[Federal Register Volume 75, Number 33 (Friday, February 19, 2010)]
[Rules and Regulations]
[Pages 7339-7342]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-3160]



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  Federal Register / Vol. 75, No. 33 / Friday, February 19, 2010 / 
Rules and Regulations  

[[Page 7339]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701

RIN 3133-AD67


Secondary Capital Accounts

AGENCY: National Credit Union Administration (NCUA).

ACTION: Interim final rule with request for comments.

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SUMMARY: NCUA is amending its rules governing secondary capital 
accounts to permit low-income designated credit unions to redeem all or 
part of secondary capital accepted from the United States Government or 
any of its subdivisions at any time after the secondary capital has 
been on deposit for two years. The amendments will also allow early 
redemption, under the same terms and conditions, of secondary capital 
accepted as a match to the government-funded secondary capital. 
Finally, the amendments change the loss distribution provision that 
applies to secondary capital accounts so that secondary capital 
accepted under the 2010 Community Development Capital Program is senior 
to any required matching secondary capital accepted from an alternative 
source. Early redemption will continue to require approval of the 
appropriate Regional Director. The amended rule will accomplish the 
following: bring NCUA regulations into compliance with the Community 
Development Capital Program; and allow qualifying low-income designated 
credit unions that accept secondary capital pursuant to the Troubled 
Asset Relief Program through the Community Development Capital Program 
to avoid an accelerated interest rate on the secondary capital over the 
last five years to maturation.

DATES: This rule is effective February 19, 2010. Comments must be 
received on or before March 22, 2010.

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/Resources/RegulationsOpinionsLaws/ProposedRegulations.aspx. Follow the 
instructions for submitting comments.
     E-mail: Address to [email protected]. Include ``[Your 
name] Comments on Secondary Capital Accounts'' in the e-mail subject 
line.
     Fax: (703) 518-6319. Use the subject line described above 
for e-mail.
     Mail: Address to Mary 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: Kevin Tuininga, Trial Attorney, at the 
above address, or telephone: (703) 518-6543.

SUPPLEMENTARY INFORMATION: 
    Public Inspection of Comments: All public comments are available on 
the agency's Web site at http://www.ncua.gov/Resources/RegulationsOpinionsLaws/RegulationComments.aspx as submitted, except as 
may not be possible for technical reasons. Public comments will not be 
edited to remove any identifying or contact information. Paper copies 
of comments may be inspected in NCUA's law library at 1775 Duke Street, 
Alexandria, Virginia 22314, by appointment weekdays between 9 a.m. and 
3 p.m. To make an appointment, call (703) 518-6546 or send an e-mail to 
[email protected].

A. Background

1. Secondary Capital

    Pursuant to the Federal Credit Union Act, 12 U.S.C. 1751 et seq., 
the NCUA Board (``Board'') has authority to permit credit unions 
serving predominantly low-income members (``LICUs'') to accept payments 
on shares from non-natural persons subject to limitations the Board 
prescribes. 12 U.S.C. 1757(6). In 1996, the Board exercised this 
authority by permitting LICUs, including State-chartered credit unions 
to the extent allowed by State law, to accept secondary capital 
(``SC'') from non-natural person members and nonmembers. 61 FR 50696 
(Sept. 27, 1996). The Board intended that SC accounts provide LICUs 
with additional means to accumulate capital. 61 FR 3788 (Feb. 2, 1996); 
71 FR 4234 (Jan. 26, 2006). Accumulated capital could be used to expand 
lending and financial services and to absorb losses that might 
otherwise cause or contribute to failure. Id.
    The Board also implemented a number of measures designed to ensure 
the safety and soundness of LICUs that accepted SC. 61 FR at 3788, 
3791. As part of the safety and soundness measures, the original SC 
rule prohibited redemption of any part of a SC account prior to 
maturity. Id. at 3791. The rule also directed that LICUs record the 
capital value of SC accounts with a maturation date of less than five 
years in accordance with an annual reduction of 20 percent of the 
original balance. Id. This net-worth reduction was designed in large 
part to avoid overreliance on the availability of temporary SC accounts 
and to encourage LICUs ``to continually replenish their sources of 
maturing secondary capital to the extent such funds are needed to 
support ongoing lending programs and other operations.'' Id. at 3789.
    In 2006, the Board amended the rule to allow LICUs to redeem 
discounted SC over the five years prior to maturity at a maximum annual 
rate of 20 percent of the original balance, subject to the approval of 
the appropriate Regional Director. 71 FR at 4239. This redemption 
schedule followed the schedule for discounting the net-worth value of 
SC accounts. 70 FR 43790 (July 29, 2005). The amendment was designed to 
prevent the net worth value of SC discounted according to the annual 
reduction from diluting a LICU's net worth ratio calculated pursuant to 
NCUA's system of prompt corrective action. 71 FR at 4235. The final 20-
percent increment of discounted SC could not be redeemed prior to the 
maturation date. Id.

2. The Troubled Asset Relief Program

    On October 3, 2008, the President signed into law the Emergency 
Economic Stabilization Act of 2008 (``EESA''). Public Law No. 110-343 
(2008). The EESA authorized the Secretary of the Treasury to establish

[[Page 7340]]

the Troubled Asset Relief Program (``TARP'') with the purpose of 
restoring and sustaining the viability of financial institutions. 12 
U.S.C. 5211. Pursuant to TARP, the United States Department of the 
Treasury (``Treasury'') has announced a Capital Program for certified 
Community Development Financial Institutions (``Community Development 
Capital Program'' or ``CDC Program''). To qualify for participation in 
the CDC Program, credit unions must have a low-income designation 
pursuant to 12 CFR 701.34.
    The terms of the CDC Program provide that LICUs accepted for 
participation would be eligible to issue CDC Senior Securities, or 
subordinated debentures, up to an aggregate principal amount of 3.5 
percent of the LICU's total assets. The subordinated debentures would 
be purchased by the Treasury, would have a 13-year maturity, and would 
pay cumulative interest at an annual rate of two percent until the 
eighth anniversary of their date of issuance. Over the remaining five 
years to maturity, the subordinated debentures would pay cumulative 
interest at an annual rate of nine percent. Under certain 
circumstances, the CDC Program may also require LICUs to secure 
matching funds from sources other than the Federal Government. SC that 
LICUs accept pursuant to the CDC Program (``TARP funds'') would be 
subject to NCUA's regulation governing secondary capital. Sec.  
701.34(b). As an additional condition imposed by Treasury, TARP funds 
accepted as SC under the CDC Program would be senior to any required 
matching SC from an alternative source with respect to covering losses.

3. Effect on LICUs

    Without this interim final rule, NCUA's regulation prevents a 
Regional Director from approving early redemption of SC outside of the 
restrictions of the redemption schedule of Sec.  701.34(d)(3). Sec.  
701.34(d)(1)-(2). To obtain approval, a LICU must demonstrate six 
eligibility requirements to the Regional Director's satisfaction. Id. 
If successful, the Regional Director's authority to approve early 
redemption would remain limited as set forth in the schedule of Sec.  
701.34(d)(3). Under that schedule, a LICU can redeem a maximum of 20 
percent of the original balance of a SC account per year, beginning at 
five years remaining maturity. Id.
    Thus, without an amendment, LICUs that choose to accept TARP funds 
in the form of SC will be required to hold an annually-decreasing 
percentage of TARP funds at nine percent interest over five years, a 
rate potentially higher than other rates that would become available on 
SC accounts. A similar concern would arise in instances where a LICU 
might accept matching SC for the TARP funds at a rate higher than it 
otherwise would in order to benefit from the two-percent rate 
applicable to TARP funds. The pre-amendment rule could therefore cause 
some LICUs to forgo application for the CDC Program because of the risk 
of holding a considerable portion of TARP funds and any match at 
interest rates significantly above market rates. These LICUs would lose 
the opportunity to improve lending capability and capital provided by 
the modest two-percent interest rate on TARP funds over their first 
eight years. In addition, NCUA's pre-amendment rule would contradict 
one of the terms of Treasury's CDC Program. The pre-amendment rule 
required pro-rata loss distribution among all secondary capital 
accounts, contrary to the seniority requirement Treasury is imposing.

B. Modifications to Section 701.34

    The amended rule exempts all SC accounts funded by the United 
States Government or any of its subdivisions (``government-funded SC'') 
\1\ from the limits of the redemption schedule in Sec.  701.34(d)(3). 
It also exempts SC accepted as a match to the government-funded SC. The 
exception seeks to accomplish the following: (1) Remove any 
disincentive for LICUs to accept TARP funds; (2) avoid subjecting LICUs 
that do accept TARP funds to the stepped-up nine-percent interest rate 
over the last five years to maturity; and (3) avoid subjecting LICUs to 
potentially high interest rates on SC accepted as a match to TARP funds 
over an extended period. The exemption language is broad enough to 
encompass the early redemption of SC accepted under other government-
funded programs that could arise in response to adverse economic 
conditions.
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    \1\ Government-funded SC refers only to SC funded by the Federal 
government as opposed to state governments or their subdivisions.
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    More narrowly, the amended rule changes the loss distribution 
procedures applicable to SC accounts so that SC accepted from the 
United States Government or any of its subdivisions under the CDC 
Program is senior to any matching SC accepted from an alternative 
source that the CDC Program requires. This amendment was necessary to 
conform NCUA regulations to the seniority terms on which Treasury is 
offering TARP funds under the CDC Program. The amended language allows 
a LICU to choose between two different methods of subordinating 
matching SC to SC accepted under the CDC Program.
    The first method excludes CDC Program SC from the pro-rata loss 
distribution procedures until all of its matching SC has been depleted 
or properly redeemed. Under this method, the pro-rata loss distribution 
calculation will cause all other SC on deposit at the time a loss is 
realized to be depleted before the CDC Program SC covers a loss. The 
first method will be available only if its seniority implications are 
not inconsistent with agreements governing other SC on deposit at the 
time a loss is realized.
    The second method is available regardless of any agreements 
governing other SC and must be followed if a LICU cannot apply the 
first method in light of other SC agreements. This method combines the 
CDC Program SC and any of its remaining matching SC for purposes of the 
pro-rata loss distribution procedure. The pro-rata loss apportioned to 
this combined account is first applied to the matching SC portion. The 
CDC Program SC becomes available to cover a loss under this method only 
once all of the matching SC has been depleted or properly redeemed. In 
effect, this will cause the CDC Program's matching SC to suffer a 
greater loss in the pro-rata calculation than other SC on deposit.
    While the possibility an investor contributing matching SC might 
suffer a greater loss sooner may make it more difficult for some LICUs 
to recruit matching SC if it is required under the CDC Program, there 
may be circumstances where this is the only option available to ensure 
the matching SC is subordinate to the CDC Program SC while also 
ensuring the subordination method does not cause a violation of any 
agreements governing other SC on deposit at the time a loss is 
realized. Following one of these two methods is necessary because 
Treasury's terms direct that any matching SC required under the Program 
be subordinate to the CDC Program SC. These two subordination methods 
only need to be applied to government-funded SC accepted under the CDC 
Program of 2010 and not to other government-funded SC that does not 
require seniority status.
    All other requirements of Sec.  701.34 remain unchanged and 
applicable to government-funded SC and its matching SC. The interim 
final rule continues to require that the appropriate Regional Director 
approve any request for partial or full redemption pursuant to the 
procedures of Sec.  701.34(d)(1) and (2). All six eligibility 
requirements of that

[[Page 7341]]

section must be met to obtain approval, including that the LICU must 
have had the SC on deposit for at least two years. In fact, the amended 
language expressly incorporates the two-year deposit requirement, which 
is intended to facilitate financial stability and encourage 
implementation of strategic business plans and budget objectives. See 
70 FR at 43790. In the case of state-chartered LICUs, Sec.  741.204(d) 
continues to require that the LICU obtain the approval of its State 
Supervisory Authority with the concurrence of the appropriate NCUA 
Regional Director.
    Clarifying the criteria for approval of SC redemption, the amended 
rule states that all government-funded SC is eligible for redemption 
along with its matching SC, regardless of whether the SC has been 
discounted pursuant to the net worth schedule of Sec.  701.34(c)(2). 
This language seeks to avoid any ambiguity that could otherwise arise 
by inclusion of the term ``discounted secondary capital'' in the 
approval procedures of Sec.  701.34(d)(1) and (2). For purposes of the 
approval procedures under the amended rule, the SC need not have been 
discounted to be eligible for early redemption, as is still required 
for non-government-funded SC that does not constitute a match to 
government-funded SC. Nevertheless, a LICU that accepts government-
funded SC must still follow the schedule for discounting net worth as 
set forth in Sec.  701.34(c)(2) if the SC and its match, if any, is not 
redeemed prior to the last five years to maturity.
    If government-funded SC and its matching SC are redeemed prior to 
the last five years to maturity, LICUs would entirely avoid the net 
worth schedule, which resurrects risks the schedule was originally 
designed to hedge against. These include the risk that a LICU could 
place overreliance on the availability of the SC as it approaches its 
approved early redemption date and the risk that the LICU could neglect 
to plan to replenish the SC to the extent needed as the early 
redemption date nears. 61 FR at 3789. However, the eligibility criteria 
the LICU is required to demonstrate to the Regional Director will 
continue to guard against those risks, particularly the requirements 
that the LICU demonstrate it will ``have a post-redemption net worth 
classification of `adequately capitalized''' and that the SC ``will not 
be needed to cover losses prior to the final maturity of the account.'' 
Sec.  701.34(d)(1)(i), (iii). Other approval eligibility requirements 
could come into play as well, depending on relevant circumstances at 
the time approval is requested or any conditions imposed on 
interdependent SC accounts.
    If the eligibility requirements are met, the rule would allow 
redemption of matching SC on the same or a different schedule or rate 
than the government-funded SC if not otherwise restricted.\2\ For 
example, if the matching SC bears a more favorable interest rate than 
its paired government-funded SC, a LICU may choose to hold the matching 
SC for a longer period. Similarly, a Regional Director may disallow an 
application for early redemption of matching SC, despite allowing it 
for government-funded SC, if the Regional Director determines such 
would be appropriate under the approval criteria. In circumstances 
where the government-funded SC has been redeemed, the SC originally 
accepted as a match for the government-funded SC, through maturity, 
would remain eligible for early redemption pursuant to the exception 
rather than the schedule of Sec.  701.34(d)(3).
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    \2\ In some instances, matching SC might be eligible for 
redemption before the government-funded SC it is matched with, 
depending on the conditions imposed by the program under which the 
government-funded SC was accepted.
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    The amended rule is not intended to affect in any manner the SC 
redemption procedures for non-government-funded SC that is not accepted 
as a match to government-funded SC.

C. Interim Final Rule and Immediate Effective Date

    NCUA is issuing this rulemaking as an interim final rule effective 
upon publication. The Administrative Procedure Act (APA), 5 U.S.C. 553, 
requires that before a rulemaking can be finalized it must first be 
published as a notice of proposed rulemaking with the opportunity for 
public comment, unless the agency for good cause finds that notice and 
public comment are impracticable, unnecessary, or contrary to the 
public interest. Additionally, the APA requires that, once finalized, a 
rulemaking must have a delayed effective date of 30 days from the date 
of publication, except for good cause.
    In this regard, NCUA invokes the good cause exception to the 
requirements of the APA. NCUA believes good cause exists for issuing 
these amendments as an interim final rule effective immediately. Due to 
Treasury's announcement of the CDC Program and the short deadline by 
which LICUs must submit applications for the Program, it is imperative 
that NCUA immediately remove any regulatory disincentive for LICUs to 
apply. An immediate amendment is also necessary to avoid the former 
rule's conflict with Treasury's SC seniority requirement.
    The interim final rule makes clear to LICUs that if they apply for 
TARP funds through the CDC Program, they will have an opportunity to 
avoid the accelerated nine-percent interest rate as the TARP funds 
approach maturity. The rule will provide a similar opportunity with 
respect to any matching funds that may be required. Finally, the 
interim rule is limited in scope and does not impose any regulatory 
burden; rather, the rule provides greater flexibility for LICUs to 
assist their members.
    For these reasons, NCUA has determined that the public notice and 
participation that the APA ordinarily requires before a regulation may 
take effect would, in this case, be contrary to the public interest 
and, further, that good cause exists for waiving the customary 30-day 
delayed effective date. Nevertheless, NCUA would like the benefit of 
public comment before adopting a permanent final rule and invites 
interested parties to submit comments during a 30-day comment period. 
In adopting the final regulation, NCUA will revise the interim rule in 
light of the comments received, if appropriate.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a rule may have on a 
substantial number of small entities (primarily those under ten million 
dollars in assets). The interim final rule allows LICUs to redeem SC 
accepted from the United States Government or any of its subdivisions, 
along with its matching SC, at any time after the SC has been on 
deposit for two years, without imposing any additional regulatory 
burden. The rule will not have a significant economic impact on a 
substantial number of small credit unions. Thus, a Regulatory 
Flexibility Analysis is not required.

Paperwork Reduction Act

    NCUA has determined that this rule will not increase paperwork 
requirements under the Paperwork Reduction Act of 1995 and regulations 
of the Office of Management and Budget.

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

[[Page 7342]]

federalism principles addressed by the Executive Order. This rule would 
not have a substantial 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. 
Accordingly, this rule does not constitute a policy that has federalism 
implications for purposes of the Executive Order.

Treasury and General Government Appropriations Act, 1999

    NCUA has determined that the 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).

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) (SBREFA) 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 APA. 5 
U.S.C. 551. NCUA does not believe this interim final rule is a ``major 
rule'' within the meaning of the relevant sections of SBREFA. NCUA has 
submitted the rule to the Office of Management and Budget for its 
determination in that regard.

List of Subjects in 12 CFR Part 701

    Credit, Credit unions, Mortgages.

    By the National Credit Union Administration Board, this 9th day 
of February, 2010.

Mary F. Rupp,
Secretary of the Board.

0
For the reasons discussed above, 12 CFR part 701 is amended as follows:

PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS

0
1. The authority citation for part 701 continues to read as follows:

    Authority:  12 U.S.C. 1752(5), 1755, 1756, 1757, 1758, 1759, 
1761a, 1761b, 1766, 1767, 1782, 1784, 1786, 1787, 1789. Section 
701.6 is also authorized by 15 U.S.C. 3717. Section 701.31 is also 
authorized by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3610. 
Section 701.35 is also authorized by 42 U.S.C. 4311-4312.


0
2. Amend Sec.  701.34 by adding a sentence to the end of paragraph 
(b)(7) introductory text, adding paragraphs (b)(7)(i) and (ii), and 
adding paragraph (d)(4) to read as follows:


Sec.  701.34   Designation of low income status; Acceptance of 
secondary capital accounts by low-income designated credit unions.

* * * * *
    (b) * * *
    (7) * * * In instances where a LICU accepts secondary capital from 
the United States Government or any of its subdivisions under the 
Community Development Capital Program of 2010 (``CDCP secondary 
capital'') and matching funds are required under the Program and are on 
deposit in the form of secondary capital at the time a loss is 
realized, a LICU must apply either of the following pro-rata loss 
distribution procedures to the CDCP secondary capital and its matching 
secondary capital with respect to the loss:
    (i) If not inconsistent with any agreements governing other 
secondary capital on deposit at the time a loss is realized, the CDC 
secondary capital may be excluded from the calculation of the pro-rata 
loss distribution until all of its matching secondary capital has been 
depleted or properly redeemed, thereby causing the CDC secondary 
capital to be held as senior to all other secondary capital until its 
matching secondary capital is exhausted. The CDCP secondary capital 
should be included in the calculation of the pro-rata loss distribution 
and is available to cover the loss only after all of its matching 
secondary capital has been depleted or properly redeemed.
    (ii) Regardless of any agreements applicable to other secondary 
capital, the CDCP secondary capital and its matching secondary capital 
may be considered a single account for purposes of determining a pro-
rata share of the loss and the amount determined as the pro-rata share 
for the combined account must first be applied to the matching 
secondary capital account, thereby causing the CDCP secondary capital 
to be held as senior to its matching secondary capital. The CDCP 
secondary capital is available to cover the loss only after all of its 
matching secondary capital has been depleted or properly redeemed.
* * * * *
    (d) * * *
    (4) Early redemption exception. Subject to the written approval of 
the appropriate Regional Director obtained pursuant to the requirements 
of paragraphs (d)(1) and (2) of this section, a LICU can redeem all or 
part of secondary capital accepted from the United States Government or 
any of its subdivisions at any time after the secondary capital has 
been on deposit for two years. If the secondary capital was accepted 
under conditions that required matching secondary capital from a source 
other than the Federal Government, the matching secondary capital may 
also be redeemed in the manner set forth in the preceding sentence. For 
purposes of obtaining the appropriate Regional Director's approval, all 
secondary capital a LICU accepts from the United States Government or 
any of its subdivisions, as well as its matching secondary capital, if 
any, is eligible for early redemption regardless of whether any part of 
the secondary capital has been discounted pursuant to paragraph (c)(2) 
of this section.
* * * * *
[FR Doc. 2010-3160 Filed 2-18-10; 8:45 am]
BILLING CODE 7535-01-P