for credit unions of this size is almost 80% since 
1999. The Board believes prudent practice and considerations of safety 
and soundness dictate a higher required maximum for credit unions with 
assets greater than $500 million. Accordingly, the Board proposes to 
increase the minimum bond coverage for credit unions with assets in 
excess of $500 million: The required fidelity bond coverage must equal 
one percent of the credit union's assets, rounded to the nearest $100 
million, to a maximum required bond coverage amount of $9 million.
    The Board also believes that substantial risk of loss has grown for 
smaller credit unions. The current rule's formula allows credit unions 
with assets of less than $4 million to have minimum bond coverage of 
less than $250,000. 12 CFR 713.5(a). The Board proposes that, for 
smaller credit unions, they should have bond coverage of at least 
$250,000 or their total assets, whichever is less.
    The Board believes increasing the coverage requirement in the 
regulation for smaller credit unions will not be a significant cost for 
smaller credit unions but is important because of increasing safety and 
soundness challenges for them. Of the approximately 2,500 credit unions 
with assets under $4 million, the Board understands most already have 
bonds equal to or greater than $250,000 and many have coverage in the 
range of $500,000 to $1 million. Premiums depend on various factors, 
including geographic location and level and type of activities. The 
Board believes increases in premium costs for smaller credit unions are 
incrementally small as compared to the significant increase in coverage 
they can get. For example, the Board understands that a small, east 
coat credit union, currently with a $100,000 bond costing about $600 
could increase coverage to $250,000 for about an additional $100.
    Smaller credit unions are in many ways uniquely vulnerable to fraud 
that can, given advances in technology, quickly produce losses that 
exceed their assets. Since year-end 1993, the NCUA has experienced 
thirteen instances in which losses to the National Credit Union Share 
Insurance Fund from insolvent credit unions have exceeded the credit 
union's stated assets at the time of liquidation, even after recovery 
of the full bond amount. Accordingly, the Board proposes to increase 
the minimum required coverage for all credit unions to the lesser of 
$250,000 or its total assets.
    The changes reflected in the proposed rule are consistent with the 
Board's ongoing efforts to reduce regulatory burden while preserving 
necessary requirements to assure credit union safety and soundness. The 
Board does not believe the increased coverage requirements will add 
significantly to the premium costs. The Board also anticipates that the 
proposed change in the deductible ceiling will result in well-run 
credit unions being able to get fidelity bond coverage at lower cost.

Listing of Approved Bond Forms

    The Board proposes to discontinue listing approved fidelity bonds 
by form number and offering company but continue to list and update 
this information on the agency's Web site. 12 CFR 713.4. The Board 
believes that a regulation is not the most efficient or effective way 
to notify credit unions about changes regarding which bonds are 
approved. Changes in the marketplace such as mergers and acquisitions 
affect the accuracy of the list of companies. For example, NCUA has 
approved bond forms offered by the Cincinnati Insurance Company and the 
Chubb Group but that information has not as yet been incorporated in 
the rule by an amendment.
    Since the rule was last amended in 1999, NCUA has significantly 
enhanced the usefulness of its Web site and credit unions have come to 
rely increasingly on the Web as a source of information. The Board 
believes the agency's Web site is a flexible, timely, and accurate 
medium for information about approved bonds for credit unions. The 
Board proposes, therefore, to eliminate the listing of approved bond 
forms and companies from the rule but to continue to provide the 
information on the agency's Web site (http://www.ncua.gov). The 
proposed amendment changes Sec.  713.4 of the rule so that it refers to 
the Web site but includes a statement that anyone without access to the 
Web can obtain a current listing of approved bond forms by contacting 
NCUA directly. The amendment would retain the current language in the 
rule requiring prior approval of the Board for bond forms not listed on 
the Web or departing from the described coverages.

Technical Amendment

    The fidelity bond requirements in our rules apply to federally 
insured, state chartered credit unions. 12 CFR 741.201. The proposed 
rule makes a technical correction to correct a cross-reference in 
subsection (b) of this rule to a provision in the corporate credit 
union rule.

Continued Viability of Standard Blanket Bond Form 23

    The current rule lists Credit Union Blanket Bond Standard Form 23 
of the Surety Association of America as a bond that credit unions may 
use without obtaining prior NCUA approval. 12 CFR 713.4(a). This bond 
form was last revised over fifty years ago. The Board is aware of the 
dramatic changes in both the credit union and the fidelity bond 
businesses that have occurred since 1950 and questions whether this 
form of blanket bond has continued relevance and viability. The Board 
solicits comment on whether to rescind its approval of this bond form 
and is particularly interested in hearing from any credit union that 
might still have this bond.

Additional Factors to Consider When Considering Additional Coverage

    The current rule notes that credit unions should consider 
additional coverage, beyond the coverage the regulation requires, if 
their circumstances warrant; the regulation offers the amount of cash 
on hand and amount of cash in transit as examples. 12 CFR 713.5(b). The 
Board believes it may be helpful to credit unions for the regulation to 
highlight other circumstances that credit unions should consider when 
considering whether to get additional coverage. Commenters should note 
this subsection in the regulation does not set out regulatory 
requirements but only suggests factors credit unions should consider 
when adjusting their coverage to their circumstances. The Board 
welcomes comments on additional examples of activities the regulation 
could highlight, such as funds transfer operations, that may present 
additional, potential risks because of new programs that are available.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires NCUA to prepare an 
analysis to describe any significant economic impact any proposed 
regulation may have on a substantial number of small entities. NCUA 
considers credit unions having less than ten million dollars in assets 
to be small for purposes of RFA. Interpretive Ruling and Policy 
Statement (IRPS) 87-2 as amended by IRPS 03-2. The proposal would 
require credit unions with assets under $4

[[Page 30019]]

million to obtain higher fidelity bond coverage than is currently 
required. The NCUA believes, based on discussions with members of the 
industry, that the increase in premium to obtain the higher coverage 
will be, relative to the premium already required, insignificant. The 
NCUA has determined and certifies that this proposed rule, if adopted, 
will not have a significant economic impact on a substantial number of 
small credit unions. Accordingly, the NCUA has determined that an RFA 
analysis is not required. NCUA solicits comment on this analysis and 
welcomes any information that would suggest a different conclusion.

Paperwork Reduction Act

A. Request for Comment on Proposed Information Collection

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995, NCUA may not conduct or sponsor, and the respondent is not 
required to respond to, an information collection unless it displays a 
currently valid Office of Management and Budget (OMB) control number. 
Simultaneous with its publication of this proposed amendment to Part 
713, NCUA is submitting a copy of the proposed rule to the Office of 
Management and Budget (OMB) along with an application for an OMB 
control number.
    The proposed amendment would require some federally insured credit 
unions to monitor their asset size and status under NCUA's Regulatory 
Flexibility Program to ensure their continued eligibility for the 
higher bond deductible permissible under the revised regulation. These 
federally insured credit unions would also be required to notify their 
bond carrier and their regulator in the event their status changes and 
they become no longer eligible to have the higher deductible. Credit 
unions that no longer qualify for the higher deductible must obtain 
revised coverage within thirty days of their change in status.
    NCUA estimates it will take an average of one hour for a credit 
union to provide notice to both its bond carrier and its regulator of 
its changed status. NCUA notes that credit unions with assets greater 
than $200 million comprise approximately seven percent of all federally 
insured credit unions; of these, 266 presently qualify for 
participation in the Regulatory Flexibility program. Based on NCUA's 
information, on average less than two percent of all Regulatory 
Flexibility program eligible credit unions fall out of eligibility 
annually.
    Thus, the burden associated with this collection of information may 
be summarized as follows:
    Number of Respondents: 5.
    Estimated Time per Response: 1 hour.
    Notice to Regulators: 1 hour x 5 credit unions = 5 hours.
    Estimated Total Annual Burden: 5 hours.
    The Paperwork Reduction Act and OMB regulations require that the 
public be provided an opportunity to comment on the paperwork 
requirements, including an agency's estimate of the burden of the 
paperwork requirements. The NCUA Board invites comment on: (1) Whether 
the paperwork requirements are necessary; (2) the accuracy of NCUA's 
estimates on the burden of the paperwork requirements; (3) ways to 
enhance the quality, utility, and clarity of the paperwork 
requirements; and (4) ways to minimize the burden of the paperwork 
requirements.
    Comments should be sent to: OMB Reports Management Branch, New 
Executive Office Building, Room 10202, Washington, DC 20503; Attention: 
Joseph Lackey, Desk Officer for NCUA. Please send NCUA a copy of any 
comments submitted to OMB.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on 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. It will not have substantial direct effects 
on the states, on the relationship between the National Government and 
the States, or on the distribution of power and responsibilities among 
the various levels of government. NCUA has determined that this 
proposal does not constitute a policy that has federalism implications 
for purposes of the executive order.

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

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

Agency Regulatory Goal

    NCUA's goal is to promulgate clear and understandable regulations 
that impose minimal regulatory burden. We request your comments on 
whether the proposed rule is understandable and minimally intrusive if 
implemented as proposed.

List of Subjects in 12 CFR Parts 713 and 741

    Credit unions, Insurance, Reporting and recordkeeping requirements.

    By the National Credit Union Administration Board on May 19, 
2005.
Mary F. Rupp,
Secretary of the Board.

    Accordingly, NCUA proposes to amend 12 CFR parts 713 and 741 as 
follows:

PART 713--FIDELITY BONDS AND INSURANCE COVERAGE FOR FEDERAL CREDIT 
UNIONS

    1. The authority citation for part 713 continues to read as 
follows:

    Authority: 12 U.S.C. 1756, 1757(5)(D), and (7)(I), 1766, 1782, 
1784, 1785 and 1786.

    2. Amend Sec.  713.4 by revising paragraph (a) to read as follows:


Sec.  713.4  What bond forms may be used?

    (a) A current listing of basic bond forms that may be used without 
prior NCUA Board approval is on NCUA's Web site, http://www.ncua.gov. 
If you are unable to access the NCUA Web site, you can get a current 
listing of approved bond forms by contacting NCUA's Public and 
Congressional Affairs Office, at (703) 518-6330.
* * * * *
    3. Amend Sec.  713.5 by revising paragraph (a) to read as follows:


Sec.  713.5  What is the required minimum dollar amount of coverage?

    (a) The minimum required amount of fidelity bond coverage for any 
single loss is computed based on a federal credit union's total assets.

----------------------------------------------------------------------------------------------------------------
                           Assets                                                Minimum bond
----------------------------------------------------------------------------------------------------------------
$0 to $4,000,000............................................  Lesser of total assets or $250,000.
$4,000,001 to $50,000,000...................................  $100,000 plus $50,000 for each million or fraction
                                                               thereof over $1,000,000.

[[Page 30020]]

 
$50,000,000 to $500,000,000.................................  $2,550,000 plus $10,000 for each million or
                                                               fraction thereof over $50,000,000, to a maximum
                                                               of $5,000,000.
Over $500,000,000...........................................  One percent of assets, rounded to the nearest
                                                               hundred million, to a maximum of $9,000,000.
----------------------------------------------------------------------------------------------------------------

* * * * *
    4. Amend Sec.  713.6 by revising paragraph (a)(1) and by adding 
paragraph (c) to read as follows:


Sec.  713.6  What is the permissible deductible?

    (a)(1)The maximum amount of allowable deductible is computed based 
on a federal credit union's asset size, as follows:

----------------------------------------------------------------------------------------------------------------
                           Assets                                             Maximum deductible
----------------------------------------------------------------------------------------------------------------
$0 to $100,000..............................................  No deductible allowed.
$100,001 to $250,000........................................  $1,000.
$250,000 to $1,000,000......................................  $2,000.
Over $1,000,000.............................................  $2,000 plus 1/1000 of total assets up to a maximum
                                                               of $200,000; for credit unions that qualify for
                                                               NCUA's Regulatory Flexibility Program in part
                                                               742, the maximum deductible is $1,000,000.
----------------------------------------------------------------------------------------------------------------

* * * * *
    (c) A credit union that becomes ineligible to have a deductible in 
excess of $200,000 must, within 30 days of becoming ineligible for the 
higher deductible, obtain the required coverage and notify the 
appropriate NCUA regional office in writing of its changed status and 
confirm that it has obtained the required coverage.

PART 741--REQUIREMENTS FOR INSURANCE

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

    Authority: 12 U.S.C. 1757, 1766, 1781-1790, and 1790d.

    2. Amend Sec.  741.201 by revising paragraph (b) to read as 
follows:


Sec.  741.201  Minimum fidelity bond requirements.

* * * * *
    (b) Corporate credit unions must comply with Sec.  704.18 of this 
chapter in lieu of part 713 of this chapter.

[FR Doc. 05-10380 Filed 5-24-05; 8:45 am]
BILLING CODE 7535-01-P