[Federal Register Volume 75, Number 202 (Wednesday, October 20, 2010)]
[Rules and Regulations]
[Pages 64786-64862]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-24616]



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Part II





National Credit Union Administration





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12 CFR Parts 702, 703, 704, et al.



Corporate Credit Unions; Final Rule

  Federal Register / Vol. 75 , No. 202 / Wednesday, October 20, 2010 / 
Rules and Regulations  

[[Page 64786]]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 702, 703, 704, 709, and 747

RIN 3133-AD58


Corporate Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: NCUA is issuing final amendments to its rule governing 
corporate credit unions. The major revisions involve corporate credit 
union capital, investments, asset-liability management, governance, and 
credit union service organization (CUSO) activities. The amendments 
establish a new capital scheme, including risk-based capital 
requirements; impose new prompt corrective action requirements; place 
various new limits on corporate investments; impose new asset-liability 
management controls; amend some corporate governance provisions; and 
limit a corporate CUSO to categories of services preapproved by NCUA. 
In addition, this rulemaking contains conforming amendments to rules 
governing Prompt Corrective Action (for natural person credit unions); 
Investments and Deposit Activities (for federal credit unions); 
Administrative Actions, Adjudicative Hearings, Rules of Practice and 
Procedure, and Investigations; and Involuntary Liquidation of Federal 
Credit Unions and Adjudication of Creditor Claims Involving Federally 
Insured Credit Unions. These amendments will strengthen individual 
corporates and the corporate credit union system as a whole.

DATES: This rule is effective January 18, 2011, except that the 
amendments to 12 CFR 702.105(a), 703.14(b), 704.2, 704.3, 704.4, and 
subpart M of 12 CFR part 747, are effective October 20, 2011.

FOR FURTHER INFORMATION CONTACT: David Shetler, Deputy Director, Office 
of Corporate Credit Unions, at telephone (703) 518-6640, National 
Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 
22314; Ross Kendall, Staff Attorney, Office of General Counsel, at the 
address above or telephone (703) 518-6540; or Paul Peterson, Associate 
General Counsel, at the address above or telephone (703) 518-6540.

SUPPLEMENTARY INFORMATION:

I. Background

    In January 2009, NCUA solicited public comment on whether 
comprehensive changes to the structure of the corporate credit union 
(corporate) system were warranted. 74 FR 6004 (Feb. 4, 2009). This 
corporate Advanced Notice of Proposed Rulemaking (ANPR) sought comment 
on how best to define and structure the role of corporates in the 
credit union system, whether to modify the level of required capital 
for corporates, whether to modify or limit the range of permissible 
investments for corporates, whether to impose new standards and limits 
on asset-liability management (ALM) and credit risk, and whether to 
make modifications in the area of corporate governance. NCUA received 
some 445 comments in response to the ANPR. NCUA reviewed these public 
comments closely and considered them carefully.
    On November 19, 2009, the NCUA Board issued a Notice of Proposed 
Rulemaking (NPR) containing extensive, specific proposed revisions to 
NCUA's rule governing corporate credit unions (corporates) and related 
rule provisions. 74 FR 65210 (Dec. 9, 2009). The proposed revisions 
covered corporate capital, prompt corrective action (PCA), investments, 
ALM, CUSOs, and governance. Briefly summarized, the major provisions in 
the proposal would have:
     Imposed new minimum capital ratios, new risk based capital 
calculations, and new elements of capital, all in general accordance 
with the Basel I capital requirements imposed by the banking regulators 
on banks.
     Required that retained earnings (RE) constitute a certain 
portion of corporate capital, and that corporates build retained 
earnings over time.
     Eliminated the current prohibition on conditioning 
membership, the receipt of services, or the pricing of services upon 
the purchase of paid-in capital.
     Added new PCA provisions similar to those currently 
applicable to banks.
     Prohibited investments in collateralized debt obligations 
(CDOs) and net interest margin (NIM) securities.
     Toughened the capital requirements for expanded investment 
authority, and restricted the credit ratings for investments purchased 
by such corporates to a minimum of ``A-.''
     Required that a corporate examine every available 
Nationally Recognized Statistical Rating Organization (NRSRO) rating 
for a particular security and only employ the lowest of those ratings, 
and that at least 90 percent of a corporate's investments be rated by 
at least two NRSROs.
     Tightened the existing single obligor concentration limit 
and imposed new sector concentration limits.
     Placed limits on subordinated positions in structured 
securities.
     Imposed new limits on the maximum difference between the 
estimated average life of the asset cash flows and the average life of 
the liability cash.
     Restricted the weighted average life (WAL) of a 
corporate's cash-flowing assets to two years.
     Limited a corporate's aggregate borrowing to the lesser of 
10 times capital or 50 percent of shares and capital; and further 
restrict secured borrowing to maximum maturities of 30 days and only 
for liquidity purposes.
     Prohibited a corporate from accepting investments or loans 
from any one entity that exceed ten percent of the corporate's assets.
     Required that a corporate CUSO only engage in categories 
of services preapproved by NCUA, including, initially, brokerage and 
investment advisory services.
     Required that a corporate CUSO agree with the corporate by 
contract to permit NCUA access to the CUSO's books, records, personnel, 
equipment, and facilities.
     Required that all corporate board members hold either a 
CEO, CFO, or COO position at a member credit union or other member 
entity.
     Generally limited corporate board members to no more than 
six years of service.
     Required that a majority of a corporate's board members be 
representatives of natural person credit unions (NPCUs).
     Required that each corporate annually disclose to its 
members the compensation of each senior executive officer and director.
     Required a merging federally-chartered corporate 
affirmatively disclose to both NCUA and its members any material, 
merger-related increase in compensation for any senior executive or 
director.
     Prohibited parties affiliated with a corporate from 
receiving 1) indemnification in connection with administrative or civil 
proceedings instituted by NCUA or a state regulatory authority where 
the party is ultimately found liable and 2) golden parachute payments.
    The preamble to the NPR included an extensive discussion of the 
crisis in the corporates giving rise to the need for regulatory reform, 
followed by a discussion of the nature of, and justification for, each 
proposed revision. Id. at 65211-65255.

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    The public comment period for the NPR closed on March 9, 2010. NCUA 
received 815 public, written comments letters totaling more than 2,600 
pages of comments. In addition, NCUA held several town halls and 
webinars during the comment period during which NCUA both answered 
questions about the proposed rulemaking and listened to oral comments 
about the proposal.
    Most commenters liked some portions of the proposed rule and 
disliked other portions. The most common comment on the overall 
rulemaking was support for the proposed stronger capital requirements; 
increased limits on single obligors; concentration limits on certain 
investment sectors; and prohibitions on certain high risk securities--
but also serious reservations about other portions of the proposal, 
including certain ALM, investment, CUSO, and corporate governance 
provisions.
    Of those commenters who expressed a general opinion on the overall 
rulemaking, many, including some trade groups and various larger NPCUs 
(i.e., over $1.2 billion in assets), generally support the rule. Many 
more commenters, however, generally oppose the proposed rule, among 
them many small and medium-sized NPCUs ranging up to over $1 billion in 
assets. Many of the commenters in opposition believed that the various 
investment and ALM restrictions in the proposed rule would cause major 
changes in corporate operations; that these changes would threaten the 
ability of corporates to provide liquidity and other valuable services 
to NPCUs; and that these changes might force NPCUs to turn to banks 
(their competitors) for services--considered by the commenters as a 
more expensive and less reliable alternative to today's corporate 
system. The comments that pertain to specific, proposed revisions are 
discussed in more detail in the section-by-section analysis below.
    The NCUA Board has now determined to issue final revisions based on 
the proposal and the comments received. Generally, these revisions will 
become effective 90 days following the publication in the Federal 
Register, but the effective date for many of the revisions will be 
delayed beyond 90 days.
    The remainder of this preamble contains four sections: A summary of 
the significant revisions in the final rule, a section-by-section 
analysis of all the revisions, an analysis of how the final investment, 
credit risk, and asset liability provisions might affect a corporate's 
ability to achieve its capital requirements, and a discussion of the 
regulatory procedures affecting this rulemaking.

II. Summary of Significant, Final Revisions

A. Overview

    Ultimately, the primary purposes of this extensive rulemaking were 
twofold. First, NCUA wanted to design a corporate rule that would 
prevent the catastrophic losses that occurred in the corporate system 
beginning in 2007 from ever recurring. Second, NCUA wanted to allow for 
the survival of some form of a well-run corporate system that could 
provide necessary services, including payments systems services, to its 
members, and build and attract sufficient capital.
    The Board believes this final rule accomplishes these two purposes.
    First, and as discussed in more detail below, the 2007 losses 
resulted almost entirely from private label residential mortgage backed 
securities (RMBS), with many of the worst performing of these 
securities being subordinated RMBS. The final rule prohibits corporates 
from purchasing either private label RMBS, or subordinated-type 
securities, going forward. In the most specific sense, then, the rule 
will make it impossible for corporates to repeat what happened in 2007. 
Of course, the next financial crisis may not be a credit or mortgage 
crisis, so the final rule includes a series of other investment, credit 
risk, ALM, liquidity, and capital measures that together should greatly 
reduce the systemic risk posed by the corporates regardless of the 
source of the next crisis.
    Second, the Board believes that a well-run corporate should be able 
to operate within the confines of the new rule and construct a business 
model, and an investment portfolio, that permits it to attract capital 
and grow retained earnings going forward. Again, this is discussed and 
demonstrated in some detail in Section IV. of the preamble below.
Affected Sections of NCUA's Rules and Regulations
    The final revisions affect part 704, Corporate Credit Unions, and 
several other sections of NCUA's regulations. The following chart lists 
the affected sections. It also summarizes the applicability dates for 
each section and, in some cases, the applicability dates for particular 
paragraphs or individual definitions.

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                                                   Delayed applicability
                                                     date? (e.g., ``+12
                                                       months'' means
                                                     delayed 12 months
    Current rule provision           Amended?        following date of
                                                    publication of final
                                                      rule in Federal
                                                         Register)
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704.1 Scope...................  No...............  Not applicable (N/A).
704.2 Definitions.............  Yes. Removed and   First replacement of
                                 replaced twice.    704.2. +90 days.
                                 Second            Second replacement of
                                 replacement        704.2. +12 months.
                                 introduces        Adjusted core
                                 capital and PCA    capital.
                                 definitions.
                                                      --deduct PCC or
                                                       NCA at another
                                                       corporate. +12
                                                       months
                                                      --deduct certain
                                                       excess PCC. +72
                                                       months to +120
                                                       months
                                                      --deduct PCC in
                                                       excess of
                                                       retained
                                                       earnings. +120
                                                       months
                                                      Permanent leverage
                                                       ratio. +36 months
704.3 Corporate credit union    Yes..............  Current 704.3
 capital.                                           replaced. +12
                                                    months.
                                                   704.3(a)(3): If RE
                                                    ratio less than
                                                    0.45, must submit
                                                    REAP. +36 months.
                                                   704.3(f)(4):
                                                    Corporate with
                                                    unconverted MCAs
                                                    must notify MCA
                                                    holders of account
                                                    status. +14 months.
704.4 Board responsibilities..  Yes. The current   Current 704.4
                                 Board              replaced with PCA
                                 responsibilities   section. +12 months.
                                 is redesignated
                                 as 704.13. New
                                 704.4 Prompt
                                 corrective
                                 action (PCA)
                                 added.
704.5 Investments.............  Yes..............  +90 days.
704.6 Credit risk management..  Yes..............  +90 days.
704.7 Lending.................  No...............  N/A.

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704.8 Asset and liability       Yes..............  Generally, +90 days.
 management.                                       704.8(k): Prohibition
                                                    on a corporate
                                                    receiving more than
                                                    15 percent of
                                                    business from one
                                                    member or credit
                                                    union. +30 months.
704.9 Liquidity management....  Yes..............  +90 days.
704.10 Investment action plan.  No...............  N/A.
704.11 Corporate CUSOs........  Yes..............  Generally, +90 days.
                                                   704.11(e)(1):
                                                    Requirement for NCUA
                                                    approval of
                                                    corporate CUSO
                                                    activities. +180
                                                    days.
                                                   704.11(e)(2):
                                                    Requirement that
                                                    corporate divest
                                                    from CUSO engaged in
                                                    unapproved
                                                    activities. +12
                                                    months.
704.12 Permissible services...  No...............  N/A.
704.13 [Reserved].............  Yes..............  The current 704.4
                                                    Board
                                                    responsibilities
                                                    redesignated as
                                                    704.13. +90 days.
704.14 Representation.........  Yes..............  Generally, +90 days.
                                                   704.14(a)(2):
                                                    Requirement that
                                                    only CEO, CFO, or
                                                    COO may seek
                                                    election to
                                                    corporate board.
                                                    +120 days.
                                                   704.14(a)(9):
                                                    Requirement that at
                                                    least a majority of
                                                    each corporate's
                                                    directors be
                                                    representatives of
                                                    NPCUs. +36 months.
704.15 Audit requirements.....  No...............  N/A.
704.16 Contract/written         No...............  N/A.
 agreements.
704.17 State-chartered          No...............  N/A.
 corporate credit unions.
704.18 Fidelity bond coverage.  No...............  N/A.
704.19 Wholesale corporate      Yes..............  Current 704.19
 credit unions.                                     removed, and new
                                                    704.19, Disclosure
                                                    of executive and
                                                    director
                                                    compensation, added.
                                                    +90 days.
704.20 None...................  Yes..............  New 704.20, Golden
                                                    parachute and
                                                    indemnification
                                                    payments, added. +90
                                                    days.
Appendix A Model forms........  Yes..............  Amended and renamed
                                                    Capital
                                                    Prioritization and
                                                    Model Forms. +90
                                                    days.
                                                   Appdx A, Part I:
                                                    Corporates may
                                                    determine that newly
                                                    contributed capital
                                                    has priority over
                                                    existing capital.
                                                    +90 days.
Appendix B Expanded             Yes..............  Generally, +90 days.
 Authorities and Requirements.                     Part I(e): Substitute
                                                    ``leverage ratio''
                                                    for ``capital
                                                    ratio.'' +12 months.
Appendix C None...............  Yes..............  New Appendix C, Risk-
                                                    Based Capital Cred-
                                                    it Risk-Weight
                                                    Categories, added.
                                                    +12 months.
702.105.......................  Yes..............  Conforming amendment
                                                    (to substitute new
                                                    capital terms). +12
                                                    months.
703.14(b).....................  Yes..............  Conforming amendment
                                                    (to substitute new
                                                    capital terms). +12
                                                    months.
709.5(b)......................  Yes..............  Conforming amendment
                                                    (to substitute new
                                                    capital terms). +90
                                                    days.
Part 747, subpart M...........  Yes..............  Add new subpart M on
                                                    due process for PCA
                                                    actions. +12 months.
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Third Party Evaluation of Proposed Rulemaking
    NCUA commissioned an outside consultant, Kamakura, Inc., to provide 
NCUA with an assessment of the proposed corporate rule. Kamakura issued 
its final report, entitled Impact Analysis--Proposed Modification of 12 
Code of Federal Regulations Part 704--National Credit Union 
Administration (the ``Kamakura Report''), on July 12, 2010. Interested 
parties can download a copy of the Kamakura Report from NCUA's Web site 
at http://www.ncua.gov. As discussed throughout the following preamble, 
NCUA carefully considered the Kamakura Report when finalizing the 
investment and ALM provisions of this rulemaking.
Legacy Assets
    The ability of some corporates to comply with the provisions of 
this final rule depends on managing certain ``legacy assets'' on their 
balance sheet. These legacy assets are securities, generally private 
label RMBS, that continue to carry significant credit risk and market 
values far below their intrinsic values.
     NCUA has been working for some time on a plan to isolate such 
legacy assets in those corporates where the exposure represents the 
greatest risk to the insurance fund. In general, these cases represent 
corporate credit unions where expected future credit losses exceed the 
corporate's total capital, and recapitalization would not occur without 
agency assistance. NCUA has, as promised, released its plans for 
dealing with those corporates' legacy assets. Information about the 
plans can be obtained from NCUA's Web site at http://www.ncua.gov.
    Some corporates have lesser positions in RMBS assets where NCUA 
does not expect the associated credit losses to exceed the corporate's 
total capital. They may also have other assets with long WALs, 
positions that are concentrated beyond the prescribed diversification 
limits, or other portfolios that otherwise inhibit compliance with new 
rule. NCUA expects these institutions to develop business plans and 
take action to become compliant with the rule. Generally, NCUA will 
want these corporates to sell these legacy assets as soon as possible 
so as to come into compliance with the corporate rule. If the corporate 
decides an alternative approach to selling the legacy assets is sound 
and supportable, the corporate will have to submit a draft investment 
action plan to NCUA for its approval under Sec.  704.10 and other 
provisions of the corporate rule, such as Sec.  704.8(j)(2)(i). For 
example, NCUA will consider approval of an action plan that includes 
retention of these legacy assets while they amortize if the corporate 
can

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document that the expected future credit losses on these assets are 
significantly less than the losses the corporate would take if the 
investments were sold at current market prices. Depending on the 
circumstances of the corporate, an NCUA-approved action plan might 
permit the corporate to operate temporarily outside the WAL limitations 
and other applicable investment, credit risk, or ALM limitations in the 
corporate rule. In addition, NCUA might grant these corporates a waiver 
of time to build the retained earnings required by this regulation--but 
only to the extent of documented losses flowing from legacy assets 
identified in an approved action plan. 12 CFR 704.1(b).
Effect of the Dodd-Frank Act on the Use of Credit Ratings
    Just recently, on July 21, 2010, Congress enacted the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (DFA). The DFA, which 
contains 848 pages divided into 16 separate Titles, has multiple 
impacts on NCUA, its regulations, and its enforcement authority. The 
Board is carefully considering the implications of the DFA and the 
actions NCUA is required to take under the DFA.
     Section 939A of the DFA is likely to affect NCUA's regulations, 
including the corporate credit union regulation. Both NCUA's current 
and revised corporate rules include references to NRSRO credit ratings. 
As stated in section 939A, NCUA has one year to review all its 
regulations and modify them to remove such references and ``substitute 
in such regulations such standard of credit-worthiness as [the Board] 
shall determine to be appropriate.'' Until the Board completes that 
review and modification, however, corporates will be expected to comply 
with all the provisions of the corporate rule that make reference to 
NRSRO ratings.
    Section 704.2 contains a definition of small business related 
securities, and that definition refers to the definition of the same 
term in Section 3(a)(53) of the Securities Exchange Act of 1934 (SEA). 
The Dodd Frank Act, however, changed the SEA definition, and the Board 
determined that it wanted to continue to use the older definition. 
Accordingly, this final rule revises the Sec.  704.2 definition of 
small business related securities to remove the reference to the SEA 
definition.
    Section 939(e)(2) the DFA, however, eliminates the reference to 
NRSRO ratings in Section 3(a)(53), and substitutes a reference to 
``meets standards of credit-worthiness established by the [Securities 
and Exchange] Commission (SEC).'' Again, until such time as either the 
SEC or NCUA can provide some content to the latter phrase, NCUA 
believes that the definition of small business related security in 
Sec.  704.2 should remain unchanged.

B. Capital

Summary of Current Capital Provisions
    Currently, corporates have only one mandatory minimum capital 
requirement: they must maintain total capital (i.e., retained earnings 
(RE), paid-in capital, and membership capital accounts) in an amount 
equal to or greater than 4 percent of their moving daily average net 
assets.\1\ Failure by a corporate to meet this minimum capital ratio 
triggers the requirement to file a capital restoration plan with NCUA 
and may cause NCUA to issue a capital restoration directive and take 
other administrative action.
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    \1\ Corporates have other capital-related requirements, such as 
a core capital ratio and a retained earnings ratio, but failure to 
meet these requirements only triggers future earnings retention 
requirements and does not trigger a capital restoration plan 
requirement or other particular supervisory actions.
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    The current rule allows a corporate to issue Paid in Capital (PIC) 
to both members and nonmembers, while Membership Capital Accounts 
(MCAs) may only be issued to members. The current rule also prohibits a 
corporate from conditioning membership, the receipt of services, or the 
pricing of services upon the purchase of PIC.
Summary of Proposed Capital Revisions (November 2009)
    The proposal contains a capital scheme based on the Basel I capital 
regimes of the other banking regulators. The proposal renames PIC as 
Perpetual Contributed Capital (PCC), and makes certain changes to the 
MCA requirements and labels those MCAs as Nonperpetual Capital Accounts 
(NCAs). The proposal then seeks to replace the one existing total 
capital ratio with three minimum capital ratios, including two Risk 
Based Capital (RBC) ratios. These RBC ratio calculations involve credit 
risk-weighting the corporate's assets and off balance sheets activities 
to produce a moving daily average net risk-weighted assets (MDANRA).
    The three new proposed ratios are described in the following chart:

----------------------------------------------------------------------------------------------------------------
                                                                                Minimum level     Minimum level
              Ratio                    Numerator \2\         Denominator       (adequate cap.)     (well cap.)
                                                                                  (percent)         (percent)
----------------------------------------------------------------------------------------------------------------
Leverage Ratio...................  RE + PCC............  MDANA..............                 4                 5
Tier-One RBC Ratio...............  RE + PCC............  MDANRA.............                 4                 6
Total RBC Ratio..................  RE + PCC + NCAs.....  MDANRA.............                 8                10
----------------------------------------------------------------------------------------------------------------

    The proposal also requires that, in the leverage ratio and Tier 1 
RBC ratio, the corporate may only count PCC to the extent that it does 
not exceed the corporate's RE. That results in the corporate needing 
200 basis points (BP) of RE to reach a 4 percent leverage ratio and so 
be adequately capitalized, and 250 BP to be well-capitalized. This RE 
requirement, and the various other proposed capital measures, are 
phased-in over a ten-year time period, as discussed below.
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    \2\ These numerator formulas are simplifications. The proposal 
actually contains certain adjustments to each capital calculation, 
and those proposed adjustments that received comments are discussed 
below.
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Summary of Proposed Phase-In of Capital Provisions
    The proposal contains a multi-step, multi-year phase-in of the new 
capital requirements:
     Year one. None of the new capital requirements would apply 
during the first year following publication of the final rule. During 
this period the current total capital ratio would remain in effect, as 
well as the revised capital order, and associated waivers, issued by 
the NCUA Board on April 29, 2010.\3\
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    \3\ The Net Economic Value (NEV) limitations that exist in the 
current rule have not changed under this final rule. 12 CFR 
704.8(d). Thus, these NEV limits continue to be in effect and no 
implementation delay for these NEV limits is warranted.
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     Years two and three. The two new risk based capital ratios 
would come into effect on the first anniversary of the publication of 
the final rule. Corporates

[[Page 64790]]

would be required to meet a minimum 4 percent Tier 1 RBC ratio and a 
minimum 8 percent Total RBC ratio. In addition, corporates would be 
required to satisfy an interim leverage ratio, defined almost 
identically to the existing total capital ratio. Because NCUA should 
have resolved the legacy assets at this point, and most corporates will 
have very low-risk weighted assets, neither of the two RBC ratios will 
likely dictate the amount of capital corporates need at this point. 
Instead, actual minimum capital requirement will likely be dictated by 
the interim leverage ratio, meaning a corporate will need 200 BP in 
PCC/RE and another 200 BP in NCAs.
     Years four through six. At the third anniversary of the 
publication of the final rule, the 4 percent minimum leverage ratio 
goes into effect. In addition, any corporate that does not have at 
least 45 BP of RE on the third anniversary must file a retained 
earnings action plan (REAP) with the NCUA illustrating how it is going 
to achieve the upcoming RE requirements at the sixth and tenth 
anniversaries of the final rule.
     Years seven through ten. At the sixth anniversary of the 
publication of the final rule, a corporate must have at least 100 BP of 
RE to be considered adequately capitalized.
     Year eleven and after. At the tenth anniversary of the 
publication of the final rule, a corporate must have at least 200 BP of 
RE to be considered adequately capitalized.
Overview of Significant Capital Revisions in This Final Rule
    Most of the public comments on the capital provisions, including 
comments received from corporate credit unions, were supportive of the 
new proposed Basel I capital requirements, including the use of risk-
based capital measures. Some of these commenters specifically supported 
the use of Basel I standards over Basel II, stating that Basel I was 
adequate and less complex.
    The Board agrees with these commenters, and has generally adopted, 
with some modifications, the minimum capital ratios, risk based capital 
calculations, and new elements of capital, as set forth in the proposed 
rule. As in the proposed, the final revisions will require that RE 
constitute a certain portion of capital. For example, to be adequately 
capitalized, a corporate must have at least 100 BP of RE after six 
years, and 200 BP of RE after ten years. Other elements of the new 
capital provisions will also be phased in over time, beginning one year 
after publication of this final rulemaking. The final revisions 
eliminate the current prohibition on conditioning membership, services, 
or the pricing of services upon the purchase of paid-in capital. 
Details about each final revision are contained in the section-by-
section analysis below.
    Some commenters, including NPCUs, questioned whether corporates 
need any capital. Other commenters stated that NCUA should not require 
any contributed capital, and that corporates should be given sufficient 
time to ``earn'' their way to adequate capitalization.
    The Board is concerned that NCUA's extraordinary actions to 
stabilize and protect the corporate system over the past few years have 
been misunderstood by some of these commenters. Because of NCUA's 
actions, including the Temporary Corporate Credit Union Share Guarantee 
Program (TCCUSGP) and the Temporary Corporate Credit Union Liquidity 
Guarantee Program (TCCULGP), many corporates have been able to operate 
as going concerns with artificially low levels of capital. Measures 
like the TCCUSGP and TCCULGP are, however, temporary measures. In the 
future, NCUA will wind down and terminate these measures, and 
corporates will have to function on their own. Further, corporates and 
their members cannot expect to ever again receive such extraordinary 
government support, either explicitly or implicitly, from NCUA or any 
other government entity.\4\ In fact, it is NCUA's intention with the 
various revisions in this final rule to ensure that the corporates, 
going forward, never again present the sort of systemic risk to the 
entire credit union system that requires such extraordinary 
intervention. And this means that, without building adequate capital 
going forward, corporates will not be able to function.
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    \4\ Except, of course, for the standard federal share insurance 
of up to $250,000, as mandated by the Federal Credit Union Act.
---------------------------------------------------------------------------

    Inadequate levels of capital introduce unacceptable moral hazards. 
When the owners of an entity have significant amounts of their own 
capital at stake, they have incentive to ensure that the entity is 
prudently operated and does not engage in overly risky activity, 
because the risk of loss is born by the capital owners. However, when 
the owners have little or no capital at stake, they have the incentive 
to overlook, or even encourage, risky behavior by the entities' 
management. We observed some of this risky behavior at certain 
corporates in the recent past--and this behavior was likely fueled by 
contributed capital levels that were too low for the risks undertaken, 
as well as the fact that some member owners of these corporates did not 
fully understand the nature and extent of their potential capital 
losses and so were not actively engaged in the oversight of their 
corporates. NCUA will not permit corporates to operate with low capital 
levels that encourage risky behavior. Accordingly, NCUA intends with 
this rulemaking to ensure corporates have adequate capital levels going 
forward to mitigate such moral hazard.\5\
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    \5\ The Board also believes that all NPCUs now understand the 
nature of any capital commitment to a corporate and the need to be 
involved in the direction and management of their corporates.
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    In addition to introducing unacceptable moral hazards, low capital 
levels have negative, direct effects on an entity's ability to 
function. For example, potential creditors would not likely lend to any 
corporate that does not have capital sufficient to absorb losses, 
because the creditors will have legitimate fears that any operating 
losses in the corporate will keep the creditors from getting repaid. 
Likewise, potential third-party vendors would not do business with 
corporates that do not have capital available to absorb operating 
losses, because these vendors would be afraid that any losses would 
have negative effects on the corporate's ability to pay the vendors' 
invoices.\6\
---------------------------------------------------------------------------

    \6\ As indicated above, after the TCCUSGP and the TCCULGP have 
served their purposes and been terminated NCUA will no longer 
provide corporates with extraordinary support. NCUA will disabuse 
the public, the members, any potential creditors of a corporate, and 
any potential vendors of a corporate, of the idea that NCUA will 
again intervene to protect insolvent corporates.
---------------------------------------------------------------------------

    In sum, going forward corporates must survive on their own and 
without continued government assistance--and that means corporates must 
have their own adequate capital.
    In response to the other comments, NCUA is not requiring that any 
of a corporate's capital be contributed capital. NCUA will not, 
however, continue its extraordinary support of the corporate system 
over the time it would take to build sufficient capital just through RE 
growth alone. For example, to achieve a 4 percent capital ratio just 
through RE growth could take 20 years or longer. It is inappropriate 
for the NCUA, which is a government entity, to provide the necessary 
guarantees and other assistance that would enable a corporate to 
survive that long with such low levels of capital. And that means that, 
to survive as a going concern without continued government assistance, 
a corporate must solicit and achieve sufficient capital in the form of 
contributed capital. Any corporate that

[[Page 64791]]

is unable to obtain the requisite levels of capital in a timely manner 
may have to be liquidated or merged.
    Some commenters questioned the need for any minimum RE requirement. 
One corporate stated that, from a NCUSIF standpoint, contributed 
capital acts in the same capacity as RE. This commenter believes that 
the building of RE is typically a decision made by the organization's 
Board and so does not believe that the portion of capital that is RE 
should be designated within the regulation. Another corporate 
commenter, however, recognized the need for a minimum RE requirement.
    As discussed at length in the preamble to the proposed rule, NCUA 
believes that, eventually, some part of a corporate's capital must 
consist of RE. This is the only form of corporate capital that, when 
depleted, does not result in losses that flow downstream to NPCUs. 
Without some RE, the corporates would be a continued source of 
instability to the credit union system as a whole.
    A few commenters stated that NCUA needed to look at other sources 
besides credit unions to recapitalize the corporate system, without 
specifying which sources. The Board is unaware of any other logical 
sources of capital. Corporates are member-owned cooperatives 
established to serve their member NPCUs, so logically the primary 
source of a corporate's contributed capital should be its member-owner 
NPCUs. Still, corporates have always been free to sell paid-in capital 
to nonmembers, including non-credit union nonmembers, but to date have 
been either unwilling or unable to do so. The proposal, and these final 
revisions, permit corporates to sell all forms of contributed capital, 
including nonperpetual capital, to nonmembers at the corporate's 
discretion. To the extent, however, that some commenters might believe 
that NCUA or the federal government can donate capital to corporates, 
that is neither legally possible nor a good idea as a policy matter. As 
stated above, credit unions in general, and corporates in particular, 
cannot depend on continued government assistance to survive.
    Some commenters thought the proposed capital requirements were 
overly complex. The NCUA Board disagrees. Corporates are complex 
financial entities and so require some detail and nuance in their 
regulation. The Board notes that the Basel I standards, and associated 
regulations, are no more complex than those capital standards imposed 
on banking entities with similarly complex operations and activities.
    A few commenters that generally opposed the new capital standards 
stated that the NCUA's basic rationale for the proposed changes is that 
the permanence of capital and a risk-based capital standard would have 
mitigated the losses at Corporates in the past two years. This is not a 
correct statement. NCUA has long been considering amendments to improve 
corporate capital standards, even before the credit crisis of 2007. The 
new capital standards, as proposed and finalized here, are intended to 
help protect the corporates, their members, and the NCUSIF from future 
losses, whether or not those future losses are related to credit risk 
in the mortgage markets (as in 2007) or are caused by other factors.
    A few commenters questioned why NCUA was imposing capital 
requirements on corporates that were similar to banking capital 
requirements while at the same time imposing ALM and investment 
requirements that were different from those imposed on banks. The Board 
believes that while many corporates engage in activities and take on 
risks similar to banks, and thus should have a capital regime similar 
to banks, the risks that corporates pose to NPCUs are systemic risks, 
and thus different than the risks posed by one bank to another bank. It 
is true that a few very large banks may present systemic risks to the 
banking system, but the Basel I standards contained in this rulemaking 
are different than the Basel II advanced standards that very large 
banks are subject to.
    Several NPCU commenters were concerned that the likelihood of 
ongoing corporate consolidation, combined with factors in the proposal 
such as the lengthening of the MCA three year requirement to five years 
and the requisite NCUA approval for any return of PCC, all increased 
the possibility that an NPCU might find itself stuck with significant 
capital in a corporate to which that NPCU did not want to belong. 
Natural person credit unions will have to decide, going forward, what 
services they want from corporates. As part of that decision, they will 
have to decide if they are willing to contribute capital to one or more 
corporates. If they decide to contribute capital, they will have to 
take into account the possibility that the corporate may then 
consolidate or merge with another corporate. If that should happen, and 
the NPCU no longer desires services from the continuing corporate, the 
NPCU does have several options. First, it may ask the corporate to 
redeem the capital. If such redemption complies with NCUA's 
regulations, and NCUA approves the redemption, the corporate may redeem 
the capital. Second, the member NPCU can attempt to transfer (sell) the 
capital to another member. And, third, the member NPCU can attempt to 
transfer the capital to a nonmember.
    A few commenters believe the proposed capital phase-in period is 
appropriate, and one NPCU labeled it as generous. Many commenters, 
however, believe that the proposal provides too short a time period for 
the phase-in of the proposed new capital requirements.
    The Board believes that the final capital phase-in, which mirrors 
the proposed phase-in, is both appropriate and feasible. As discussed 
in the preamble to the proposed rule, the phase-in period balances the 
need for corporates to (1) quickly achieve sufficient capital, and wean 
themselves from government assistance, through solicitations of 
contributed capital and growth of RE, while (2) providing for an 
adequate opportunity to make that solicitation and achieve that growth.
    The proposed rule was issued ten months ago, and corporates have 
had some time since then to consider the ramifications of the proposal. 
Further, none of the new capital provisions will be effective until the 
first anniversary of the publication of this final rulemaking in the 
Federal Register. This one year period gives corporates ample 
opportunity to analyze the elements of this final rule, perfect their 
business plans, convince their members of the validity of their 
business plans, and solicit contributed capital.\7\ Corporates that are 
well-run should be able to make an effective solicitation so as to 
garner sufficient contributed capital by the first anniversary.
---------------------------------------------------------------------------

    \7\ Some corporates may not even need additional capital on the 
first anniversary.
---------------------------------------------------------------------------

    Under the final rule, the first specific RE target (e.g. 45 BP of 
accumulated RE) does not go into effect until the third anniversary of 
publication, and the first specific RE requirement (100 BP) does not go 
into effect until the sixth anniversary of publication. As discussed in 
the sections below on the asset liability management provisions of the 
final rule, the final investment and ALM provisions permit corporate 
credit unions a bit more leeway in the mismatch of their assets and 
liability cash flows than in the proposed rule, and the Board believes 
this should help corporate credit unions generate additional earnings 
on their assets. As also discussed below, NCUA has modeled various 
investment portfolios that corporates could purchase under provisions 
of the final corporate rule, and the Board has concluded that a well-
run corporate can, in fact, generate

[[Page 64792]]

45 BP of earnings in the first three years and 100 BP of earnings in 
the first six years as required by the capital phase-in.
    Other, more specific comments on capital are discussed in the 
section-by-section analysis below.

C. Prompt Corrective Action (PCA)

    Although prompt corrective action (PCA) applies to natural person 
credit unions (NPCUs) and to banking entities, PCA does not currently 
apply to corporates. The proposed rule contained a PCA regime similar 
to what the other banking regulators, and the Federal Deposit Insurance 
Act, impose on banks.
    The final rule adopts the proposed PCA provisions substantially as 
proposed. Each corporate will be assigned to one of five capital 
categories: Well-capitalized, adequately capitalized, undercapitalized, 
significantly undercapitalized, and critically undercapitalized. The 
potential consequences of failing to meet capital standards include 
restrictions on activities, restrictions on investments and asset 
growth, restrictions on the payment of dividends, restrictions on 
executive compensation, requirements to elect new directors or dismiss 
management, and possible conservatorship. The final rule does include 
some due process enhancements beyond those contained in the proposed 
rule.

D. Corporate Investments, Credit Risk, and Asset-Liability Management 
(ALM)

Summary of Current Investment, Credit Risk, and ALM Provisions
    The current Part 704 generally prohibits certain types of 
investments, including derivatives, stripped mortgage backed securities 
(MBS), mortgage servicing rights, and residual interests in asset 
backed securities (ABS). The rule specifies, for permissible investment 
types, that investments must be rated no lower than AA- by at least one 
NRSRO at time of purchase. Corporates that qualify for Part I expanded 
authority, however, have additional investment authority, including the 
purchase of investments rated down to A-. Corporates that qualify for 
Part II expanded authority may purchase investments rated down to 
BBB(flat). Corporates that qualify for Part III expanded authority may 
invest in certain foreign obligations; corporates that qualify for Part 
IV expanded authority may engage in derivatives transactions for 
certain specified purposes; and corporates with Part V expanded 
authority may engage in certain loan participations.
    The current rule requires that corporates maintain an internal 
investment policy that includes ``reasonable and supportable 
concentration limits'' including limits by ``investor type and 
sector.'' The current rule limits the aggregate of all investments in 
any single obligor to the greater of 50 percent of capital or $5 
million, but includes no regulatory sector limits. The rule does not 
limit investments that are structured to be subordinate, in terms of 
potential credit losses, to other securities.
Summary of Significant Proposed Investment, Credit Risk, and ALM 
Provisions
    NCUA developed the proposed changes to the investment, credit risk, 
and ALM provisions based on lessons learned from both the recent 
experience with corporate investment portfolios and their associated 
losses and comments received from the ANPR.
    NCUA determined that three major risk conditions were the primary 
contributors to the current losses in the corporate system: (1) 
Excessive investment sector concentrations, particularly private label 
RMBS; (2) excessive average-life mismatches between assets and 
liabilities; and (3) excessive concentrations in subordinated 
securities, including mezzanine securities. The proposed revisions to 
the investment and asset-liability provisions of the corporate rule 
control these risk conditions in the aggregate through the use of 
limits, many of which are tied to a corporate credit union's capital. 
The proposal provided a framework that allowed for a level of risk-
taking necessary to support the profitability of a corporate but which 
would also be continuously and adequately protected by the corporate's 
capital.
    The proposed rule established new prohibitions for investments in 
collateralized debt obligations (CDOs) and net interest margin (NIM) 
securities.
    The proposal also required that a corporate examine the NRSRO 
rating from every NRSRO that publicly rates a particular investment and 
only employ the lowest of those ratings and required that at least 90 
percent of a corporate's investments be rated by at least two NRSROs. 
The proposal eliminated Part II expanded authority, thus making ``A-'' 
the lowest possible rating for an NRSRO-rated investment purchased by a 
corporate with expanded investment authority. To qualify for Parts I 
and II (i.e., the current Parts I and III) expanded investment 
authority, the proposal required a corporate achieve and maintain 
higher capital levels, that is, a minimum six percent capital ratio.
    The proposal generally reduced the single obligor limits from 50 
percent of capital to 25 percent of capital, with slightly higher 
limits for investments in mutual funds and repurchase agreements. The 
proposal also imposed specific concentration limits by investment 
sector. Sectors included residential mortgage backed securities (RMBS), 
commercial mortgage backed securities (CMBS), student loan asset backed 
securities (ABS), automobile loan/lease asset backed securities, credit 
card asset backed securities, other asset backed securities, corporate 
debt obligations, municipal securities, and money market mutual funds, 
and an ``all others'' category to account for the development of new 
investment types. The proposed sector limits were, generally, (1) the 
lower of 500 percent of capital/25 percent of assets, or (2) the lower 
of 1000 percent of capital/50 percent of assets (for the less risky 
sectors).
    The proposal excluded certain assets entirely from both the single 
obligor concentration limit in Sec.  704.6(b) and the sector 
concentration limits in Sec.  704.6(c). The excluded assets include 
fixed assets, loans, investments in CUSOs, investments issued by the 
United States or its agencies or its government sponsored enterprises, 
and investments fully guaranteed or insured as to principal and 
interest by the United States or its agencies. Investments in other 
federally-insured credit unions, deposits in other depository 
institutions, and investment repurchase agreements would also be 
excluded from the sector concentration limits but not the single 
obligor concentration limit. Investments in CUSOs, while excluded from 
both the Sec.  704.6 concentration limits, would still be subject to 
the investment limits in the corporate CUSO rule, Sec.  704.11(b).
    The proposal limited subordinated positions in a structured 
security to the lesser of 100 percent of capital/5 percent of assets in 
any given sector class and the lesser of 400 percent of capital/20 
percent of assets in the aggregate.
    The proposal generally limited a corporate's Part III (renumbered 
from Part IV) derivatives activity to derivatives used for the purposes 
of reducing the corporate's overall risk.
Summary of Significant Investment, Credit Risk, and ALM Revisions From 
the Proposed to the Final Rule
    Based on comments received and further review, the NCUA Board 
adopted most of the proposed

[[Page 64793]]

provisions but also made some significant changes. The most significant 
changes in the final rule were the removal of the two ALM provisions 
designed to limit cash flow mismatches between assets and liabilities. 
In place of these tests, the final rule substitutes an alternative 
weighted average life extension test on the corporate's investments 
along with specific prohibitions on private label RMBS and subordinated 
securities.
    The effect of these changes is to create the following, final set 
of investment, credit risk, and ALM hurdles through which a corporate 
must run any contemplated investment purchase:
     NRSRO ratings screen. The final rule uses NRSRO ratings as 
a screening tool. The final NRSRO screen is tougher than the current 
rule provides. For example, to get by the ratings screen the corporate 
has to look at all available NRSRO ratings (not just one rating), and 
the corporate has to take the lowest of all the ratings (i.e., it can't 
cherry pick ratings). This ratings screen is exclusionary, not 
inclusionary. Even if a security gets by the ratings screen, there are 
still six additional hurdles (listed below) each security must pass 
before the corporate can buy the security.
     Prohibition of certain highly complex and leveraged 
securities. NCUA is adding to the list of outright prohibited 
securities in part 704 that are overly complex and/or leveraged. So a 
corporate cannot buy the security if it is:
    [cir] A Collateralized debt obligation (CDO), or
    [cir] A Net Interest Margin security (NIM), or
    [cir] A Private label RMBS, or
    [cir] A security subordinated to any other securities in the 
issuance.
     Single obligor limit. The final rule tightens the existing 
limit from 50% of capital to 25% of capital. So if the corporate wanted 
to buy, say, a highly rated student loan asset backed security (ABS) 
issued by ``Mainstreet Bank,'' but the corporate has already reached 
the 25% of capital limit in investments issued by the same Mainstreet 
Bank trust, the corporate can't buy that additional ABS within the same 
trust.
     Sector concentration limits. Assuming the corporate still 
wants to buy that Mainstreet Bank ABS, and it has not reached its 
single obligor limit with Mainstreet Bank, the corporate must then 
apply the sector limits for these ABS. If the purchase of the 
Mainstreet Bank ABS would put the corporate over the private label 
student loan ABS sector limit (generally, the lower of 500% of capital 
or 25% of assets), the corporate can't buy the ABS.
     Portfolio WAL not to exceed two years. If the corporate 
got the Mainstreet Bank ABS past all those hurdles above, there are 
still more hurdles to overcome. The corporate cannot buy the ABS if it 
would put the weighted average life (WAL) of the corporate's loan and 
investment portfolio over two years in length.
     Portfolio WAL (assuming prepayment slowdown of 50%) not to 
exceed 2.25 years. The corporate must then test the Mainstreet Bank ABS 
for extension risk. The corporate cannot buy the ABS if it would put 
the weighted average life of the corporate's loan and investment 
portfolio, assuming the portfolio prepayment speeds slow by 50%, out 
over 2.25 years in length.
     Interest rate risk shock test. This IRR test is in the 
current rule, and the final rule does not change this test. Assuming 
that the Mainstreet Bank ABS is floating rate, and its liabilities 
reset rates in similar fashion, it would likely not be affected at all 
by this particular test. But if its liabilities did not reprice 
similarly to the ABS (e.g., the floating rate ABS was funded by fixed 
rate liabilities), its addition to the portfolio could not cause the 
corporate's NEV to decline by more than 15 percent when the portfolio 
as a whole is shocked by 300 BP.\8\
---------------------------------------------------------------------------

    \8\ Assuming the corporate was operating under Base level 
investment authority.
---------------------------------------------------------------------------

    These final revisions provide for a simpler rule that still 
accomplishes NCUA's goal of reducing or eliminating various risks while 
allowing for sufficient potential for growth in a corporate's RE.
Investment Action Plans for Prohibited Investments
    Most of the new investment prohibitions and other credit and ALM 
requirements go into effect 90 days after publication of the final 
rule. Some corporates may hold investments that are in violation of one 
or more of these new prohibitions, and these investments will be 
subject to the investment action plan provisions of Sec.  704.10. For 
example, if a corporate holds a subordinated security prohibited by the 
revised paragraph 704.5(h)(8), and determines not to sell that 
security, it must, within 30 calendar days of the effective date of the 
704.5(h)(8) prohibition prepare and submit to the OCCU Director an 
investment action plan. 12 CFR 704.10(a). If the plan is not approved 
by the OCCU Director, the corporate must comply with the ``Director's 
directed course of action.'' 12 CFR 704.10(c).

E. Liquidity

Summary of Current Rule
    The current rule generally requires a corporate evaluate its 
liquidity needs and plan for appropriate liquidity. It also provides 
that a corporate credit union may borrow up to the greater of 10 times 
capital or 50 percent of capital and shares (excluding shares created 
by the use of member reverse repurchase agreements).
Summary of Significant Revisions
    The proposal restricted a corporate's borrowing to the lower of 10 
times capital or 50 percent of capital and shares (excluding shares 
created by the use of member reverse repurchase agreements). The 
proposal also added a sublimit for secured borrowings. The final rule 
adopts the proposal without changes.

F. Corporate Governance Provisions

Summary of Current Rule
    The current Part 704 places limitations on board representation, 
including limits on the number of trade organization representatives. 
The current rule does not, however, place any experience or knowledge 
requirements on individual corporate directors; limit the 
representation of corporate managers and officials on the boards of 
other corporates; provide for term limits; require any disclosure of 
senior executive compensation to the members of a corporate; or place 
any limits on ``golden parachute'' severance packages for corporate 
senior executives.
Summary of Significant Governance Revisions
    The final revisions require that all corporate board members hold 
either a CEO, CFO, or COO position at their member credit union or 
other member entity. The final rule will, for clarity, add the 
positions of Manager and Treasurer, as these are often the equivalent 
of CEO or CFO at smaller credit unions. The revisions also require that 
a majority of a corporate's board members be representatives of NPCU 
members. The proposal also included a six year term limit on board 
service, but this mandatory term limit has been removed from the final 
rule.
    The final revisions require that each corporate annually prepare, 
and provide to its members, a document that discloses the compensation 
of certain employees. For corporates with 41 or more employees, the 
disclosure must include the top five compensated employees. For 
corporate with 31 to 40 employees, the disclosure must include

[[Page 64794]]

the top four compensated employees. For corporates with 30 or fewer 
employees, the disclosure must include the top three compensated 
employees.
    With respect to any corporate merger, the final revisions require a 
merging federally-chartered corporate affirmatively disclose to both 
NCUA and its members any material, merger-related increase in 
compensation (i.e., an increase of more than 15 percent of annual 
compensation or $10,000, whichever is greater) for any senior executive 
or director. A state-chartered corporate must also make the merger-
related disclosure, but only to NCUA unless state law requires 
otherwise.
    The final revisions prohibit golden parachutes, that is, payments 
made to an institution affiliated party (IAP) that are contingent on 
the termination of that person's employment and received when the 
corporate making the payment is either troubled, undercapitalized, or 
insolvent. The revisions also generally prohibit a corporate, 
regardless of its financial condition, from paying or reimbursing an 
IAP's legal and other professional expenses incurred in administrative 
or civil proceedings instituted by NCUA or a state regulatory authority 
where the IAP is ultimately found liable.

G. Corporate CUSOs

Summary of Current Rule
    The current corporate CUSO provisions do not specify the particular 
services that corporate CUSOs may offer, but does provide that the CUSO 
must ``primarily serve credit unions'' and ``restrict its services to 
those related to the normal course of business of credit unions.'' The 
current rule requires the CUSO agree to allow the corporate's auditor, 
the corporate's board, and also NCUA access to the CUSO's ``books, 
records, and any other pertinent documentation.''
Summary of Significant CUSO Revisions
    The final revisions will retain the existing 704.11 requirements, 
and further require that a corporate CUSO may only engage in categories 
of services preapproved by NCUA. Brokerage services and investment 
advisory services will be preapproved in the rule, and NCUA will 
approve additional categories of services on an ad hoc basis. Once 
approved, however, NCUA may only remove a category of service through a 
rulemaking. The final rule provides extra time for a CUSO to seek NCUA 
approval of a service category, and extra time for a corporate to 
extricate itself from a CUSO that is engaged in activities not 
preapproved by NCUA.
    The final revisions further require a CUSO agree to permit the 
corporate and NCUA to access the books, records, personnel, equipment, 
and facilities of the CUSO.

H. Delay of Effective Dates

    None of these final revisions will take effect until 90 days 
following publication of this final rulemaking in the Federal Register. 
This delay in the effective dates will generally provide the 
corporates, and their NPCU members, some time to analyze and adapt to 
the final rule and to observe how NCUA is moving forward on resolution 
of the legacy asset problem.
    Some provisions of this final rule, including the capital and PCA 
provisions, will have delays in their effective dates that are much 
longer than 90 days. Those delays will be discussed below.

III. Section-by-Section Analysis

    This section, which provides a section-by-section analysis of the 
final revisions, generally follows the organization of part 704, that 
is, starting with the proposed capital (Sec.  704.3) and PCA (Sec.  
704.4) amendments, then investments (Sec.  704.5) and credit risk 
(Sec.  704.6), then asset and liability management (Sec.  704.8), then 
corporate board representation (Sec.  704.14), and then the new 
sections relating to disclosure of executive and director compensation 
(Sec.  704.19) and golden parachutes and indemnification (Sec.  
704.20).
    Many of the final revisions require new definitions that appear in 
Sec.  704.2, and the discussion of these definitions generally appears 
with the discussion of the associated substantive change to the 
corporate rule. This rulemaking revises Appendices A and B, and adds a 
new Appendix C. Since Appendix B relates to investment authority, the 
revisions to that appendix are discussed as part of the discussion of 
Sec.  704.5. Since Appendices A and C (on model forms and the risk-
weighting of assets, respectively) relate to corporate capital, the 
changes to these appendices are discussed immediately following the 
discussion of Sec.  704.3. The new subpart L to part 747 provides the 
due process associated with the new PCA provisions in Sec.  704.4, and 
so is discussed following the Sec.  704.4 discussion.
    The revisions to capital terminology in part 704 also necessitate 
conforming amendments to parts 702, 703, and 709, as discussed below.

A. Part 702 Prompt Corrective Action

    Part 702 sets forth PCA for NPCUs. The proposal contained a 
conforming amendment to paragraph 702.105(d) changing references to 
paid-in capital and membership capital to perpetual capital and 
nonperpetual capital accounts, respectively. The final 702.105(d) is 
adopted as proposed.

B. Part 703 Investments and Deposit Activities

    Part 703 sets forth the permissible investment and deposit 
activities generally applicable to federal credit unions. The proposal 
contained a conforming amendment to paragraph 703.14(b) changing 
references to paid-in capital and membership capital to perpetual 
capital and nonperpetual capital accounts, respectively. The final 
703.14(b) is adopted as proposed.

C. Part 704 Corporate Credit Unions

Section 704.2 Definitions
    New and modified definitions in Sec.  704.2 are discussed below in 
the section where the defined word or phrase appears.
Section 704.3 Capital
    Section 704.3 establishes the capital requirements for corporates. 
The final 704.3 contains six paragraphs (a) through (f). Paragraph (a) 
covers the basic capital requirements. Paragraph (b) contains the 
requirements for nonperpetual capital accounts (NCAs) and paragraph (c) 
contains the requirements for perpetual contributed capital (PCC). 
Paragraph (d) contains the requirements and procedures for establishing 
different minimum capital requirements for a particular corporate. 
Paragraph (e) contains certain other reservations of authority to the 
NCUA Board. Paragraph (f) explains the treatment of certain former 
capital accounts under the old corporate rule (i.e., membership capital 
accounts) that are not converted to the new forms of capital (i.e., 
either NCAs or PCCs).
    As discussed previously, this new 704.3 capital section will not 
become effective until October 20, 2011, and some elements of this 
section, and associated definitions, have applicability dates that are 
delayed beyond October 20, 2011.

704.3(a) Capital Requirements

    The proposed 704.3(a), along with associated definitions in 704.2, 
established a new leverage ratio, new Tier 1 risk based capital ratio 
(T1RBC ratio), and a new total risk based capital ratio (Total RBC 
ratio). The proposal established minimum of 4 percent for

[[Page 64795]]

the leverage ratio, 4 percent for the T1RBC ratio, and 8 percent for 
the Total RBC ratio. The proposal required a corporate develop goals, 
objectives, and strategies to ensure adequacy of capital. The proposal 
required that a corporate attempt to build RE to a level of 0.45 
percent of its moving daily average net assets (DANA) within 36 months 
of publication of the final rule, and submit a RE accumulation plan 
(REAP) to NCUA if it fails to do so.
    The final rule generally adopts 704.3(a), and the associated 
definitions, as proposed. Some commenters, however, sought 
clarification about certain provisions, as discussed below.

704.3(a)(1)(i) and 704.2 Definitions of Leverage Ratio

    A few commenters expressed confusion about the effective date of 
the new leverage ratio, and whether that date was actually 12 months 
following publication of the final rule, or 36 months as stated in the 
preamble. In fact, the permanent leverage ratio will become effective 
36 months after publication, but the rule does contain an interim 
leverage ratio to bridge the gap between the general effective date of 
the capital provision (i.e., 12 months after publication) and the 
permanent leverage ratio.
    The proposal, between 12 months and 36 months following publication 
of the final rule, requires a minimum 4 percent interim leverage ratio, 
which was defined as the adjusted total capital divided by moving DANA. 
The proposed definition of ``total capital'' included RE, PCC, and 
NCAs, while the proposed definition of ``adjusted total capital'' then 
excluded all NCAs in excess of the amount of PCCs. This result would 
have limited the use of NCAs to only 200 BP toward the 400 BP necessary 
to achieve the minimum leverage ratio.
    Two corporate commenters suggested that corporates be allowed to 
use NCAs, without limit to satisfy their interim leverage ratio (that 
is, until the 36 month point). One stated that the current calculation 
of interim leverage ratio will result in NCAs not being an effective 
capital tool. This commenter believes that under the proposal as 
drafted corporates will immediately solicit PCC following publication 
of the final rule so as to be in compliance with the interim leverage 
ratio at the 12 month mark. This commenter suggests, instead, that NCUA 
redefine the numerator of leverage ratio from ``adjusted total 
capital'' to ``total capital,'' thus allowing for unrestricted use of 
NCAs in the numerator until at least the third anniversary of 
publication of the final rule. This commenter states this will give 
NPCUs additional time to decide whether they want to stay in the 
corporate system and invest permanently in the corporates through PCCs, 
and will also improve the corporate's ability to grow RE in the first 
three years, as NCAs are less expensive than PCCs.
    The Board agrees with these commenters. Accordingly, in the final 
rule the numerator of the interim leverage ratio includes all elements 
of capital and permits the use of any one element without limitation. 
Hence, a corporate could use just NCAs, if it desires, to satisfy the 4 
percent interim leverage ratio requirement. Thirty six months after 
publication of the final rule, the proposal defined, and this final 
rule adopts, the permanent leverage ratio to be defined as adjusted 
core capital divided by moving DANA. Core capital, in turn, is limited 
to Tier 1 capital (i.e., RE and PCCs). Accordingly, NCAs will not count 
at all toward the permanent leverage ratio when it becomes effective 
after 36 months. The final rule also adds clarifying statements at the 
end of each of the two definitions, that is ``[T]his is the interim 
leverage ratio,'' and ``[T]his is the permanent leverage ratio,'' so 
that those who read the definitions will understand that these are two 
distinct definitions.

704.2 Definition of ``Core Capital''

    The proposal defines core capital as the sum of the corporate 
credit union's RE, paid-in capital, and the RE of any acquired credit 
union, or of an integrated set of activities and assets, calculated at 
the point of acquisition, if the acquisition was a mutual combination. 
Upon the first anniversary of the publication of the final rule, the 
new Basel I capital provisions and ratios become effective. On that 
date, the proposal adjusts the definition of core capital to make a 
nomenclature change (i.e., replace PIC with PCC) and to add to capital 
the minority interests in the equity accounts of CUSOs that are fully 
consolidated with the corporate.

704.2 Definition of ``Adjusted Core Capital''

    The permanent leverage ratio and the Tier 1 risk based capital 
ratio use adjusted core capital as the numerator. The proposal defined 
adjusted core capital as core capital modified by six different 
deductions.
    The proposed deductions required when adjusting core capital 
include the amount of the corporate's investments in consolidated 
CUSOs. Some commenters objected to this deduction, arguing that such a 
deduction varies from the Basel I standards. The Board agrees that this 
proposed deduction, as worded in the proposed, did not accurately 
reflect the Basel I standard. The deduction should be for investments 
in CUSOs that are not consolidated with the corporate, as described in 
the Basel I Accord:

    It has been concluded that the following deductions should be 
made from the capital base for the purpose of calculating the risk-
weighted capital ratio. The deductions will consist of: * * * 
investments in subsidiaries engaged in banking and financial 
activities which are not consolidated in national systems. The 
normal practice will be to consolidate subsidiaries for the purpose 
of assessing the capital adequacy of banking groups. Where this is 
not done, deduction is essential to prevent the multiple use of the 
same capital resources in different parts of the group. The 
deduction for such investments will be made against the total 
capital base. The assets representing the investments in subsidiary 
companies whose capital had been deducted from that of the parent 
would not be included in total assets for the purposes of computing 
the ratio.\9\

    \9\ International Convergence of Capital Measurement and Capital 
Standards (July 1988, updated to April 1998), Section I(c), 
paragraph 24(ii) (emphasis added). See also 12 CFR part 3, Appendix 
A, Sec.  2(c)(7)(i) (Office of the Comptroller of the Currency 
deductions from capital), and 12 CFR part 208, Appendix A, Sec.  
II.B.(ii) (Federal Reserve Board deductions from capital).

    The Board has amended the final definition of adjusted total 
capital to required deduction of investments in unconsolidated CUSOs.
    The proposed definition of adjusted core capital also requires that 
corporates should deduct from their own capital any capital they have 
contributed to other corporates. Specifically, the proposal stated:

    If the corporate credit union, on or after (the first 
anniversary of the final rule), contributes new capital or renews an 
existing capital contribution to another corporate credit union, 
deduct an amount equal to the aggregate of such new or renewed 
capital * * *.

    Some NPCU commenters specifically agreed with this deduction, 
noting that cross-corporate capitalization can inflate capital levels 
and exposes NPCU members of the contributor corporate to the problems 
of another corporate.
    One commenter asked for clarification about the meaning of ``renew 
an existing capital contribution.'' The only capital placed in another 
corporate that is exempt from this required deduction is existing PIC 
that is converted directly to PCC on the first anniversary of the 
publication of the final rule or unconverted MCAs that are amortizing 
under the provisions of paragraph 704.3(f). All other PCC, and all 
NCAs,

[[Page 64796]]

must be deducted. The Board has amended the final version of the rule 
text to clarify that if the corporate credit union contributes any PCC, 
or maintains any NCAs, at another corporate credit union, it may deduct 
an amount equal to that PCC or NCA.
    Another commenter said NCUA should consider an exception for de 
minimus member capital contributions between corporates. The Board 
considered this last comment, but does not believe a de minimus 
exception is necessary.
    One commenter objected to this proposed deduction, stating that it 
seemed to indicate that NCUA would consider any capital deposits made 
by NPCUs into corporates to have a 100 percent risk weighting, if and 
when NPCUs might fall under a risk-weighted capital system, and this 
would further hinder corporate recapitalization. The Board does not 
believe that NPCU's should equate capitalization by NPCUs of retail 
corporates with cross-capitalization of corporates for purposes of PCA.
    One commenter stated that the definition of core capital should 
include NCAs. The Board disagrees. Adding NCAs to the definition of 
core capital would undermine the permanent nature of core capital and 
the associated capital protection provided by the minimum leverage 
ratio.

704.2 Definition of ``Supplementary Capital''

    The proposed definition of supplementary capital included NCAs, a 
portion of the corporates allowance for loan and lease losses, and a 
portion of the unrealized gains on available for sale equity securities 
with readily determinable fair values. The term, which is synonymous 
with Tier 2 capital, is used in the numerator of the total risk based 
capital ratio. One commenter suggested that all of the unrealized gains 
on equity securities should count as supplementary capital. The Board 
disagrees, as this approach would be inconsistent with the Basel I 
regulations of the other banking regulators.\10\ The Board also notes 
that corporates are not likely to have much in the way of equity 
securities, as they are generally impermissible investments for 
corporates.
---------------------------------------------------------------------------

    \10\ See, e.g.,12 CFR part 208, Appendix A, Sec.  II.A.2.(e) 
(Federal Reserve supplementary capital elements).
---------------------------------------------------------------------------

704.2 Definition of ``Fair Value''

    The final rule also refines the definition of fair value to be 
consistent with Financial Accounting Standard 157.

704.2 Definition and Use of ``Moving Monthly Average Net Risk-Weighted 
Assets''

    The proposal defined the denominator of both new risk based capital 
ratios as ``Moving Daily Average Net Risk-Weighted Assets'' (MDANRA). 
Some commenters questioned the burden of daily risk weighting to 
produce the MDANRA figure. The Board agrees that a daily calculation is 
not necessary and could be quite burdensome for some corporates. 
Accordingly, the final rule replaces the denominator of both risk based 
capital ratios with a new moving monthly average net risk-weighted 
assets (MMANRA), defined to mean the average of the net risk-weighted 
assets for the month being measured and the previous eleven (11) 
months. The definition also requires that MMANRA measurements be taken 
on the last day of each month.

704.2 Definition of ``Retained Earnings''

    The final rule amends the definition of retained earnings to create 
a cross reference to GAAP: ``Retained earnings means retained earnings 
as defined under Generally Accepted Accounting Principles (GAAP).''

704.3(a)(3) RE Accumulation Target and REAP

    Some commenters incorrectly characterized the proposal as 
establishing a ``requirement'' for 45 BP of RE after three years, and 
questioned the feasibility of reaching that target under the proposed 
ALM and investment restrictions (discussed elsewhere). In fact, the 
proposal does not require 45 BP after three years, but, rather, calls 
for the submission of a RE accumulation plan (REAP) if the 45 BP target 
is not met.
    Many commenters, including both NPCUs and corporates, thought that 
the multi-step RE phase-in (i.e., target of 45 BP after three years, 
and a requirement for 100 BP after six years, and then 200 BP after 
ten) was too difficult for corporates to achieve. Commenters thought 
this was too difficult because of the current interest rate 
environment; the fact that most corporate income comes from 
investments, and not loans; and the limitations imposed by the proposed 
ALM and investment requirements (discussed elsewhere). One of these 
commenters stated this RE timetable was likely to encourage aggressive 
strategies to accumulate RE or cause a corporate ``to solicit high cost 
capital,'' and that corporates ``must not be unnecessarily forced into 
a survival mode while rebuilding capital.'' Many of these same 
commenters suggested that these milestones be changed from three, six, 
and ten years to four, eight, and twelve years, respectively. One of 
these commenters asked that these milestones be changed to five, seven, 
and twelve years, respectively. One corporate commenter, however, did 
state its belief that these RE targets and requirements were 
achievable.
    The Board disagrees with those commenters who believe the proposed 
time line is not achievable. The proposed timeline, which the Board has 
adopted in the final, provides the necessary balance between permitting 
a well-run corporate time to solicit capital and grow retained 
earnings, while ensuring that there is pressure on the corporate to 
achieve adequate capital levels.
    Of the commenters who specifically thought requiring 100 BP of RE 
by year six was too aggressive, one asked that NCUA make public its 
third-party review of this requirement, along with the assumptions used 
during the review. As discussed above, NCUA has made public the 
Kamakura report, and has made changes in response to portions of the 
report. Overall, NCUA believes these changes will make it easier for a 
corporate to achieve the necessary RE growth, as discussed in more 
detail below.
    One commenter stated that the proposal should require a state 
chartered corporate submit any REAP to both NCUA and the relevant state 
regulator, and that NCUA consult with the state regulator on the 
evaluations of the REAP. The NCUA Board agrees that it should consult 
with the relevant state regulator in these circumstances, and has 
amended the final regulation accordingly.
    Except as described above, the Board adopts the final paragraph 
704.3(a), and associated capital definitions in Sec.  704.2, as 
proposed.

704.3(b) Requirements for Nonperpetual Capital Accounts (NCAs)

    The proposal replaced membership capital accounts (MCAs) with 
nonperpetual capital accounts (NCAs). NCAs must be either term or 
notice accounts, with a minimum maturity or notice period of five 
years. Under the proposal, adjustable balance NCAs were not permitted.
    Two commenters stated that five-year notice is more appropriate 
than three-year notice, since ``this three year time period is short in 
relation to the term of some corporate assets.'' These commenters, 
however, believe that all

[[Page 64797]]

contributed capital should be five-year notice and that there is no 
need for perpetual contributed capital. The Board believes it is 
important to have some element of perpetual capital in corporates. This 
is consistent with Basel I and with the fact that, going forward, 
corporates cannot expect any future extraordinary government 
intervention.
    One NPCU stated that NCUA should continue to permit accounts that 
adjust with credit union balance sheets. This commenter stated that 
such adjustable accounts are ``necessary for the system and in times of 
tight liquidity allows credit unions to have flexibility.'' The Board 
disagrees. Capital must have a sense of permanence. Capital accounts 
that adjust based on measures that can be manipulated by the member 
lack this permanence.
    One commenter asked that, with regard to the new NCAs, the word 
``original'' be placed in front of the phrase ``minimum term.'' The 
Board agrees and has made this clarification.
    Two commenters recommended that, for ``nonmaturity'' or ``notice'' 
NCAs, the withdrawal notice be changed from five years to three years 
if the NCAs have been in existence at the corporate for at least two 
years. The Board believes this change would be confusing to implement, 
would undermine the stability of NCAs, and would be inconsistent with 
the Basel standards. Accordingly, the Board is not adopting this 
recommendation.
    A few commenters objected to the proposed change from three years 
to five and said MCA maturity should stay at three years; and one 
billion dollar NPCU stated that the proposed extension to five years 
could cause some credit unions to leave the corporate network. A few 
NPCUs stated that if NCUA wanted NPCUs to recapitalize corporates, it 
would shorten the term of MCAs instead of lengthening the term, and one 
of these NPCUs suggested a term of one to two years. The Board believes 
that the importance of having solid, perpetual capital, consistent with 
the international Basel I standards, outweighs these concerns.
    Another commenter stated that credit unions will need the 
flexibility to withdraw or change to another corporate credit union 
that meets their needs without having to wait three to five years to 
withdraw a capital deposit. The Board disagrees. Capital by its very 
nature must be stable and not subject to easy withdrawal. As discussed 
above, potential creditors and vendors of a corporate will not do 
business with the corporate absent a strong capital regime that is 
available to absorb losses ahead of these third parties.

704.3(b)(6), (c)(5) Permitting the Transfer of Contributed Capital 
Accounts (NCA and PCC) to Third Parties

    The proposal would permit members to freely transfer their NCAs 
(704.3(b)(6)) and PCCs (704.3(c)(5)) to third parties, regardless of 
membership status.
    One NPCU commenter stated that free transferability of capital was 
good, as it helped enforce market discipline. A few commenters, 
however, stated that there should be limits on the ability of a member 
to unilaterally sell or transfer their contributed capital to any other 
member or a nonmember. These commenters believe that a corporate credit 
union's board must be empowered to preapprove any proposed transfer of 
capital funds (other than in a merger or liquidation). One of these 
commenters would restrict transfers to other entities in the field of 
membership, and another commenter stated that:


    It does not appear that the corporate credit union would have 
any ability to control the transfer of or the ultimate ownership of 
its capital shares. This lack of control could lead to the required 
registration of capital shares as public securities. Such a 
registration could be required despite the wishes of the corporate 
and the majority of its members. Registration would dramatically 
increase the cost and complexity of operating a corporate. In 
addition, the free transfer of capital shares could allow 
manipulation including enabling natural person credit unions to cut 
their capital exposure to a corporate by selling shares rather than 
by putting them on notice. Alternatively, a prospective member 
credit union could buy shares rather than contributing capital 
directly to a corporate. This regulation would hamper the objective 
of building committed corporate capital.

    The Board agrees that there should be additional limits on the 
transferability of NCAs and PCCs to mitigate the possibility of 
securities laws violations. PCC and NCAs are generally subject to the 
securities laws because they meet the general definition of 
``security.''\11\ Securities issued by corporate credit unions are 
exempt from registration under the Securities Act of 1933 (SA),\12\ and 
since it is unlikely that either members or corporates would engage in 
activities involving PCC or NCAs that would trigger the application of 
broker/dealer provisions of the Securities and Exchange Act of 1934 
(SEA), the risk of securities law violations is minimal. Still, the 
anti-fraud provisions of SEA Sec.  10(b) and SEC Rule 10b-5 would apply 
to any transfer, so that members should not withhold, or misstate, any 
available financial information about the corporates when making such a 
transfer and should also ensure that the potential transferees have 
some sophistication.\13\
---------------------------------------------------------------------------

    \11\ See, e.g., 15 U.S.C. 77b(a)(1), 15 U.S.C. 77c(a)(10).
    \12\ See 15 U.S.C. 77c(a)(5), and Securities and Exchange 
Commission (SEC) Release No. 33-6758, Regulation D Revisions, 53 FR 
7866, note 10 (March 3, 1988).
    \13\ See 15 U.S.C. 78j(b).
---------------------------------------------------------------------------

    Accordingly, the final rule requires a corporate member wishing to 
transfer PCC or NCAs to a non-credit union third party must ensure the 
potential transferee obtains appropriate financial information about 
the corporate. To ensure the proper flow of information, the rule 
provides that the member must notify the corporate at least 14 days 
before consummating the transaction, and the corporate must then 
provide both the member and the potential transferee all financial 
information about the corporate available to the members or the public, 
including any call report data submitted by the corporate to NCUA but 
not yet posted by NCUA.
    The final rule also limits such transfer to nonnatural persons. 
This serves a consumer protection function and is also consistent with 
NCUA's rules on the sale of secondary capital at low income credit 
unions.

704.2 Definition of ``Aavailable To Cover Losses That Exceed Retained 
Earnings''

    NCAs must be ``available to cover losses that exceed retained 
earnings and perpetual contributed capital.''\14\ The quoted phrase is 
defined in proposed 704.2, and the definition provided that ``[t]o the 
extent that contributed capital funds are used to cover losses, the 
corporate credit union must not restore or replenish the affected 
capital accounts under any circumstances.'' Some commenters believe 
that this is a new requirement. In fact, it is not a new requirement, 
but simply a clarification of an existing requirement. The proposal 
also provided that contributed capital that is used to cover losses in 
a fiscal year previous to the year of liquidation has no claim against 
the liquidation estate. To avoid the ambiguity associated with 
different possible fiscal years, the final rule replaces ``fiscal 
year'' with ``calendar year.'' The entire final definitions now read as 
set forth in the regulatory text of this rule.\15\
---------------------------------------------------------------------------

    \14\ And PCCs must be ``available to cover losses that exceed 
retained earnings.'' 12 CFR 704.2.
    \15\ The final revisions to the corporate rule contain two 
different versions of the definitions section (Sec.  704.2): A 
temporary version that goes into effect with the bulk of the 
revisions 90 days after publication in the Federal Register, and a 
permanent version that goes into effect one year after publication 
on the effective date of the capital and PCA provisions. The 
definition of Available to cover losses that exceed retained 
earnings set forth following amendatory instruction 7 of this rule 
is the permanent version of the definition. The temporary version 
following amendatory instruction 6 of this rule refers to PIC and 
MCAs, not PCC and NCAs.

---------------------------------------------------------------------------

[[Page 64798]]

    Except as discussed above, the Board adopts the final paragraph 
704.3(b), and associated definitions in Sec.  704.2, as proposed.

704.3(c) Requirements for Perpetual Contributed Capital (PCC)

    The proposal renamed paid in capital (PIC) as perpetual contributed 
capital (PCC). Generally, the proposed terms and conditions for PCC 
tracked those of the existing PIC, with the following exceptions.
    The existing rule permits a corporate to call PIC if the corporate 
would meet its minimum levels of capital and NEV ratios after 
redemption; the proposal requires NCUA's prior approval for any such 
redemption. The proposal permits the free transferability of PCC to 
certain nonmember third parties, under the same conditions as NCAs may 
be transferred (as discussed above). The proposal also eliminated the 
existing prohibition on conditioning membership, services, or prices 
for services on a member's ownership of PIC (now to be renamed PCC).

704.3(c)(3) Callability of PCC

    Many commenters objected to the 704.3(c)(3) proposal that NCUA must 
preapprove a corporate's determination to call, or redeem, PCC. Some of 
these commenters believe NCUA preapproval is overreaching and 
unnecessary in light of other provisions in the proposed regulation. 
Some of these commenters stated that the corporate should be free to 
permit redemption of PCC, without NCUA preapproval, so long as the 
corporate would continue to meet its minimum capital requirements. Two 
commenters stated that this prohibition might discourage members from 
contributing PCC. One stated that over time RE will replace much of the 
PCC, and that should reduce NCUA's concerns with PCC redemption.
    PCC will fulfill a central role in corporate capital structures for 
many years to come. The Board wishes to ensure that, before a corporate 
lets any PCC go through redemption, the corporate truly does meet its 
minimum capital and NEV levels, and is likely to maintain those levels 
into the foreseeable future. Accordingly, the final rule retains the 
proposed requirement for NCUA preapproval of any PCC redemption.

704.3(c)(6) Conditioning Membership, Services, and Prices of Services 
on Purchase of PCC

    Many commenters recommended that NCUA not eliminate the current 
prohibition on a corporate conditioning membership, services, or prices 
for service on a credit union's ownership of PIC (PCC going forward). 
One of these commenters stated that granting the corporates the ability 
to condition payment services or other services on ``membership'' could 
force only those NPCUs who have no other alternative to place more 
capital at risk and out of their control. Another NPCU commenter stated 
that it learned from the Capital Corporate collapse in the 1990s and 
has avoided buying capital shares, and does not want to be forced to 
contribute capital going forward.
    Many other commenters, however, including many NPCU commenters, 
supported the full elimination of this prohibition. Most of these 
commenters believe this sort of decision on requiring capital 
contributions is appropriately left to the board and management of the 
corporate credit union. One commenter stated that lifting this 
prohibition was necessary to protect against free riders, noting that 
because of this prohibition the current distribution of losses among 
members of corporate was unfair.
    A few NPCU commenters even thought a corporate should require 
member capital to receive services. Some of these commenters thought 
that the requirement should be linked to the amount of the NPCU's 
deposits at the corporate, and others to an NPCU's asset size, and some 
stated that larger NPCUs should not be permitted to subscribe to lesser 
amounts of capital as a percentage of asset size.
    In the Board's view, corporates are designed to service NPCUs, and 
NPCUs own the corporates and the associated risks and rewards of such 
ownership. If NPCUs believe that corporates provide some valuable or 
essential service, then NPCUs will need to capitalize the corporates. 
Accordingly, the Board believes it is appropriate that a corporate be 
given the option of conditioning its membership, services, or the 
prices for services, on the purchase of PCC. This authority helps the 
corporate protect itself from free riders, that is, those NPCUs and 
other entities that want the benefits of the corporate without taking 
on any risks. The Board does not believe that NCUA should, by rule, 
require some minimum amount of capital contribution, but does believe 
that the corporate's board should have the authority to do so.
    Several commenters stated, however, that if this prohibition is 
eliminated, the regulation should make clear that corporates cannot 
change their policies so as to threaten immediate termination of 
essential services absent immediate PCC contributions. Many of these 
commenters suggested that an NPCU that refuses to meet a new demand for 
contributed capital be given at least 12 months to find another service 
provider.
    The Board appreciates the concern of these commenters. Corporate 
members should be given adequate time to look for alternatives should 
they find any particular, proposed conditions on membership, services, 
or the prices for services too onerous. The Board believes, however, 
that six months to find an alternative service provider should be 
appropriate. Accordingly, the final paragraph 704.3(c)(6) provides that 
a corporate must give a member at least six months written notice of 
(i) the requirement to purchase PCC, including specific amounts; and 
(ii) the effects of a failure to purchase the requisite PCC on the 
pricing of services or on the member's access to membership or 
services.
    One NPCU commenter stated that if corporates are permitted to 
require capital contributions as a condition of membership or services, 
the NCUSIF should insure the capital contribution. Another NPCU 
commenter stated that capital should be ``portable,'' meaning that if 
an NPCU wishes to move to another corporate because they may not be 
satisfied with the services being offered, then the NPCU should be free 
to shift its existing capital to the new corporate without any 
conditions or time constraints. Again, these commenters misunderstand 
the fundamental nature of capital. Capital is a buffer to ensure that 
creditors and vendors of a corporate will not be first in line to 
absorb operating losses. If NCUA insured the capital, that would be 
transferring the risk from the member-owner to the entire universe of 
insured credit unions, and that is not appropriate. Further, if NCUA 
permitted capital to be ``portable,'' it would undermine this primary 
role of capital as assuring potential creditors and vendors of the 
corporate of the continued availability of that capital to absorb 
operating losses.

704.2 Definition of Tier 2 Capital Includes Certain PCC

    Paragraphs (5) and (6) of the proposed definition of adjusted core 
capital excludes certain PCC that exceeds certain levels of RE. The 
purposes of

[[Page 64799]]

these exclusions is to force corporates to build up their RE for 
inclusion in adjusted core capital and inclusion in the corresponding 
leverage ratio and Tier 1 risk based capital ratios. The effect of 
these provisions, however, was to also exclude the excess PCC from all 
capital calculations, including Tier 2 capital ratios.
    Some commenters stated that all PCC should continue to count as 
capital. They ask that some other method be used to encourage RE growth 
but, if not, then in the alternative that excess PCC should continue to 
count as at least Tier 2 capital (i.e., and count toward the total RBC 
ratio). These commenters understood that the proposal intends to push 
corporates toward building RE growth, but they argue that any existing 
excess PCC still protects the corporate from losses. Two commenters 
stated that to the extent PCC does not count as capital it should be 
returned to the members.
    The Board agrees that excess PCC should continue to count as Tier 2 
capital. Accordingly, in the final rule the Board amends the definition 
of Tier 2 capital to include ``any perpetual capital deducted from 
adjusted core capital.''

704.2 Definition of Equity Investments

    The proposal uses the term equity investments as a deduction for 
purposes of calculating adjusted core capital, and defines the term in 
704.2 to include only investments in real property and equity 
securities. One commenter pointed out that equity investments can also 
take the form of investments in partnerships or limited liability 
companies. Accordingly, the final rule adds those investments to the 
definition.
    Accordingly, and except as described above, the Board adopts the 
final paragraph 704.3(c), and associated definitions in Sec.  704.2, as 
proposed.

704.3(d) Individual Minimum Capital Requirements

    Proposed paragraph 704.3(d) gave NCUA the authority to require 
higher minimum capital requirements of individual corporate credit 
unions. The proposal provided the corporate with notice and an 
opportunity to respond in writing before imposition of the new capital 
requirements.
    Many commenters opposed this paragraph as giving too much 
discretionary power to NCUA and NCUA examiners. Some of these 
commenters mistakenly believe that the proposal delegates this 
authority to the OCCU Director or some other ``individual.'' In fact, 
the proposal provides this authority to the ``NCUA,'' meaning the 
``NCUA Board'' (unless further delegated by the Board). The Board 
believes that this provision gives the Board powers it needs to ensure 
the health of the corporate system and the credit union system as a 
whole. The Board does agree that some additional due process may be 
appropriate, as discussed below.

704.3(d)(4) Standards for Determination of New Minimum Capital 
Requirement

    Some commenters objected to the language in proposed 704.3(d)(3) 
stating that ``levels for an individual corporate cannot be determined 
solely through the application of a rigid mathematical formula or 
wholly objective criteria. The decision is necessarily based in part on 
subjective judgment grounded in agency experience.'' These commenters 
thought this language was too subjective, and that it departed from the 
models of the other banking regulators that NCUA was purporting to 
follow. In fact, this statement is true. Further, the same language 
does appear in the regulations of the other banking regulators. See, 
e.g., 12 CFR 3.11 (OCC Regulation). Accordingly, the final rule retains 
this language.

704.3(d)(4) Procedures for Imposing New Minimum Capital Requirement

    The proposal does provide the corporate due process, that is, 
notice and an opportunity to respond in writing. The proposal generally 
provides that a corporate will have 30 days to respond to the notice, 
but that NCUA may shorten this period for good cause, and two 
commenters stated that the corporate should have at least a minimum 
time of 15 days to respond. One of these commenters stated that such 
powers should be exercised only by the NCUA Board, and not be 
delegable. Another commenter stated that, for state chartered 
corporates, the regulation should require the NCUA Board obtain the 
concurrence of the state regulator before exercising this authority.
    The Board agrees that additional due process may be warranted in 
some cases. Accordingly, the final rule includes a new paragraph 
704.3(d)(4)(vi) that permits a corporate to request an informal 
hearing. The corporate must make the request in writing, and NCUA must 
receive the request no later than 10 days following the initial notice 
of NCUA's intent to establish a different minimum capital requirement. 
Upon receipt of the request for hearing, NCUA will conduct an informal 
hearing and render a decision using the procedures described in 
paragraphs (d), (e), and (f) of Section 747.3003.
    Some of these commenters also objected to the statement that the 
NCUA decision on this matter represents ``final agency action.'' 
However, this statement is true as there is no administrative appeal 
from NCUA's decision in this matter. Accordingly, the final rule 
retains this language.
    Except as described above, the Board adopts the final 704.3(d) as 
proposed.

704.3(e) Reservation of Authority

    The proposed paragraph 704.3(e) provided for various reservations 
of authority to NCUA.
    Proposed paragraph 704.3(e)(2) gave NCUA the authority to require a 
corporate to use period end assets, instead of moving DANA, for 
purposes of calculating capital ratios. One corporate commenter 
objected to this proposed authority, stating that month-end assets can 
be more than 10 percent higher than DANA for the month. This commenter 
suggested NCUA adopt an objective standard for the use of this 
authority, such as where month-end assets are at least 125 percent of 
DANA for three consecutive months. Another commenter stated that 
corporates should be given the option of using average or period end 
assets, as NPCUs are permitted to do under the PCA regime. The Board 
disagrees, and refuses to put such limits on its authority to require 
the use of period-end assets in appropriate cases.
    Proposed paragraph 704.3(e)(3) gave NCUA authority to discount a 
particular asset or capital component of a particular corporate from 
the computation of capital. Some commenters opposed this as giving too 
much power to NCUA, the OCCU Director, and NCUA examiners. One 
commenter stated that no corporate should be treated differently from 
others just because of the examiner. The provision, however, only 
empowers the NCUA Board, not the OCCU Director or NCUA examiners 
(unless the Board delegates its authority).
    A few commenters correctly noted that the proposal does not provide 
for any particular due process before NCUA acts. Another commenter 
believes that there should be some stated time for the corporate to 
correct the deficiency that gave rise to the unsatisfactory rating.
    The Board agrees that there should be some due process associated 
with its reservations of authority under paragraph 704.3(e), and the 
final rule adds a new paragraph 704.3(e)(5) setting forth such due 
process. Before taking any action under paragraph (e), NCUA will 
provide the corporate with written

[[Page 64800]]

notice of the intended action and the reasons for such action. The 
corporate will have seven days to provide NCUA with a written response, 
and NCUA will consider the response before taking the action. Upon the 
timely request of the corporate credit union, and for good cause, NCUA 
may extend the seven-day response period.

704.3(f) Former Capital Accounts

    Many commenters suggested that three-year MCAs that are not 
converted to five-year NCAs be permitted to count as capital, and some 
stated that they should count on a two-year declining basis. These 
commenters argued that MCAs were available for some loss protection 
until such time as they were converted or returned and so should count 
in some way toward the corporate's capital requirements. One commenter 
asked whether NCUA would permit the corporate to return to its members 
three-year MCAs that were not converted to five-year NCAs.
    The Board agrees that some corporate members may refuse to convert 
their existing three-year MCAs to the new five-year NCA or to perpetual 
PCC prior to the effective date of the new capital rules (i.e., the 
first anniversary of the publication of the final rule in the Federal 
Register). The Board also agrees that the entire balance of these 
accounts is available to absorb losses until the account is closed, and 
that these unconverted MCAs should count, at least partially, as Tier 2 
capital. Accordingly, the final rule adds a new paragraph 704.3(f) that 
provides, effective on the first anniversary of publication of the 
final rule, unconverted MCAs will be treated as follows:
     For ``adjustable balance'' MCAs, the corporate will 
immediately put those accounts on notice of withdrawal (if they are not 
already on notice). The corporate will continue to adjust the balances 
of the MCA account in accordance with the original terms of the account 
until the entire notice period has run and then return the remaining 
balance, less any losses, to the member. Until the expiration of the 
notice period, the entire adjusted balance will be available to cover 
losses that exceed RE and certain contributed capital. The corporate 
may count the unconverted MCAs as Tier 2 capital on an amortizing 
basis, using the amortization method described in proposed 
704.3(b)(3).\16\ Corporates will also be required, on the first 
anniversary of the publication of the final rule, to provide members 
who hold unconverted MCAs a one-time disclosure about the status of 
their MCA accounts.
---------------------------------------------------------------------------

    \16\ This amortization method reduces the amount that counts 
towards capital to zero when one year is remaining on the notice 
period or term. This amortization method also assumes that the 
adjustment is determined based on a relatively permanent measure, 
such as the member's assets, and not on some impermanent measure, 
such as the member shares at the corporate.
---------------------------------------------------------------------------

     For three-year term MCAs, the corporate will return the 
MCAs at the expiration of the three-year term. Again, until the 
expiration of three-year term, the entire account balance will be 
available to cover losses that exceed RE and certain other contributed 
capital. The corporate may count the unconverted MCAs as Tier 2 capital 
on an amortizing basis, using the amortization method described in 
proposed 704.3(b)(3). Corporates will also be required, on the first 
anniversary of the publication of the final rule, to provide members 
who hold unconverted MCAs a one-time disclosure about the status of 
their MCA accounts.

Part 704, Appendix A--Capital Prioritization and Model Forms

    The current Appendix A to part 704, entitled Model Forms, contains 
forms that members provide the corporate on an annual basis 
acknowledging the terms and conditions of the members' PIC and MCA 
accounts. The proposal renamed Appendix A as Capital Prioritization and 
Model Forms.
    The proposed Appendix A had two parts. Part I, which is new, 
provided the corporate's board of directors an option to give entities 
that contribute new capital to the corporate priority--in terms of 
availability to absorb losses and payout in liquidation--over existing 
capital contributions. New capital in this context was defined as any 
capital contributed more than 60 days following the publication of the 
final rule. The purpose of this provision is to provide a tool to the 
corporate for facilitating capital growth. Part II contained amended 
model disclosure forms that cover MCAs, PIC, NCAs, and PCCs. The forms 
included variable disclosures depending on whether the corporate 
exercises the option described in Part I.
    NCUA received very few comments on Appendix A, but the final rule 
does include two minor changes from the proposed.
    Consistent with the proposed clarifying amendments to Sec.  709.5, 
Model Form A in Appendix A of the proposal included disclosure language 
that depleted capital has no claim against the liquidation estate for 
claims filed beyond the fiscal year of depletion. For clarity and to 
reduce the potential ambiguity associated with ``fiscal year,'' the 
final rule substitutes ``calendar year'' for ``fiscal year.'' The final 
rule also contains a similar revision to the payout priority paragraphs 
709.5(b)(7) (for NCAs) and (b)(9) (for PCC holders).
    Also, since the effective date of the final rule will generally be 
ninety days following the date of publication, the final rule modifies 
the definition of new contributed capital for purposes of Part I, 
changing if from capital contributed more than 60 days following 
publication to capital contributed more than 90 days following 
publication.
    Accordingly, and other than as described above, the final rule 
adopts Appendix A as proposed.
    Part 704, Appendix B relates closely to the investment (Sec.  
704.5), credit risk (Sec.  704.6) and asset-liability (Sec.  704.8) 
provisions of the corporate rule, and is discussed below in connection 
with those provisions.

Part 704, Appendix C--Risk Weighting of Assets for Risk Based Capital 
Calculations

    The current corporate rule has no risk weighted capital ratios or 
provisions. The proposal included two new minimum capital ratios 
defined in terms of risk-weighted assets and activities. Proposed 
Appendix C contained the detailed instructions for assigning risk 
weights, including:
     Assets that appear on the corporate's balance sheet will, 
generally, be risk-weighted at zero percent, 20 percent, 50 percent, or 
100 percent, with less risky assets (e.g., treasury bills) given lower 
percentages, and more risky assets (e.g., loans) given higher 
percentages.
     Activities that involve risk but that may not appear on a 
corporate's balance sheet (e.g., an interest rate swap, or a guaranteed 
line of credit not yet drawn upon) are assigned a conversion factor and 
then risk weighted as if the underlying assets were, in fact, on the 
corporate's balance sheet. Recourse obligations (e.g., a recourse 
obligation on a transferred loan) and direct credit substitutes (e.g., 
a mortgage backed security that is subordinated to other securities in 
the same issuance) are generally treated as if the entire amount of the 
supported asset is on the credit union's balance sheet. Residual 
interests (e.g., retained, subordinated interests in a loan or loan 
participation transfer, or a retained credit enhancing interest-only 
strip) have different, more severe risk weighting calculations.

[[Page 64801]]

     A corporate may employ a ratings-based risk weighting 
option for certain investments, (i.e., a recourse obligation, a direct 
credit substitute, a residual interest, or an asset- or mortgage-backed 
security extended in connection with a securitization) that have NRSRO 
ratings. When there is more than one available NRSRO rating, the 
corporate must use the lowest rating.

Appendix C, Paragraph I(a) Scope

    The final rule amends paragraph I(a)(4) to emphasize that this 
Appendix does not provide authority for corporates to invest in or 
purchase any particular type of asset or to engage in any particular 
type of activity. In other words, a corporate credit must have other 
identifiable authority for any investment it makes or activity it 
engages in. So, for example, this Appendix describes risk weightings 
for subordinated securities, even though the final Sec.  704.5 
prohibits corporates from investing in subordinated securities and so a 
corporate credit union cannot invest in subordinated securities. This 
risk-weighting provision is retained because it is possible that a 
corporate could come into possession of a security that is 
impermissible for direct investment (e.g., through enforcement of a 
lien on a defaulted loan), or that such securities that are 
impermissible now might become permissible in the future, and Appendix 
C will not have to be amended to deal with those situations.

Appendix C, Paragraph II(a) Risk Weighting of On-Balance Sheet Assets

    A few commenters sought clarity on the risk weighting for ABS and 
MBS. Asset backed securities are risk weighted in the ``all others'' 
risk weighting category (i.e., 100 percent risk weighting) unless rated 
using the ratings based approach. For private label MBS that are backed 
by non-qualifying mortgage loans, or a combination of non-qualifying 
and qualifying mortgage loans, these MBS are also risk-weighted at 100 
percent, again unless rated using the ratings based approach. Only MBS 
backed entirely by qualifying mortgages may use the 50 percent risk 
weighting permitted by paragraph II(a)(3)(iii).

Appendix C, Paragraph II(b) Risk-Weighting of Off-Balance Sheet Items

Paragraph II(b)(6) Off-Balance Sheet Derivative Contracts; Interest 
Rate and Foreign Exchange Rate Contracts (Group F).--
    One commenter stated that NCUA should consider excluding off-
balance sheet items from the risk-based assets calculation. This 
commenter stated that an alternative may be to allow a corporate to 
establish a distinct capital pool for off-balance sheet items to 
prevent any confusion about the items having the same risk as on-
balance sheet assets of the corporate. The Board believes the rule as 
proposed is clear enough on the treatment of on-balance sheet and off-
balance sheet items.
    One commenter noted that the proposal assigns derivative risk 
weights for interest rate swaps and foreign currency swaps, but not for 
other types of derivatives, and corporates may, if authorized by NCUA 
under the Expanded Authorities, engage in other forms of derivative 
transactions. The commenter sought clarification of this issue. The 
Board agrees that clarification is necessary, and so the final rule 
includes an ``all others'' catch-all category of derivative risk 
weighting. As with interest rate swaps and foreign currency swaps, the 
credit equivalent amount for these other derivatives is generally 
determined by summing the current credit exposure and the potential 
future credit exposure. Appendix C, Paragraph II(b)(6)(ii). The current 
credit exposure is calculated the same way for all derivatives, 
including other derivatives. Appendix C, Paragraph II(b)(6)(ii)(A). The 
potential future credit exposure is determined by multiplying the 
notional principal times a credit conversion factor. Appendix C, 
Paragraph II(b)(6)(ii)(B). The size of this credit conversion factor 
depends on the remaining maturity of the derivative. For the catch-all 
derivatives category, the conversion factors in the final rule are ten 
percent (remaining maturity of one year or less), 12 percent (remaining 
maturity of over one year but less than five years), and 15 percent 
(remaining maturity over five years). This treatment of these other 
derivatives is similar to that used by the Federal Reserve and the 
other banking regulators. See 12 CFR part 208, Appendix A, Paragraph 
III.E.2.e. (Capital Regulation of the Board of Governors of the Federal 
Reserve).
    After the credit equivalent amount is determined for any 
derivative, including the catch-all category, a risk weighting is 
applied to the credit equivalent amount depending on the nature of the 
counterparty. Appendix C, Paragraph II(b)(6)(iv)(A). The maximum risk 
weight, however, for the credit equivalent amount of any derivative 
contract is 50 percent.
    One commenter sought clarification on the effects of collateral 
posted by derivative counterparties on the risk weighting of those 
derivatives. Appendix C only recognizes certain forms of collateral for 
the purposes of risk-weighting: cash, treasuries, U.S. Government 
agency securities, securities issued by the central governments of OECD 
countries, and securities issued by multilateral lending institutions 
or regional development banks in which the United States is a 
member.\17\ The portion of the derivative's credit equivalent amount 
equal to the fair market value of this collateral is generally risk-
weighted at 20 percent. See Appendix C, Paragraphs II(a)(2)(ii), (vii), 
(xiii), and (xv).
---------------------------------------------------------------------------

    \17\ Other forms of collateral, or risk-weighting percentages, 
may be used for risk-weighting if the derivatives counterparty is a 
qualified securities firm. See Appendix C, Sections II(a)(1)(viii) 
and II(a)(2)(viii).
---------------------------------------------------------------------------

    Another commenter asked whether derivatives used for hedging the 
credit risk of other assets in the corporate's portfolio would have a 
reduced, or zero, risk weighting. The answer is no. Whether or not a 
derivative is used for hedging is not relevant to its risk weighting 
for purposes of these Basel I capital ratio calculations.

Appendix C, Paragraph II(c) Risk Weighting of Recourse Obligations, 
Direct Credit Substitutes, and Certain Other Positions

Paragraph II(c)(3) Ratings Based Approach (RBA)
    One commenter asked for clarification on the discretion of 
corporates to choose between a ratings-based, and non-ratings based, 
approach to risk weighting for those investments that carry an NRSRO 
rating and could be risk-weighted using the RBA. The proposed rule 
language could be interpreted as permitting corporates the freedom to 
choose their ratings approach if both the general risk weighting and 
RBA risk weighting might apply, and, perhaps, to apply differing 
approaches to differing securities on the same call report. To ensure 
consistency, the Board has added a new paragraph II(c)(3)(iii) to the 
final rule to require a corporate that uses RBA risk weighting for one 
or more securities on a particular call report use the RBA approach for 
all eligible securities on that call report. This requirement is 
consistent with how the other banking regulators have addressed this 
issue, at least informally. See, e.g., 73 FR 43993 (July 29, 2008) 
(``Regardless of the method a banking organization chooses [on a call 
report], it would have to use that approach consistently for all 
corporate exposures.''). The Board also notes that, currently, RBA is 
not permissible under Basel I for corporate debt obligations, even 
short-term debt

[[Page 64802]]

obligations.\18\ Without the RBA option, corporate debt will generally 
be risk weighted at 100 percent. The Board has determined a lower risk 
weight may be appropriate for highly-rated, short term corporate debt 
(i.e., an original or remaining final maturity of 120 days or less), as 
proposed by the other banking agencies in their Basel II 
regulations.\19\
---------------------------------------------------------------------------

    \18\ In the proposal, the RBA is only permitted for a position 
that is a ``recourse obligation, direct credit substitute, residual 
interest, or asset- or mortgage-backed security * * * .''
    \19\ [Reserved]

------------------------------------------------------------------------
                                                             Risk-weight
                 Short term rating category                   percentage
------------------------------------------------------------------------
Highest Investment Grade...................................           20
Second-Highest Investment Grade............................           50
Third-Highest Investment Grade.............................          100
Below investment grade.....................................          150
No applicable external ratings.............................          100
------------------------------------------------------------------------

    Accordingly, paragraph II(c)(3)(ii)(A)(1) is amended in the final 
rule to permit corporates the optional use of the RBA for short term 
corporate debt.

Section 704.4 Prompt Corrective Action (PCA)

    The proposed PCA provisions are similar to those currently 
applicable to banks. Under the proposal, each corporate would be 
assigned to one of five capital categories: well-capitalized, 
adequately capitalized, undercapitalized, significantly 
undercapitalized, and critically undercapitalized. The potential 
consequences of failing to meet capital standards include restrictions 
on activities, restrictions on investments and asset growth, 
restrictions on the payment of dividends, restrictions on executive 
compensation, requirements to elect new directors or dismiss 
management, and possible conservatorship. The proposed due process for 
credit unions and their employees associated with the new PCA 
provisions was set out in a new subpart to part 747 of NCUA's rules.
    Many commenters thought generally that the imposition of PCA 
standards for corporates was a good idea and long overdue. A few 
commenters stated that the PCA powers given to NCUA under the proposal 
were appropriate, because as long as the possibility exists for 
reckless behavior at corporate credit unions, the agency needs the 
power to intervene. One NPCU commenter said that it at first thought 
the proposal gave NCUA too much power and was overreaching, but then 
upon further reflection changed its mind given what has happened and 
NCUA's central role to oversee the corporate system. One corporate 
commenter specifically stated that the minimum four percent (leverage 
and Tier 1 risk based capital ratios) and eight percent (total risk 
based capital ratio) were appropriate for adequate PCA capitalization.
    Many commenters, however, thought that the proposed PCA provisions 
gave NCUA too much discretionary power and room for arbitrary 
decisions. Some commenters saw a general need for more clarity and 
certainty in the due process and appellate rights associated with PCA 
actions. The Board has addressed these concerns with some changes to 
the final rule as discussed below.

704.4(a) Purpose

    This proposed paragraph set forth the purpose of prompt corrective 
action. One sentence, related to the coordination with the state 
authorities for state-chartered corporates on discretionary supervisory 
activities, was amended and moved in the final rule to paragraph 
704.4(f). The amendment is discussed below.

704.4(b) Scope

    This proposed paragraph sets forth the scope of the PCA section.

704.4(b)(2) Prohibition on Advertising of PCA Category Without Prior 
NCUA Approval

    The proposal required that no corporate may state in any 
advertisement or promotional material its PCA category unless NCUA 
specifically permits such statement or the law requires it. Many NPCU 
commenters stated that corporates should be required to disclose their 
capital category as the proposed prohibition denies transparency to the 
corporate's member/owners and makes it difficult for them to do their 
due diligence.
    The Board is sympathetic to the concerns of the commenters. The 
members of a corporate need some transparency on the corporate's 
activities. The members are ultimately responsible for what the 
corporate does or does not do, and the members usually have both 
capital and uninsured shares at risk in the corporate. NCUA understands 
this, and will be taking additional actions in the future, such as 
improved call reporting requirements, to increase such transparency, at 
least with regard to the balance sheet. In fact, likely 99 percent of 
the time, a member will be able to determine a corporate's PCA status 
from the call report since NCUA will be requiring that a corporate 
report its capital levels, including its Leverage, T1RBC, and Total RBC 
ratios, on the call report. If members need additional financial 
information beyond the call report, they can request the corporate 
provide them the information voluntarily, or even involuntarily in 
response to a member petition filed under the member inspection 
process. 12 CFR 701.3. And, of course, the members have the ultimate 
power over their corporate board, since the members elect--and can 
refuse to reelect--board directors who are not responsive to the 
members.
    NCUA wants to clarify one aspect of the members' rights to 
financial information from their corporates. Exam reports, and other 
documents prepared by NCUA, or prepared specifically by the corporate 
at NCUA's request or in response to an NCUA request, belong to NCUA and 
not to the corporate.\20\ The corporate will not be able to release 
this information to anyone, including the corporate's members, without 
obtaining NCUA's prior approval.
---------------------------------------------------------------------------

    \20\ State regulators will likely have similar controls over 
their interactions with their state chartered corporates.
---------------------------------------------------------------------------

    One commenter agreed with the proposed prohibition on publicizing 
PCA category, but thought it needed to be clarified since certain PCA 
terms, such as ``adequately capitalized'' and ``well capitalized,'' are 
common expressions and could be used unintentionally. The Board 
understands that such phrases might be used unintentionally, but 
believes it important that corporates strive as much as possible not to 
discuss their capital adequacy in the public media.

704.4(c) Notice of Capital Category

    The proposal set forth the effective date of a PCA capital 
category, and when the corporate must give notice to NCUA of a change 
in capital category, and vice versa.

704.4(c)(2)(ii) Notice of Capital Category

    This paragraph provides for NCUA notice to the corporate of a 
change in capital category. One NPCU commenter complained that this 
provision appears to give NCUA the authority to subjectively reclassify 
a corporate capital classification based on administrative review, and 
the commenter objected to this. The Board notes that this provision 
does not give NCUA substantive authority to change a PCA category. Such 
authority arises from other provisions, such as 704.3(d)(2) and 
704.4(d)(3). These

[[Page 64803]]

provisions each have their own associated due process.

704.4(d) Capital Measures and Capital Category Definitions

    The proposal set forth the various PCA capital categories and the 
minimum capital ratios for each category.

704.4(d)(3) Authority of NCUA, After Due Process, To Downgrade a 
Corporate One PCA Capital Category for an Unsafe or Unsound Condition 
or Practice

    Some commenters opposed the proposed downgrade authority in 
704.4(d)(3) as giving too much power to NCUA examiners and the OCCU 
Director. In fact, under the proposal this authority would reside in 
the NCUA Board (subject to delegation), not the OCCU Director or 
examiners.
    One commenter who opposed this provision stated that probably 
within the past five years every corporate would have been downgraded 
because it had at least one Corporate Risk Information System (CRIS) 
rating of three or lower.\21\ Another NPCU commenter expressed concern 
that NCUA might use this power to downgrade a corporate to force an 
involuntary merger, resulting in a transfer of the NPCU member, and his 
capital accounts, to another corporate which the NPCU may not want to 
support. Two commenters stated that the rule needed to provide a 
corporate with the opportunity, and time, to correct the deficiencies 
leading to the adverse CRIS rating before a PCA downgrade. Two of these 
commenters noted that during the exam process corporates are given a 
time frame to correct deficiencies.
---------------------------------------------------------------------------

    \21\ The proposal, however, does not require NCUA enforce a PCA 
downgrade because of a low CRIS rating--it only empowers the NCUA 
Board to take such action.
---------------------------------------------------------------------------

    The Board believes the discretionary authority vested in it by 
proposed 704.4(d)(3) to downgrade a corporate is appropriate. The Board 
notes that it would not normally authorize a downgrade of a corporate 
based solely on a negative CRIS rating until the corporate had had a 
reasonable opportunity to correct the deficiencies underlying the CRIS 
rating.
    The Board also notes that it is highly likely that there will be 
some corporate combinations in the coming years. While most of these 
mergers would be voluntary, some might be involuntary. NPCUs should 
take this fact into account when deciding which corporate they will use 
for services and how much capital they are willing to contribute to 
that corporate.

704.4(d)(4) Modification of Minimum PCA Percentages

    Proposed 704.4(d)(4) permits the NCUA, for good cause, to modify 
any of the minimum PCA percentages for a particular corporate as 
provided for in 704.3(d). A few commenters objected to this provision 
because they thought this proposal transfers power from the NCUA Board 
to the OCCU Director. Again, this authority is simply a cross reference 
to the authority in 704.3(d). There is no delegation to the OCCU 
Director, and 704.3(d) provides the affected corporate with due 
process.

704.4(e) Capital Restoration Plans

    The proposal described when a corporate must file a plan with the 
NCUA, the contents of the plan, the consequences for failure to file a 
plan, and NCUA's processing and approval of the plan.

704.4(e)(5) Disapproval of Capital Plan

    Proposed 704.4(e)(5) provides that if an undercapitalized corporate 
does not submit a capital restoration plan acceptable to NCUA the 
corporate will be downgraded to significantly undercapitalized.
    Two commenters protested that this allows the Director of the OCCU 
to treat a corporate that is undercapitalized the same as if it was 
significantly undercapitalized, and allows the Director to do so for an 
undue length of time. The Board disagrees. The PCA provisions encourage 
a corporate to file a timely and realistic capital restoration plan. If 
a corporate fails to do that, the Board must have the authority to take 
appropriate action to protect the corporate, its members, and the 
NCUSIF. In addition, the proposal makes no delegation to the OCCU 
Director.

704.4(f) Mandatory and Discretionary Supervisory Actions

    This proposed paragraph sets forth various mandatory and 
discretionary PCA actions depending on a corporate's PCA category. One 
commenter thought that the PCA supervisory actions that come into play 
depending on the corporate's PCA capital categories, and which are 
variously labeled within the proposal as mandatory or discretionary at 
the given capital category, should never be mandatory. Instead, they 
should all be discretionary with NCUA. The Board disagrees. The Board 
wants corporates to know, with certainty, that certain PCA effects will 
happen if a corporate falls into a particular PCA category.
    A few commenters asked that, for discretionary PCA actions against 
state chartered corporates, if NCUA determines such an action is 
appropriate, NCUA give the appropriate state supervisory authority 
(SSA) an opportunity to take the action separately from, or jointly 
with, NCUA. As pointed out by the commenters, this approach is 
consistent with NCUA's PCA rules for NPCUs located in paragraph 
702.205(c) of part 702. Accordingly, the final rule amends paragraph 
704.4(f)(2) to permit the appropriate SSA an opportunity to take 
discretionary PCA actions independently from, or jointly with, NCUA.

704.4(g) Directives to Take Prompt Corrective Action

    The proposed paragraph requires advance notice of pending 
directives to significantly and critically undercapitalized corporates. 
There were no significant comments on this paragraph.

704.4(h) Procedures for Reclassifying a Corporate Credit Union Based on 
Criteria Other Than Capital

    The proposed paragraph requires advance notice of intent to 
reclassify and makes reference to the associated due process provision. 
There were no significant comments on this paragraph.

704.4(i) Order to Dismiss a Director or Senior Executive Officer

    The proposed paragraph provides that affected individuals are 
entitled to a copy of the order or directive provided to the corporate, 
along with notice of the right to seek reinstatement. The paragraph 
also makes reference to the associated due process. There were no 
significant comments on this paragraph.

704.4(j) Enforcement of Directives

    The proposal cross references Sec.  747.3005 as the source of the 
process for enforcing PCA directives. There were no comments on this 
paragraph.

704.4(k) Remedial Actions Towards Undercapitalized, Significantly 
Undercapitalized, and Critically Undercapitalized Corporate Credit 
Unions

    The proposal prescribes certain remedial actions for corporates in 
these PCA categories.

704.4(k)(1) Prohibition on Undercapitalized Credit Union Paying 
Dividends on Capital Accounts

    Proposed 704.4(k)(1) prohibited a corporate credit union from 
making any capital distribution, including payment of dividends on 
perpetual and nonperpetual capital accounts, if, after

[[Page 64804]]

making the distribution, the credit union would be undercapitalized.
    A few commenters supported this prohibition. Many commenters, 
however, were opposed to this prohibition, generally saying that this 
undermined the attractiveness of capital accounts and would discourage 
recapitalization of the corporate credit union system, and that the 
decision on payment of dividends should be left to the corporate's 
board of directors. One commenter stated that this prohibition could 
perpetuate the undercapitalized condition. Several of these commenters 
stated that this prohibition should be limited to significantly or 
critically undercapitalized corporates. Several others said that this 
prohibition should be tied to some sort of minimum RE ratio, not the 
fact that the corporate may be undercapitalized.
    The Board disagrees with the commenters that oppose the 
prohibition. When a corporate is undercapitalized, the payment of 
dividends on existing capital depletes the corporate's RE and worsens 
the corporate's capital position, increasing the odds of the 
corporate's failure. The Board disagrees with those commenters that 
believe that a corporate must be significantly undercapitalized before 
it is in true capital trouble. The undercapitalized PCA category 
indicates serious capital problems that the corporate must address, and 
anything that undermines capital retention and growth in the 
undercapitalized PCA category must be controlled. The Board notes that 
this prohibition on the payment of dividends at undercapitalized 
corporates is also consistent with the Basel capital regulations of the 
other banking regulators.
    The Board does believe that the NCUA's authority to waive the 
prohibition as stated in the proposal is unnecessary (due to 704.1(b)), 
and perhaps even harmful, as this internal waiver language suggests 
that the NCUA might grant such dividend waivers as a matter of routine. 
Accordingly, the final rule eliminates the NCUA waiver authority from 
the text of 704.4(k)(1).

704.4(k)(2)(v) Discretionary Safeguards

    This proposed paragraph stated that NCUA may, with respect to any 
undercapitalized corporate credit union, take one or more of the 
actions described in paragraph (k)(3)(ii) (e.g., for significantly 
undercapitalized corporates) if the NCUA determined those actions are 
necessary to carry out the purpose of the PCA section.
    Many commenters thought this proposed paragraph went too far. 
Several of these commenters mischaracterized this authority as residing 
with the OCCU Director when, in fact, under the proposal this authority 
would reside in the NCUA Board (subject to delegation). Some commenters 
stated that under this provision, the NCUA could fire any employee and 
or remove any board at any existing corporate today, and will be able 
to do so for years to come as long as the corporates remain 
undercapitalized. One commenter called this provision outrageous, and 
two others questioned its constitutionality. Another commenter said 
these powers should be reserved only for corporates categorized as 
either significantly or critically undercapitalized.
    The Board agrees with this last commenter, and has eliminated this 
proposed paragraph from the final rule.

704.4(k)(6)(ii)(C) Restricting the Activities of Critically 
Undercapitalized Corporates

    Proposed paragraph 704.4(k)(6)(ii)(C) prohibits a critically 
undercapitalized corporate from amending its charter or bylaws without 
the prior approval of the NCUA, except as necessary to carry out any 
other requirement of law, regulation, or order.
    A few commenters stated that this usurped the authority of state 
regulators over state charters. The Board disagrees. A corporate that 
is critically undercapitalized represents a significant risk to the 
NCUSIF. Accordingly, the NCUA must have control over any significant 
activities that corporate might undertake, including, but not limited 
to, charter changes that affect the control or governance of the 
corporate.
    Proposed paragraph 704.4(k)(6)(ii)(F) prohibited a corporate from 
paying interest on new or renewed liabilities at a rate that would 
increase the corporate credit union's weighted average cost of funds to 
a level significantly exceeding the prevailing rates of interest on 
insured deposits in the corporate credit union's normal market areas. 
One commenter stated that corporates under PCA should not be restricted 
to dividend rates in the region the institution is located since some 
corporates have national fields of membership.
    The Board notes that most corporates, even with national FOMs, have 
a concentration of members within a particular area of the country. In 
the case of a corporate which has no such identifiable concentration, 
the market area of the corporate would be the entire nation. 
Accordingly, the Board sees no need to amend the paragraph as proposed.

704.8(j)(2)(ii) Proposed PCA Downgrade for Failure To Correct NEV Test 
Failures

    The proposed paragraph 704.8(j)(2) in the asset liability section, 
would require PCA category downgrades for failure to correct NEV test 
failures. One commenter recommended that PCA compliance and regulatory 
remedies be eliminated for the NEV type testing, stating that there was 
no precedent for the application of PCA beyond the three ``routine 
capital measures.'' The Board strongly disagrees. Corporates must 
comply with the corporate rule's NEV requirements. And, if a corporate 
fails to comply, NCUA must have the supervisory tools to deal with such 
noncompliance. The PCA downgrade provisions in 704.8(j)(2)(ii) provide 
the NCUA with the necessary tools.
    One commenter suggested that there should be a phase-in period for 
the new PCA requirements, but this commenter did not indicate whether 
the desired phase-in was over and above the 12 months currently 
envisioned under the proposal. The final rule retains the one-year 
phase-in of the PCA provisions as proposed.
    Except as discussed above, the Board adopts the final Sec.  704.4 
as proposed.
    The proposal also included a new subpart M to Part 747, setting 
forth the procedures and due process available in connection with the 
PCA provisions of Sec.  704.4. The proposal adopts subpart M as 
proposed.

704.5 Investments

704.5(a) Through 704.5(g)

    The proposal did not contain any amendments to these seven 
paragraphs, and they remain as in the current rule.

704.5(h) Prohibitions

    The proposed paragraph 704.5(h) added prohibitions on corporate 
credit unions investing in collateralized debt obligations (CDOs) and 
net interest margin securities (NIMs).
    Many commenters supported the prohibition on CDOs and NIMs, and the 
final rule retains these prohibitions. Many commenters also stated a 
desire for additional restrictions on corporate investments. These 
additional restrictions ranged from limiting corporate credit unions to 
investing only in government securities to additional prohibitions on 
securities, including residential mortgage-backed securities (RMBS) and 
subordinated securities that caused the credit union industry so much 
of a loss. NCUA hired

[[Page 64805]]

Kamakura Corporation (Kamakura) to assist in analyzing the proposed 
rule, and Kamakura also recommended prohibiting investments in 
subordinated securities and placing further limits on private label 
RMBS.\22\
---------------------------------------------------------------------------

    \22\ Kamakura Report, p. 10.
---------------------------------------------------------------------------

    The Board agrees with these commenters and, accordingly, has added 
a new paragraph (h)(7) to the final rule to prohibit corporates from 
investing in private label RMBS. Private label RMBS are not guaranteed 
by the United States Government, its agencies, or its sponsored 
enterprises. The RMBS' underlying assets, residential mortgage loans, 
are also more sensitive to macro-economic factors than other 
investments available to corporate credit unions. In fact, of the 
current combined losses at Western Corporate Federal Credit Union 
(WesCorp) and U.S. Central Federal Credit Union (U.S. Central), over 95 
percent were related to private label RMBS. NPCUs also invest directly 
in residential mortgages, and by prohibiting corporates from purchasing 
private label RMBS, the pro-cyclical nature of corporate and NPCU 
balance sheets is also diminished. Given the lack of a guarantee, the 
sensitivity of mortgages to macro-economic factors, the concentration 
of mortgages on the balance sheets of natural person credit unions, and 
the recent history of corporate investments, the NCUA Board believes a 
prohibition on private label RMBS is warranted.

704.2 Definition of Private Label Security

    The final rule defines private label security as ``a security that 
is not issued or guaranteed by the U.S. government, its agencies, or 
its government-sponsored enterprises (GSEs).''

704.2 Definition of Residential Mortgage-Backed Security

    One commenter noted that while the proposed rule defined the terms 
``residential property'' and ``residential mortgage backed security,'' 
the proposed definition of RMBS did not include the use of the phrase 
``residential property.'' The Board agrees that, for precision, the 
RMBS definition should refer to ``residential property,'' and the final 
rule now defines RMBS as ``a mortgage-backed security collateralized 
primarily by mortgage loans on residential properties.'' Also, as a 
point of clarification, this 704.2 definition of RMBS includes not only 
securities primarily backed by first lien residential mortgages, but 
also securities primarily backed by other-than-first-lien residential 
mortgages, such as home equity loans.

704.5(h)(8) Prohibiting Subordinated Securities

    The Board has also added a new paragraph 704.5(h)(8) to the final 
rule prohibiting investment in subordinated securities. Subordinated 
securities present greater credit risk, liquidity risk, and price 
volatility than more senior securities. Losses on subordinated 
securities may at times reach 100 percent of principal, even when a 
more senior security in the same issuance may only lose pennies on the 
dollar. In fact, over 48 percent of the current combined losses 
incurred by WesCorp and U.S. Central are attributable to subordinated 
securities, mostly subordinated RMBS.

704.2 Definition of Subordinated Security

    The proposal defined subordinated security in Sec.  704.2 as ``[a] 
security that has a junior claim on the underlying collateral or assets 
to other securities in the same issuance. If a security is junior only 
to money market fund eligible securities in the same issuance, the 
former security is not subordinated for purposes of this definition.'' 
The final rule retains this definition, but adds the words ``at the 
time of purchase'' because a subordinated security can lose its 
subordination as the more senior tranches are paid down. The final rule 
also moves the existing prohibition on purchasing stripped MBS from 
paragraph (h)(7) to (h)(9).
    The relationship between the other investment, credit risk, and ALM 
prohibitions, and these two 704.5(h) prohibitions on private label RMBS 
and subordinated securities, is discussed in more detail below.
    Accordingly, and except as described above, the Board adopts the 
final Sec.  704.5, and associated definitions, as proposed.

704.6 Credit Risk Management

    The proposed Sec.  704.6 included tighter single obligor limits and 
new sector concentration limits. The proposal also required that all 
corporate investments, other than in another corporate or CUSO, have a 
minimum credit rating from all publicly available NRSROs of no lower 
than AA- for long-term ratings and A-1 for short-term ratings. 
Additionally, 90 percent of corporate investments must have at least 
two NRSRO ratings.
    Several commenters thought the proposed tightening of the existing 
single obligor limits, and establishing of new sector limits, was a 
positive change, and some asked for even tighter restrictions. On the 
other hand, several commenters thought the proposed limits were too 
tight and may increase risk and limit the corporates' ability to manage 
their businesses and balance sheets efficiently. The Board agrees that 
some of the proposed limits should be tightened and others relaxed, as 
discussed below.

704.6(a) Policies

    The proposal did not contain any amendments to this paragraph.

704.6(b) Exemptions

    The proposed paragraph 704.6(b) exempted certain assets from both 
the sector concentration limits and the single obligor concentration 
limit, including fixed assets, loans, investments in CUSOs, investments 
issued by the United States or its agencies or its government sponsored 
enterprises, and investments fully guaranteed or insured as to 
principal and interest by the United States or its agencies.
    Several commenters believed settlement funds should also be exempt. 
These commenters were concerned that the tight single obligor limit 
would force corporates to find many additional settlement 
counterparties given the proposed tighter limit of 25 percent of 
capital per obligor. The commenters were particularly concerned about 
seasonal patterns that cause settlement activity to fluctuate 
throughout the year and could potentially cause violations of the 
single obligor limits.
    The Board agrees with these concerns, and has added settlement 
funds in federally insured depository institutions to the list of 
exempt investments in the final 704.6(b). The Board has also added a 
definition of settlement funds to the final Sec.  704.2 to read as set 
forth in the regulatory text of this rule.
    Corporates must take care to properly classify settlement funds and 
not include non-settlement short-term investments in this category. 
Generally, the characteristics of settlement funds are: (1) Funds are 
used for immediate-value transactions (transactions that must be paid 
for immediately to be processed or have a particular value at the time 
of processing); (2) Funds are used to settle transactions from 
institutions such as clearing houses, banks, payment processors, and 
other credit unions; and (3) Funds are used for same-day settlement 
accounts, or in the case of automated clearing house transactions 
within a few days. The amount of money a corporate classifies as 
``settlement funds'' at a third party for purposes of exclusion from 
the 704.6

[[Page 64806]]

single obligor limit should also be no more than the third party 
requires under the terms of its settlement policies.
    The proposed 704.6(b) had a complete exemption for agency MBS, but 
the Board has instead determined not to exempt such MBS. Rather, the 
Board intends to permit investment in MBS, including agency MBS, 
subject to concentration limits described below. Accordingly, the final 
rule amends the 704.6(b) exemption for ``investments that are issued or 
fully guaranteed as to principal and interest by the U.S. government or 
its agencies or its sponsored enterprises'' by adding the words ``other 
than mortgage backed-securities'' at the end. Also, the reference to 
subordinated securities is eliminated from the final rule since such 
securities will be prohibited.

704.6(c) Issuer Concentration Limits

    The proposed 704.6(c) tightens the single obligor limits to 25 
percent of capital, subject to certain enumerated exceptions.
    In addition to the enumerated exceptions, many commenters felt 
short-term investments, such as federal funds, should have either a 
relaxed single obligor limit, or be exempt from the single obligor 
limit, due to the lower risk associated with these transactions. The 
Board agrees. Investments of shorter maturity present less credit risk, 
all else being equal. Still, it is not appropriate to exempt these 
short term investments from some limit, as these obligations (including 
federal funds) do have some credit risk. Accordingly, the Board adds a 
new paragraph (c)(2)(i) to the final rule limiting investments in one 
obligor to 50 percent of capital where the remaining maturity of all 
obligations with that obligor are less than 30 days.
    In general, the obligor in a securitization situation will be the 
Qualified Special Purpose Entity (QSPE) trust that issues the 
securities. Some commenters were concerned that there were very few 
potential obligors in the credit card ABS sector, particularly given 
the prevalence of ``master'' QSPE trusts, and so the single obligor 
limitation could keep corporates from making any significant 
investments in the credit card ABS sector. Accordingly, the final rule 
adds a new paragraph 704.6(c)(2)(ii) to the final rule relaxing the 
single obligor limitation for credit card master trusts to 50 percent 
of capital. The Board observes that credit card ABS, both as a sector 
and as individual securities, have withstood both systemic and issuer 
shocks since these ABS were first issued. Given the sector's relative 
safety and the limited number of potential counterparties, NCUA 
believes a 50 percent obligor limitation for these master trusts is 
appropriate.

704.2 Definition of Obligor

    The final rule amends this definition to clarify that, for purposes 
of securities issued out of a trust, such as a Qualified Special 
Purpose Entity (QSPE) trust, the trust itself is the obligor.

704.6(d) Sector Concentration Limits

    NCUA proposed, as part of its sector concentration limits, that 
private label RMBS be limited to the lower of 500 percent of capital or 
50 percent of assets. Some commenters, and Kamakura, were concerned 
that these limits were not tight enough. Kamakura recommended tighter 
limits for both commercial mortgage-backed securities (CMBS) and 
private label RMBS and a combined limit for the MBS sectors due to the 
higher correlation of mortgages to macro-economic factors.\23\ Kamakura 
recommended a sector limit of 15 percent of the portfolio each for both 
CMBS and private label RMBS, and a combined sector limit of 25 percent 
of the portfolio. As discussed earlier, the final rule prohibits 
private label residential MBS. The Board also agrees a tighter limit 
for the CMBS sector is appropriate. Additionally, the Board believes an 
overall restriction on the amount of MBS, including agency MBS, is 
appropriate due to the additive nature of the corporates' concentration 
exposure when considered along with NPCU mortgage exposure.
---------------------------------------------------------------------------

    \23\ Kamakura Report, p. 10.
---------------------------------------------------------------------------

    Accordingly, the Board amended the final paragraph (d)(1)(i) to 
limit all MBS, inclusive of commercial mortgage-backed securities, to 
the lower of 1000 percent of capital or 50 percent of assets. 
Additionally, the final rule revises paragraph (d)(1)(ii) to tighten 
the limit on CMBS to the lower of 300 percent of capital or 15 percent 
of assets.
    Paragraphs (d)(1) and (d)(2) establish sector concentration limits 
for specified investment types, and paragraph (d)(3) establishes a 
general, aggregate limit of 100 percent of capital or 5 percent of 
assets for any other investment type not described in (d)(1) or (d)(2). 
Some commenters were concerned that investments in federal funds might 
be included in the (d)(3) limit since fed funds were not specifically 
enumerated in the other sectors and were not generally exempt under 
704.6(b). The Board recognizes that corporate credit unions need 
flexibility to engage in short-term investments and agrees that federal 
funds transactions with federally insured depository institutions 
should be explicitly excluded from the sector concentration limits in a 
manner similar to deposits in those institutions. Accordingly, the 
final rule amends paragraph (d)(4) to explicitly exclude federal funds 
investments in other federally insured depository institutions from 
sector concentration limits.

704.6(e) Corporate Debt Obligation Subsector Limits

    The proposed paragraph 704.6(e) set out concentration limits for 
subordinated securities. Since the final 704.5(h) outright prohibits 
subordinated securities, the proposed text is no longer necessary and 
has been deleted from the final rule and replaced with a different 
provision, as discussed below.
    The proposed 704.6(d)(1)(viii) limited corporate debt obligations 
to the lower of 1000 percent of capital or 50 percent of assets. Some 
commenters, including some trade associations, thought these limits 
were not restrictive enough. Some of these commenters recommended that 
NCUA further restrict concentrations in corporate debt by industry. The 
NCUA Board agrees. The final rule replaces the proposed 704.6(e) with a 
new 704.6(e) establishing subsector limits for corporate debt 
obligations. The final rule limits corporate debt to the lower of 200 
percent of capital or 10 percent of assets for each of the 20 North 
American Industry Classification System (NAICS) industry sectors. The 
20 NAICS sectors are listed in the following table:

------------------------------------------------------------------------
                         Industry                           Industry
       Code           classification        Code         classification
------------------------------------------------------------------------
11................  Agriculture,                   53  Real Estate and
                     Forestry,                          Rental and
                     Fishing and                        Leasing.
                     Hunting.
21................  Mining,                        54  Professional,
                     Quarrying, and                     Scientific, and
                     Oil and Gas                        Technical
                     Extraction.                        Services.
22................  Utilities........              55  Management of
                                                        Companies and
                                                        Enterprises.
23................  Construction.....              56  Administrative
                                                        and Support and
                                                        Waste Management
                                                        and Remediation
                                                        Services.

[[Page 64807]]

 
31-33.............  Manufacturing....              61  Educational
                                                        Services.
42................  Wholesale Trade..              62  Health Care and
                                                        Social
                                                        Assistance.
44-45.............  Retail Trade.....              71  Arts,
                                                        Entertainment,
                                                        and Recreation.
48-49.............  Transportation                 72  Accommodation and
                     and Warehousing.                   Food Services.
51................  Information......              81  Other Services
                                                        (except Public
                                                        Administration).
52................  Finance and                    92  Public
                     Insurance.                         Administration.
------------------------------------------------------------------------

    These subsector limits will ensure more diversification in 
corporate debt obligations and reduce correlation risk due to excessive 
concentrations in any single subsector, particularly the finance 
subsector.

704.6(f) Credit Ratings

    As discussed above, the proposed paragraph 704.6(f) required that 
corporates consult all publicly available NRSRO ratings and use those 
ratings to screen potential investments.
    Several commenters and Kamakura expressed concerns regarding 
reliance on credit ratings provided by NRSROs. Kamakura recommended 
corporates not look to NRSRO ratings and instead implement a macro 
economic analysis approach to evaluating credit risk and conduct their 
own internal analysis on the probability of default of any given 
securities.\24\ The current 704.6(a), which NCUA did not amend in this 
rulemaking, requires that a corporate adopt a credit risk policy and 
evaluate the credit risk of individual securities. Still, the Board 
disagrees with the idea that NRSRO ratings have no value and that they 
should be entirely ignored when conducting credit analysis on a 
particular security. NRSRO ratings are useful tools when used, as in 
the proposed 704.6(f), only to exclude, not include, securities as 
potential corporate investments. Corporates must do additional credit 
analysis on each security that passes the initial NRSRO ratings screen, 
and each security that passes the NRSRO screen must comply with each 
and every one of the other investment, credit risk, and ALM provisions 
of this final rule.
---------------------------------------------------------------------------

    \24\ Kamakura report, pp. 8-10.
---------------------------------------------------------------------------

704.6(g) Reporting and Documentation

    The proposal did not contain any amendments to this paragraph. 
Accordingly, and except as described above, the Board adopts the final 
Sec.  704.6 as proposed.

704.8 Asset and Liability Management (ALM)

    The proposed Sec.  704.8 contained several new ALM provisions, 
including a modification to the provision on early withdrawal 
penalties, two cash flow mismatches limits, a new 2-year limit on the 
WAL of a corporate's assets, and a requirement to measure net interest 
income. Some commenters were in favor of the revisions in the proposed 
rule. Many commenters, however, objected to different provisions within 
the proposed rule, generally complaining about the complexity and 
efficacy of the multi-level testing in proposed paragraphs 704.8(e), 
(f), and (g). As discussed below, the Board has made several changes 
from the proposed Sec.  704.8 to the final.

704.8(a) Policies

    Proposed paragraph 704.8(a)(6) contained a conforming change to 
reference the two proposed cash flow mismatch sensitivity tests. 
Because, as discussed below, these tests are not adopted in the final 
rule, the conforming amendment has been removed from paragraph (a)(6).

704.8(b) Asset and Liability Management Committee (ALCO)

    The proposal did not contain any amendments to this paragraph.

704.8(c) Penalty for Early Withdrawals

    The proposal limited a corporate's ability to pay a market-based 
redemption price to no more than its book value, thus eliminating the 
corporate's ability to pay a premium on early withdrawals. Hundreds of 
commenters objected to this prohibition, arguing that the proposed 
prohibition on premiums would make corporates less competitive with 
their certificates, and thus reduce corporate liquidity on the front-
end. The NCUA Board agrees now that prohibiting a premium is not likely 
to protect the corporate's liquidity, and could interfere with the 
corporate's competiveness, and so the Board determined not to adopt the 
final 704.8(c) as proposed. Instead, paragraph 704.8(c) will remain as 
in the current rule. Some comments also indicated that all corporates 
are not applying the current rule correctly. For example, the Board 
noted a corporate may base its market-based penalty on the asset values 
the certificate is matched against, and so the redemption value would 
decline as the value of the underlying assets decline. This methodology 
violates the current regulation's requirement that penalties be based 
on the cost of replacing the lost funds.
    The following example illustrates the application of the rule in a 
premium situation.
    Assume a corporate is offering 2-year certificates at a 2-percent 
coupon, and 1-year certificates at a 1.5-percent coupon, and that the 
corporate then issues a 2-year certificate to ``NPCU A.'' One year 
later, assume NPCU A wishes to redeem the certificate and that interest 
rates have dropped, so that the corporate is now issuing 1-year 
certificates at 1 percent. That would make the replacement cost of the 
original certificate approximately 100 basis points (BP) (assuming the 
corporate can immediately issue a new certificate), but the dividend 
rate on the original certificate is more than that, at 200 BP. So the 
net savings for the corporate because of the early redemption is 100 
BP. NCUA would then expect the corporate, at a minimum, to redeem this 
certificate at a premium of nearly 100 BP, but subtract some penalty 
spread to account for the uncertainty, and expense, in actually issuing 
a replacement certificate. Using this methodology and a penalty spread 
of, say, 25 BP, the 2-year certificate will be redeemed at an 
approximate price of 100.75. The market-based penalty, then, would 
technically be 25 BP, which reduced the 100 BP premium to 75 BP.

704.8(d) Interest Rate Sensitivity Analysis

    The proposal did not contain any specific amendments to this 
paragraph. However, the final rule clarifies that for interest rate 
risk (IRR) tests conducted ``at least quarterly,'' at least one of the 
tests must be conducted on the last day of the calendar quarter. 
Traditionally, the last day of the quarter has been used by the 
corporates, and this clarification ensures consistency in measurement 
periods. Additionally, if ``at least monthly'' testing is required 
because NEV ratio falls below three percent, the last day of the month 
must also be one of the testing dates.

[[Page 64808]]

(Proposed) 704.8(e) Cash Flow Mismatch Sensitivity Analysis

    See discussion in next paragraph.

(Proposed) 704.8(f) Cash Flow Mismatch Sensitivity Analysis With 50 
Percent Slowdown in Prepayment Speeds

    The proposal established new limits on cash flow mismatch 
sensitivity tests. Although the proposed tests were structured in terms 
of the effect on NEV of an immediate 300 basis point increase in the 
yield demanded by investors, the effect of the proposal was to ensure 
that the gap between the average life of a corporate's assets and its 
liabilities would remain within a few months and so not present 
extensive liquidity and market risk to the corporate.
    Many commenters thought the two proposed cash flow mismatch 
sensitivity tests were too restrictive. Other commenters thought these 
tests were too complicated. Some commenters did not understand the 
tests were measuring the risk associated with cash flow mismatches, and 
these commenters discussed spread widening based on historical averages 
for such widening. Kamakura recommended eliminating the paragraph (e) 
and (f) stress tests, stating that these tests pose a potential burden 
on corporate credit unions, greatly reduce the number of securities 
available for investment, and do not appear to identify securities with 
differences in credit performance meaningfully related to the 
performance of securities throughout the credit crisis.
    The Board generally concurs with these commenters and Kamakura, and 
the two proposed cash flow mismatch tests have been removed from the 
final rule. The elimination of the these two tests will allow 
corporates to have a larger mismatch between asset and liability cash 
flows, which increases earnings potential but also increases credit and 
liquidity risk. To mitigate this increased risk, the NCUA Board has 
retained the proposed 2-year WAL on assets and added an asset WAL 
extension test as discussed below.

(Proposed) 704.8(g), (Final) 704.8(e) Net interest income modeling

    In addition to this NEV testing, the proposal required every 
corporate conduct net interest income (NII) modeling. The Board did not 
receive any significant comments on this provision, other than ones 
stating that corporates already did this modeling as a matter of 
policy. The final rule amends the timing of the modeling to read ``be 
performed at least quarterly, including once on the last day of the 
calendar quarter.'' As discussed above, this change ensures consistency 
in the modeling results. This paragraph is also renumbered as paragraph 
704.8(e) in the final.

(Proposed) 704.8(h) (Final) 704.8(f) Weighted Average Asset Life

    The proposal prohibited the weighted average life (WAL) of a 
corporate's loans and investment portfolio, excluding derivatives and 
equity investments (e.g., investments with indefinite maturities such 
as PIC and CUSO investments), from exceeding two years.
    The primary purpose of this restriction in the proposal was to 
ensure that a corporate did not artificially inflate the WAL of its 
liabilities so as to get around the asset--liability cash flow mismatch 
limits. Many commenters objected to the 2-year asset WAL restriction.
    Some of these commenters were concerned that the 2-year WAL 
restriction would prevent corporates from providing long term liquidity 
loans to NPCUs. Loans over two years in maturity are not generally 
liquidity loans--they are loans used for term balance sheet funding to 
match off against longer-term loans or to fund portfolio growth. Since 
a corporate's primary role in lending is as a liquidity provider of 
short-term loans, NPCUs cannot rely on corporates to provide term 
lending in significant amounts. NPCUs have other viable options for 
longer-term funding such as the Federal Home Loan Bank system, which 
provides both fixed rate and variable rate lending.
    With the elimination of the cash flow mismatch tests in proposed 
paragraphs 704.8(e) and 704.8(f), the NCUA Board believes it is very 
important to retain the proposed 2-year WAL restriction on the 
investment portfolio. This 2-year limit forces corporates to 
accommodate to the fact that corporates are, first and foremost, 
providers of payment systems, which, in turn, requires some matching of 
the investment portfolio to the short term payment liabilities to 
ensure liquidity for the payments system. Providing liquidity to NPCUs, 
particularly long-term liquidity, is of secondary importance to this 
payment systems function.\25\ Still, the 2-year WAL restriction is a 
portfolio-wide restriction, and the WAL restriction will allow 
corporates to make limited amounts of term loans exceeding two years in 
maturity if those loans are matched by other corporate assets of less 
than two year maturities.
---------------------------------------------------------------------------

    \25\ Providing investments on a principal basis will be even 
less of a priority in the corporate business model going forward.
---------------------------------------------------------------------------

    Some of the commenters thought the 2-year asset WAL would prevent a 
corporate from being able to earn sufficient spread to build retained 
earnings in a timely manner. As discussed in more detail below in 
connection with some hypothetical corporate portfolios, the Board does 
not believe this is true. In fact, as suggested in the Kamakura report, 
the proposed cash flow mismatch tests were in most cases the 
determining factor in limiting a corporate's ability to populate its 
investment portfolio with ABS and MBS that generated higher yields for 
the corporate. Under the proposed 704.8(e) cash flow mismatch test, and 
assuming a 4 percent NEV, a corporate's asset WAL could not exceed its 
liability WAL by more than about 3 months without violating proposed 
704.8(e). That meant that if the WAL of the corporate's liabilities was 
about 8 months--which is about the current average for corporates--then 
the corporate's asset WAL could only be about 11 months. Since the 
final rule will not contain the proposed cash flow mismatch tests, this 
corporate can take its asset WAL all the way out from 11 months to 2 
years, generating more earning power (assuming an upward sloping yield 
curve). NCUA expects the WAL of a corporates' liabilities to remain 
relatively short going forward as they focus on the payment systems 
function. Accordingly, the elimination of the cash flow mismatch tests 
will have an even greater positive impact on corporates' ability to 
maintain longer assets and generate earnings from such assets.\26\
---------------------------------------------------------------------------

    \26\ Though a corporate is still bound by the IRR NEV 
constraints in paragraph 704.8(d).
---------------------------------------------------------------------------

    The proposal required that a corporate assume, when calculating the 
WAL, that no issuer options will be exercised. For example, the 
corporate cannot assume that an issuer will execute a clean-up call. 
The final rule also requires that the corporate not assume that any 
market options will be exercised. This requirement addresses the 
failure of auction rate securities. During the credit crisis, auction 
rate securities, initially considered by some to have a maturity of 
approximately one month, extended out in some cases to 15 or 20 years 
when the auction failed.
    The final rule also provides that if the WAL of a corporate credit 
union's investment portfolio exceeds two years on the testing date, 
this WAL must be measured more frequently. In that case the measurement 
must be taken at least monthly, including once on the last day

[[Page 64809]]

of the month, until the WAL is once again below two years.
    With the elimination of the cash flow mismatch tests in paragraphs 
704.8(e) and 704.8(f), the proposed WAL limit has been renumbered in 
the final rule from 704.8(h) to 704.8(f).

704.2 Definition of Weighted Average Life

    The current Sec.  704.2 definition of weighted average life uses a 
calculation based on the average time for a return of a dollar of 
principal. Although stripped MBS are generally impermissible for 
corporates, it is possible that a corporate might hold some sort of 
stripped interest only (IO) security that has no principal return. 
Accordingly, the Board amends the final definition of weighted average 
life to include for IO securities a calculation based on the average 
time to the expected receipt of a dollar of interest.

(Final) 704.8(g) Weighted Average Life With 50 Percent Slowdown in 
Prepayment Speeds

    As discussed above, the Board's decision to forgo the proposed cash 
flow sensitivity tests increases the importance of the proposed 2-year 
asset WAL in protecting the payment systems from excessive risk. In 
addition to the 2-year WAL restriction, and to protect against 
extension risk, the Board has added a new paragraph 704.8(g) to the 
final rule limiting asset WAL extension to 2.25 years assuming a 50 
percent slowdown in prepayment speeds, regardless of asset type.
    In the past, many market participants believed that lower interest 
rates would create faster prepayment speeds in residential MBS. During 
the recent credit crisis, however, prepayment speeds slowed 
substantially in many RMBS, even with lower interest rates. In some 
cases, a prepayment slowdown can produce radical increases in the WAL 
of a security (e.g., in excess of one thousand percent), particularly 
in support tranches. Accordingly, this new 50 percent slowdown test 
limits the extension risk, and the related credit and liquidity risk, 
that a corporate can accept into its portfolio. This new 704.8(g) WAL 
test with prepayment slowdown is similar to the proposed 704.8(f) cash 
flow mismatch sensitivity test with prepayment slowdown that the Board 
is not adopting, except that this new 704.8(g) is simpler to calculate 
and not as restrictive as the proposed 704.8(f).

704.8(h) Government Issued and Guaranteed Securities

    Many commenters thought securities that are issued or fully 
guaranteed as to principal and interest by the U.S. government or its 
agencies or its sponsored enterprises should be exempt from the cash 
flow mismatch and 2-year WAL restrictions. The most common argument was 
the absence of credit risk in these securities.
    The Board is sympathetic to this concern, and so the final rule 
allows the WAL of securities that are issued by, or fully guaranteed as 
to principal and interest by, the U.S. government or its agencies or 
its sponsored enterprises to be multiplied by a factor of 0.50 when 
determining the WAL of a corporate's entire portfolio. So, for example, 
a 4-year WAL agency security will be treated as if it has a 2-year WAL 
for purposes of the WAL calculations in paragraph 704.8(f) and (g). The 
Board also considered exempting government securities from both the 
asset WAL tests, but concluded that such an exemption was not 
appropriate because these securities do have some market volatility.
    The Board determined to use the 0.50 factor because it provides 
corporate credit unions with a material measure of relief from the WAL 
calculation without creating undue market risk. Small factors, such as 
0.25, would not provide a significant benefit to the corporates, while 
larger factors, such as 0.75, raised concerns over market risk and the 
potential negative effects on NEV. During the global credit crisis, 
even agency RMBS spreads widened significantly between October 2008 and 
November 2008. During this period, spreads between the Bloomberg 
generic 5-year Fannie Mae Benchmark and the swap curve widened by 111 
BP, introducing significant market risk on these securities. Other 
Bloomberg generic indices also widened significantly, with the longer 
term benchmarks widening even more. The Board believes the 0.50 factor 
provides the best balance between WAL relief and ensuring that 
corporate NEV positions are protected.

704.8(i) Effective and Spread Durations

    The proposed paragraph 704.8(i) required a corporate measure at 
least once a quarter, the effective duration and spread durations of 
each of its assets and liabilities, where the values of these are 
affected by changes in interest rates or credit spreads. There was no 
significant comment on this provision. The Board determined to clarify 
the timing of the tests by inserting the phrase ``including once on the 
last day of the calendar quarter.'' Otherwise, this paragraph was 
finalized as proposed.

704.8(j) Regulatory Violations

    The proposed paragraph 704.8(j) required that a corporate take 
action to report, and cure, violations of Sec.  704.8. The proposal 
also stated that if the corporate could not timely cure the violation, 
the corporate would suffer a PCA downgrade.
    One commenter thought it inappropriate to tie the failure of ALM 
tests to PCA downgrades. The Board disagrees. A corporate must maintain 
its NEV levels, and protect those NEV levels from credit, extension, 
and liquidity risk. A PCA downgrade, and the associated PCA provisions 
in Sec.  704.4, give the Board the necessary tools to deal with a 
corporate's failure to meet important regulatory requirements.

704.8(k) Overall Limit on Business Generated From Individual Credit 
Unions

    The proposed paragraph 704.8(k) prohibited a corporate from 
accepting from a member or nonmember credit union or other entity any 
investment, including shares, loans, PCC, or NCAs if, following that 
investment, the aggregate of all investments from that member or entity 
in the corporate would exceed 10 percent of the corporate credit 
union's moving daily average net assets.
    Hundreds of commenters opposed this limit on business from 
individual entities. Some commenters believed, for example, that this 
restriction would prevent a corporate from certain borrowings, such as 
liquidity borrowings from sources like the Federal Home Loan Banks. 
This was not the Board's intent. Accordingly, the final 704.8(k) 
applies the limit only to member and nonmember credit unions. The Board 
has also increased the limit in the final rule from 10 percent of a 
corporate credit union's moving daily average net assets to 15 percent. 
This increase in the limit is appropriate because of seasonal factors 
that affect the amounts of settlement funds a NPCU may have with a 
corporate. The Board believes, however, that increasing the limit 
beyond 15 percent is not appropriate and could lead to excessive 
concentrations of risk with one or two members. The final 704.8(k) will 
not become effective for 30 months following the date the final rule is 
published in the Federal Register.

[[Page 64810]]

    Accordingly, and except as described above, the Board adopts the 
final Sec.  704.8, and associated definitions, as proposed.

704.9 Liquidity Management

704.9(a) General

    The proposed paragraph (a)(3) required a corporate maintain 
sufficient sources of cash and cash equivalents to support its payment 
system obligations. There was no significant comment on this proposal, 
and it is adopted into the final rule.

704.9(b) Borrowing Limits

    The proposed paragraph 704.9(b) replaced the current borrowing 
limits of up to the greater of 10 times capital or 50 percent of shares 
(excluding shares created by the use of member reverse repurchase 
agreements) and capital, with a limit of the lower of 10 times capital 
or 50 percent of capital and shares on aggregate borrowing. The 
proposal also added a new sublimit on secured borrowing, as discussed 
below.

704.9(b)(1) Secured Borrowings

    The proposal permitted a corporate to borrow on a secured basis, 
but, generally, only for liquidity purposes and only with a maximum 
maturity of 30 days. A corporate may also borrow on a secured basis for 
non-liquidity purposes, but only if the corporate is well-capitalized 
and only in an amount equal to the corporate's excess capital.
    Several commenters felt current borrowing limits were sufficient 
while others felt their corporates should have no borrowing limits. 
These latter commenters argued the risks associated with borrowing 
would be captured by asset liability management modeling. Dozens of 
commenters also felt the 30 day limit on secured borrowings established 
by Sec.  704.9(b)(1) was too restrictive and would reduce a corporate's 
ability to offer lending products and interest rate swaps to natural 
person credit unions. Many commenters stated any negative ramifications 
of borrowing in excess of 30 days would be constrained by other aspects 
of the proposed rule. Many commenters felt Sec.  704.9(b)(1) should be 
eliminated all together.
    The Board believes the proposed borrowing limits are prudent and 
sufficient to allow corporate credit unions to manage liquidity needs 
and to safeguard their payment systems. The Board also still believes 
that corporates should be limited in their ability to borrow on a 
secured basis for other than liquidity purposes. As demonstrated by 
recent events, secured borrowing can create additional risks for the 
corporate and the NCUSIF. Secured lenders require collateral to be 
valued at market and they impose an additional haircut (margin) to 
ensure the borrowing is fully and continuously collateralized. Market 
shocks can create short-term market values that are significantly below 
long-term intrinsic values and which can magnify potential losses if 
the creditor seized the collateral and sold it as permitted by the 
lending agreements.
    Accordingly, the final rule retains restrictions on secured 
borrowing for non-liquidity purposes and retains the 30 day maximum 
term for secured borrowings made for liquidity purposes. These 
restrictions will not preclude a corporate from renewing liquidity-
related borrowings on a rolling basis. These limits on aggregate 
borrowing and secured borrowing should help mitigate the consequences 
of future adverse market events for the corporates and the NCUSIF.
    As with most of these final revisions, the effective date of the 
paragraph 704.9(b) revisions will be January 18, 2011. NCUA expects 
that corporates will not enter into any new borrowings before that date 
that will put them out of compliance with 704.9(b) on that date. Also, 
to the extent that a corporate has one or more borrowings on that date 
that are not in compliance with the requirements of 704.9(b), NCUA will 
expect the corporate to move aggressively to pay off those borrowings 
or to replace them with borrowings that comply with 704.9(b).
    Accordingly, and except as described above, the Board adopts the 
final Sec.  704.9 as proposed.

Appendix B to Part 704--Expanded Authorities and Requirements

    The proposed rule revised the qualification criteria, and elements 
of, the Base-plus and Part I authority, and eliminated the current Part 
II authority, in Appendix B.

General

    The final Appendix B includes language requiring state chartered 
corporates seeking expanded authority first obtain the approval of 
their SSAs before submitting an application to NCUA. This requirement 
is consistent with 12 CFR 704.1(b).

Base Plus

    The final Base-Plus section removes the references to the proposed 
cash flow sensitivity tests in Sec.  704.8(e)(1) and Sec.  704.8(f)(1) 
since these two proposed tests do not appear in the final rule. 
Language has also been added to clarify that for monthly NEV testing, 
the last day of the month must also be one of the testing dates.

Part I

    To qualify for Part I authority, the proposal added a requirement 
that a corporate achieve and maintain a leverage ratio of at least 6 
percent, meaning that its Tier 1 capital, divided by its moving DANA, 
must equal or exceed 6 percent. The proposal also limited the aggregate 
amount of investments purchased under Part I authorities to the lower 
of 500 percent of capital or 25 percent of a corporate credit union's 
assets. NCUA did not receive any significant comment on these 
proposals, and they are retained in the final Part I. The final Part I 
removes the references to the proposed cash flow sensitivity tests in 
Sec.  704.8(e)(1) and Sec.  704.8(f)(1) since these two proposed tests 
do not appear in the final rule.

Part II

    The proposal removed the current Part II, which generally permitted 
investments down to BBB, and renumbered the existing Part III, on 
foreign investments, as Part II.
    NCUA did not receive any significant comment on the removal of the 
current Part II, and it is removed and replaced in the final rule with 
the Part on foreign investments.
    The proposed Part II on foreign investments established credit 
exposure limits for any single foreign obligor not to exceed 50 percent 
of capital. The NCUA Board intended this limit to be consistent with 
the single obligor limits established by the proposed and final Sec.  
704.6(c). Accordingly, the final paragraph (a)(4) of Part II is amended 
to limit exposure to a single foreign obligor to the greater of 25 
percent of capital or $5 million.

Part III

    The proposal renumbered the current Part IV, which permits limited 
investments in derivative transactions, to Part III.
Paragraph (a) Permissible Purposes for Derivatives
    The proposal modified the current authority in paragraph (a) to 
ensure that corporates do not use derivatives to take on additional 
risk. Proposed paragraph (a) permits the use of derivatives only to 
create structured products, mitigate interest rate and credit risk on 
its own balance sheet, or to hedge the balance sheet of its members. 
NCUA received no significant comment on this proposal, and the final 
paragraph (a) is adopted as proposed.

[[Page 64811]]

Paragraph (b) Credit Ratings of Derivatives Counterparties
    The proposed paragraph (b)(1)(i) limited corporates to derivative 
counterparties rated no lower than the minimum permissible rating for 
comparable permissible term investments. Some commenters were concerned 
with the lack of AA- rated counterparties for corporates without Part I 
Expanded Authority. These commenters argued this AA- rating restriction 
would keep corporates from finding an adequate number of qualifying 
derivative counterparties. Some commenters also cited the netting and 
collateral posting required in derivative transactions, noting these 
requirements mitigate the credit risk of a derivative transaction in 
comparison to a similarly rated investment transaction.
    The Board concurs there are few potential derivatives 
counterparties rated AA- or higher. In fact, there are many more 
potential derivatives counterparties rated A or A-, and a corporate 
that wants to engage in derivatives activity needs access to 
counterparties rated A or A-. The Board believes the credit quality of 
derivative counterparties is not as important as the credit quality of 
investment issuers. The nature of derivative transactions the 
corporates generally make (e.g., interest rate swaps) make them less 
risky than traditional investments, given the relatively low exposure 
levels and the mitigation of credit risk associated with bilateral 
netting agreements and collateral requirements.
    Accordingly, the final paragraphs (b)(1)(i) and (ii) permit 
corporates that qualify for Part III derivatives authority to engage in 
derivatives transactions with domestic counterparties rated no lower 
than A-, and, if the corporate has Part II Expanded Authorities, with 
foreign counterparties rated no lower than permissible under that Part 
II. The final paragraph (b)(1)(iv) also requires the corporate comply 
with the Investment Action Plan provisions of Sec.  704.10 if any 
rating relied upon to meet the requirements of paragraphs (b)(1)(i) or 
(ii) is downgraded below the minimum rating requirements.
    In addition, the Board notes that OCCU publishes separately from 
Part 704 the specific criteria to qualify for any particular expanded 
authority. NCUA will publish the parameters for Part III qualification, 
which parameters will include compliance with industry best practices 
on bilateral netting of derivatives and the posting of collateral.

Part IV

    The proposal renumbered the current Part V authority on 
participation lending as Part IV. The final rule reflects this 
renumbering.
    Accordingly, and except as described above, the Board adopts the 
final Appendix B as proposed.

Section 704.11 Corporate Credit Union Service Organizations (CUSOs)

704.11(e) Permissible Activities

    The current 704.11(e), entitled prohibited activities, prohibits a 
CUSO from acquiring control, directly or indirectly, of another 
depository financial institution or to invest in shares, stocks, or 
obligations of an insurance company, trade association, liquidity 
facility, or similar organization.
    The proposal would move the current prohibition language in 
704.11(e) to proposed paragraph 704.11(g)(4) and replace the current 
704.11(e) with a new paragraph entitled permissible activities. The new 
proposed 704.11(e) would require that a corporate CUSO agree to limit 
its activities to brokerage activities, investment advisory services, 
or other categories of activities (including but not limited to service 
activities) as approved in writing by the NCUA and published on the 
NCUA Web site.
    Several commenters generally agreed with the proposed regulation of 
CUSO activities and enhancement of CUSO transparency. Some of these 
commenters are concerned about the migration of activities from 
corporates to CUSOs and increased corporate exposure to CUSO risks.
    Many commenters, however, objected to the proposal that NCUA 
preapprove and publish a listing of approved corporate CUSO activities. 
Some objected to such NCUA preapproval generally, while others felt 
that publishing the list separate and apart from the rule created too 
much ambiguity in the rule and would inhibit proper corporate planning. 
Those commenters that objected categorically to NCUA preapproval felt 
such a preapproval requirement would discourage corporate ownership of 
CUSOs, and that such ownership was important because corporates bring a 
level of expertise to CUSO management that NPCUs may not bring. One of 
these commenters stated that NCUA should continue the approach of 
delineating those activities that are prohibited, not those that are 
approved. Another commenter believes that NCUA should not place limits 
on corporate CUSOs at this time because the most recent corporate 
crisis was an investment issue not related to CUSOs.
    The Board believes that NCUA must have some oversight over 
corporate CUSOs. These CUSOs affect not only the health of the 
corporates, but also the health of the credit union system as a whole, 
because many corporate CUSOs serve NPCUs directly. The Board is 
concerned that some activities might migrate from corporates to CUSOs 
as a result of this rulemaking, and NCUA needs to understand and 
preapprove the activities of these CUSOs and have access to these 
CUSOs. In addition, the Board reiterates that it is not regulating just 
in reaction to the immediate past crisis, but also attempting to 
anticipate future problems and construct a regulatory scheme that will 
help NCUA deal with those problems when they arise.
    One commenter wanted to know why NCUA had only identified two 
activities (brokerage and investment advisory services) as preapproved 
in the rule text, and stated that only one of its four existing CUSOs 
would prequalify under these approved activities. This commenter stated 
that another activity, ``item processing,'' which was very important to 
its members, had been moved from the corporate to a CUSO to separate 
the ``operational risk'' from the corporate, and this commenter wanted 
a lengthier list of preapproved activities in the rule, including item 
processing. Two commenters suggested NCUA should expand the list of 
preapproved activities in the regulation to include item processing, 
shared data processing, and ``shared services.'' This commenter and 
others also stated that the rule should outline the process and 
criteria for approving each new category and explain the criteria. 
Other commenters asked that the approved list include business lending 
services, ALM services, card services, and the programs for the 
purchase of CDs from other depository institutions. One commenter 
stated that data processing should be preapproved. A few commenters 
stated that the corporate rule should include the same list of 
preapproved CUSO activities as currently exists for federal credit 
union CUSOs in part 712 of NCUA's rules. One said that, at a minimum, 
NCUA should incorporate into part 704 all the activities described in 
712.5(a), (b), (e), (g), and (k).
    The Board preapproved brokerage and investment advisor services 
because the Board believes providing those services are very 
appropriate corporate CUSO activities. The Board does not believe that 
all the preapproved categories of activities in Sec.  712.5 for natural 
person

[[Page 64812]]

federal credit union CUSOs are necessarily appropriate for corporate 
CUSOs, and so declines to incorporate Sec.  712.5 language into 
704.11(e). In fact, at this time, the Board will not be adding 
additional preapproved activities into the rule text of 704.11(e). 
Corporate CUSOs may submit descriptions of the activities they 
currently perform, or desire to perform, to NCUA beginning immediately 
on publication of this rule, and NCUA will begin the review and 
approval process for those activities. The Board wants to examine each 
activity, whether new to corporate CUSOs or a preexisting activity.
    One commenter suggested that a corporate submit a business case 
when seeking approval for a service rather than limit, upfront, the 
kinds of activities permissible. This commenter noted that the credit 
union system needs to have the flexibility to grasp opportunities as 
they arise. Some commenters objected to the informal nature of the NCUA 
approval process and wanted additional definitions and information in 
the rule text.
    In fact, the Board's intent with the proposed, informal approval 
process is to streamline that process and to ensure that appropriate 
activities are approved as quickly as possible. Once NCUA has approved 
and published an activity category, any corporate CUSO may engage in 
that activity without further approval. The Board intends this process 
to be flexible enough to accommodate opportunities as they arise, 
without creating too much risk to the credit union system. On the other 
hand, the Board understands that corporates and their CUSOs need 
certainty, and some sort of permanence to the category or approved 
activities. The Board does not want corporates or their CUSOs to be 
concerned that NCUA might use the informal process to remove or 
radically alter a category of approved activities after NCUA's 
publication of that approval. Accordingly, the final rule adds a new 
paragraph (e)(3) that provides NCUA will not remove a particular 
activity from the approved list, or make substantial changes to the 
content or description of that approved activity, except through the 
formal rulemaking process.
    One commenter was concerned about potential service disruptions as 
existing CUSOs go about obtaining NCUA approval. Some commenters stated 
that corporates would need a transition period following publication of 
the final rule to determine if their current corporates were engaged in 
activities acceptable to NCUA, with one suggesting 180 days. Another 
commenter thought NCUA should publish a list of approved activities in 
advance of the final rule, and another stated that there should be a 
``fast track'' approval process for existing CUSOs. One commenter 
suggested that there should also be a 12-month period for a corporate 
to divest from impermissible CUSOs.
    The Board is sympathetic to these concerns about the transition to 
the preapproval system. Accordingly, the requirement in the final rule 
that NCUA preapprove CUSO activities will not become applicable until 
April 18, 2011, so as to provide time for application to NCUA and NCUA 
review. Further, the final rule will permit a corporate an additional 
12 months to extricate itself from an impermissible CUSO, if the 
corporate can demonstrate that, on the date of publication of the final 
rule, (1) the CUSO was actively engaged in the activity, and (2) the 
activity met all the requirements of Sec.  704.11 as that rule existed 
prior to effective date of final rule.
    A few commenters stated that, for state chartered corporates, the 
states should determine what CUSO activities were appropriate. One 
commenter stated that NCUA should retain only the authority to 
``restrict an activity that is determined to present an undue material 
risk to the insurance fund.''
    It is the intent of the Board that NCUA will review corporate CUSO 
activities for their potential impact on the insurance fund. 
Unfortunately, the Board cannot know in advance every sort of activity 
that a CUSO might wish to engage in that might have a negative impact 
on the NCUSIF. Accordingly, the proposed preapproval process is 
necessary. This is particularly true given that corporate CUSO 
activities present greater systemic risk to the credit union system, 
and the NCUSIF, than natural person credit union CUSO activities.
    Many commenters wanted to know if existing CUSOs, and existing 
activities, would be exempt from the approval process (i.e., 
grandfathered). Several commenters stated that previously approved 
corporate CUSOs and CUSO activities should be added to NCUA's approved 
list of CUSO activities in the proposed rule text; two commenters 
stated that NCUA is ``aware'' of current CUSO activities, and so should 
preapprove those current CUSO activities in the regulation. Another 
NPCU stated that a corporate should simply notify NCUA of what CUSOs it 
had and what they were doing and should not have to seek any NCUA 
approval, and that NCUA could obtain all the information it needs about 
the CUSO from ``public'' sources.
    The Board will not be grandfathering preexisting CUSO activities. 
NCUA has not previously approved any existing CUSO activities, and is 
not necessarily fully aware of all activities that corporate CUSOS 
currently undertake or intend to undertake. Many CUSOs are privately 
held, and public sources provide insufficient information about what 
these CUSOs are doing.

704.11(g) Written Agreement With CUSO

704.11(g)(5) Agreement to Provide NCUA Expanded Access

    The proposal also amends NCUA's CUSO access authority, currently 
limited to the CUSO's ``books, records, and any other pertinent 
documentation,'' to include access as well to a CUSO's ``personnel, 
facilities, and equipment.''
    Several commenters objected to the proposed expansion of NCUA 
access to a corporate CUSO, most believing it was overly intrusive and 
disruptive. Some of these commenters who disliked the proposed NCUA 
access did acknowledge that corporates might shunt nonperforming assets 
or problematic activities off to CUSOs, or that some particular 
corporate CUSO activities might pose particular risk to corporates or 
NPCUs, and these commenters generally thought that perhaps NCUA should 
be able to obtain access to corporate CUSOs, but only for ``material'' 
risks. One of these commenters stated that ``for example, CMBS and 
SimpliCD may pose the threat of material losses in contrast to a 
corporate's minority interest in MDC or CUDL.'' None of these 
commenters, however, specified how, or by whom, such materiality would 
be determined.
    As these commenters acknowledge, the NCUA is concerned about the 
potential migration of activities and risk from the corporates to their 
CUSOs. If the NCUA believes it needs access to a particular CUSO, it 
cannot be placed in the position of arguing with the corporate, or the 
CUSO, about whether the perceived risk is ``material.'' Accordingly, 
the Board declines to adopt that standard for CUSO access.
    Some commenters expressed concern that the expanded NCUA access 
envisioned for corporate CUSOs might cause third party service 
providers to decline credit union investment for fear of being 
categorized as a CUSO. In response, the Board notes that service 
providers cannot generally accept direct credit union investment 
without becoming CUSOs, but that the CUSOs of

[[Page 64813]]

natural person federal credit unions are permitted to invest in non-
CUSO service providers under certain circumstances. See 12 CFR 
712.5(r). If a corporate wants to invest a minimal amount in a third 
party service provider, but insulate the service provider from NCUA 
access and oversight, the corporate can request approval from NCUA to 
add such an investment activity above as an approved corporate CUSO 
activity. Before approving such a CUSO investment activity, however, 
the corporate or its CUSO would have to explain the arrangement, 
including the extent of the proposed investment by the CUSO in the 
service provider and why NCUA access to the particular service provider 
is not necessary to ensure protection of the NCUSIF.
    Some commenters thought NCUA did not have the expertise to examine 
CUSO activities, or that regulation by state regulators, or that NCUA 
access to CUSOs through NPCU FCU owners, would be sufficient. In fact, 
NCUA doubts that it would ever become the primary regulator of a CUSO, 
or would conduct routine exams of any particular CUSO. The intent of 
the provision is to ensure that NCUA can get quick and complete access 
to a CUSO should the need arise.
    Some commenters believe that access by NCUA would only be 
appropriate where the corporate has a ``controlling interest,'' as 
opposed to a minority interest. The Board disagrees. Three or four 
corporates, or corporates and other credit unions, could form a CUSO 
where no one credit union had a controlling interest, and this CUSO 
could present the same risk to the credit union system as a CUSO that 
is controlled by one corporate.
    One corporate commenter stated that the proposal ``appears to give 
the NCUA expanded authority over a CUSO simply by virtue of a corporate 
credit union holding stock in a CUSO.'' This commenter did not see why 
a corporate CUSO should receive different NCUA supervision than a 
natural person credit union CUSO. This commenter does not understand 
that NCUA has long required, for both natural person FCU CUSOs and 
corporate CUSOs, that the CUSOs permit NCUA access to their books, 
records, and documentation. See, e.g., 12 CFR 712.3(a)(3). Given the 
expanded rule that corporate CUSOs are likely to play in the future of 
the credit union system, the proposal ensures that NCUA has access 
commensurate with the systemic risk that corporate CUSOs may present.
    Accordingly, and except as described above, the Board adopts the 
final Sec.  704.11 as proposed.

Section 704.14 Representation

Proposed Revisions

    The proposal required that all corporate board members hold either 
a CEO, CFO, or COO position at their member credit union or other 
member entity. The proposal also required that a majority of a 
corporate's board members be representatives of natural person credit 
union members and that individual board members, and the organizations 
they represent, be limited to no more than six consecutive years of 
board service. In addition, the proposal prohibited any person from 
sitting on the boards of two or more corporates at the same time, and 
would preclude a single organizational member from having more than one 
individual representative on the board of any given corporate. Some 
aspects of the proposal, such as the requirement that a majority of the 
corporate board be representatives of natural person credit unions, 
would be phased in over time. The provisions governing term limits 
would have taken effect at the time of the next election to the board, 
so that no currently sitting director would have to resign before his 
current term expired, regardless of the length of time he had been on 
the board.

General Comments on the Proposal

    Some commenters asserted that NCUA's efforts to impose limits or 
standards in the area of board membership were excessive and beyond the 
scope of what was appropriate for the regulator. Many stated that 
attempts to regulate in this area usurped the rights of the membership 
to make their own decisions concerning their representatives and were 
inconsistent with the democratic principles that are fundamental to 
credit unions.
    The NCUA has long been in the business of setting standards for 
credit union governance. The Federal Credit Union Act, for example, 
provides the Board with specific authority to promulgate standard FCU 
bylaws, as well as general authority to regulate both federal credit 
unions and federally insured credit unions, and to protect the NCUSIF. 
See, e.g., 12 U.S.C. 1758. Corporate credit unions play a fundamental 
role in the credit union system, creating both significant systemic 
benefits and significant systemic risks, and the make-up of the board 
of directors has a significant impact on the risk to the NCUSIF. 
Accordingly, NCUA has, for many years, established governance 
parameters for corporates. While members retain the right to elect 
directors, for example, the NCUA has previously imposed governance 
requirements, such as standard federal corporate bylaws and rules 
pertaining to conflicts of interest and overlapping relationships 
between directors and trade associations that apply to all corporates. 
The proposed and final governance provisions are consistent, in form 
and content, with these principles.
    Some commenters questioned whether the proposed limits and 
restrictions would have made any difference in avoiding the losses that 
corporates sustained during the recent market dislocation. Whether or 
not these new provisions might have affected the size or scope of the 
losses is not determinable. Still, the Board reiterates its belief that 
improving and strengthening corporate governance will help corporate 
credit unions to survive whatever market conditions they must face in 
the years ahead.
    Another commenter, representing the views of state regulators, 
asserted that issues such as director qualifications and term limits 
for state chartered entities rightfully come under the province of 
state law, as administered by state regulators, and that NCUA has no 
business regulating for all corporates in these areas. In response, the 
Board reiterates that part 704 has historically been applicable to all 
corporates, including state chartered corporates, because of their 
systemic risk to the credit union system and the NCUSIF. The final rule 
contains several requirements and references to collaboration between 
NCUA and the relevant state regulator when working with state chartered 
corporates, and the Board intends the tradition of collaboration will 
continue.
    Some commenters expressed concern that NCUA may elect to impose 
some or all of the proposed governance requirements on directors of 
natural person credit unions. The Board did issue a proposed rule in 
July, 2010, that would extend the golden parachute and indemnification 
provisions originally proposed for corporates to all insured credit 
unions. 75 FR 47236 (Aug. 5, 2010). The Board does not, however, 
presently anticipate that any of the other governance provisions in 
this rule, as proposed or finalized, will also be extended to natural 
person credit unions.
    A discussion of the specific governance revisions adopted in the 
final rule follows.

704.14(a) Board Representation

704.14(a)(2) Boards Limited to CEOs, CFOs, or COOs

    The proposed 704.14(a)(2) prospectively limited those who could

[[Page 64814]]

seek reelection to sitting CEOs, CFOs, or COOs.
    A large number of commenters opposed the requirement that service 
on the board of a corporate be limited to individuals currently holding 
the position of CEO, CFO, or COO of a member institution. Several 
commenters noted that many credit unions are run by individuals holding 
the title of manager or treasurer, and that the rule should be changed 
to accommodate such circumstances. Many commenters criticized this 
provision as being, simultaneously, overly restrictive and ineffective. 
These commenters stated that there may be many individuals with the 
willingness, capacity, and expertise sufficient to enable them to be 
very effective members of the board, but who may not hold one of these 
three titles. These commenters believe that accountants, attorneys, and 
capital market specialists, for example, may all have the type of 
background that could be of value to a corporate credit union. Some 
commenters also supported extending the qualifications to retirees. 
Commenters also noted that just having one of the three enumerated 
titles is no assurance that an individual will exhibit the requisite 
competence or commitment required to be a successful member of the 
board. Many commenters questioned whether any evidence exists to 
support the view that any of the problems currently afflicting the 
corporate sector can be attributed to boards being comprised of 
individuals lacking these titles; many also suggested that the 
imposition of this requirement would have done nothing to avert the 
problems that were encountered. Several noted, for example, that there 
was no shortage of persons holding these titles on the boards of the 
two corporates currently in the conservatorship of the NCUA.
    Many commenters complained that, by imposing this restriction, the 
agency would be overstepping the boundary of appropriate regulatory 
oversight and treading on territory that is more properly left to the 
membership. These commenters believe that the democratic principles 
that have always characterized the member-owned, member-controlled 
credit union movement require that members be allowed to make their own 
decisions about whom to elect to the board. Many of these commenters 
suggested that a more appropriate approach for NCUA to take in this 
respect would be to impose a requirement that nominating committees 
establish guidelines concerning education and experience criteria that 
must be met by candidates for board positions. Alternatively, many 
commenters proposed that NCUA approach this issue by requiring 
corporates to implement mandatory training and continuing education 
programs for all directors, possibly through a new bylaw provision 
establishing such a requirement. Some suggested that NCUA simply impose 
an experience requirement, such as five years working in the credit 
union sector, as a prerequisite to eligibility to serve on a corporate 
board; one suggested imposing a minimum age for service on the board. 
Another commenter suggested imposing a requirement that directors may 
only come from member credit unions with a specified minimum level of 
investment in the corporate. Several commenters also urged NCUA to 
require corporates to adopt best practices for boards to follow in this 
context, including provisions dealing with attendance, training, self 
assessment and review.
    A few commenters, typically representing smaller credit unions, 
believed that one probable outcome of this rule would be that smaller 
credit unions, which typically have relatively few employees, could be 
effectively excluded from representation on boards. In some cases, for 
example, the CEO (or Treasurer/Manager) may be one of only two or three 
full time employees. The credit union may be unable to spare the 
individual or allow him or her to devote the type of time commitments 
required of board membership. Consequently, according to these 
commenters, many such credit unions may go without representation at 
their corporate.
    Other comments on director qualifications included the suggestion 
that NCUA allow directors of corporates to be paid for their service on 
the board. Several commenters also suggested that NCUA should allow up 
to 20 percent of the board to consist of outside directors, 
specifically to include individuals with capital market knowledge and 
experience, provided that NCUA also establish and impose appropriate 
safeguards to protect against conflicts of interest involving such 
individuals. One commenter suggested extending the qualification 
concept to include executive officers, by imposing a knowledge or 
experience requirement before individuals may take a position with 
responsibility for finance, investment, credit risk and enterprise risk 
areas of the corporate's business.
    The Board acknowledges that, in the case of some natural person 
credit unions, the person fulfilling the role of chief executive 
actually holds the title of Treasurer/Manager. This title, which is 
perhaps more common among smaller credit unions, has traditionally been 
used as a more descriptive term for what the chief executive actually 
does on a day to day basis. In any event, the Board recognizes that the 
same rationale that deems a CEO as qualified to serve on the board of a 
corporate should apply equally to the case of persons holding the 
Treasurer/Manager title. Accordingly, the final rule has been expanded 
to include this position in the category of persons qualified to 
fulfill the role of corporate credit union director.
    The Board has elected not to make additional changes to the 
proposed rule. Although the Board recognizes that some individuals who 
are not employed in one of the identified, qualifying positions may 
actually have the ability to serve on a corporate board, the Board 
nevertheless believes the listed positions (as noted above, expanded to 
include Treasurer/Managers) provide a good proxy for the most 
qualified, experienced and capable individuals in the credit union 
industry. These are, in other words, the very persons whose knowledge, 
skills and abilities are necessary to guide and direct corporates 
through to the next stage of their business.
    The Board notes, in this respect, that corporate boards are free to 
retain the services of subject matter experts as consultants or 
advisors to the board, to the extent that such expertise in a 
particular field, such as capital markets or real estate, should be 
viewed as necessary. Corporates are also free to propose non-standard 
bylaw provisions that would require, for example, that incumbent 
directors must receive periodic training from qualified sources on 
issues of importance to the corporate's operations and business model, 
including such aspects as capital markets and investments, asset-
liability management, accounting and regulatory compliance. As the 
Board noted in the preamble to the proposed rule, citing Corporate 
Credit Union Guidance Letter 2005-02, directors must have considerable 
knowledge and devote sufficient time to have an adequate understanding 
of a corporate's operations. If anything, these principles have greater 
urgency in 2010 than they had in 2005 when that Guidance Letter was 
first issued. The Board also rejects the notion of allocating some 
portion of director slots to outside directors, as this would be 
inconsistent with the democratic principles that have always been 
fundamental to the credit union industry.

704.14(a)(3) Term Limits

    The proposed paragraph 704.14(a)(3) provided generally that no 
corporate

[[Page 64815]]

board members could seek election if, at the end of the term to which 
elected that board member would have served more than six consecutive 
years.
    The issue of a mandatory 6-year term limit for board members 
attracted, by far, the most comment within the sphere of comments 
directed toward the governance aspects of the proposal, with hundreds 
of commenters opposed to the proposed term limit. Many commenters 
opposed the notion of term limits altogether, arguing that members 
should not be constrained in their ability to select individuals of 
their own choosing to serve on the board. These commenters argued that 
NCUA would be exceeding its proper role by establishing an arbitrary 
barrier that would undermine freedom of choice of the membership. 
Virtually all of the persons who commented on the term limit proposal 
asserted that a 6-year period is too short. These commenters argued 
that a 6-year period would create significant disruption in the 
management and operation of corporates, at a time when significant 
challenges to their survival are foreseeable and when the full 
attention and concentration of the board will most be required. Many 
commenters expressed concern that the effect of the term limit 
provisions would be to severely disrupt the institutional knowledge 
available to the board. Several pointed out that six years is less than 
the duration of the typical business cycle. One commenter predicted 
that the turnover caused by the proposed term limit would create 
``havoc;'' and many others cautioned against the likelihood of 
unintended consequences should the provision become final.
    Some of these commenters may have misread the proposal, as it would 
not require any currently sitting director to resign his or her seat. 
Instead, it would apply to those seeking re-election. Most corporate 
boards should have staggered terms, such that only a percentage of the 
entire board is up for re-election each year. Nevertheless, the Board 
acknowledges the concern identified by some commenters who indicated 
that, at least initially, the average remaining tenure for current 
board members would probably be about three years under the proposal.
    Some commenters argued that corporate boards are substantially 
different from NPCU boards and that a dramatically greater learning 
curve exists before a director can typically acquire the level of 
knowledge and expertise he or she needs to make a meaningful 
contribution to the work of the board. These commenters believe that a 
6-year term limit would require experienced directors to exit the board 
just at the time they had become productive, leaving the corporate 
dangerously exposed to the oversight and management of an inexperienced 
board.
    Other points argued by commenters in opposition to the 6-year term 
limit included that management officials of the corporate would become 
more vulnerable to pressure to implement short-sighted policies or 
programs to meet the direction of board members who will not be with 
the corporate long-term. Another point raised by several commenters 
representing or served by corporates in small or rural states is that 
the universe of candidates available for service on the board is 
relatively small, and that the turnover required by a 6-year term limit 
would create a hardship for those corporates to recruit and retain 
capable directors. Some commenters called for the grandfathering of 
service by existing board members completed before the final effective 
date of the rule; a few asserted that the rule should not be applied to 
cover the term of service of an individual appointed to fill an 
unexpired term, lest such individual be precluded from seeking two 
elected terms, which the rule would ostensibly permit.
    Commenters opposed to the 6-year limit suggested a wide range of 
alternatives. Most commenters suggested that, if required at all, the 
term limit should be extended to 9 or 12 years, to allow for the 
development of appropriate experience on the board and to dampen the 
impact of sudden, massive turnover; some commenters proposed a 10-year 
or 15-year term limit, and one even advocated for 20 years. Another 
suggested allowing the lesser of four consecutive terms or nine years, 
while another suggested abandonment of term limits for directors but 
imposing a specific limit on the time a board member may hold a 
particular board office, such as chairman, etc.
    The Board is persuaded by the arguments made by commenters to the 
effect that the imposition by rule of mandatory term limits for 
directors is inconsistent with the democratic principles on which 
credit unions are founded. Accordingly, the final rule deletes the 
proposed paragraph 704.14(a), with its associated mandatory term limit, 
and renumbers the remaining subparagraphs of 704.14(a). The Board notes 
that individual corporates may as a matter of policy determine that 
some sort of limitation on consecutive service by directors is 
appropriate. In such cases, the corporate is free to propose a non-
standard bylaw imposing reasonable term limits. The corporate could 
also, for example, impose an internal requirement that board offices, 
such as board chairman, be rotated among directors in accordance with a 
prescribed schedule.

704.14(a)(4) Individual Service on More Than One Corporate Board

    The proposed paragraph 704.14(a)(4) prohibited any individual from 
being elected or appointed to serve on the board if, after such 
election or appointment, the individual would be a director at more 
than one corporate credit union. The NCUA did not receive any 
significant comment on this proposal, and there is no change to it in 
the final (other than renumbering to (a)(3)).

704.14(a)(5) Multiple Member Representatives on Corporate Board

    The proposed paragraph 704.14(a)(5) prohibited any individual from 
being elected or appointed to serve on a corporate board if, after such 
election or appointment, any member of the corporate credit union would 
have more than one representative on the board of the corporate. The 
NCUA did not receive any significant comment on this proposal, and 
there is no change to it in the final rule (other than renumbering to 
(a)(4)).

704.14(a)(10) Majority of Directors Must Be NPCU Representatives

    The proposed paragraph 704.14(a)(10) required that at least a 
majority of directors of every corporate credit union, including the 
chair of the board, must serve on the board as representatives of 
natural person credit union members. This requirement would be 
effective 36 months after publication of the final rule in the Federal 
Register. The commenters addressing this proposal were generally 
supportive, and there is no change to it in the final (other than 
renumbering to (a)(9)).
    Accordingly, and except as discussed above, the Board adopts the 
final Sec.  704.14 as proposed.

(Current) Section 704.19 Wholesale Corporate Credit Unions

    The proposal would eliminate the current Sec.  704.19, which grants 
wholesale corporate credit unions a lesser RE reserve requirement than 
the requirement generally applicable to retail corporates.
    No commenters objected to the elimination of this provision, and 
the final rule eliminates it.

[[Page 64816]]

(Proposed and Final) Section 704.19 Disclosure of Executive and 
Director Compensation

    The proposal would have required that each corporate prepare, on an 
annual basis, a document that discloses the compensation, in dollars, 
of each senior executive officer and director. Compensation is broadly 
defined, and includes benefits, deferred payments, informal 
arrangements, and payments made to acquaintances and relatives. Any 
member of the corporate could obtain a copy of the disclosure upon 
request, and the corporate would also be required to distribute the 
information to its members at least once a year, in the annual report 
or by some other means of its choosing. The proposal would have 
permitted the corporate to include with the disclosure additional 
information if necessary to put the disclosure in context. With respect 
to any corporate merger, a merging federally-chartered corporate would 
be required to affirmatively disclose to both NCUA and its members any 
material, merger-related increase in compensation (i.e., an increase of 
more than 15 percent of annualized compensation or $10,000, whichever 
is greater) for any senior executive or director. The proposal would 
have also required a state-chartered corporate to make the merger-
related disclosure, but only to NCUA unless state law requires 
otherwise.

General Comments

    Many commenters expressed concern with this aspect of the proposal.
    Several expressed opposition based on privacy, arguing that an 
executive's compensation is no one's business except his or her own. 
Others took the view that the proposed disclosure requirements were 
punitive in nature and would not, had they been in place, have had any 
significant impact on helping corporates weather the recent market 
dislocation and economic crisis.
    The Board disagrees that the disclosure requirements are in any way 
punitive or violative of legitimate privacy expectations. The rule is 
designed to assure that corporate credit union members are aware of the 
level of compensation paid to senior management officials. As the Board 
noted in the preamble to the proposed rule:

    The member-owners of a corporate credit union have a strong 
financial interest in the corporate. The typical corporate member 
has large investments in the corporate and much of this investment 
is at risk, either in the form of paid-in capital, membership 
capital, or uninsured shares. The corporate member has a powerful 
interest in ensuring this at-risk investment is properly managed and 
protected. That interest extends both to ensuring the corporate 
provides proper financial incentives to its managers to do a good 
job and also that the corporate is properly expending its funds--
information categories that both include senior management 
compensation.

74 FR 65210, 65252 (December 9, 2009). The Board believes the members' 
interest in this information outweighs any privacy interests the senior 
managers may have in the information. The Board also believes these 
interests exist whether or not such information would have mitigated 
the corporate losses sustained during the last two years.
    Many commenters predict that the disclosures will make recruitment 
and retention of qualified senior executives much more difficult, as 
potential candidates will opt for other positions not subject to 
potential disclosure. The Board disagrees, as discussed further below. 
Other commenters argued that adequate methods currently exist for 
members to gain access to compensation information, while several 
asserted that compensation information should only be accessible to the 
NCUA, which ought to use its own regulatory powers and oversight to 
assure that arrangements are not unreasonable. Some commenters asserted 
that information should be made available only on an aggregate basis, 
or should only be made available to members on request, rather than 
disseminated.
    The Board is of the view that disclosure on an aggregate basis 
would not provide the level of warranted transparency. Further, the 
Board does not believe NCUA's role should be the arbiter of appropriate 
compensation in lieu of the members.
    A few commenters evidently misread the disclosure requirement and 
complained that the disclosure should not be made to members of the 
public or to the media, which in fact the proposal does not require. 
Other commenters called for the rule to allow corporates to present the 
compensation information in their own preferred format, with contextual 
information, which is also permissible under the current proposal. One 
commenter asked for a definition of the term ``compensation'' for 
purposes of the required disclosure. The proposed rule, however, does 
contain a detailed definition of ``compensation'' in Sec.  704.2.

704.19(a) Annual Disclosure

    The proposal required that corporates must annually prepare and 
maintain a disclosure of the compensation, in dollar terms, of each 
senior executive officer and director.
    Several commenters made the point that, as currently defined, the 
term ``senior executive officer'' would extend to individuals who may 
hold a title, such as vice president, but who are not truly senior 
level executives with program level or operational authority or 
responsibility. Commenters suggested that these are not the types of 
employees who ought to be subject to the disclosure requirements. Many 
commenters suggested that NCUA adjust the rule to limit it to the truly 
senior level executives, for example by limiting the disclosure 
obligation to the CEO and the executives who report directly to the 
CEO, or by limiting the disclosure to include only the top five 
officials in terms of compensation. Another suggestion was to simply 
establish a compensation threshold and extend the disclosure obligation 
to all earners receiving income above the threshold. Several suggested 
that NCUA follow the SEC rules on identifying which are the truly 
senior level officials for purposes of this disclosure obligation. 
Others suggested that NCUA should simply adopt and follow the approach 
applicable to those state chartered corporates that must file the IRS 
Form 990 compensation disclosures.
    The Board agrees that the proposal was very broad. In many 
corporates, individuals may hold the title of vice president but not 
necessarily have program level or operational authority. Mandatory 
disclosure of compensation paid to such individuals would extend the 
concept of transparency beyond what the Board considers to be a 
reasonable level. Accordingly, the Board has modified the final 
paragraph 704.19(a) so that disclosure is required only of compensation 
paid to approximately the top ten percent of employees with, generally, 
a minimum of three employees who must disclose and a maximum of five. 
Specifically:
     Final paragraph (a)(1) requires corporates with 41 or more 
employees must disclose compensation paid to the top 5 most highly paid 
individuals.
     Final paragraph (a)(2) requires corporates with between 30 
and 41 full time employees must disclose the compensation paid to the 4 
most highly compensated employees.
     Final paragraph (a)(3) requires corporates with 30 or 
fewer full time employees must disclose compensation paid to the 3 most 
highly paid individuals.
    In addition, final paragraph (a)(4) requires that compensation paid 
to the corporate's chief executive officer must

[[Page 64817]]

also be disclosed, if the chief executive officer is not already 
included among the most highly compensated employees described in 
subparagraphs (a)(1) through (a)(3).
    The Board also determined to remove the reference to directors from 
paragraph 704.19(a), as it is highly unlikely that a director, in his 
or her capacity as director, would be among the most highly compensated 
individuals at the corporate.
    The Board believes this revised compensation disclosure provision 
strikes a reasonable compromise between the right of the corporate's 
members to know the level of compensation paid to its senior staff and 
the expectation of privacy that mid and junior level executives have 
concerning their personal affairs. Also, as discussed in the preamble 
to the proposed rule, the Board has concluded that the disclosures in 
the IRS Form 990 are an insufficient substitute for those required in 
this final rule.
    The Board did not receive any other significant comment on the 
proposed provisions of Sec.  704.19. Accordingly, and except as 
described above, the Board adopts the final Sec.  704.19 as proposed.

Section 704.20 Limitations on Golden Parachute and Indemnification 
Payments

    The proposal would have prohibited golden parachutes, that is, 
payments made to an institution affiliated party (IAP) that are 
contingent on the termination of that person's employment and received 
when the corporate making the payment is either troubled, 
undercapitalized, or insolvent. The proposal would have also generally 
prohibited a corporate, regardless of its financial condition, from 
paying or reimbursing an IAP's legal and other professional expenses 
incurred in administrative or civil proceedings instituted by NCUA or a 
state regulatory authority where the IAP is ultimately found liable. 
For federal corporates, the proposed indemnification limits would be in 
addition to the requirements of Sec.  701.33.

General Comments

    Most commenters that expressed concern about the proposal believed 
it might inhibit the ability of a corporate to recruit and retain 
qualified individuals willing to serve as board directors. Several 
commenters stated that, unlike their counterparts in the banking 
sector, these individuals serve without pay, on a voluntary basis. Some 
commenters expressed concern that many such individuals will be 
unwilling to serve as board members if they believe their own personal 
net worth is at risk and their corporate is unable to offer them 
protection against potentially unlimited personal claims.
    The Board does not agree with these commenters. First, although 
most individuals who serve on the boards of corporates are technically 
uncompensated volunteers, they are, in fact, for the most part 
employees of NPCU members who are tagged to serve at the corporate by 
their NPCU and who do so as part of their responsibilities to the NPCU. 
So if the NPCU asks them to serve, they will. Second, the 
indemnification limitations in the proposal apply only to 
administrative enforcement actions brought by the NCUA or another 
appropriate regulator. Such actions, which often take the form of 
either a removal action or an attempt to prohibit an individual from 
serving on behalf of an insured depository institution in the future, 
do not typically threaten the targeted individual with ``unlimited'' 
personal liability. In addition, the Board notes that paragraph 
704.20(a)(9) does allow for the purchase of director and officer 
liability insurance to protect the director. Finally, paragraph 
704.20(e) of the proposal permits a corporate, if it makes a good faith 
determination that the affected director was acting in a manner he or 
she believed to be in the best interests of the institution, to make 
reasonable indemnification payments subject to the director's written 
agreement to reimburse the corporate should the director ultimately be 
found liable. As a technical clarification, the final rule replaces the 
word ``institution'' with the word ``membership'' in paragraph 
704.20(e)(1)(i). See 75 FR 15574, 15575 (March 29, 2010) and 71 FR 
77150, 77155 (Dec. 22, 2006). Accordingly, and except as described 
above, the Board adopts the final Sec.  704.20 as proposed.

D. Part 709--Involuntary Liquidation of Federal Credit Unions and 
Adjudication of Creditor Claims Involving Federally Insured Credit 
Unions In Liquidation

    The proposed rule revised the payout priority of 709.5(b)(7) to 
reference the capital priority option set forth in Appendix A. The 
final rule further amends the payout priority to clarify that no claim 
is available for capital accounts or instruments depleted in a year 
prior to the date of liquidation. This is consistent with the final 
amendments to Model Form A in Appendix A, which include disclosure 
language that depleted capital has no claim against the liquidation 
estate for claims filed beyond the fiscal year of depletion. For 
clarity, and to reduce the potential ambiguity associated with ``fiscal 
year,'' the final rule also substitutes ``calendar year'' for ``fiscal 
year.'' The final rule contains a similar amendment to Sec.  
709.5(b)(9).

Part 747--Administrative Actions, Adjudicative Hearings, Rules of 
Practice and Procedure, and Investigations

Subpart M--Issuance, Review and Enforcement of Orders Imposing Prompt 
Corrective Action on Corporate Credit Unions
    The proposal would add a new subpart M to part 747, setting forth 
the procedures and due process available in connection with the PCA 
provisions of proposed Sec.  704.4.
    The Board received very little comment on proposed subpart M, and 
the final rule adopts subpart M as proposed.

IV. Analysis of the Final Investment, Credit Risk, and ALM Provisions

    The final rule requires that corporates strive to achieve 100 BP of 
retained earnings (RE) in the first six years. Of course, some 
corporates already have some amount of RE, and so achieving this 100 BP 
after six years may not be a challenge for them. For those that 
currently have little or no RE, they must earn about 17 BP a year on 
average to meet the 6-year mark. This section illustrates how a 
corporate might structure its investment portfolio to satisfy the RE 
growth requirements while complying with the new investment, credit 
risk, and ALM provisions in the final rule.\27\ The intent of this 
section is to demonstrate that there are multiple possible approaches 
to portfolio construction available to corporates under the rule. NCUA 
does not promulgate or endorse a preferred asset allocation or 
structure.
---------------------------------------------------------------------------

    \27\ The final rule also requires a corporate get to 200 BP in 
10 years. We expect that a corporate that can get to 100 BP in 6 
years has a reasonable chance to get to 200 BP in 10, particularly 
since the RE itself will start generating earnings. Also, the 
following modeling assumes a clean sheet balance sheet, that is, 
that the corporate is able to sell those assets on its existing 
balance sheet that cause it to violate the final corporate rule or 
that carry the possibility of significant future credit losses. The 
Board realizes that some corporates may be unable to entirely clean 
their balance sheet of such legacy assets. As discussed above in the 
Legacy assets section, NCUA might grant these corporates waivers of 
some corporate rule requirements, including a waiver of the maximum 
allowable time to build the retained earnings required by this 
regulation. Any waiver involving the required retained earnings 
growth rate, however, will tied to the documented amount of losses 
flowing from legacy assets identified in an approved action plan. 12 
CFR 704.1(b).
---------------------------------------------------------------------------

    Several public commenters wrote about the ability of a corporate to 
achieve the necessary RE growth under the restrictions of the rule, and 
some of

[[Page 64818]]

these commenters provided sample corporate investment portfolios. NCUA 
identified 12 different public comment letters with ``model'' 
investment portfolios, that is, investment portfolios recommended by 
the commenters as appropriate for corporates going forward. Among these 
12 comment letters there were 3 unique, model portfolios. One unique 
portfolio was submitted by Southwest Corporate FCU and another by 
Magnus Enterprises.\28\ A third portfolio was submitted by 10 different 
commenters. This latter portfolio was originally provided to NCUA by 
the Association of Corporate Credit Unions (ACCU).\29\
---------------------------------------------------------------------------

    \28\ Both the Southwest and Magnus comment letters were dated 
February 17, 2010. These public comment letters, as with all public 
comment letters on proposed NCUA regulations, are available on 
NCUA's Web site at http://www.ncua.gov. Additionally, the Magnus 
comment letter first appeared on the blog http://www.unrealizedlosses.blogspot.com and was likely drafted by the 
author of that blog.
    \29\ The ACCU analysis was provided to NCUA in an email from 
then ACCU Executive Director Brad Miller to Director, OCCU, Scott 
Hunt, Subject: ACCU Part 704 Analysis, dated February 22, 2010. For 
an example of a public comment letter that employs this particular 
ACCU portfolio, see the public comment letter from the California 
and Nevada Credit Union Leagues, dated February 17, 2010.
---------------------------------------------------------------------------

    To analyze the efficacy of this final rule, this section first 
constructs a hypothetical corporate balance sheet that satisfies the 
restrictions of the final rule, and then demonstrates that this 
portfolio generates the necessary 17 BP of earnings growth per year. 
This section then includes a second hypothetical balance sheet, with a 
different asset allocation, that also generates sufficient RE. The 
section then examines the complete model balance sheets submitted by 
Southwest FCU, Magnus, and the ACCU. Each of these balance sheets uses 
a different asset allocation from both the NCUA hypothetical balance 
sheets and the other two model balance sheets. The analysis shows that 
each of these three unique balance sheets either does--or can easily be 
modified to--comply with the requirements of the final rule, and that 
each of these portfolios can generate more than enough RE inside the 
given balance sheet to meet the 17 BP annual RE growth requirement.

A. Hypothetical Balance Sheet 1

    NCUA constructed a balance sheet with the following asset 
allocation, liability allocation, WAL, capital, and spread 
characteristics: \30\
---------------------------------------------------------------------------

    \30\ This balance sheet differs from the one described by NCUA 
in the proposed rule. Changes in the final rule, such as the 
prohibition on private label RMBS, would affect that earlier 
hypothetical balance sheet.

                                      Hypothetical Balance Sheet 1
----------------------------------------------------------------------------------------------------------------
                                      Percent of                                                  WAL in 50%
             Sector                  balance sheet      Spread to LIBOR      WAL  (years)         prepayment
                                       (percent)        (basis points)                         slowdown  (years)
----------------------------------------------------------------------------------------------------------------
                                                     Assets
----------------------------------------------------------------------------------------------------------------
FFELP Student Loans.............                10                  33                   3                  3.8
ABS--Autos......................                 5                  15                   2                  2.5
ABS--Credit Cards...............                10                  25                   3                  3
Bonds--Corporate................                20                  82                   3.5                3.5
Agency RMBS.....................                15                  45              \31\ 4                  7
Overnight Investments...........                40                   0                   0                  0
                                 -------------------------------------------------------------------------------
    Total.......................               100                  29.7                 1.7                2.03
----------------------------------------------------------------------------------------------------------------
                                             Equity and Liabilities
----------------------------------------------------------------------------------------------------------------
Overnight Shares................                36                 -10    ..................  ..................
Term Certificates...............                60                   0    ..................  ..................
Member Capital..................                 4                   0    ..................  ..................
                                 -------------------------------------------------------------------------------
    Total.......................               100                  -3.6  ..................  ..................
----------------------------------------------------------------------------------------------------------------
    Net Interest Income (basis    ..................                33.3  ..................
     points)....................
----------------------------------------------------------------------------------------------------------------

Model Balance Sheet Compliance With the Final Corporate Rule
    NCUA constructed the asset allocation so that it would comply with 
the restrictions of the final rule. Specifically:
---------------------------------------------------------------------------

    \31\ The final rule permits the actual WAL of Treasuries, Agency 
RMBS, and Agency GSEs to be reduced by a factor of 0.5 for purposes 
of the two WAL calculations. Accordingly, this 4-year WAL will be 
reduced to 2.0 years, and on the extension test, the 7-year WAL will 
be reduced to 3.5 years.
---------------------------------------------------------------------------

     All NRSRO ratings are AA or better.
     There are no private label RMBS.
     Sector limits are observed.
     The structured securities are primarily floating rate, so 
the IRR NEV test of 704.8(d) is satisfied.\32\
---------------------------------------------------------------------------

    \32\ Given today's low rate environment, NEV volatility should 
not be significant even with the existence of interest rate caps.
---------------------------------------------------------------------------

     The portfolio has a WAL of 1.7 years, which is under the 
2.0 year limit in 704.8(f). The final rule permits the actual WAL of 
Treasuries, Agency RMBS, and Agency GSEs to be reduced by a factor of 
0.5 for purposes of the two WAL calculations. Accordingly, this agency 
RMBS WAL will be reduced to 2.0 years.
     Under the prepayment slowdown scenario, the WAL extends 
only to 2.03 years, well within the 2.25 year limit required by 
704.8(g). Corporate bonds do not prepay, so the extension test does not 
affect them; and the agency RMBS WAL of 7.0 years will be reduced, when 
multiplied by the 0.5 factor, to 3.5 years.
    More information about the assets, liabilities, and capital used in 
the balance sheet follows.
Assets Used in the Balance Sheet
    NCUA has allocated investments across five distinct asset classes 
that are permissible corporate investments. For diversification 
purposes, no asset sector, other than overnight investments, exceeds 20 
percent of the portfolio (although the final rule permits greater 
concentration in several of these sectors). NCUA determined that 40 
percent of the current average corporate

[[Page 64819]]

credit union portfolio has maturities of less than 180 days, and NCUA 
used this for the overnight allocation percentage. Forty percent is 
also the median percentage allocation in the public commenter models.
    The model uses current spreads over LIBOR, determined as of early 
August, 2010, for each asset class. NCUA used two primary sources of 
data for its spread numbers. The first source was Bank of America//
Merrill Lynch's, US Securitization Research, Securitization Weekly, 
dated August 6, 2010. The second source was Wells Fargo Securities' 
Libor/Swap spreads for July 30, 2010. These sources were supplemented 
with actual market observations for a number of agency RMBS.\33\ NCUA 
believes that these spread numbers represent typical spreads, although 
NCUA did find some particular CUSIPs of the same asset type, credit 
quality, and WAL that had better spreads.\34\
---------------------------------------------------------------------------

    \33\ For example, a Fannie Mae sequential pay floating rate CMO, 
CUSIP 31398RV51, with a 6.5 percent cap.
    \34\ Examples of particular securities follow.
    ABS--Auto.
    Example 1. CUSIP 34529LAD6, Issuer Ford Credit Auto Owner Trust, 
WAL 2Yr, 1st Settle Date 4/28/10, Coupon 1.32%, Maturity 8/14/10. On 
its settlement date 4/28/10, the price was 99.50 and the yield 
1.5720. LIBOR 1Yr 1.2% (estimated). Spread over LIBOR: 37 BP Example 
2. CUSIP 06052MAB1, Issuer Bank of America Auto Trust, WAL 1Yr, 1st 
Settle Date 6/24/10, Coupon 0.91%, Maturity 8/15/10. On its 
settlement date 6/24/10, the price was 98.50 and the yield was 
2.4574, LIBOR 1Yr 1.2 (estimated). Spread over LIBOR: 125 BP
    ABS--Credit Card.
    Example 1. CUSIP 02582JFT2, Issuer American Express, WAL 2.9Yr, 
1st Settle Date 6/9/09, Coupon 1.69094%, Maturity 5/15/14. On its 
settlement date 6/9/09, the price was 100 and the yield was 1.6415. 
USD SWAP 3Year 1.30 (estimated). Spread over LIBOR: 34 BP
    Example 2. CUSIP 36159JCC3, Issuer GE Capital, WAL 3Yr, 1st 
Settle Date 6/24/10, Coupon 2.21%, Maturity 6/15/13. On its 
settlement date 6/24/10, price 99.22, yield 2.4950, USD SWAP 3Yr 
1.30 (estimated). Spread Over LIBOR: 120 BP
    ABS--Student Loan
    Example 1. ISIN USU82908AA93, Issuer SLM Student Loan Trust, WAL 
0.9yr, 1st Settle Date 7/22/10, Coupon 2.25%, Maturity 7/22/11. On 
its settlement date 7/22/10, price 100.10, yield 2.1540, LIBOR 1Y 
1.20 (estimated). Spread over LIBOR: 95 BP
    Example 2. CUSIP 78445MAA8, Issuer SLM Student Loan Trust, WAL 
3.4Yr, 1st Settle Date 3/11/10, Coupon 3.2%, Maturity 3/11/2014. On 
its settlement date 3/11/10, price 99.85, yield 3.2692, USD SWAP 3Yr 
1.30 (estimated). Spread over LIBOR: 196 BP.
    All these securities are rated AA- or higher.
---------------------------------------------------------------------------

    The FFELP student loan ABS spread data assumes a generic AAA-rated 
bond with a 3-year WAL. The auto ABS spread data assumes a generic AAA-
rated bond backed by prime automobile loans with a 2-year WAL. Auto ABS 
backed by subprime automobile loans are also available in the market at 
wider spreads but these were not included in the portfolio. The credit 
card ABS spread data is for a generic AAA-rated bond with a 3-year WAL. 
The corporate bond portion of the portfolio assumes an equal allocation 
of generic AA-rated 2-year bonds paying 67 BP over LIBOR and generic 
AA-rated 5-year bonds paying 97 BP over LIBOR.
    The WAL and WAL extension calculations above reflect the 0.5 
reduction factor for the agency RMBS. The WAL life of the portfolio 
without the application of this factor would be 1.95 years and the WAL 
assuming a 50 percent slowdown in prepayments would be 2.40. This 
illustrates the benefit to the corporates of permitting longer WALs for 
U.S. Government and Agency securities.
Liabilities Used in the Balance Sheet
    The overnight share allocation of 36 percent is based on the lowest 
observed month-end level of corporate overnight shares during the past 
10 years. The average percentage of overnight shares for the five years 
leading up to the implementation of the corporate share guarantee was 
higher, ranging from 42 to 49 percent. The 36 percent figure is also 
comparable to the median of 42.5 percent in the models submitted by 
commenters. Many corporate credit unions use the federal funds 
effective rate for setting dividend rates on their overnight accounts; 
and NCUA used this benchmark to set the overnight rate at LIBOR--10.
    The certificate allocation of 60 percent constitutes the remaining 
liabilities after setting overnight shares at 36 percent and 
contributed capital at 4 percent. The hypothetical balance sheet 
assumes certificates pay LIBOR flat, which is a reasonable spread over 
agency securities with similar maturities and is consistent with the 
assumptions in the models submitted by Southwest and the ACCU.
Contributed Capital Used in the Balance Sheet
    The balance sheet model assumes contributed capital is priced at 
LIBOR flat. Some, but not all, commenter models priced contributed 
capital at spreads as high as 150 BP or 200 BP over LIBOR. Most capital 
instruments pay dividends based on the financial condition and 
performance of the underlying organization rather than a strict 
formula, and the same should be true for corporate credit unions. 
Accordingly, NCUA believes that members should accept a lower dividend 
payment on their PCC and NCAs until such time as their corporate is 
able to accumulate sufficient earnings to satisfy the RE requirements 
of the final rule.
    There are various ways that a corporate could structure its PCC and 
NCA dividend provisions to facilitate a corporate's RE goals. One way 
would be for a corporate to offer capital instruments with a spread of 
100 to 200 BP above LIBOR, but which also clearly notes that in any 
given year, should the corporate fall short of a particular earnings 
growth goal, the actual dividend paid may be reduced as low as zero (on 
a noncumulative basis) to make up for the earnings shortfall. To the 
extent that a member receives a reduced dividend in a given year, the 
member should consider this reduction as a form of fee for services 
received.
Model Balance Sheet's Ability To Generate Earnings
    There are three major components to the determination of whether a 
corporate can generate earnings and the amount of such earnings. One 
component is net interest income (NII), which is generally calculated 
by taking the difference between the interest generated by the 
corporate's loans and investments and subtracting off the cost of the 
corporate's liabilities. The other two components are the total non-
interest income (TNII)(which is primarily fee income) and the operating 
expenses (OE). A corporate's earnings, or net operating income, is then 
calculated using the following equation:

Net Operating Income (Earnings) = NII + TNII--OE

    Although the income on a corporate's investment feeds into the NII 
and not into either the TNII or the OE, assumptions about the latter 
two terms are important in estimating the corporate's ultimate ability 
to generate earnings. Accordingly, before looking at a corporate's 
asset allocation and the NII it can produce, a discussion of TNII and 
OE is in order. For purposes of this document we define the difference 
between TNII and OE as net operating expenses (NOE), because it will 
generally be a negative number. Then:

Earnings = NII + NOE.

    For the most recent 12 months ending in June, 2010, the average 
corporate TNII was 25 BP, and the average OE was 40 BP. NOE, then, was 
a negative 15 BP and, for the corporate to generate the necessary 17 BP 
in earnings, it must strive to generate 32 BP in NII.
    NCUA believes that approximating NOE at negative 15 BP is a good 
starting point for any analysis. The expected earnings of this 
hypothetical balance sheet are demonstrated here:

[[Page 64820]]



------------------------------------------------------------------------
                                                                 (Basis
            Hypothetical Balance Sheet 1               points)
------------------------------------------------------------------------
Net Interest Income (NII) (from model).......................       33.3
TNII.........................................................         25
OE...........................................................         40
NOE..........................................................       (15)
------------------------------------------------------------------------
  Net Income From Operations (Earnings)......................       18.3
------------------------------------------------------------------------

    Accordingly, the asset allocation in hypothetical balance sheet 
1 should produce about 18.3 BP of earnings growth a year, more 
than the necessary 17 BP of annual earnings necessary to meet the 6-
year RE target.
Methods To Improve Earnings
    The Board believes that there are ways that any corporate, 
including the model corporate earning 18.3 BP a year above, can improve 
its RE growth. For example:
     A corporate might improve its NII by improved share 
pricing. Corporates have some measure of control of their dividend 
pricing structure, and they need to account for asset yields when 
making decisions on funding strategies.
     The current positively shaped yield curve should improve 
earnings as securities roll down the yield curve.
     After a corporate has built some retained earnings it can, 
if necessary, improve its RE ratio by shrinking its assets.
    NCUA also believes that corporates have some pricing power over the 
fees they charge their members, and higher fees result in higher TNII. 
In addition, corporates can become more efficient, reducing their OE. 
Higher TNII and lower OE result in an improved NOE. Currently, the 
average corporate NOE is about negative 15 BP, but NCUA believes that 
well-run corporates can reduce this NOE number over time--making it 
easier to generate the necessary NII to support earnings growth at 17 
BP annually.
    Historical corporate trends indicate that corporate NOE is, in 
fact, declining:

----------------------------------------------------------------------------------------------------------------
                                        2005         2006         2007         2008         2009        2010*
----------------------------------------------------------------------------------------------------------------
TNII..............................         0.26         0.25         0.21         0.22         0.26         0.24
OE................................         0.48         0.46         0.41         0.45         0.43         0.38
NOE...............................        -0.22        -0.21        -0.19        -0.23        -0.17        -0.14
----------------------------------------------------------------------------------------------------------------
* Annualized.

    As the above chart illustrates, corporates have seen continued 
improvement in NOE (from -0.22 to -0.14) over the past five years. The 
only exception to this trend was in 2008. In that year, the improvement 
in NOE reversed temporarily, most likely due to a one-time spike of 5 
BP in employee compensation and benefits. Absent that one time expense, 
NOE would have been negative 18 BP, right in line with the historical 
trend.
    NCUA recognizes that the TNII, OE, and NOE information quoted above 
is average information and not necessarily reflective of any particular 
corporate and its business model. The Board notes, for example, that 
for purposes of analyzing its forward-looking model portfolio, 
Southwest Corporate FCU used TNII of 37.3 BP and OE of 45.3 BP, both 
significantly higher than the current corporate averages.\35\ Yet 
Southwest's NOE--the difference between its TNII and OE--was only 
negative 12 BP. This is right in line with the improving corporate 
trends demonstrated above.
---------------------------------------------------------------------------

    \35\ Southwest FCU comment letter, p. 24.
---------------------------------------------------------------------------

B. Hypothetical Balance Sheet 2

    There are other balance sheets that differ from Balance Sheet 
1 that should generate sufficient earnings going forward. For 
example, by reducing the allocation to corporate bonds, and increasing 
the allocation to Agency RMBS and adding some commercial mortgage 
backed securities (CMBS), a corporate might hold a balance sheet like 
this:
---------------------------------------------------------------------------

    \36\ After applying the 0.5 reduction factor to the Agency RMBS 
permitted by paragraph 704.8(h). The factor is also applied to the 
prepayment slowdown WAL.

                                      Hypothetical Balance Sheet 2
----------------------------------------------------------------------------------------------------------------
                                                                                                  WAL in 50%
              Sector                   Percent of       Spread to LIBOR       WAL (years)         prepayment
                                     balance sheet      (basis points)                         slowdown (years)
----------------------------------------------------------------------------------------------------------------
                                                     Assets
----------------------------------------------------------------------------------------------------------------
FFELP Student Loans..............                  5               33                   3                  3.8
ABS--Autos.......................                  7               15                   2                  2.5
ABS--Credit Cards................                  8               25                   3                  3
Bonds--Corporate.................                 12               82                   3.5                3.5
Agency RMBS......................                 18               45                   4                  7
CMBS.............................                 10              130                   5                  5
Overnight Invest.................                 40                0                   0                  0
                                  ------------------------------------------------------------------------------
    Total........................                100               35.64           \36\ 1.81               2.155
----------------------------------------------------------------------------------------------------------------
                                                   Liabilities
----------------------------------------------------------------------------------------------------------------
Overnight Shares.................                 36              -10     ..................  ..................
Term Certificates................                 60                0     ..................  ..................
Member Capital...................                  4                0     ..................  ..................
                                  ------------------------------------------------------------------------------
    Total........................                100               -3.6   ..................  ..................
----------------------------------------------------------------------------------------------------------------
    Net Interest Income (NII).......................               39.24  ..................  ..................

[[Page 64821]]

 
    TNII............................................               25     ..................  ..................
    OE..............................................               40     ..................  ..................
    NOE.............................................             (15)     ..................  ..................
----------------------------------------------------------------------------------------------------------------
    Net Income From Operations (Earnings)...........               24.24  ..................  ..................
----------------------------------------------------------------------------------------------------------------

    Again, NCUA constructed this portfolio to be in compliance with the 
final rule, including the rule's requirements for asset credit quality, 
sector limits, the 2-year asset WAL limit, and the 2.25-year asset 
extension limit. Again, the spread sources used include Bank of 
America//Merrill Lynch's, US Securitization Research, Securitization 
Weekly, dated August 6, 2010; and Wells Fargo Securities' Libor/Swap 
spreads for July 30, 2010.
    The other general assumptions about assets, liabilities, cost of 
capital, and TNII, OE, and NOE are also the same as in hypothetical 
1. Since this Balance Sheet 2 earns more than Balance 
Sheet 1, the corporate could possibly pay its capital 
contributors more on their contributed capital. In fact, the corporate 
could pay up to LIBOR +150 on its contributed capital and still 
generate more than 17 BP of earnings each year.

C. Hypothetical Balance Sheet 3 (Southwest Corporate Federal 
Credit Union)

    Southwest Corporate Federal Credit Union (Southwest) submitted the 
following model balance sheet as part of its comment letter:

                      Hypothetical Balance Sheet 3--Southwest Model (From Annex C)
                                 [All data in this table supplied by Southwest]
----------------------------------------------------------------------------------------------------------------
                                                           Percent of                            Maturity \37\
                Investments and loans                    balance sheet      Spread to LIBOR         (Years)
----------------------------------------------------------------------------------------------------------------
                                                   Investments
----------------------------------------------------------------------------------------------------------------
Loans................................................                  7               40                   2.0
ABS--Autos...........................................                 20               35                   2.0
ABS--Credit Cards....................................                 20               38                   2.0
FFELP Student Loans..................................                 18               32                   2.0
Agency...............................................                 10               10                   1.0
Overnight............................................                 25              -12                   0.0
                                                      ----------------------------------------------------------
    Total............................................                100               21.2                 1.40
----------------------------------------------------------------------------------------------------------------
                                                   Liabilities
----------------------------------------------------------------------------------------------------------------
Overnight Shares.....................................                 65              -18                   0
Certificates.........................................                 31                0                   0.7
Member Capital.......................................                  4              150                   0.0
RUDE.................................................                  0  ..................                0.0
                                                      ----------------------------------------------------------
    Total............................................                100               -5.7                 0.22
----------------------------------------------------------------------------------------------------------------
    Asset/Liability WAL mismatch (years)................................                1.18  ..................
    Net Interest Margin (bps)...........................................               26.9   ..................
    Net Fee Income (bps)................................................               37.3   ..................
    Operating Expenses (bps)............................................               45.3   ..................
----------------------------------------------------------------------------------------------------------------
    Net Income From Operations (bps)....................................               18.9   ..................
----------------------------------------------------------------------------------------------------------------

     
---------------------------------------------------------------------------

    \37\ NCUA believes that Southwest meant this to be WAL, not 
maturity. In any event, the WAL would be less than or equal to the 
maturity.
---------------------------------------------------------------------------

    Southwest stated that its model balance sheet has about $7 billion 
in assets and is based on Southwest's recommendations and current 
business model.
---------------------------------------------------------------------------

    \37\ NCUA believes that Southwest meant this to be WAL, not 
maturity. In any event, the WAL would be less than or equal to the 
maturity.
---------------------------------------------------------------------------

Model Balance Sheet Compliance With the Final Corporate Rule
    This model appears to comply with the investment, credit risk, and 
ALM provisions of the final rule.\38\ Specifically:
---------------------------------------------------------------------------

    \38\ NCUA assumes that the commenter constructed this portfolio 
in compliance with the NRSRO limits (AA-) and IRR NEV limits. These 
limits exist in the current corporate rule, and the final rule does 
not change the existing base limits.
---------------------------------------------------------------------------

     The asset allocation complies with the sector limits of 
704.6(d).
     The WAL of the assets, at 1.40 years, is less than the 2.0 
year limit in 704.8(f).\39\
---------------------------------------------------------------------------

    \39\ Southwest was concerned about the proposed cash flow 
mismatch sensitivity tests in the proposed rule, and its mismatch of 
1.18 years would have violated one of those tests--but both of those 
tests have been removed from the final rule.
---------------------------------------------------------------------------

     The portfolio contains no private-label RMBS, which are 
prohibited under the final rule 704.5(h).
     The portfolio complies with the new asset extension test, 
that is, the new

[[Page 64822]]

2.25 year limit in 704.8(g) on WAL of assets assuming a 50% prepayment 
slowdown. While Southwest did not discuss this new extension test--
because it was not in the proposed rule--Southwest's balance sheet mix 
indicates the portfolio would meet this requirement. For example, the 
most likely securities to have any extension risk are those with 
student loans and mortgages. If upon prepayment slowdown the student 
loan ABS extends to 3 years (market indications are an extension to 2.6 
years) and the agency securities (assuming agency MBS) extend to 4 
years (a 1.5 year WAL security was observed to extend only to 2.7 
years), the WAL of the portfolio is still only 1.96 years. Even then, 
the WAL for agency mortgages can be reduced by a factor of 0.5 under 
the final rule, 704.5(h). Applying the 0.5 factor to these securities, 
the WAL of the extended portfolio would drop to only 1.76 years, again 
well below the 2.25 year limit.
Model Balance Sheet's Ability To Generate Earnings
    As recognized by Southwest in its comment letter, this balance 
sheet generates sufficient income to pass the retained earnings goals 
established by the new corporate regulation. Projected retained 
earnings are well above 17 BP a year. For example, after 3 years, 
Southwest projected the RE growth at 57 basis points, and after 6 years 
Southwest projected an RE of 113 basis points.
    NCUA notes that this model generates sufficient earnings even when 
capital holders are paid at LIBOR +150. Earnings would be enhanced if 
the rate of return on capital was reduced, even temporarily.
Effect of Changes in the Spreads Over Time
    Southwest expressed some concern that spreads, as they existed when 
it wrote to NCUA in February 2010, might tighten over time, thus 
reducing a corporate's ability to generate earnings. In Annex D of its 
letter, Southwest analyzed its model balance sheet under ``historic'' 
spread levels and concluded that its model asset allocation would not 
produce sufficient earnings at those historic levels.
    NCUA agrees that spreads going forward will have an impact on a 
corporate's ability to generate earnings. It is impossible, however, to 
predict the future--spreads could tighten, widen, or even stay the same 
for a protracted period. And even if spreads change, it is uncertain as 
to the speed of change. In fact, no one can say if spreads will ever 
return to ``historical'' levels, or even what exactly those historical 
levels are. For example, Southwest's letter indicates it based its 
Annex D analysis on the past 9 years of historical data, and concluded 
that the spread over LIBOR for an Agency MBS was only 6 BP during this 
time period. Using a longer historical view of the past 20 years, 
however, Bloomberg data suggests the average 1-year Agency MBS spreads 
were much higher than 6 BP, with an average Agency MBS spread over this 
20-year period of about 22 BP and a median of about 16 BP.
    Corporates will have to adapt to changing spreads, including 
variances within asset classes. As suggested by Southwest FCU, its 
model asset allocation would have worked in February 2010, and NCUA 
believes the asset allocations in hypotheticals 1 and 
2 above will work given today's spreads. The Board believes 
that corporates can adapt to changes in spreads, and the WAL limits in 
the final rule will provide corporates additional flexibility to shift 
allocations.

D. Hypothetical Balance Sheet 4--Magnus Enterprises Model

    Magnus proposed a different investment model that grows RE at a 
successful rate:

                               Hypothetical Balance Sheet 4--Magnus Model
                                   [All data in this table supplied by Magnus]
----------------------------------------------------------------------------------------------------------------
                                                           Portfolio
                Investments and loans                      percentage      LIBOR/EDSF spread   Total WAL (years)
----------------------------------------------------------------------------------------------------------------
                                                     Assets
----------------------------------------------------------------------------------------------------------------
Agency Mortgages.....................................                 35               60                 4
ABS--Autos...........................................                 10               25                 0.6
ABS--Credit Cards....................................                 10               30                 1
FFELP Student Loans..................................                 15               25                 0.5
Overnight Investments................................                 30               -5                 0.003
                                                      ----------------------------------------------------------
    Total............................................                100               28.75              1.6359
----------------------------------------------------------------------------------------------------------------
                                                   Liabilities
----------------------------------------------------------------------------------------------------------------
Overnight Shares.....................................                 30               -5                 0.003
Certificates.........................................                 70               -5                 0.5
                                                      ----------------------------------------------------------
    Total............................................                100               -5                 0.3509
----------------------------------------------------------------------------------------------------------------
    Net Interest Income.................................................               33.75  ..................
----------------------------------------------------------------------------------------------------------------

Model Balance Sheet Compliance With the Final Corporate Rule
    Again, this Magnus Balance Sheet 4 appears to comply with 
the investment, credit risk, and ALM provisions of the final rule. The 
portfolio contains no private label RMBS and complies with the final 
sector limits. The WAL of the assets, at 1.63 years, is under the 2-
year WAL limit. In fact, since the final rule permits agency securities 
to multiply their actual WAL by a factor of 0.5 before applying the 2-
year WAL, the effective WAL of this portfolio is well under 1.63 years. 
The asset liability mismatch of 1.285 years is not relevant, as the 
proposed cash flow mismatch tests have been removed from the final 
rule. And NCUA also believes that these assets, if prepayments slowed 
by 50 percent, would not cause the portfolio WAL to exceed 2.25 years, 
thus satisfying the asset extension test of 704.8(g).

[[Page 64823]]

Model Balance Sheet's Ability To Generate Earnings
    The Magnus balance sheet generates a net interest income of 33.75 
BP.
    Magnus' letter discusses corporate operating expenses. The author 
believes, as NCUA does, that corporates can and will become more 
efficient. He asserts an operating expense level of 30 BP is achievable 
after cost reductions and potential mergers in the coming years. For 
purposes of analyzing the Magnus model, however, NCUA used the current 
average, annual ratio of corporate operating expenses to daily average 
net assets of 40 BP.
    Magnus believes that corporates have control over their cost of 
capital. Specifically, he says that:

    I am not troubled by the lack of cost of capital in [NCUA's 
proposed rule] margin analysis. Any new capital that comes into the 
corporates is going to come from NPCUs and they all understand that 
their capital investment isn't really a traditional investment that 
pays a high annual yield. Instead, it's an investment that may not 
pay dividends for 10 years or more * * *. Members who value the 
cooperative nature of their relationship with their corporate should 
be willing to forsake the dividend on PCC and NCA in the short run 
in order for the corporate to rebuild retained earnings.

Magnus letter, p. 4. NCUA agrees with this quoted language, 
particularly the last sentence. Accordingly, for purposes of analyzing 
the Magnus model, the analysis assumes that capital pays only LIBOR 
flat.
    Magnus' model does not address net fee income. For purposes of 
analysis, NCUA made the same TNII assumptions (25 BP) as discussed 
previously. Accordingly, the Magnus investment portfolio, with its 
primary emphasis on Agency MBS, would produce an annual RE growth of 
about 19 BP, as follows:

------------------------------------------------------------------------
                                                                 (Basis
                   Analysis of Magnus model                     points)
------------------------------------------------------------------------
Net Interest Income..........................................      33.75
TNII.........................................................         25
OE...........................................................         40
NOE..........................................................       (15)
------------------------------------------------------------------------
  Net Income From Operations (Earnings)......................      18.75
------------------------------------------------------------------------

    This earnings growth exceeds the necessary 17 BP a year. Again, as 
discussed in connection with NCUA's hypothetical 1 above, 
there are multiple potential ways to further improve this RE growth. 
For example, the corporate could become more efficient, moving toward 
the 30 BP expense level discussed by Magnus; or the corporate could use 
its pricing power to increase its fee income or reduce its dividends.

E. Hypothetical Balance Sheet 5--ACCU Model

    As mentioned above, a number of commenters adopted or referenced a 
model developed by the Association of Corporate Credit Unions (ACCU), 
given in the table below:

            Hypothetical Balance Sheet 5--ACCU Model
                [All data in this table supplied by ACCU]
------------------------------------------------------------------------
                                        Percent of
              Assets                  balance sheet     Spread to LIBOR
------------------------------------------------------------------------
Loans.............................                 10                 50
ABS--Autos........................                 20                 37
ABS--Credit Cards.................                 15                 42
FFELP Student Loans...............                  5                 45
Structured Agency.................                 15                 34
Bank Floaters.....................                  5                 29
Other Short-term..................                  8                 12
CMBS..............................                  7                100
Overnight.........................                 15                  4
                                   -------------------------------------
    Total.........................                100                 36
------------------------------------------------------------------------
                            Shares and Equity
------------------------------------------------------------------------
Overnight Shares..................                 50                  0
Certificates......................                 46                  0
Member Capital....................                  4                200
Rude..............................                  0                  0
                                   -------------------------------------
      Total.......................                100                  8
                                   -------------------------------------
    Net Interest Margin (basis                     28  .................
     points)......................
    Other Income..................                 18  .................
    Operating Expenses............                 32  .................
    Net Income....................                 14  .................
------------------------------------------------------------------------

    The ACCU asset allocation varies from both the Southwest and Magnus 
allocations. For example, the ACCU model includes wider variation in 
investment classes and, as with hypothetical 2 above, 
introduces some CMBS.
Model Balance Sheet Compliance With the Final Corporate Rule
    Again, this balance sheet appears to comply with the investment, 
credit risk, and ALM provisions of the final rule. For example, the 
portfolio contains no private label RMBS, and it complies with the 
final sector limits.
    ACCU did not provide direct information about the WAL of its 
assets. However, it did provide data from which the asset WAL can be 
reverse engineered. Specifically, ACCU also provided this chart:

 
------------------------------------------------------------------------
                          NEV Shocks                            Maximum
------------------------------------------------------------------------
Rates +300 bp................................................     -14.0%

[[Page 64824]]

 
Credit +100 bp...............................................     -30.3%
+Paydowns -50%...............................................     -32.7%
------------------------------------------------------------------------

    If a credit shock of 100 BP produces an NEV decline of 30 percent 
from a starting NEV of 4 percent, that equates to a difference in the 
WALs of the assets and liabilities of about 1.2 years. Given that 
ACCU's liabilities are half overnight and half certificates, and the 
certificates likely have an aggregate WAL of a year or less (as do the 
certificates in both the Southwest and Magnus models), the aggregate 
liability WAL of the ACCU model is likely less than 0.8 years, which 
would make ACCU's asset WAL less than 2.0 years, satisfying the WAL 
restriction in the final rule.
    As for the asset extension test, ACCU indicates that a 100 BP shock 
to its portfolio, assuming a 50 percent prepayment slowdown, produces 
an NEV decline of 32.7 percent. This equates to an asset extension of 
less than two months, and so the asset WAL, with the slowdown, would be 
less than 2.25 years. Accordingly, the ACCU model satisfies the 
extension test of 704.8(g).
Model Balance Sheet's Ability To Generate Earnings
    ACCU's bottom line of 14 BP annually is 3 BP short of the annual RE 
growth needed under the final rule. Although the ACCU model assumes 
lower net fee income than the Southwest model, in the ACCU model this 
lower fee income is offset by a lower operating expense estimate.
    There are multiple ways a corporate starting with the ACCU model 
can adjust its earnings capacity to achieve the 17 BP target. For 
example,
     The corporate can improve its efficiencies and product 
pricing, as discussed earlier.
     The corporate could change its sector weighting slightly. 
For example, if the corporate shifted 5 percent of its portfolio from 
Auto ABS to CMBS, the portfolio return would improve by over 3 BP 
annually using ACCU's spreads.
     ACCU assumed its cost of capital would be 200 BP over 
LIBOR. Again, NCUA believes that NPCUs that desire corporate services 
should be willing to provide capital at little or no cost, at least 
temporarily. If the cost of capital in ACCU's model was reduced to 
LIBOR flat, for example, that would increase its operating income by 8 
BP annually and put the corporate well over its 17 BP annual earnings 
target.
Conclusion
    There are multiple, different asset allocations available to 
corporates under the restrictions of the new rule that should provide 
corporates the necessary earnings flexibility to meet the new RE growth 
requirements.

V. Further Revisions to the Corporate Rule

    As discussed above, NCUA issued its proposed revisions to the 
corporate rule back in November 2009, more than ten months ago. Since 
that time NCUA has received significant feedback. NCUA received formal 
feedback in the form of 815 public comment letters with over 2,600 
pages of comments. NCUA also received much informal feedback, for 
example, from the credit union industry (through numerous town hall 
meetings and webinars), from other federal regulators, and from the 
Kamakura Corporation.
    Much of that feedback has resulted in changes from the proposed 
rule to this final rule. Some of the feedback, though, went beyond the 
scope of the proposed rulemaking. Ideas--even very good ideas--that are 
beyond the scope of the proposed rule are not addressed in this final 
rulemaking. Instead, the NCUA has considered some of these ideas and 
plans in the near future to issue another proposal with further 
revisions to the corporate rule. The Board believes it important, 
though, as corporates and credit unions move now to adapt to this final 
rule, that they also have some information about what these pending 
proposals are.
    Specifically, the Board will be proposing that:
    1. Corporates be subject to internal control reporting requirements 
similar to those required under Section 36 of the FDI Act (for banks 
and thrifts) and the Sarbanes-Oxley Act of 2002 (for public companies). 
See 12 U.S.C. 1831m; Public Law 107-204; and 12 CFR part 363, Annual 
Independent Audits and Reporting Requirements (FDIC rulemaking 
integrating FDI Act Section 36 and certain Sarbanes-Oxley 
requirements).
    2. At any given time, an NPCU would be limited to membership in one 
corporate of the NPCU's choice. An NPCU could belong to two corporates 
for a short period of time, but only when transitioning between those 
corporates.
    3. The board of directors of a corporate must establish a risk 
management committee. The committee will include at least one 
independent risk management expert with sufficient experience in 
identifying, assessing, and managing risk exposures.
    4. When the TCCUSF makes an assessment on FICUs, NCUA would ask all 
corporate members that are not FICUs (``non-FICUs'') to make a 
voluntary contribution to the TCCUSF. Corporates will hold a membership 
vote to determine whether any non-FICU that fails to make the requested 
contribution should be expelled from the corporate.
    5. Each vote by a corporate's boards of directors must be recorded 
in the minutes so that the vote of each individual director is apparent 
from the minutes.
    6. Corporates would be permitted to charge their members reasonable 
one-time or periodic membership fees. The fees must generally be 
proportional to the member's asset size, and a member must be given at 
least six months notice of any new fee, or any material change to an 
existing fee.
    In a sense, this final rulemaking is the first step in the 
remolding of the corporate rule, and the six proposals above are the 
second step. As much as practicable, NCUA intends to mesh the effective 
dates of these two rulemakings. As discussed above, the effective date 
for most of this final rule is January 18, 2011. Accordingly, the Board 
plans to move this second-step rulemaking along by issuing these six 
proposals at either the October 2010 or November 2010 Board meeting for 
a 30-day public comment period.
    Also, although not involving any additional rulemaking, the Board 
plans to:
    1. Consult with other federal financial regulators to create a data 
tracking system to enhance NCUA's ability to systemically conduct trend 
analyses to identify recurrent or network-wide issues, and
    2. Upgrade NCUA's current guidance on corporate mergers into a 
formal corporate credit union merger manual.
    NCUA intends to implement the data tracking system within nine 
months and publish the merger manual within six months.

VI. Regulatory Procedures

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a proposed rule may have on 
a substantial number of small credit unions (those under ten million 
dollars in assets). This final rule only applies to corporates, all but 
one of which has assets well in excess of $10 million. Accordingly, the 
NCUA Board certifies that this final rule will not have a significant 
economic impact on a substantial number of small credit

[[Page 64825]]

unions, and, therefore, a regulatory flexibility analysis is not 
required.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or modifies an existing burden. 44 U.S.C. 3507(d). For 
purposes of the PRA, a paperwork burden may take the form of a either a 
reporting or a recordkeeping requirement, both referred to as 
information collections. NCUA identified and described several 
information collection requirements in the proposed rule, including new 
requirements in the following broad areas: capital and PCA, 
investments, ALM, CUSO procedures, and corporate governance 
requirements. As required by the PRA, NCUA submitted a copy of the 
proposed regulation to the Office of Management and Budget (OMB) for 
its review and approval. Persons interested in submitting comments with 
respect to the information collection aspects of the proposed rule were 
invited to submit them to the OMB at the address noted in the preamble 
to the proposed rule.
    While NCUA received a substantial number of comments on the 
proposed rule, commenters did not specifically address the agency's 
estimates of burden hours or costs, which estimates were set out 
specifically in the preamble as required by PRA. However, as discussed 
more fully in the preamble to this final rule, the Board has determined 
to make several changes in the final rule, and some of those changes 
affect the burden estimates for some aspects of the collection 
requirements. These changes, all of which have the effect of reducing 
the estimated burden, are discussed below.
ALM Requirements
    The Board has determined to eliminate entirely the two cash flow 
mismatch tests that had been proposed (Sec. Sec.  704.6(e) and (f) in 
the proposed rule). The final rule will retain as proposed the two-year 
weighted average limit and will now require a new, additional test with 
a 2.25 year weighted average life limit that assumes a 50 percent 
slowdown in prepayment speeds to limit extension risk. The new test 
must be done quarterly and will be required of and affect all 
corporates. As with the original proposal, corporates will be required 
to calculate and record the effective and spread durations for 
individual assets and liabilities to support the test results.
    From an information collection standpoint, NCUA estimates that the 
net impact of this change will be a reduction by approximately 50 
percent in the estimated burden hours associated with ALM requirements. 
Accordingly, the revised burden estimate for compliance with this 
revised requirement would be as follows:

27 corporates x 84 hours per year = 2268 hours.
Corporate Governance Requirements
    The final rule changes the provisions relating to disclosure of 
compensation by reducing the number of senior executives whose 
compensation must be disclosed. Many commenters noted that the original 
proposal could have had the effect of requiring disclosure of 
compensation for many individuals, such as some persons holding the 
title of vice president, who are not, in fact, in positions with 
program or operational level responsibilities. The Board has changed 
the language from the proposal to now limit the total number of 
required executives subject to disclosure to the top ten percent of 
most highly paid individuals, to a maximum of five. For corporates with 
thirty or fewer employees, the top three highly paid executives must be 
disclosed. In all cases, the compensation paid to the CEO must be 
included in the disclosure if the CEO is not in the most highly paid 
ten percent. While the initial estimate of the burden for complying 
with this aspect of the governance provisions was not substantial, the 
Board believes the change will reduce the final burden by approximately 
50 percent.
    Accordingly, the revised burden estimate for compliance with this 
revised requirement would be as follows:

27 corporates x 5 hours = 135 hours.
Summary of Collection Burden (Revised)
    With the revisions described above, NCUA estimates the total 
information collection burden represented by the final rule, calculated 
on an annual basis, as follows:

 
 
 
Capital restoration plans........................  20 corporates x 50 hours = 1,000 hours.
Retained earnings accumulation plans.............  3 corporates x 50 hours = 150 hours
Notice of intent to redeem contributed capital...  10 corporates x 1 hour = 10 hours.
Notice of PCA category change....................  10 corporates x 1 hour = 10 hours.
Ratings procurement..............................  27 corporates x 2 hours = 54 hours.
Investment action plans..........................  10 corporates x 20 hours = 200 hours.
ALM testing......................................  27 corporates x 84 hours = 2,268 hours.
CUSO approval requests...........................  12 corporates x 2 hours = 24 hours.
Compensation disclosures.........................  27 corporates x 5 hours = 135 hours.
Merger related disclosures.......................  4 corporates x 5 hours = 20 hours.
Requests to make golden parachute and severance    4 corporates x 4 hours = 16 hours.
 payments.
                                                  --------------------------------------------------------------
    Total Additional Burden Hours................  3,887 hours.
 

    NCUA does not anticipate that the revisions discussed above will 
have any significant impact on the cost estimates set out in the 
proposed rule.
    NCUA has submitted these burden revisions to the OMB. NCUA expects 
that OMB will review and approve the revisions, and publish its 
approval, in the near future.

C. 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.
    This final rule applies to all federally-insured corporates, 
including state charters. Nonfederally insured corporates must also 
agree by contract, as a condition of receiving shares or deposits from 
federally-insured credit unions, to adhere to the requirements of this 
part and submit to NCUA examinations. 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.'' NCUA has 
plenary statutory authority to regulate corporate credit unions and 
federally insured credit unions. See 12

[[Page 64826]]

U.S.C. 1766(a) and 12 U.S.C. 1781 et. seq. Further, the risk of loss to 
federally-insured credit unions and the NCUSIF due to corporate 
activities are concerns of national scope.
    The final rule does not impose additional costs or burdens on the 
states or have a significant effect on the states' ability to discharge 
traditional state government functions. NCUA has determined that the 
corporate rule as a whole, and this rulemaking, may have an occasional 
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. However, the 
potential risk to the NCUSIF and the entire credit union system that 
would result without extending the entire corporate rule, including the 
revisions in this rulemaking, to all corporates is more significant 
than any such effects.
    Accordingly, NCUA believes that the protection of corporates, the 
NCUSIF, and the entire system of federally-insured credit unions 
requires application of this final rule to all such corporates, and 
that this application is consistent with Executive Order 13132.

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

    The NCUA has determined that this 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).

E. Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement 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 for purposes of the Small Business 
Regulatory Enforcement Fairness Act of 1996.

List of Subjects

12 CFR Part 702

    Credit unions, Reporting and recordkeeping requirements.

12 CFR Part 703

    Credit unions, Investments.

12 CFR Part 704

    Credit unions, Corporate credit unions, Reporting and recordkeeping 
requirements.

12 CFR Part 709

    Credit unions, Liquidations.

12 CFR Part 747

    Credit unions, Administrative practices and procedures.

    By the National Credit Union Administration Board on September 
24, 2010.
Mary F. Rupp,
Secretary of the Board.

0
Accordingly, NCUA amends 12 CFR parts 702, 703, 704, 709, and 747 as 
follows:

PART 702--PROMPT CORRECTIVE ACTION

0
1. The authority citation for part 702 continues to read as follows:

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


0
2. Effective October 20, 2011, revise paragraph (d) of Sec.  702.105 to 
read as follows:


Sec.  702.105  Weighted--average life of investments.

* * * * *
    (d) Capital in mixed-ownership Government corporations and 
corporate credit unions. For capital stock in mixed-ownership 
Government corporations, as defined in 31 U.S.C. 9101(2), and perpetual 
and nonperpetual capital in corporate credit unions, as defined in 12 
CFR 704.2, the weighted-average life is defined as greater than one (1) 
year, but less than or equal to three years;
* * * * *

PART 703--INVESTMENTS AND DEPOSIT ACTIVITIES

0
3. The authority citation for part 703 continues to read as follows:

    Authority:  12 U.S.C. 1757(7), 1757(8), 1757(15).


0
4. Effective October 20, 2011, revise paragraph (b) of Sec.  703.14 to 
read as follows:


Sec.  703.14  Permissible investments.

* * * * *
    (b) Corporate credit union shares or deposits. A Federal credit 
union may purchase shares or deposits in a corporate credit union, 
except where the NCUA Board has notified it that the corporate credit 
union is not operating in compliance with part 704 of this chapter. A 
Federal credit union's aggregate amount of perpetual and nonperpetual 
capital, as defined in part 704 of this chapter, in one corporate 
credit union is limited to two percent of the federal credit union's 
assets measured at the time of investment or adjustment. A Federal 
credit union's aggregate amount of contributed capital in all corporate 
credit unions is limited to four percent of assets measured at the time 
of investment or adjustment.
* * * * *

PART 704--CORPORATE CREDIT UNIONS

0
5. Revise the authority citation for part 704 to read as follows:

    Authority:  12 U.S.C. 1762, 1766(a), 1772a, 1781, 1789, and 
1795e.


0
6. Effective January 18, 2011, revise Sec.  704.2 to read as follows:


Sec.  704.2  Definitions.

    As used in this part:
    Adjusted trading means any method or transaction whereby a 
corporate credit union sells a security to a vendor at a price above 
its current market price and simultaneously purchases or commits to 
purchase from the vendor another security at a price above its current 
market price.
    Asset-backed security (ABS) means a security that is primarily 
serviced by the cashflows of a discrete pool of receivables or other 
financial assets, either fixed or revolving, that by their terms 
convert into cash within a finite time period plus any rights or other 
assets designed to assure the servicing or timely distribution of 
proceeds to the security holders. Mortgage-backed securities are a type 
of asset-backed security.
    Available to cover losses that exceed retained earnings means that 
the funds are available to cover operating losses realized, in 
accordance with generally accepted accounting principles (GAAP), by the 
corporate credit union that exceed retained earnings net of equity 
acquired in a combination. Likewise, available to cover losses that 
exceed retained earnings and perpetual contributed capital (PCC) means 
that the funds are available to cover operating losses realized, in 
accordance with GAAP, by the corporate credit union that exceed 
retained earnings net of equity acquired in a combination and PCC. Any 
such losses must be distributed pro rata at the time the loss is 
realized first among the holders of paid-in capital (PIC), and when all 
PIC is exhausted, then pro rata among all MCAs, all subject to the 
optional prioritization described in Appendix A

[[Page 64827]]

of this Part. To the extent that any contributed capital funds are used 
to cover losses, the corporate credit union must not restore or 
replenish the affected capital accounts under any circumstances. In 
addition, contributed capital that is used to cover losses in a 
calendar year previous to the year of liquidation has no claim against 
the liquidation estate.
    Capital means the sum of a corporate credit union's retained 
earnings, paid-in capital, and membership capital. For a corporate 
credit union that acquires another credit union in a mutual 
combination, capital includes the retained earnings of the acquired 
credit union, or of an integrated set of activities and assets, at the 
point of acquisition.
    Capital ratio means the corporate credit union's capital divided by 
its moving daily average net assets.
    Collateralized debt obligation (CDO) means a debt security 
collateralized by mortgage-backed securities, asset-backed securities, 
or corporate obligations in the form of loans or debt. Senior tranches 
of Re-REMIC's consisting of senior mortgage- and asset-backed 
securities are excluded from this definition.
    Collateralized mortgage obligation (CMO) means a multi-class 
mortgage-backed security.
    Commercial mortgage-backed security (CMBS) means a mortgage-backed 
security collateralized primarily by multi-family and commercial 
property loans.
    Compensation means all salaries, fees, wages, bonuses, severance 
payments, current year contributions to employee benefit plans (for 
example, medical, dental, life insurance, and disability), current year 
contributions to deferred compensation plans and future severance 
payments, including payments in connection with a merger or similar 
combination (whether or not funded; whether or not vested; and whether 
or not the deferred compensation plan is a qualified plan under Section 
401(a) of the IRS Code). Compensation also includes expense accounts 
and other allowances (for example, the value of the personal use of 
housing, automobiles or other assets owned by the corporate credit 
union; expense allowances or reimbursements that recipients must report 
as income on their separate income tax return; payments made under 
indemnification arrangements; and payments made for the benefit of 
friends or relatives). In calculating required compensation 
disclosures, reasonable estimates may be used if precise cost figures 
are not readily available.
    Contributed capital means either paid-in capital or membership 
capital accounts.
    Core capital means the sum of:
    (1) Retained earnings;
    (2) Paid-in capital; and
    (3) The retained earnings of any acquired credit union, or of an 
integrated set of activities and assets, calculated at the point of 
acquisition, if the acquisition was a mutual combination.
    Core capital ratio means the corporate credit union's core capital 
divided by its moving daily average net assets.
    Corporate credit union means an organization that:
    (1) Is chartered under Federal or state law as a credit union;
    (2) Receives shares from and provides loan services to credit 
unions;
    (3) Is operated primarily for the purpose of serving other credit 
unions;
    (4) Is designated by NCUA as a corporate credit union;
    (5) Limits natural person members to the minimum required by state 
or federal law to charter and operate the credit union; and
    (6) Does not condition the eligibility of any credit union to 
become a member on that credit union's membership in any other 
organization.
    Daily average net assets means the average of net assets calculated 
for each day during the period.
    Derivatives means a financial contract whose value is derived from 
the values of one or more underlying assets, reference rates, or 
indices of asset values or reference rates. Derivative contracts 
include interest rate derivative contracts, exchange rate derivative 
contracts, equity derivative contracts, commodity derivative contracts, 
credit derivative contracts, and any other instrument that poses 
similar counterparty credit risks.
    Dollar roll means the purchase or sale of a mortgage-backed 
security to a counterparty with an agreement to resell or repurchase a 
substantially identical security at a future date and at a specified 
price.
    Embedded option means a characteristic of certain assets and 
liabilities which gives the issuer of the instrument the ability to 
change the features such as final maturity, rate, principal amount and 
average life. Options include, but are not limited to, calls, caps, and 
prepayment options.
    Equity investments means investments in real property, equity 
securities, and any other ownership interests, including, for example, 
investments in partnerships and limited liability companies.
    Equity security means any security representing an ownership 
interest in an enterprise (for example, common, preferred, or other 
capital stock) or the right to acquire (for example, warrants and call 
options) or dispose of (for example, put options) an ownership interest 
in an enterprise at fixed or determinable prices. However, the term 
does not include convertible debt or preferred stock that by its terms 
either must be redeemed by the issuing enterprise or is redeemable at 
the option of the investor.
    Exchangeable collateralized mortgage obligation means a class of a 
collateralized mortgage obligation (CMO) that, at the time of purchase, 
represents beneficial ownership interests in a combination of two or 
more underlying classes of the same CMO structure. The holder of an 
exchangeable CMO may pay a fee and take delivery of the underlying 
classes of the CMO.
    Fair value means the price that would be received to sell an asset 
or paid to transfer a liability in an orderly transaction between 
market participants at the measurement date. If there is a principal 
market for the asset or liability, the fair value measurement is the 
price in that market (whether that price is directly observable or 
otherwise determined using a valuation technique), even if the price in 
a different market is potentially more advantageous at the measurement 
date. In the absence of a principal market, the fair value measurement 
occurs in the most advantageous market for the asset or liability. The 
fair value of the asset or liability shall be determined based on the 
assumptions that market participants would use in pricing the asset or 
liability. In developing those assumptions, the corporate need not 
identify specific market participants. Rather, the corporate should 
identify characteristics that distinguish market participants 
generally, considering factors specific to all of the following: the 
asset or liability; the principal (or most advantageous) market for the 
asset or liability; and market participants with whom the corporate 
would transact in that market. To increase consistency and 
comparability in fair value measurements and related disclosures, the 
fair value hierarchy prioritizes the inputs to valuation techniques 
used to measure fair value into three broad levels. The fair value 
hierarchy gives the highest priority to quoted prices (unadjusted) in 
active markets for identical assets or liabilities (Level 1) and the 
lowest priority to unobservable inputs (Level 3). Examples of valuation 
techniques include the present value of estimated future cash

[[Page 64828]]

flows, option-pricing models, and option-adjusted spread models.
    Federal funds transaction means a short-term or open-ended 
unsecured transfer of immediately available funds by one depository 
institution to another depository institution or entity.
    Foreign bank means an institution which is organized under the laws 
of a country other than the United States, is engaged in the business 
of banking, and is recognized as a bank by the banking supervisory 
authority of the country in which it is organized.
    Immediate family member means a spouse or other family member 
living in the same household.
    Limited liquidity investment means a private placement or funding 
agreement.
    Member reverse repurchase transaction means an integrated 
transaction in which a corporate credit union purchases a security from 
one of its member credit unions under agreement by that member credit 
union to repurchase the same security at a specified time in the 
future. The corporate credit union then sells that same security, on 
the same day, to a third party, under agreement to repurchase it on the 
same date on which the corporate credit union is obligated to return 
the security to its member credit union.
    Membership capital means funds contributed by members that: are 
adjustable balance with a minimum withdrawal notice of 3 years or are 
term certificates with a minimum term of 3 years; are available to 
cover losses that exceed retained earnings and paid-in capital; are not 
insured by the NCUSIF or other share or deposit insurers; and cannot be 
pledged against borrowings.
    Mortgage-backed security (MBS) means a security backed by first or 
second mortgages secured by real estate upon which is located a 
dwelling, mixed residential and commercial structure, residential 
manufactured home, or commercial structure.
    Moving daily average net assets means the average of daily average 
net assets for the month being measured and the previous eleven (11) 
months.
    Mutual combination means a transaction or event in which a 
corporate credit union acquires another credit union, or acquires an 
integrated set of activities and assets that is capable of being 
conducted and managed as a credit union.
    Nationally Recognized Statistical Rating Organization (NRSRO) means 
any entity that has applied for, and been granted permission to be 
considered an NRSRO by the United States Securities and Exchange 
Commission.
    NCUA means NCUA Board (Board), unless the particular action has 
been delegated by the Board.
    Net assets means total assets less loans guaranteed by the NCUSIF 
and member reverse repurchase transactions. For its own account, a 
corporate credit union's payables under reverse repurchase agreements 
and receivables under repurchase agreements may be netted out if the 
GAAP conditions for offsetting are met.
    Net economic value (NEV) means the fair value of assets minus the 
fair value of liabilities. All fair value calculations must include the 
value of forward settlements and embedded options. Paid-in capital, and 
the unamortized portion of membership capital, that is, the portion 
that qualifies as capital for purposes of any of the total capital 
ratio, is excluded from liabilities for purposes of this calculation. 
The NEV ratio is calculated by dividing NEV by the fair value of 
assets.
    Net interest margin security means a security collateralized by 
residual interests in collateralized mortgage obligations, residual 
interests in real estate mortgage investment conduits, or residual 
interests in other asset-backed securities.
    Obligor means the primary party obligated to repay an investment, 
e.g., the issuer of a security, such as a Qualified Special Purpose 
Entity (QSPE) trust; the taker of a deposit; or the borrower of funds 
in a federal funds transaction. Obligor does not include an originator 
of receivables underlying an asset-backed security, the servicer of 
such receivables, or an insurer of an investment.
    Official means any director or committee member.
    Paid-in capital means accounts or other interests of a corporate 
credit union that: are perpetual, non-cumulative dividend accounts; are 
available to cover losses that exceed retained earnings; are not 
insured by the NCUSIF or other share or deposit insurers; and cannot be 
pledged against borrowings.
    Pair-off transaction means a security purchase transaction that is 
closed out or sold at, or prior to, the settlement or expiration date.
    Private label security means a security that is not issued or 
guaranteed by the U.S. government, its agencies, or its government-
sponsored enterprises (GSEs).
    Quoted market price means a recent sales price or a price based on 
current bid and asked quotations.
    Repurchase transaction means a transaction in which a corporate 
credit union agrees to purchase a security from a counterparty and to 
resell the same or any identical security to that counterparty at a 
specified future date and at a specified price.
    Residential mortgage-backed security (RMBS) means a mortgage-backed 
security collateralized primarily by mortgage loans on residential 
properties.
    Residential properties means houses, condominiums, cooperative 
units, and manufactured homes. This definition does not include boats 
or motor homes, even if used as a primary residence, or timeshare 
properties.
    Residual interest means the ownership interest in remainder cash 
flows from a CMO or ABS transaction after payments due bondholders and 
trust administrative expenses have been satisfied.
    Retained earnings means retained earnings as defined under 
Generally Accepted Accounting Principles (GAAP).
    Retained earnings ratio means the corporate credit union's retained 
earnings divided by its moving daily average net assets. For a 
corporate credit union that acquires another credit union in a mutual 
combination, the numerator of the retained earnings ratio also includes 
the retained earnings of the acquired credit union, or of an integrated 
set of activities and assets, at the point of acquisition.
    Section 107(8) institution means an institution described in 
Section 107(8) of the Federal Credit Union Act (12 U.S.C. 1757(8)).
    Securities lending means lending a security to a counterparty, 
either directly or through an agent, and accepting collateral in 
return.
    Senior executive officer mean a chief executive officer, any 
assistant chief executive officer (e.g., any assistant president, any 
vice president or any assistant treasurer/manager), and the chief 
financial officer (controller). This term also includes employees of 
any entity hired to perform the functions described above.
    Settlement date means the date originally agreed to by a corporate 
credit union and a counterparty for settlement of the purchase or sale 
of a security.
    Short sale means the sale of a security not owned by the seller.
    Small business related security means a security that is rated in 1 
of the 4 highest rating categories by at least one Nationally 
Recognized Statistical Rating Organization (NRSRO), and represents an 
interest in one or more promissory notes or leases of personal property 
evidencing the obligation of a small business concern and originated by 
an insured depository institution, insured

[[Page 64829]]

credit union, insurance company, or similar institution which is 
supervised and examined by a Federal or State authority, or a finance 
company or leasing company. This definition does not include Small 
Business Administration securities permissible under Sec.  107(7) of 
the Act.
    State means any one of the several states of the United States of 
America, the District of Columbia, Puerto Rico, and the territories and 
possessions of the United States.
    Stripped mortgage-backed security means a security that represents 
either the principal-only or interest-only portion of the cash flows of 
an underlying pool of mortgages.
    Subordinated security means a security that, at the time of 
purchase, has a junior claim on the underlying collateral or assets to 
other securities in the same issuance. If a security is junior only to 
money market fund eligible securities in the same issuance, the former 
security is not subordinated for purposes of this definition.
    Total assets means the sum of all a corporate credit union's assets 
as calculated under GAAP.
    Total capital means the sum of a corporate credit union's core 
capital and its membership capital accounts.
    Trade date means the date a corporate credit union originally 
agrees, whether orally or in writing, to enter into the purchase or 
sale of a security.
    Trigger means an event in a securitization that will redirect cash-
flows if predefined thresholds are breached. Examples of triggers are 
delinquency and cumulative loss triggers.
    Weighted average life means the weighted-average time to the return 
of a dollar of principal, calculated by multiplying each portion of 
principal received by the time at which it is expected to be received 
(based on a reasonable and supportable estimate of that time) and then 
summing and dividing by the total amount of principal. The calculation 
of weighted average life for interest only securities means the 
weighted-average time to the return of a dollar of interest, calculated 
by multiplying each portion of interest received by the time at which 
it is expected to be received (based on a reasonable and supportable 
estimate of that time) and then summing and dividing by the total 
amount of interest to be received.
    When-issued trading means the buying and selling of securities in 
the period between the announcement of an offering and the issuance and 
payment date of the securities.

0
7. Effective October 20, 2011, revise Sec.  704.2 to read as follows:


Sec.  704.2  Definitions.

    As used in this part:
    Adjusted core capital means core capital modified as follows:
    (1) Deduct an amount equal to the amount of the corporate credit 
union's intangible assets that exceed one half percent of the corporate 
credit union's moving daily average net assets, but the NCUA, on its 
own initiative, upon petition by the applicable state regulator, or 
upon application from a corporate credit union, may direct that a 
particular corporate credit union add some or all of these excess 
intangibles back to the credit union's adjusted core capital;
    (2) Deduct investments, both equity and debt, in unconsolidated 
credit union service organizations (CUSOs);
    (3) If the corporate credit union, on or after October 20, 2011, 
contributes any perpetual contributed capital (PCC), or maintains any 
NCAs, at another corporate credit union, deduct an amount equal to this 
PCC or NCA;
    (4) Beginning on October 20, 2016, and ending on October 20, 2020, 
deduct any amount of perpetual contributed capital (PCC) that causes 
PCC minus retained earnings, all divided by moving daily net average 
assets, to exceed two percent; and
    (5) Beginning after October 20, 2020, deduct any amount of PCC that 
causes PCC to exceed retained earnings.
    Adjusted trading means any method or transaction whereby a 
corporate credit union sells a security to a vendor at a price above 
its current market price and simultaneously purchases or commits to 
purchase from the vendor another security at a price above its current 
market price.
    Applicable state regulator means the prudential state regulator of 
a state chartered corporate credit union.
    Asset-backed commercial paper program (ABCP program) means a 
program that primarily issues commercial paper that has received a 
credit rating from an NRSRO and that is backed by assets or other 
exposures held in a bankruptcy-remote special purpose entity. The term 
sponsor of an ABCP program means a corporate credit union that:
    (1) Establishes an ABCP program;
    (2) Approves the sellers permitted to participate in an ABCP 
program;
    (3) Approves the asset pools to be purchased by an ABCP program; or
    (4) Administers the ABCP program by monitoring the assets, 
arranging for debt placement, compiling monthly reports, or ensuring 
compliance with the program documents and with the program's credit and 
investment policy.
    Asset-backed security (ABS) means a security that is primarily 
serviced by the cashflows of a discrete pool of receivables or other 
financial assets, either fixed or revolving, that by their terms 
convert into cash within a finite time period plus any rights or other 
assets designed to assure the servicing or timely distribution of 
proceeds to the security holders. Mortgage-backed securities are a type 
of asset-backed security.
    Available to cover losses that exceed retained earnings means that 
the funds are available to cover operating losses realized, in 
accordance with generally accepted accounting principles (GAAP), by the 
corporate credit union that exceed retained earnings net of equity 
acquired in a combination. Likewise, available to cover losses that 
exceed retained earnings and perpetual contributed capital (PCC) means 
that the funds are available to cover operating losses realized, in 
accordance with GAAP, by the corporate credit union that exceed 
retained earnings net of equity acquired in a combination and PCC. Any 
such losses must be distributed pro rata at the time the loss is 
realized first among the holders of PCC, and when all PCC is exhausted, 
then pro rata among all nonperpetual capital accounts (NCAs) and 
unconverted membership capital accounts, all subject to the optional 
prioritization described in Appendix A of this Part. To the extent that 
any contributed capital funds are used to cover losses, the corporate 
credit union must not restore or replenish the affected capital 
accounts under any circumstances. In addition, contributed capital that 
is used to cover losses in a calendar year previous to the year of 
liquidation has no claim against the liquidation estate.
    Capital means the same as total capital, defined below.
    Capital ratio means the corporate credit union's capital divided by 
its moving daily average net assets.
    Collateralized debt obligation (CDO) means a debt security 
collateralized by mortgage-backed securities, asset-backed securities, 
or corporate obligations in the form of loans or debt. Senior tranches 
of Re-REMIC's consisting of senior mortgage- and asset-backed 
securities are excluded from this definition.
    Collateralized mortgage obligation (CMO) means a multi-class 
mortgage-backed security.
    Commercial mortgage-backed security (CMBS) means a mortgage-backed 
security collateralized primarily by

[[Page 64830]]

multi-family and commercial property loans.
    Compensation means all salaries, fees, wages, bonuses, severance 
payments, current year contributions to employee benefit plans (for 
example, medical, dental, life insurance, and disability), current year 
contributions to deferred compensation plans and future severance 
payments, including payments in connection with a merger or similar 
combination (whether or not funded; whether or not vested; and whether 
or not the deferred compensation plan is a qualified plan under Section 
401(a) of the IRS Code). Compensation also includes expense accounts 
and other allowances (for example, the value of the personal use of 
housing, automobiles or other assets owned by the corporate credit 
union; expense allowances or reimbursements that recipients must report 
as income on their separate income tax return; payments made under 
indemnification arrangements; and payments made for the benefit of 
friends or relatives). In calculating required compensation 
disclosures, reasonable estimates may be used if precise cost figures 
are not readily available.
    Consolidated Credit Union Service Organization (Consolidated CUSO) 
means any corporation, partnership, business trust, joint venture, 
association or similar organization in which a corporate credit union 
directly or indirectly holds an ownership interest (as permitted by 
Sec.  704.11 of this Part) and the assets of which are consolidated 
with those of the corporate credit union for purposes of reporting 
under Generally Accepted Accounting Principles (GAAP). Generally, 
consolidated CUSOs are majority-owned CUSOs.
    Contributed capital means either perpetual or nonperpetual capital.
    Core capital means the sum of:
    (1) Retained earnings;
    (2) Perpetual contributed capital;
    (3) The retained earnings of any acquired credit union, or of an 
integrated set of activities and assets, calculated at the point of 
acquisition, if the acquisition was a mutual combination; and
    (4) Minority interests in the equity accounts of CUSOs that are 
fully consolidated. However, minority interests in consolidated ABCP 
programs sponsored by a corporate credit union are excluded from the 
credit unions' core capital or total capital base if the corporate 
credit union excludes the consolidated assets of such programs from 
risk-weighted assets pursuant to Appendix C of this Part.
    Core capital ratio means the corporate credit union's core capital 
divided by its moving daily average net assets.
    Corporate credit union means an organization that:
    (1) Is chartered under Federal or state law as a credit union;
    (2) Receives shares from and provides loan services to credit 
unions;
    (3) Is operated primarily for the purpose of serving other credit 
unions;
    (4) Is designated by NCUA as a corporate credit union;
    (5) Limits natural person members to the minimum required by state 
or federal law to charter and operate the credit union; and
    (6) Does not condition the eligibility of any credit union to 
become a member on that credit union's membership in any other 
organization.
    Credit-enhancing interest-only strip. (1) Credit-enhancing 
interest-only strip means an on-balance sheet asset that, in form or in 
substance:
    (i) Represents the contractual right to receive some or all of the 
interest due on transferred assets; and
    (ii) Exposes the corporate credit union to credit risk directly or 
indirectly associated with the transferred assets that exceeds its pro 
rata share of the corporate credit union's claim on the assets whether 
through subordination provisions or other credit enhancement 
techniques.
    (2) NCUA reserves the right to identify other cash flows or related 
interests as a credit-enhancing interest-only strip. In determining 
whether a particular interest cash flow functions as a credit-enhancing 
interest-only strip, NCUA will consider the economic substance of the 
transaction.
    Daily average net assets means the average of net assets calculated 
for each day during the period.
    Daily average net risk-weighted assets means the average of net 
risk-weighted assets calculated for each day during the period.
    Derivatives means a financial contract whose value is derived from 
the values of one or more underlying assets, reference rates, or 
indices of asset values or reference rates. Derivative contracts 
include interest rate derivative contracts, exchange rate derivative 
contracts, equity derivative contracts, commodity derivative contracts, 
credit derivative contracts, and any other instrument that poses 
similar counterparty credit risks.
    Dollar roll means the purchase or sale of a mortgage-backed 
security to a counterparty with an agreement to resell or repurchase a 
substantially identical security at a future date and at a specified 
price.
    Eligible ABCP liquidity facility means a legally binding commitment 
to provide liquidity support to asset-backed commercial paper by 
lending to, or purchasing assets from any structure, program or conduit 
in the event that funds are required to repay maturing asset-backed 
commercial paper and that meets the following criteria:
    (1)(i) At the time of the draw, the liquidity facility must be 
subject to an asset quality test that precludes funding against assets 
that are 90 days or more past due or in default; and
    (ii) If the assets that the liquidity facility is required to fund 
against are assets or exposures that have received a credit rating by 
an NRSRO at the time the inception of the facility, the facility can be 
used to fund only those assets or exposures that are rated investment 
grade by an NRSRO at the time of funding; or
    (2) If the assets that are funded under the liquidity facility do 
not meet the criteria described in paragraph (1) of this definition, 
the assets must be guaranteed, conditionally or unconditionally, by the 
United States Government, its agencies, or the central government of an 
Organization for Economic Cooperation and Development (OECD) country.
    Embedded option means a characteristic of certain assets and 
liabilities which gives the issuer of the instrument the ability to 
change the features such as final maturity, rate, principal amount and 
average life. Options include, but are not limited to, calls, caps, and 
prepayment options.
    Equity investment means investments in real property, equity 
securities, and any other ownership interests, including, for example, 
investments in partnerships and limited liability companies.
    Equity security means any security representing an ownership 
interest in an enterprise (for example, common, preferred, or other 
capital stock) or the right to acquire (for example, warrants and call 
options) or dispose of (for example, put options) an ownership interest 
in an enterprise at fixed or determinable prices. However, the term 
does not include convertible debt or preferred stock that by its terms 
either must be redeemed by the issuing enterprise or is redeemable at 
the option of the investor.
    Exchangeable collateralized mortgage obligation means a class of a 
collateralized mortgage obligation (CMO) that, at the time of purchase, 
represents beneficial ownership interests in a combination of two or 
more underlying classes of the same CMO structure. The holder of an

[[Page 64831]]

exchangeable CMO may pay a fee and take delivery of the underlying 
classes of the CMO.
    Fair value means the price that would be received to sell an asset 
or paid to transfer a liability in an orderly transaction between 
market participants at the measurement date. If there is a principal 
market for the asset or liability, the fair value measurement is the 
price in that market (whether that price is directly observable or 
otherwise determined using a valuation technique), even if the price in 
a different market is potentially more advantageous at the measurement 
date. In the absence of a principal market, the fair value measurement 
occurs in the most advantageous market for the asset or liability. The 
fair value of the asset or liability shall be determined based on the 
assumptions that market participants would use in pricing the asset or 
liability. In developing those assumptions, the corporate need not 
identify specific market participants. Rather, the corporate should 
identify characteristics that distinguish market participants 
generally, considering factors specific to all of the following: the 
asset or liability; the principal (or most advantageous) market for the 
asset or liability; and market participants with whom the corporate 
would transact in that market. To increase consistency and 
comparability in fair value measurements and related disclosures, the 
fair value hierarchy prioritizes the inputs to valuation techniques 
used to measure fair value into three broad levels. The fair value 
hierarchy gives the highest priority to quoted prices (unadjusted) in 
active markets for identical assets or liabilities (Level 1) and the 
lowest priority to unobservable inputs (Level 3). Examples of valuation 
techniques include the present value of estimated future cash flows, 
option-pricing models, and option-adjusted spread models.
    Federal funds transaction means a short-term or open-ended 
unsecured transfer of immediately available funds by one depository 
institution to another depository institution or entity.
    Foreign bank means an institution which is organized under the laws 
of a country other than the United States, is engaged in the business 
of banking, and is recognized as a bank by the banking supervisory 
authority of the country in which it is organized.
    Immediate family member means a spouse or other family member 
living in the same household.
    Intangible assets means assets considered to be intangible assets 
under GAAP. These assets include, but are not limited to, core deposit 
premiums, purchased credit card relationships, favorable leaseholds, 
and servicing assets (mortgage and non-mortgage). Interest-only strips 
receivable are not intangible assets under this definition.
    Leverage ratio means, before October 21, 2013, the ratio of total 
capital to moving daily average net assets. This is the interim 
leverage ratio.
    Leverage ratio means, on or after October 21, 2013, the ratio of 
adjusted core capital to moving daily average net assets. This is the 
permanent leverage ratio.
    Limited liquidity investment means a private placement or funding 
agreement.
    Member reverse repurchase transaction means an integrated 
transaction in which a corporate credit union purchases a security from 
one of its member credit unions under agreement by that member credit 
union to repurchase the same security at a specified time in the 
future. The corporate credit union then sells that same security, on 
the same day, to a third party, under agreement to repurchase it on the 
same date on which the corporate credit union is obligated to return 
the security to its member credit union.
    Mortgage-backed security (MBS) means a security backed by first or 
second mortgages secured by real estate upon which is located a 
dwelling, mixed residential and commercial structure, residential 
manufactured home, or commercial structure.
    Moving daily average net assets means the average of daily average 
net assets for the month being measured and the previous eleven (11) 
months.
    Moving monthly average net risk-weighted assets means the average 
of the net risk-weighted assets for the month being measured and the 
previous eleven (11) months. Measurements must be taken on the last day 
of each month.
    Mutual combination means a transaction or event in which a 
corporate credit union acquires another credit union, or acquires an 
integrated set of activities and assets that is capable of being 
conducted and managed as a credit union.
    Nationally Recognized Statistical Rating Organization (NRSRO) means 
any entity that has applied for, and been granted permission, to be 
considered an NRSRO by the United States Securities and Exchange 
Commission.
    NCUA means NCUA Board (Board), unless the particular action has 
been delegated by the Board.
    Net assets means total assets less loans guaranteed by the NCUSIF 
and member reverse repurchase transactions. For its own account, a 
corporate credit union's payables under reverse repurchase agreements 
and receivables under repurchase agreements may be netted out if the 
GAAP conditions for offsetting are met. Also, any amounts deducted from 
core capital in calculating adjusted core capital are also deducted 
from net assets.
    Net economic value (NEV) means the fair value of assets minus the 
fair value of liabilities. All fair value calculations must include the 
value of forward settlements and embedded options. Perpetual 
contributed capital, and the unamortized portion of nonperpetual 
capital that is, the portion that qualifies as capital for purposes of 
any of the minimum capital ratios, is excluded from liabilities for 
purposes of this calculation. The NEV ratio is calculated by dividing 
NEV by the fair value of assets.
    Net interest margin security means a security collateralized by 
residual interests in collateralized mortgage obligations, residual 
interests in real estate mortgage investment conduits, or residual 
interests in other asset-backed securities.
    Net risk-weighted assets means risk-weighted assets less Central 
Liquidity Facility (CLF) stock subscriptions, CLF loans guaranteed by 
the NCUSIF, and member reverse repurchase transactions. For its own 
account, a corporate credit union's payables under reverse repurchase 
agreements and receivables under repurchase agreements may be netted 
out if the GAAP conditions for offsetting are met. Also, any amounts 
deducted from core capital in calculating adjusted core capital are 
also deducted from net risk-weighted assets.
    Nonperpetual capital means funds contributed by members or 
nonmembers that: are term certificates with an original minimum term of 
five years or that have an indefinite term (i.e., no maturity) with a 
minimum withdrawal notice of five years; are available to cover losses 
that exceed retained earnings and perpetual contributed capital; are 
not insured by the NCUSIF or other share or deposit insurers; and 
cannot be pledged against borrowings. In the event the corporate is 
liquidated, the holders of nonperpetual capital accounts (NCAs) will 
claim equally. These claims will be subordinate to all other claims 
(including NCUSIF claims), except that any claims by the holders of 
perpetual contributed capital (PCC) will be subordinate to the claims 
of holders of NCAs.
    Obligor means the primary party obligated to repay an investment, 
e.g., the issuer of a security, such as a Qualified Special Purpose 
Entity (QSPE)

[[Page 64832]]

trust; the taker of a deposit; or the borrower of funds in a federal 
funds transaction. Obligor does not include an originator of 
receivables underlying an asset-backed security, the servicer of such 
receivables, or an insurer of an investment.
    Official means any director or committee member.
    Pair-off transaction means a security purchase transaction that is 
closed out or sold at, or prior to, the settlement or expiration date.
    Perpetual contributed capital (PCC) means accounts or other 
interests of a corporate credit union that: are perpetual, non-
cumulative dividend accounts; are available to cover losses that exceed 
retained earnings; are not insured by the NCUSIF or other share or 
deposit insurers; and cannot be pledged against borrowings. In the 
event the corporate is liquidated, any claims made by the holders of 
perpetual contributed capital will be subordinate to all other claims 
(including NCUSIF claims).
    Private label security means a security that is not issued or 
guaranteed by the U.S. government, its agencies, or its government-
sponsored enterprises (GSEs).
    Quoted market price means a recent sales price or a price based on 
current bid and asked quotations.
    Repurchase transaction means a transaction in which a corporate 
credit union agrees to purchase a security from a counterparty and to 
resell the same or any identical security to that counterparty at a 
specified future date and at a specified price.
    Residential mortgage-backed security (RMBS) means a mortgage-backed 
security collateralized primarily by mortgage loans on residential 
properties.
    Residential properties means houses, condominiums, cooperative 
units, and manufactured homes. This definition does not include boats 
or motor homes, even if used as a primary residence, or timeshare 
properties.
    Residual interest means the ownership interest in remainder cash 
flows from a CMO or ABS transaction after payments due bondholders and 
trust administrative expenses have been satisfied.
    Retained earnings means retained earnings as defined under 
Generally Accepted Accounting Principles (GAAP).
    Risk-weighted assets means a corporate credit union's risk-weighted 
assets as calculated in accordance with Appendix C of this part.
    Section 107(8) institution means an institution described in 
Section 107(8) of the Federal Credit Union Act (12 U.S.C. 1757(8)).
    Securities lending means lending a security to a counterparty, 
either directly or through an agent, and accepting collateral in 
return.
    Securitization means the pooling and repackaging by a special 
purpose entity of assets or other credit exposures that can be sold to 
investors. Securitization includes transactions that create stratified 
credit risk positions whose performance is dependent upon an underlying 
pool of credit exposures, including loans and commitments.
    Senior executive officer means a chief executive officer, any 
assistant chief executive officer (e.g., any assistant president, any 
vice president or any assistant treasurer/manager), and the chief 
financial officer (controller). This term also includes employees of 
any entity hired to perform the functions described above.
    Settlement date means the date originally agreed to by a corporate 
credit union and a counterparty for settlement of the purchase or sale 
of a security.
    Short sale means the sale of a security not owned by the seller.
    Small business related security means a security that is rated in 1 
of the 4 highest rating categories by at least one nationally 
recognized statistical rating organization, and represents an interest 
in one or more promissory notes or leases of personal property 
evidencing the obligation of a small business concern and originated by 
an insured depository institution, insured credit union, insurance 
company, or similar institution which is supervised and examined by a 
Federal or State authority, or a finance company or leasing company. 
This definition does not include Small Business Administration 
securities permissible under Sec.  107(7) of the Act.
    State means any one of the several states of the United States of 
America, the District of Columbia, Puerto Rico, and the territories and 
possessions of the United States.
    Stripped mortgage-backed security means a security that represents 
either the principal-only or interest-only portion of the cash flows of 
an underlying pool of mortgages.
    Subordinated security means a security that, at the time of 
purchase, has a junior claim on the underlying collateral or assets to 
other securities in the same issuance. If a security is junior only to 
money market fund eligible securities in the same issuance, the former 
security is not subordinated for purposes of this definition.
    Supplementary Capital means the sum of the following items:
    (1) Nonperpetual capital accounts, as amortized under Sec.  
704.3(b)(3);
    (2) Allowance for loan and lease losses calculated under GAAP to a 
maximum of 1.25 percent of risk-weighted assets; and
    (3) Forty-five percent of unrealized gains on available-for-sale 
equity securities with readily determinable fair values. Unrealized 
gains are unrealized holding gains, net of unrealized holding losses, 
calculated as the amount, if any, by which fair value exceeds 
historical cost. The NCUA may disallow such inclusion in the 
calculation of supplementary capital if the NCUA determines that the 
securities are not prudently valued.
    Tier 1 capital means adjusted core capital. Tier 1 risk-based 
capital ratio means the ratio of Tier 1 capital to the moving monthly 
average net risk-weighted assets.
    Tier 2 capital means supplementary capital plus any perpetual 
contributed capital deducted from adjusted core capital.
    Total assets means the sum of all a corporate credit union's assets 
as calculated under GAAP.
    Total capital means the sum of a corporate credit union's adjusted 
core capital and its supplementary capital, less the corporate credit 
union's equity investments not otherwise deducted when calculating 
adjusted core capital.
    Total risk-based capital ratio means the ratio of total capital to 
moving monthly average net risk-weighted assets.
    Trade date means the date a corporate credit union originally 
agrees, whether orally or in writing, to enter into the purchase or 
sale of a security.
    Trigger means an event in a securitization that will redirect cash-
flows if predefined thresholds are breached. Examples of triggers are 
delinquency and cumulative loss triggers.
    Weighted average life means the weighted-average time to the return 
of a dollar of principal, calculated by multiplying each portion of 
principal received by the time at which it is expected to be received 
(based on a reasonable and supportable estimate of that time) and then 
summing and dividing by the total amount of principal. The calculation 
of weighted average life for interest only securities means the 
weighted-average time to the return of a dollar of interest, calculated 
by multiplying each portion of interest received by the time at which 
it is expected to be received (based on a reasonable and supportable 
estimate of that time) and then summing and

[[Page 64833]]

dividing by the total amount of interest to be received.
    When-issued trading means the buying and selling of securities in 
the period between the announcement of an offering and the issuance and 
payment date of the securities.

0
8. Effective October 20, 2011, revise Sec.  704.3 to read as follows:


Sec.  704.3  Corporate credit union capital.

    (a) Capital requirements. (1) A corporate credit union must 
maintain at all times:
    (i) A leverage ratio of 4.0 percent or greater;
    (ii) A Tier 1 risk-based capital ratio of 4.0 percent or greater; 
and
    (iii) A total risk-based capital ratio of 8.0 percent or greater.
    (2) To ensure it meets its capital requirements, a corporate credit 
union must develop and ensure implementation of written short- and 
long-term capital goals, objectives, and strategies which provide for 
the building of capital consistent with regulatory requirements, the 
maintenance of sufficient capital to support the risk exposures that 
may arise from current and projected activities, and the periodic 
review and reassessment of the capital position of the corporate credit 
union.
    (3) Beginning with the first call report submitted on or after 
October 21, 2013, a corporate credit union must calculate and report to 
NCUA the ratio of its retained earnings to its moving daily average net 
assets. If this ratio is less than 0.45 percent, the corporate credit 
union must, within 30 days, submit a retained earnings accumulation 
plan to the NCUA for NCUA's approval. The plan must contain a detailed 
explanation of how the corporate credit union will accumulate earnings 
sufficient to meet all its future minimum leverage ratio requirements, 
including specific semiannual milestones for accumulating retained 
earnings. In the case of a state-chartered corporate credit union, the 
NCUA will consult with the appropriate state supervisory authority 
(SSA) before making a determination to approve or disapprove the plan, 
and will provide the SSA a copy of the completed plan. If the corporate 
credit union fails to submit a plan acceptable to NCUA, or fails to 
comply with any element of a plan approved by NCUA, the corporate will 
immediately be classified as significantly undercapitalized or, if 
already significantly undercapitalized, as critically undercapitalized 
for purposes of prompt corrective actions. The corporate credit union 
will be subject to all the associated actions under Sec.  704.4.
    (b) Requirements for nonperpetual capital accounts (NCAs)--(1) 
Form. NCA funds may be in the form of a term certificate or a no-
maturity notice account.
    (2) Disclosure. The terms and conditions of a nonperpetual capital 
account must be disclosed to the recorded owner of the account at the 
time the account is opened and at least annually thereafter.
    (i) The initial NCA disclosure must be signed by either all of the 
directors of the member credit union or, if authorized by board 
resolution, the chair and secretary of the board; and
    (ii) The annual disclosure notice must be signed by the chair of 
the corporate credit union. The chair must sign a statement that 
certifies that the notice has been sent to all entities with NCAs. The 
certification must be maintained in the corporate credit union's files 
and be available for examiner review.
    (3) Five-year remaining maturity. When a no-maturity NCA has been 
placed on notice, or a term account has a remaining maturity of less 
than five years, the corporate will reduce the amount of the account 
that can be considered as nonperpetual capital by a constant monthly 
amortization that ensures the capital is fully amortized one year 
before the date of maturity or one year before the end of the notice 
period. The full balance of an NCA being amortized, not just the 
remaining non-amortized portion, is available to absorb losses in 
excess of the sum of retained earnings and perpetual contributed 
capital until the funds are released by the corporate credit union at 
the time of maturity or the conclusion of the notice period.
    (4) Release. Nonperpetual capital may not be released due solely to 
the merger, charter conversion, or liquidation of the account holder. 
In the event of a merger, the capital account transfers to the 
continuing entity. In the event of a charter conversion, the capital 
account transfers to the new institution. In the event of liquidation, 
the corporate may release a member capital account to facilitate the 
payout of shares, but only with the prior written approval of the NCUA.
    (5) Redemption. A corporate credit union may redeem NCAs prior to 
maturity or prior to the end of the notice period only with the prior 
approval of the NCUA and, for state chartered corporate credit unions, 
the approval of the appropriate state regulator.
    (6) Sale. A member may transfer its interest in a nonperpetual 
capital account to another member or to a nonmember (other than a 
natural person). At least 14 days before consummating such a transfer, 
the member must notify the corporate credit union of the pending 
transfer. The corporate credit union must, within 10 days of such 
notice, provide the member and the potential transferee all financial 
information about the corporate credit union that is available to the 
public or that the corporate credit union has provided to its members, 
including any call report data submitted by the corporate credit union 
to NCUA but not yet posted on NCUA's Web site.
    (7) Merger. In the event of a merger of a corporate credit union, 
nonperpetual capital will transfer to the continuing corporate credit 
union. The minimum five-year notice period for withdrawal of no-
maturity capital remains in effect.
    (c) Requirements for perpetual contributed capital (PCC)--(1) 
Disclosure. The terms and conditions of any perpetual contributed 
capital instrument must be disclosed to the recorded owner of the 
instrument at the time the instrument is created and must be signed by 
either all of the directors of the member credit union or, if 
authorized by board resolution, the chair and secretary of the board.
    (2) Release. Perpetual contributed capital may not be released due 
solely to the merger, charter conversion or liquidation of a member 
credit union. In the event of a merger, the perpetual contributed 
capital transfers to the continuing credit union. In the event of a 
charter conversion, the perpetual contributed capital transfers to the 
new institution. In the event of liquidation, the perpetual contributed 
capital may be released to facilitate the payout of shares with NCUA's 
prior written approval.
    (3) Callability. A corporate credit union may call perpetual 
contributed capital instruments only with the prior approval of the 
NCUA and, for state chartered corporate credit unions, the applicable 
state regulator. Perpetual contributed capital accounts are callable on 
a pro-rata basis across an issuance class.
    (4) Perpetual contributed capital. A corporate credit union may 
issue perpetual contributed capital to both members and nonmembers.
    (5) The holder of a PCC instrument may transfer its interests in 
the instrument to another member or to a nonmember (other than a 
natural person). At least 14 days before consummating such a transfer, 
the member must notify the corporate credit union of the pending 
transfer. The corporate credit union must, within 10 days of such 
notice, provide the member

[[Page 64834]]

and the potential transferee all financial information about the 
corporate credit union that is available to the public or that the 
corporate credit union has provided to its members, including any call 
report data submitted by the corporate credit union to NCUA but not yet 
posted on NCUA's Web site.
    (6) A corporate credit union is permitted to condition membership, 
services, or prices for services on a member's ownership of PCC, 
provided the corporate credit union gives existing members at least six 
months written notice of:
    (i) The requirement to purchase PCC, including specific amounts; 
and
    (ii) The effects of a failure to purchase the requisite PCC on the 
pricing of services or on the member's access to membership or 
services.
    (d) Individual minimum capital requirements.
    (1) General. The rules and procedures specified in this paragraph 
apply to the establishment of an individual minimum capital requirement 
for a corporate credit union that varies from any of the risk-based 
capital requirement(s) or leverage ratio requirements that would 
otherwise apply to the corporate credit union under this part.
    (2) Appropriate considerations for establishing individual minimum 
capital requirements. Minimum capital levels higher than the risk-based 
capital requirements or the leverage ratio requirement under this part 
may be appropriate for individual corporate credit unions. The NCUA may 
establish increased individual minimum capital requirements, including 
modification of the minimum capital requirements related to being 
either significantly and critically undercapitalized for purposes of 
Sec.  704.4 of this part, upon a determination that the corporate 
credit union's capital is or may become inadequate in view of the 
credit union's circumstances. For example, higher capital levels may be 
appropriate when NCUA determines that:
    (i) A corporate credit union is receiving special supervisory 
attention;
    (ii) A corporate credit union has or is expected to have losses 
resulting in capital inadequacy;
    (iii) A corporate credit union has a high degree of exposure to 
interest rate risk, prepayment risk, credit risk, concentration risk, 
certain risks arising from nontraditional activities or similar risks, 
or a high proportion of off-balance sheet risk including standby 
letters of credit;
    (iv) A corporate credit union has poor liquidity or cash flow;
    (v) A corporate credit union is growing, either internally or 
through acquisitions, at such a rate that supervisory problems are 
presented that are not dealt with adequately by other NCUA regulations 
or other guidance;
    (vi) A corporate credit union may be adversely affected by the 
activities or condition of its CUSOs or other persons or entities with 
which it has significant business relationships, including 
concentrations of credit;
    (vii) A corporate credit union with a portfolio reflecting weak 
credit quality or a significant likelihood of financial loss, or has 
loans or securities in nonperforming status or on which borrowers fail 
to comply with repayment terms;
    (viii) A corporate credit union has inadequate underwriting 
policies, standards, or procedures for its loans and investments;
    (ix) A corporate credit union has failed to properly plan for, or 
execute, necessary retained earnings growth, or
    (ix) A corporate credit union has a record of operational losses 
that exceeds the average of other, similarly situated corporate credit 
unions; has management deficiencies, including failure to adequately 
monitor and control financial and operating risks, particularly the 
risks presented by concentrations of credit and nontraditional 
activities; or has a poor record of supervisory compliance.
    (3) Standards for determination of appropriate individual minimum 
capital requirements. The appropriate minimum capital levels for an 
individual corporate credit union cannot be determined solely through 
the application of a rigid mathematical formula or wholly objective 
criteria. The decision is necessarily based, in part, on subjective 
judgment grounded in agency expertise. The factors to be considered in 
NCUA's determination will vary in each case and may include, for 
example:
    (i) The conditions or circumstances leading to the determination 
that a higher minimum capital requirement is appropriate or necessary 
for the corporate credit union;
    (ii) The exigency of those circumstances or potential problems;
    (iii) The overall condition, management strength, and future 
prospects of the corporate credit union and, if applicable, its 
subsidiaries, affiliates, and business partners;
    (iv) The corporate credit union's liquidity, capital and other 
indicators of financial stability, particularly as compared with those 
of similarly situated corporate credit unions; and
    (v) The policies and practices of the corporate credit union's 
directors, officers, and senior management as well as the internal 
control and internal audit systems for implementation of such adopted 
policies and practices.
    (4) Procedures--(i) In the case of a state chartered corporate 
credit union, NCUA will consult with the appropriate state regulator 
when considering imposing a new minimum capital requirement.
    (ii) When the NCUA determines that a minimum capital requirement is 
necessary or appropriate for a particular corporate credit union, it 
will notify the corporate credit union in writing of its proposed 
individual minimum capital requirement; the schedule for compliance 
with the new requirement; and the specific causes for determining that 
the higher individual minimum capital requirement is necessary or 
appropriate for the corporate credit union. The NCUA shall forward the 
notifying letter to the appropriate state supervisory authority (SSA) 
if a state-chartered corporate credit union would be subject to an 
individual minimum capital requirement.
    (iii) The corporate credit union's response must include any 
information that the credit union wants the NCUA to consider in 
deciding whether to establish or to amend an individual minimum capital 
requirement for the corporate credit union, what the individual capital 
requirement should be, and, if applicable, what compliance schedule is 
appropriate for achieving the required capital level. The responses of 
the corporate credit union and SSA must be in writing and must be 
delivered to the NCUA within 30 days after the date on which the 
notification was received. The NCUA may extend the time period for good 
cause, and the time period for response by the insured corporate credit 
union may be shortened for good cause:
    (A) When, in the opinion of the NCUA, the condition of the 
corporate credit union so requires, and the NCUA informs the corporate 
credit union of the shortened response period in the notice;
    (B) With the consent of the corporate credit union; or
    (C) When the corporate credit union already has advised the NCUA 
that it cannot or will not achieve its applicable minimum capital 
requirement.
    (iv) Failure by the corporate credit union to respond within 30 
days, or such other time period as may be specified by the NCUA, may 
constitute a waiver of any objections to the proposed individual 
minimum capital requirement or to the schedule for complying with it, 
unless the NCUA has

[[Page 64835]]

provided an extension of the response period for good cause.
    (v) After expiration of the response period, the NCUA will decide 
whether or not the proposed individual minimum capital requirement 
should be established for the corporate credit union, or whether that 
proposed requirement should be adopted in modified form, based on a 
review of the corporate credit union's response and other relevant 
information. The NCUA's decision will address comments received within 
the response period from the corporate credit union and the appropriate 
state supervisory authority (SSA) (if a state-chartered corporate 
credit union is involved) and will state the level of capital required, 
the schedule for compliance with this requirement, and any specific 
remedial action the corporate credit union could take to eliminate the 
need for continued applicability of the individual minimum capital 
requirement. The NCUA will provide the corporate credit union and the 
appropriate SSA (if a state-chartered corporate credit union is 
involved) with a written decision on the individual minimum capital 
requirement, addressing the substantive comments made by the corporate 
credit union and setting forth the decision and the basis for that 
decision. Upon receipt of this decision by the corporate credit union, 
the individual minimum capital requirement becomes effective and 
binding upon the corporate credit union. This decision represents final 
agency action.
    (vi) In lieu of the procedures established above, a corporate 
credit union may request an informal hearing. The corporate credit 
union must make the request for a hearing in writing, and NCUA must 
receive the request no later than 10 days following the date of the 
notice described in paragraph (d)(4)(ii) of this section. Upon receipt 
of the request for hearing, NCUA will conduct an informal hearing and 
render a decision using the procedures described in paragraphs (d), 
(e), and (f) of Sec.  747.3003 of this chapter.
    (5) Failure to comply. Failure to satisfy any individual minimum 
capital requirement, or to meet any required incremental additions to 
capital under a schedule for compliance with such an individual minimum 
capital requirement, will constitute a basis to take action as 
described in Sec.  704.4.
    (6) Change in circumstances. If, after a decision is made under 
paragraph (b)(3)(iv) of this section, there is a change in the 
circumstances affecting the corporate credit union's capital adequacy 
or its ability to reach its required minimum capital level by the 
specified date, the NCUA may amend the individual minimum capital 
requirement or the corporate credit union's schedule for such 
compliance. The NCUA may decline to consider a corporate credit union's 
request for such changes that are not based on a significant change in 
circumstances or that are repetitive or frivolous. Pending the NCUA's 
reexamination of the original decision, that original decision and any 
compliance schedule established in that decision will continue in full 
force and effect.
    (e) Reservation of authority.
    (1) Transactions for purposes of evasion. The NCUA may disregard 
any transaction entered into primarily for the purpose of reducing the 
minimum required amount of regulatory capital or otherwise evading the 
requirements of this section.
    (2) Period-end versus average figures. The NCUA reserves the right 
to require a corporate credit union to compute its capital ratios on 
the basis of period-end assets rather than average assets when the NCUA 
determines this requirement is appropriate to carry out the purposes of 
this part.
    (3) Reservation of authority. (i) Notwithstanding the definitions 
of core and supplementary capital in paragraph (d) of this section, the 
NCUA may find that a particular asset or core or supplementary capital 
component has characteristics or terms that diminish its contribution 
to a corporate credit union's ability to absorb losses, and the NCUA 
may require the discounting or deduction of such asset or component 
from the computation of core, supplementary, or total capital.
    (ii) Notwithstanding Appendix C to this Part, the NCUA will look to 
the substance of a transaction and may find that the assigned risk-
weight for any asset, or credit equivalent amount or credit conversion 
factor for any off-balance sheet item does not appropriately reflect 
the risks imposed on the corporate credit union. The NCUA may require 
the corporate credit union to apply another risk-weight, credit 
equivalent amount, or credit conversion factor that NCUA deems 
appropriate.
    (iii) If Appendix C to this part does not specifically assign a 
risk-weight, credit equivalent amount, or credit conversion factor to a 
particular asset or activity of the corporate credit union, the NCUA 
may assign any risk-weight, credit equivalent amount, or credit 
conversion factor that it deems appropriate. In making this 
determination, NCUA will consider the risks associated with the asset 
or off-balance sheet item as well as other relevant factors.
    (4) Where practicable, the NCUA will consult with the appropriate 
state regulator before taking any action under this paragraph (e) that 
involves a state chartered corporate credit union.
    (5) Before taking any action under this paragraph (e), NCUA will 
provide the corporate credit union with written notice of the intended 
action and the reasons for such action. The corporate credit union will 
have seven days to provide the NCUA with a written response, and the 
NCUA will consider the response before taking the action. Upon the 
timely request of the corporate credit union, and for good cause, NCUA 
may extend the seven day response period.
    (f) Former capital accounts. This paragraph addresses membership 
capital accounts (MCAs) that qualified as corporate capital prior to 
October 20, 2011 but which no longer satisfy the definitions of capital 
because the accounts have not been converted by the member to 
nonperpetual capital accounts (NCAs) or to perpetual contributed 
capital (PCC).
    (1) For MCAs structured as adjustable balance accounts, the 
corporate will immediately place the account on notice of withdrawal if 
the member has not already done so. The corporate will continue to 
adjust the balance of the MCA account in accordance with the original 
terms of the account until the entire notice period has run and then 
return the remaining balance, less any losses, to the member. Until the 
expiration of the notice period the entire adjusted balance will be 
available to cover losses at the corporate credit union that exceed 
retained earnings and PCC (excluding, if a corporate credit union 
exercises the capital prioritization option under Part I of Appendix A 
to this Part, any PCC with priority under that option).
    (2) For term MCAs, the corporate credit union will return the 
balance of the MCA account to the member at the expiration of the term. 
Until the expiration of term, the entire account balance will be 
available to cover losses that exceed retained earnings and PCC 
(excluding, if a corporate credit union exercises the capital 
prioritization option under part I of Appendix A to this part, any PCC 
with priority under that option).
    (3) A corporate credit union may count a portion of unconverted 
MCAs as Tier 2 capital. Beginning on the date of issuance (for term 
MCAs) or the date of notice of withdrawal (for other MCAs), the 
corporate may count the entire account balance as Tier 2 capital, but

[[Page 64836]]

will then reduce the amount of the account that can be considered as 
Tier 2 capital by a constant monthly amortization that ensures the 
capital is fully amortized one year before the date of maturity or one 
year before the end of the notice period. For adjustable balance 
account MCAs where the adjustment is determined based on some 
impermanent measure, such as shares on deposit with the corporate, the 
corporate credit union may not treat any part of the account as 
capital.
    (4) A corporate credit union must, on or before December 20, 2011, 
provide any members that hold unconverted MCAs a one-time written 
disclosure about the status of their MCA accounts as described in this 
paragraph (f).


Sec.  704.4  [Redesignated as Sec.  704.13]

0
9. Effective January 18, 2011, redesignate Sec.  704.4 as Sec.  704.13.

0
10. Effective October 20, 2011, add a new Sec.  704.4 to read as 
follows:


Sec.  704.4.  Prompt corrective action.

    (a) Purpose. The principal purpose of this section is to define, 
for corporate credit unions that are not adequately capitalized, the 
capital measures and capital levels that are used for determining 
appropriate supervisory actions. This section establishes procedures 
for submission and review of capital restoration plans and for issuance 
and review of capital directives, orders, and other supervisory 
directives.
    (b) Scope. This section applies to corporate credit unions, 
including officers, directors, and employees.
    (1) This section does not limit the authority of NCUA in any way to 
take supervisory actions to address unsafe or unsound practices, 
deficient capital levels, violations of law, unsafe or unsound 
conditions, or other practices. The NCUA may take action under this 
section independently of, in conjunction with, or in addition to any 
other enforcement action available to the NCUA, including issuance of 
cease and desist orders, approval or denial of applications or notices, 
assessment of civil money penalties, or any other actions authorized by 
law.
    (2) Unless permitted by the NCUA or otherwise required by law, no 
corporate credit union may state in any advertisement or promotional 
material its capital category under this part or that the NCUA has 
assigned the corporate credit union to a particular category.
    (3) Any group of credit unions applying for a new corporate credit 
union charter will submit, as part of the charter application, a 
detailed draft plan for soliciting contributed capital and building 
retained earnings. The draft plan will include specific levels of 
contributed capital and retained earnings and the anticipated 
timeframes for achieving those levels. The Board will review the draft 
plan and modify it as necessary. If the Board approves the plan, the 
Board will include any necessary waivers of this section or part.
    (c) Notice of capital category. (1) Effective date of determination 
of capital category. A corporate credit union will be deemed to be 
within a given capital category as of the most recent date:
    (i) A 5310 Financial Report is required to be filed with the NCUA;
    (ii) A final NCUA report of examination is delivered to the 
corporate credit union; or
    (iii) Written notice is provided by the NCUA to the corporate 
credit union that its capital category has changed as provided in 
paragraphs (c)(2) or (d)(3) of this section.
    (2) Adjustments to reported capital levels and category--
    (i) Notice of adjustment by corporate credit union. A corporate 
credit union must provide the NCUA with written notice that an 
adjustment to the corporate credit union's capital category may have 
occurred no later than 15 calendar days following the date that any 
material event has occurred that would cause the corporate credit union 
to be placed in a lower capital category from the category assigned to 
the corporate credit union for purposes of this section on the basis of 
the corporate credit union's most recent call report or report of 
examination.
    (ii) Determination by the NCUA to change capital category. After 
receiving notice pursuant to paragraph (c)(1) of this section, or on 
its own initiative, the NCUA will determine whether to change the 
capital category of the corporate credit union and will notify the 
corporate credit union of the NCUA's determination.
    (d) Capital measures and capital category definitions. (1) Capital 
measures. For purposes of this section, the relevant capital measures 
are:
    (i) The total risk-based capital ratio;
    (ii) The Tier 1 risk-based capital ratio; and
    (iii) The leverage ratio.
    (2) Capital categories. For purposes of this section, a corporate 
credit union is:
    (i) Well capitalized if the corporate credit union:
    (A) Has a total risk-based capital ratio of 10.0 percent or 
greater; and
    (B) Has a Tier 1 risk-based capital ratio of 6.0 percent or 
greater; and
    (C) Has a leverage ratio of 5.0 percent or greater; and
    (D) Is not subject to any written agreement, order, capital 
directive, or prompt corrective action directive issued by NCUA to meet 
and maintain a specific capital level for any capital measure.
    (ii) Adequately capitalized if the corporate credit union:
    (A) Has a total risk-based capital ratio of 8.0 percent or greater; 
and
    (B) Has a Tier 1 risk-based capital ratio of 4.0 percent or 
greater; and
    (C) Has:
    (1) A leverage ratio of 4.0 percent or greater; and
    (2) Does not meet the definition of a well capitalized corporate 
credit union.
    (iii) Undercapitalized if the corporate credit union:
    (A) Has a total risk-based capital ratio that is less than 8.0 
percent; or
    (B) Has a Tier 1 risk-based capital ratio that is less than 4.0 
percent; or
    (C) Has a leverage ratio that is less than 4.0 percent.
    (iv) Significantly undercapitalized if the corporate credit union 
has:
    (A) A total risk-based capital ratio that is less than 6.0 percent; 
or
    (B) A Tier 1 risk-based capital ratio that is less than 3.0 
percent; or
    (C) A leverage ratio that is less than 3.0 percent.
    (v) Critically undercapitalized if the corporate credit union has:
    (A) A total risk-based capital ratio that is less than 4.0 percent; 
or
    (B) A Tier 1 risk-based capital ratio that is less than 2.0 
percent; or
    (C) A leverage ratio that is less than 2.0 percent.
    (3) Reclassification based on supervisory criteria other than 
capital. Notwithstanding the elements of paragraph (d)(2) of this 
section, the NCUA may reclassify a well capitalized corporate credit 
union as adequately capitalized, and may require an adequately 
capitalized or undercapitalized corporate credit union to comply with 
certain mandatory or discretionary supervisory actions as if the 
corporate credit union were in the next lower capital category, in the 
following circumstances:
    (i) Unsafe or unsound condition. The NCUA has determined, after 
notice and opportunity for hearing pursuant to paragraph (h)(1) of this 
section, that the corporate credit union is in an unsafe or unsound 
condition; or
    (ii) Unsafe or unsound practice. The NCUA has determined, after 
notice and an opportunity for hearing pursuant to paragraph (h)(1) of 
this section, that the corporate credit union received a less-than-
satisfactory rating (i.e., three or lower) for any rating category 
(other than in a rating category specifically

[[Page 64837]]

addressing capital adequacy) under the Corporate Risk Information 
System (CRIS) rating system and has not corrected the conditions that 
served as the basis for the less than satisfactory rating. Ratings 
under this paragraph (d)(3)(ii) refer to the most recent ratings (as 
determined either on-site or off-site by the most recent examination) 
of which the corporate credit union has been notified in writing.
    (4) The NCUA may, for good cause, modify any of the percentages in 
paragraph (d)(2) of this section as described in Sec.  704.3(d).
    (e) Capital restoration plans. (1) Schedule for filing plan--
    (i) In general. A corporate credit union must file a written 
capital restoration plan with the NCUA within 45 days of the date that 
the corporate credit union receives notice or is deemed to have notice 
that the corporate credit union is undercapitalized, significantly 
undercapitalized, or critically undercapitalized, unless the NCUA 
notifies the corporate credit union in writing that the plan is to be 
filed within a different period. An adequately capitalized corporate 
credit union that has been required pursuant to paragraph (d)(3) of 
this section to comply with supervisory actions as if the corporate 
credit union were undercapitalized is not required to submit a capital 
restoration plan solely by virtue of the reclassification.
    (ii) Additional capital restoration plans. Notwithstanding 
paragraph (e)(1)(i) of this section, a corporate credit union that has 
already submitted and is operating under a capital restoration plan 
approved under this section is not required to submit an additional 
capital restoration plan based on a revised calculation of its capital 
measures or a reclassification of the institution under paragraph 
(d)(3) of this section unless the NCUA notifies the corporate credit 
union that it must submit a new or revised capital plan. A corporate 
credit union that is notified that it must submit a new or revised 
capital restoration plan must file the plan in writing with the NCUA 
within 45 days of receiving such notice, unless the NCUA notifies the 
corporate credit union in writing that the plan is to be filed within a 
different period.
    (2) Contents of plan. All financial data submitted in connection 
with a capital restoration plan must be prepared in accordance with the 
instructions provided on the call report, unless the NCUA instructs 
otherwise. The capital restoration plan must include all of the 
information required to be filed under paragraph (k)(2)(ii) of this 
section. A corporate credit union required to submit a capital 
restoration plan as the result of a reclassification of the corporate 
credit union pursuant to paragraph (d)(3) of this section must include 
a description of the steps the corporate credit union will take to 
correct the unsafe or unsound condition or practice.
    (3) Failure to submit a capital restoration plan. A corporate 
credit union that is undercapitalized and that fails to submit a 
written capital restoration plan within the period provided in this 
section will, upon the expiration of that period, be subject to all of 
the provisions of this section applicable to significantly 
undercapitalized credit unions.
    (4) Review of capital restoration plans. Within 60 days after 
receiving a capital restoration plan under this section, the NCUA will 
provide written notice to the corporate credit union of whether it has 
approved the plan. The NCUA may extend this time period.
    (5) Disapproval of capital plan. If the NCUA does not approve a 
capital restoration plan, the corporate credit union must submit a 
revised capital restoration plan, when directed to do so, within the 
time specified by the NCUA. An undercapitalized corporate credit union 
is subject to the provisions applicable to significantly 
undercapitalized credit unions until it has submitted, and NCUA has 
approved, a capital restoration plan. If the NCUA directs that the 
corporate submit a revised plan, it must do so in time frame specified 
by the NCUA.
    (6) Failure to implement a capital restoration plan. Any 
undercapitalized corporate credit union that fails in any material 
respect to implement a capital restoration plan will be subject to all 
of the provisions of this section applicable to significantly 
undercapitalized institutions.
    (7) Amendment of capital plan. A corporate credit union that has 
filed an approved capital restoration plan may, after prior written 
notice to and approval by the NCUA, amend the plan to reflect a change 
in circumstance. Until such time as NCUA has approved a proposed 
amendment, the corporate credit union must implement the capital 
restoration plan as approved prior to the proposed amendment.
    (f) Mandatory and discretionary supervisory actions. (1) Mandatory 
supervisory actions.--
    (i) Provisions applicable to all corporate credit unions. All 
corporate credit unions are subject to the restrictions contained in 
paragraph (k)(1) of this section on capital distributions.
    (ii) Provisions applicable to undercapitalized, significantly 
undercapitalized, and critically undercapitalized corporate credit 
unions. Immediately upon receiving notice or being deemed to have 
notice, as provided in paragraph (c) or (e) of this section, that the 
corporate credit union is undercapitalized, significantly 
undercapitalized, or critically undercapitalized, the corporate credit 
union will be subject to the following provisions of paragraph (k) of 
this section:
    (A) Restricting capital distributions (paragraph (k)(1));
    (B) NCUA monitoring of the condition of the corporate credit union 
(paragraph (k)(2)(i));
    (C) Requiring submission of a capital restoration plan (paragraph 
(k)(2)(ii));
    (D) Restricting the growth of the corporate credit union's assets 
(paragraph (k)(2)(iii)); and
    (E) Requiring prior approval of certain expansion proposals 
(paragraph (k)(2)(iv)).
    (iii) Additional provisions applicable to significantly 
undercapitalized, and critically undercapitalized corporate credit 
unions. In addition to the mandatory requirements described in 
paragraph (f)(1) of this section, immediately upon receiving notice or 
being deemed to have notice that the corporate credit union is 
significantly undercapitalized, or critically undercapitalized, or that 
the corporate credit union is subject to the provisions applicable to 
corporate credit unions that are significantly undercapitalized because 
the credit union failed to submit or implement in any material respect 
an acceptable capital restoration plan, the corporate credit union will 
become subject to the provisions of paragraph (k)(3)(iii) of this 
section that restrict compensation paid to senior executive officers of 
the institution.
    (iv) Additional provisions applicable to critically 
undercapitalized corporate credit unions. In addition to the provisions 
described in paragraphs (f)(1)(ii) and (f)(1)(iii) of this section, 
immediately upon receiving notice or being deemed to have notice that 
the corporate credit union is critically undercapitalized, the 
corporate credit union will become subject to these additional 
provisions of paragraph (k) of this section:
    (A) Restricting the activities of the corporate credit union 
((k)(5)(i)); and
    (B) Restricting payments on subordinated debt of the corporate 
credit union ((k)(5)(ii)).
    (2) Discretionary supervisory actions.
    (i) All PCA actions listed in paragraph (k) of this section that 
are not discussed

[[Page 64838]]

in paragraph (f)(1) of this section are discretionary.
    (ii) All discretionary actions available to NCUA in the case of an 
undercapitalized corporate credit union are available to NCUA in the 
case of a significantly undercapitalized credit union. All 
discretionary actions available to NCUA in the case of an 
undercapitalized corporate credit union or a significantly 
undercapitalized corporate credit union are available to NCUA in the 
case of a critically undercapitalized corporate credit union.
    (iii) In taking any discretionary PCA actions with a corporate 
credit union that is deemed to be undercapitalized, significantly 
undercapitalized or critically undercapitalized, or has been 
reclassified as undercapitalized, or significantly undercapitalized; or 
an action in connection with an officer or director of such corporate 
credit union; the NCUA will follow the procedures for issuing 
directives under paragraphs (g) and (i) of this section.
    (iv) NCUA will consult and seek to work cooperatively with the 
appropriate state supervisory authority (SSA) before taking any 
discretionary supervisory action with respect to a state-chartered 
corporate credit union; will provide notice of its decision to the SSA; 
and will allow the appropriate SSA an opportunity to take the proposed 
action independently or jointly with NCUA.
    (g) Directives to take prompt corrective action. The NCUA will 
provide an undercapitalized, significantly undercapitalized, or 
critically undercapitalized corporate credit union prior written notice 
of the NCUA's intention to issue a directive requiring such corporate 
credit union to take actions or to follow proscriptions described in 
this part. Section 747.3002 of this chapter prescribes the notice 
content and associated process.
    (h) Procedures for reclassifying a corporate credit union based on 
criteria other than capital. When the NCUA intends to reclassify a 
corporate credit union or subject it to the supervisory actions 
applicable to the next lower capitalization category based on an unsafe 
or unsound condition or practice, the NCUA will provide the credit 
union with prior written notice of such intent. Section 747.3003 of 
this chapter prescribes the notice content and associated process.
    (i) Order to dismiss a Director or senior executive officer. When 
the NCUA issues and serves a directive on a corporate credit union 
requiring it to dismiss from office any director or senior executive 
officer under paragraphs (k)(3) of this section, the NCUA will also 
serve upon the person the corporate credit union is directed to dismiss 
(Respondent) a copy of the directive (or the relevant portions, where 
appropriate) and notice of the Respondent's right to seek 
reinstatement. Section 747.3004 of this chapter prescribes the content 
of the notice of right to seek reinstatement and the associated 
process.
    (j) Enforcement of directives. Section 747.3005 of this chapter 
prescribes the process for enforcement of directives.
    (k) Remedial actions towards undercapitalized, significantly 
undercapitalized, and critically undercapitalized corporate credit 
unions. (1) Provision applicable to all corporate credit unions. A 
corporate credit union is prohibited from making any capital 
distribution, including payment of dividends on perpetual and 
nonperpetual capital accounts, if, after making the distribution, the 
credit union would be undercapitalized.
    (2) Provisions applicable to undercapitalized corporate credit 
unions.
    (i) Monitoring required. The NCUA will--
    (A) Closely monitor the condition of any undercapitalized corporate 
credit union;
    (B) Closely monitor compliance with capital restoration plans, 
restrictions, and requirements imposed under this section; and
    (C) Periodically review the plan, restrictions, and requirements 
applicable to any undercapitalized corporate credit union to determine 
whether the plan, restrictions, and requirements are achieving the 
purpose of this section.
    (ii) Capital restoration plan required.
    (A) Any undercapitalized corporate credit union must submit an 
acceptable capital restoration plan to the NCUA.
    (B) The capital restoration plan will--
    (1) Specify--
    (i) The steps the corporate credit union will take to become 
adequately capitalized;
    (ii) The levels of capital to be attained during each year in which 
the plan will be in effect;
    (iii) How the corporate credit union will comply with the 
restrictions or requirements then in effect under this section; and
    (iv) The types and levels of activities in which the corporate 
credit union will engage; and
    (2) Contain such other information as the NCUA may require.
    (C) The NCUA will not accept a capital restoration plan unless the 
NCUA determines that the plan--
    (1) Complies with paragraph (k)(2)(ii)(B) of this section;
    (2) Is based on realistic assumptions, and is likely to succeed in 
restoring the corporate credit union's capital; and
    (3) Would not appreciably increase the risk (including credit risk, 
interest-rate risk, and other types of risk) to which the corporate 
credit union is exposed.
    (iii) Asset growth restricted. An undercapitalized corporate credit 
union must not permit its daily average net assets during any calendar 
month to exceed its moving daily average net assets unless--
    (A) The NCUA has accepted the corporate credit union's capital 
restoration plan; and
    (B) Any increase in total assets is consistent with the plan.
    (iv) Prior approval required for acquisitions, branching, and new 
lines of business. An undercapitalized corporate credit union must not, 
directly or indirectly, acquire any interest in any entity, establish 
or acquire any additional branch office, or engage in any new line of 
business unless the NCUA has accepted the corporate credit union's 
capital restoration plan, the corporate credit union is implementing 
the plan, and the NCUA determines that the proposed action is 
consistent with and will further the achievement of the plan.
    (3) Provisions applicable to significantly undercapitalized 
corporate credit unions and undercapitalized corporate credit unions 
that fail to submit and implement capital restoration plans.
    (i) In general. This paragraph applies with respect to any 
corporate credit union that--
    (A) Is significantly undercapitalized; or
    (B) Is undercapitalized and--
    (1) Fails to submit an acceptable capital restoration plan within 
the time allowed by the NCUA under paragraph (e)(1) of this section; or
    (2) Fails in any material respect to implement a plan accepted by 
the NCUA.
    (ii) Specific actions authorized. The NCUA may take one or more of 
the following actions:
    (A) Requiring recapitalization.
    (1) Requiring the corporate credit union to seek and obtain 
additional contributed capital.
    (2) Requiring the corporate credit union to increase its rate of 
earnings retention.
    (3) Requiring the corporate credit union to combine, in whole or 
part, with another insured depository institution, if one or more 
grounds exist under this section or the Federal Credit Union Act for 
appointing a conservator or liquidating agent.

[[Page 64839]]

    (B) Restricting any ongoing or future transactions with affiliates.
    (C) Restricting interest rates paid.
    (1) In general. Restricting the rates of dividends and interest 
that the corporate credit union pays on shares and deposits to the 
prevailing rates on shares and deposits of comparable amounts and 
maturities in the region where the institution is located, as 
determined by the NCUA.
    (2) Retroactive restrictions prohibited. Paragraph (k)(3)(ii)(c) of 
this section does not authorize the NCUA to restrict interest rates 
paid on time deposits or shares made before (and not renewed or 
renegotiated after) the date the NCUA announced this restriction.
    (D) Restricting asset growth. Restricting the corporate credit 
union's asset growth more stringently than in paragraph (k)(2)(iii) of 
this section, or requiring the corporate credit union to reduce its 
total assets.
    (E) Restricting activities. Requiring the corporate credit union or 
any of its CUSOs to alter, reduce, or terminate any activity that the 
NCUA determines poses excessive risk to the corporate credit union.
    (F) Improving management. Doing one or more of the following:
    (1) New election of directors. Ordering a new election for the 
corporate credit union's board of directors.
    (2) Dismissing directors or senior executive officers. Requiring 
the corporate credit union to dismiss from office any director or 
senior executive officer who had held office for more than 180 days 
immediately before the corporate credit union became undercapitalized.
    (3) Employing qualified senior executive officers. Requiring the 
corporate credit union to employ qualified senior executive officers 
(who, if the NCUA so specifies, will be subject to approval by the 
NCUA).
    (G) Requiring divestiture. Requiring the corporate credit union to 
divest itself of or liquidate any interest in any entity if the NCUA 
determines that the entity is in danger of becoming insolvent or 
otherwise poses a significant risk to the corporate credit union;
    (H) Conserve or liquidate the corporate credit union if NCUA 
determines the credit union has no reasonable prospect of becoming 
adequately capitalized; and
    (I) Requiring other action. Requiring the corporate credit union to 
take any other action that the NCUA determines will better carry out 
the purpose of this section than any of the actions described in this 
paragraph.
    (iii) Senior executive officers' compensation restricted.
    (A) In general. The corporate credit union is prohibited from doing 
any of the following without the prior written approval of the NCUA:
    (1) Pay any bonus or profit-sharing to any senior executive 
officer.
    (2) Provide compensation to any senior executive officer at a rate 
exceeding that officer's average rate of compensation (excluding 
bonuses and profit-sharing) during the 12 calendar months preceding the 
calendar month in which the corporate credit union became 
undercapitalized.
    (B) Failing to submit plan. The NCUA will not grant approval with 
respect to a corporate credit union that has failed to submit an 
acceptable capital restoration plan.
    (iv) Discretion to impose certain additional restrictions. The NCUA 
may impose one or more of the restrictions prescribed by regulation 
under paragraph (k)(5) of this section if the NCUA determines that 
those restrictions are necessary to carry out the purpose of this 
section.
    (4) More stringent treatment based on other supervisory criteria.
    (i) In general. If the NCUA determines, after notice and an 
opportunity for hearing as described in subpart M of part 747 of this 
chapter, that a corporate credit union is in an unsafe or unsound 
condition or deems the corporate credit union to be engaging in an 
unsafe or unsound practice, the NCUA may--
    (A) If the corporate credit union is well capitalized, reclassify 
the corporate credit union as adequately capitalized;
    (B) If the corporate credit union is adequately capitalized (but 
not well capitalized), require the corporate credit union to comply 
with one or more provisions of paragraphs (k)(1) and (k)(2) of this 
section, as if the corporate credit union were undercapitalized; or
    (C) If the corporate credit union is undercapitalized, take any one 
or more actions authorized under paragraph (k)(3)(ii) of this section 
as if the corporate credit union were significantly undercapitalized.
    (ii) Contents of plan. Any plan required under paragraph (k)(4)(i) 
of this section will specify the steps that the corporate credit union 
will take to correct the unsafe or unsound condition or practice. 
Capital restoration plans, however, will not be required under 
paragraph (k)(4)(i)(B) of this section.
    (5) Provisions applicable to critically undercapitalized corporate 
credit unions.
    (i) Activities restricted. Any critically undercapitalized 
corporate credit union must comply with restrictions prescribed by the 
NCUA under paragraph (k)(6) of this section.
    (ii) Payments on contributed capital and subordinated debt 
prohibited. A critically undercapitalized corporate credit union must 
not, beginning no later than 60 days after becoming critically 
undercapitalized, make any payment of dividends on contributed capital 
or any payment of principal or interest on the corporate credit union's 
subordinated debt unless the NCUA determines that an exception would 
further the purpose of this section. Interest, although not payable, 
may continue to accrue under the terms of any subordinated debt to the 
extent otherwise permitted by law. Dividends on contributed capital do 
not, however, continue to accrue.
    (iii) Conservatorship, liquidation, or other action. The NCUA may, 
at any time, conserve or liquidate any critically undercapitalized 
corporate credit union or require the credit union to combine, in whole 
or part, with another institution. NCUA will consider, not later than 
90 days after a corporate credit union becomes critically 
undercapitalized, whether NCUA should liquidate, conserve, or combine 
the institution.
    (6) Restricting activities of critically undercapitalized corporate 
credit unions. To carry out the purpose of this section, the NCUA will, 
by order--
    (i) Restrict the activities of any critically undercapitalized 
corporate credit union; and
    (ii) At a minimum, prohibit any such corporate credit union from 
doing any of the following without the NCUA's prior written approval:
    (A) Entering into any material transaction other than in the usual 
course of business, including any investment, expansion, acquisition, 
sale of assets, or other similar action.
    (B) Extending credit for any transaction NCUA determines to be 
highly leveraged.
    (C) Amending the corporate credit union's charter or bylaws, except 
to the extent necessary to carry out any other requirement of any law, 
regulation, or order.
    (D) Making any material change in accounting methods.
    (E) Paying compensation or bonuses NCUA determines to be excessive.
    (F) Paying interest on new or renewed liabilities at a rate that 
would increase the corporate credit union's weighted average cost of 
funds to a level significantly exceeding the prevailing rates of 
interest on insured deposits in the corporate credit union's normal 
market areas.

[[Page 64840]]


0
11. Revise Sec.  704.5 to read as follows:


Sec.  704.5.  Investments.

    (a) Policies. A corporate credit union must operate according to an 
investment policy that is consistent with its other risk management 
policies, including, but not limited to, those related to credit risk 
management, asset and liability management, and liquidity management. 
The policy must address, at a minimum:
    (1) Appropriate tests and criteria for evaluating investments and 
investment transactions before purchase; and
    (2) Reasonable and supportable concentration limits for limited 
liquidity investments in relation to capital.
    (b) General. All investments must be U.S. dollar-denominated and 
subject to the credit policy restrictions set forth in Sec.  704.6.
    (c) Authorized activities. A corporate credit union may invest in:
    (1) Securities, deposits, and obligations set forth in Sections 
107(7), 107(8), and 107(15) of the Federal Credit Union Act, 12 U.S.C. 
1757(7), 1757(8), and 1757(15), except as provided in this section;
    (2) Deposits in, the sale of federal funds to, and debt obligations 
of corporate credit unions, Section 107(8) institutions, and state 
banks, trust companies, and mutual savings banks not domiciled in the 
state in which the corporate credit union does business;
    (3) Corporate CUSOs, as defined in and subject to the limitations 
of Sec.  704.11;
    (4) Marketable debt obligations of corporations chartered in the 
United States. This authority does not apply to debt obligations that 
are convertible into the stock of the corporation; and
    (5) Domestically-issued asset-backed securities.
    (d) Repurchase agreements. A corporate credit union may enter into 
a repurchase agreement provided that:
    (1) The corporate credit union, directly or through its agent, 
receives written confirmation of the transaction, and either takes 
physical possession or control of the repurchase securities or is 
recorded as owner of the repurchase securities through the Federal 
Reserve Book-Entry Securities Transfer System;
    (2) The repurchase securities are legal investments for that 
corporate credit union;
    (3) The corporate credit union, directly or through its agent, 
receives daily assessment of the market value of the repurchase 
securities and maintains adequate margin that reflects a risk 
assessment of the repurchase securities and the term of the 
transaction; and
    (4) The corporate credit union has entered into signed contracts 
with all approved counterparties and agents, and ensures compliance 
with the contracts. Such contracts must address any supplemental terms 
and conditions necessary to meet the specific requirements of this 
part. Third party arrangements must be supported by tri-party contracts 
in which the repurchase securities are priced and reported daily and 
the tri-party agent ensures compliance; and
    (e) Securities Lending. A corporate credit union may enter into a 
securities lending transaction provided that:
    (1) The corporate credit union, directly or through its agent, 
receives written confirmation of the loan, obtains a first priority 
security interest in the collateral by taking physical possession or 
control of the collateral, or is recorded as owner of the collateral 
through the Federal Reserve Book-Entry Securities Transfer System;
    (2) The collateral is a legal investment for that corporate credit 
union;
    (3) The corporate credit union, directly or through its agent, 
receives daily assessment of the market value of collateral and 
maintains adequate margin that reflects a risk assessment of the 
collateral and terms of the loan; and
    (4) The corporate credit union has entered into signed contracts 
with all agents and, directly or through its agent, has executed a 
written loan and security agreement with the borrower. The corporate or 
its agent ensures compliance with the agreements.
    (f) Investment companies. A corporate credit union may invest in an 
investment company registered with the Securities and Exchange 
Commission under the Investment Company Act of 1940 (15 U.S.C. 80a), or 
a collective investment fund maintained by a national bank under 12 CFR 
9.18 or a mutual savings bank under 12 CFR 550.260, provided that the 
company or fund prospectus restricts the investment portfolio to 
investments and investment transactions that are permissible for that 
corporate credit union.
    (g) Investment settlement. A corporate credit union may only 
contract for the purchase or sale of an investment if the transaction 
is settled on a delivery versus payment basis within 60 days for 
mortgage-backed securities, within 30 days for new issues (other than 
mortgage-backed securities), and within three days for all other 
securities.
    (h) Prohibitions. A corporate credit union is prohibited from:
    (1) Purchasing or selling derivatives, except for embedded options 
not required under GAAP to be accounted for separately from the host 
contract or forward sales commitments on loans to be purchased by the 
corporate credit union;
    (2) Engaging in trading securities unless accounted for on a trade 
date basis;
    (3) Engaging in adjusted trading or short sales;
    (4) Purchasing mortgage servicing rights, small business related 
securities, residual interests in collateralized mortgage obligations, 
residual interests in real estate mortgage investment conduits, or 
residual interests in asset-backed securities;
    (5) Purchasing net interest margin securities;
    (6) Purchasing collateralized debt obligations;
    (7) Purchasing private label residential mortgage-backed 
securities;
    (8) Purchasing subordinated securities; and
    (9) Purchasing stripped mortgage-backed securities (SMBS), or 
securities that represent interests in SMBS, except as described in 
subparagraphs (i) and (iii) below.
    (i) A corporate credit union may invest in exchangeable 
collateralized mortgage obligations (exchangeable CMOs) representing 
beneficial ownership interests in one or more interest-only classes of 
a CMO (IO CMOs) or principal-only classes of a CMO (PO CMOs), but only 
if:
    (A) At the time of purchase, the ratio of the market price to the 
remaining principal balance is between .8 and 1.2, meaning that the 
discount or premium of the market price to par must be less than 20 
points;
    (B) The offering circular or other official information available 
at the time of purchase indicates that the notional principal on each 
underlying IO CMO should decline at the same rate as the principal on 
one or more of the underlying non-IO CMOs, and that the principal on 
each underlying PO CMO should decline at the same rate as the 
principal, or notional principal, on one or more of the underlying non-
PO CMOs; and
    (C) The credit union investment staff has the expertise dealing 
with exchangeable CMOs to apply the conditions in paragraphs 
(h)(5)(i)(A) and (B) of this section.
    (ii) A corporate credit union that invests in an exchangeable CMO 
may exercise the exchange option only if all of the underlying CMOs are 
permissible investments for that credit union.
    (iii) A corporate credit union may accept an exchangeable CMO 
representing beneficial ownership interests in one or more IO CMOs or 
PO CMOs as an asset associated with an

[[Page 64841]]

investment repurchase transaction or as collateral in a securities 
lending transaction. When the exchangeable CMO is associated with one 
of these two transactions, it need not conform to the conditions in 
paragraphs (h)(5)(i)(A) or (B) of this section.
    (i) Conflicts of interest. A corporate credit union's officials, 
employees, and immediate family members of such individuals, may not 
receive pecuniary consideration in connection with the making of an 
investment or deposit by the corporate credit union. Employee 
compensation is exempt from this prohibition. All transactions not 
specifically prohibited by this paragraph must be conducted at arm's 
length and in the interest of the corporate credit union.
    (j) Grandfathering. A corporate credit union's authority to hold an 
investment is governed by the regulation in effect at the time of 
purchase. However, all grandfathered investments are subject to the 
requirements of Sec. Sec.  704.8 and 704.9.

0
12. Revise Sec.  704.6 to read as follows:


Sec.  704.6.  Credit risk management.

    (a) Policies. A corporate credit union must operate according to a 
credit risk management policy that is commensurate with the investment 
risks and activities it undertakes. The policy must address at a 
minimum:
    (1) The approval process associated with credit limits;
    (2) Due diligence analysis requirements;
    (3) Maximum credit limits with each obligor and transaction 
counterparty, set as a percentage of capital. In addition to addressing 
deposits and securities, limits with transaction counterparties must 
address aggregate exposures of all transactions including, but not 
limited to, repurchase agreements, securities lending, and forward 
settlement of purchases or sales of investments; and
    (4) Concentrations of credit risk (e.g., originator of receivables, 
servicer of receivables, insurer, industry type, sector type, 
geographic, collateral type, and tranche priority).
    (b) Exemption. The limitations and requirements of this section do 
not apply to certain assets, whether or not considered investments 
under this part, including fixed assets, individual loans and loan 
participation interests, investments in CUSOs, investments that are 
issued or fully guaranteed as to principal and interest by the U.S. 
government or its agencies or its sponsored enterprises (other than 
mortgage backed-securities), investments that are fully insured or 
guaranteed (including accumulated dividends and interest) by the NCUSIF 
or the Federal Deposit Insurance Corporation, and settlement funds in 
federally insured depository institutions.
    (c) Issuer concentration limits--(1) General rule. The aggregate of 
all investments in any single obligor is limited to 25 percent of 
capital or $5 million, whichever is greater.
    (2) Exceptions.
    (i) Investments in one obligor where the remaining maturity of all 
obligations is less than 30 days are limited to 50 percent of capital;
    (ii) Investments in credit card master trust asset-backed 
securities are limited to 50 percent of capital in any single obligor;
    (iii) Aggregate investments in repurchase and securities lending 
agreements with any one counterparty are limited to 200 percent of 
capital;
    (iv) Investments in non-money market registered investment 
companies are limited to of 50 percent of capital in any single 
obligor;
    (v) Investments in money market registered investment companies are 
limited to 100 percent of capital in any single obligor; and
    (vi) Investments in corporate CUSOs are subject to the limitations 
of Sec.  704.11.
    (3) For purposes of measurement, each new credit transaction must 
be evaluated in terms of the corporate credit union's capital at the 
time of the transaction. An investment that fails a requirement of this 
section because of a subsequent reduction in capital will be deemed 
non-conforming. A corporate credit union is required to exercise 
reasonable efforts to bring nonconforming investments into conformity 
within 90 calendar days. Investments that remain nonconforming for 90 
calendar days will be deemed to fail a requirement of this section and 
the corporate credit union will have to comply with Sec.  704.10.
    (d) Sector concentration limits. (1) A corporate credit union must 
establish sector limits that do not exceed the following maximums:
    (i) Mortgage-backed securities (Inclusive of commercial mortgage-
backed securities)--the lower of 1000 percent of capital or 50 percent 
of assets;
    (ii) Commercial mortgage-backed securities--the lower of 300 
percent of capital or 15 percent of assets;
    (iii) FFELP student loan asset-backed securities--the lower of 1000 
percent of capital or 50 percent of assets;
    (iv) Private student loan asset-backed securities--the lower of 500 
percent of capital or 25 percent of assets;
    (v) Auto loan/lease asset-backed securities--the lower of 500 
percent of capital or 25 percent of assets;
    (vi) Credit card asset-backed securities--the lower of 500 percent 
of capital or 25 percent of assets;
    (vii) Other asset-backed securities not listed in paragraphs (ii) 
through (vi)--the lower of 500 percent of capital or 25 percent of 
assets;
    (viii) Corporate debt obligations--the lower of 1000 percent of 
capital or 50 percent of assets; and
    (ix) Municipal securities--the lower of 1000 percent of capital or 
50 percent of assets.
    (2) Registered investment companies--A corporate credit union must 
limit its investment in registered investment companies to the lower of 
1000 percent of capital or 50 percent of assets. In addition to 
applying the limit in this paragraph (d)(2), a corporate credit union 
must also include the underlying assets in each registered investment 
company in the relevant sectors described in paragraph (d)(1) of this 
section when calculating those sector limits.
    (3) A corporate credit union will limit its aggregate holdings in 
any investments not described in paragraphs (d)(1) or (d)(2) of this 
section to the lower of 100 percent of capital or 5 percent of assets. 
The NCUA may approve a higher percentage in appropriate cases.
    (4) Investments in other federally insured credit unions, deposits 
and federal funds investments in other federally insured depository 
institutions, and investment repurchase agreements are excluded from 
the concentration limits in paragraphs (d)(1), (d)(2), and (d)(3) of 
this section.
    (e) Corporate debt obligation subsector limits. In addition to the 
limitations in paragraph (d)(1)(viii) of this section, a corporate 
credit union must not exceed the lower of 200 percent of capital or 10 
percent of assets in any single North American Industry Classification 
System (NAICS) industry sector. If the corporation does not have a 
readily ascertainable NAICS classification, a corporate credit union 
will use its reasonable judgment in assigning such a classification. 
NCUA may direct, however, that the corporate change the classification.
    (f) Credit ratings.--(1) All investments, other than in another 
depository institution, must have an applicable credit rating from at 
least one NRSRO. At a minimum, 90 percent of all such investments, by 
book value, must have a rating by at least two NRSROs. Corporate credit 
unions may

[[Page 64842]]

use either public or nonpublic NRSRO ratings to satisfy this 
requirement.
    (2) At the time of purchase, investments with long-term ratings 
must be rated no lower than AA- (or equivalent) by every NRSRO that 
provides a publicly available long-term rating on that investment, and 
investments with short-term ratings must be rated no lower than A-1 (or 
equivalent) by every NRSRO that provides a publicly available short-
term rating on that investment. If the corporate credit union obtains a 
nonpublic NRSRO rating, that rating must also be no lower than AA-, or 
A-1, for long-term and short-term ratings, respectively.
    (3) All rating(s) relied upon to meet the requirements of this part 
must be identified at the time of purchase and must be monitored for as 
long as the corporate owns the investment. Corporate credit unions must 
identify and monitor any new post-purchase NRSRO ratings on investments 
they hold.
    (4) Investments are subject to the requirements of Sec.  704.10 if:
    (i) An NRSRO that rates the investment downgrades that rating, 
after purchase, below the minimum rating requirements of this part; or
    (ii) The investment is part of an asset class or group of 
investments that exceeds the sector or obligor concentration limits of 
this section.
    (g) Reporting and documentation. (1) At least annually, a written 
evaluation of each credit limit with each obligor or transaction 
counterparty must be prepared and formally approved by the board or an 
appropriate committee. At least monthly, the board or an appropriate 
committee must receive an investment watch list of existing and/or 
potential credit problems and summary credit exposure reports, which 
demonstrate compliance with the corporate credit union's risk 
management policies.
    (2) At a minimum, the corporate credit union must maintain:
    (i) A justification for each approved credit limit;
    (ii) Disclosure documents, if any, for all instruments held in 
portfolio. Documents for an instrument that has been sold must be 
retained until completion of the next NCUA examination; and
    (iii) The latest available financial reports, industry analyses, 
internal and external analyst evaluations, and rating agency 
information sufficient to support each approved credit limit.

0
13. Revise Sec.  704.8 to read as follows:


Sec.  704.8.  Asset and liability management.

    (a) Policies. A corporate credit union must operate according to a 
written asset and liability management policy which addresses, at a 
minimum:
    (1) The purpose and objectives of the corporate credit union's 
asset and liability activities;
    (2) The maximum allowable percentage decline in net economic value 
(NEV), compared to base case NEV;
    (3) The minimum allowable NEV ratio;
    (4) Policy limits and specific test parameters for the NEV 
sensitivity analysis requirements set forth in paragraphs (d), (e), and 
(f) of this section;
    (5) The modeling of indexes that serve as references in financial 
instrument coupon formulas; and
    (6) The tests that will be used, prior to purchase, to estimate the 
impact of investments on the percentage decline in NEV compared to base 
case NEV. The most recent NEV analysis, as determined under paragraph 
(d)(1)(i) of this section may be used as a basis of estimation.
    (b) Asset and liability management committee (ALCO). A corporate 
credit union's ALCO must have at least one member who is also a member 
of the board of directors. The ALCO must review asset and liability 
management reports on at least a monthly basis. These reports must 
address compliance with Federal Credit Union Act, NCUA Rules and 
Regulations (12 CFR chapter VII), and all related risk management 
policies.
    (c) Penalty for early withdrawals. A corporate credit union that 
permits early certificate/share withdrawals must assess market-based 
penalties sufficient to cover the estimated replacement cost of the 
certificate redeemed. This means the minimum penalty must be reasonably 
related to the rate that the corporate credit union would be required 
to offer to attract funds for a similar term with similar 
characteristics.
    (d) Interest rate sensitivity analysis. (1) A corporate credit 
union must:
    (i) Evaluate the risk in its balance sheet by measuring, at least 
quarterly, including once on the last day of the calendar quarter, the 
impact of an instantaneous, permanent, and parallel shock in the yield 
curve of plus and minus 100, 200, and 300 BP on its NEV and NEV ratio. 
If the base case NEV ratio falls below 3 percent at the last testing 
date, these tests must be calculated at least monthly, including once 
on the last day of the month, until the base case NEV ratio again 
exceeds 3 percent;
    (ii) Limit its risk exposure to levels that do not result in a base 
case NEV ratio or any NEV ratio resulting from the tests set forth in 
paragraph (d)(1)(i) of this section below 2 percent; and
    (iii) Limit its risk exposures to levels that do not result in a 
decline in NEV of more than 15 percent.
    (2) A corporate credit union must assess annually if it should 
conduct periodic additional tests to address market factors that may 
materially impact that corporate credit union's NEV. These factors 
should include, but are not limited to, the following:
    (i) Changes in the shape of the Treasury yield curve;
    (ii) Adjustments to prepayment projections used for amortizing 
securities to consider the impact of significantly faster/slower 
prepayment speeds; and
    (iii) Adjustments to volatility assumptions to consider the impact 
that changing volatilities have on embedded option values.
    (e) Net interest income modeling. A corporate credit union must 
perform net interest income (NII) modeling to project earnings in 
multiple interest rate environments for a period of no less than 2 
years. NII modeling must, at minimum, be performed at least quarterly, 
including once on the last day of the calendar quarter.
    (f) Weighted average asset life. The weighted average life (WAL) of 
a corporate credit union's loan and investment portfolio, excluding 
derivative contracts and equity investments, may not exceed 2 years. A 
corporate credit union must test its assets at least quarterly, 
including once on the last day of the calendar quarter, for compliance 
with this WAL limitation. When calculating its WAL, a corporate credit 
union must assume that no issuer or market options will be exercised. 
If the WAL of a corporate credit union's assets exceeds 2 years on the 
testing date, this test must be calculated at least monthly, including 
once on the last day of the month, until the WAL is below 2 years.
    (g) Weighted average asset life with 50 percent slowdown in 
prepayment speeds. The weighted average life (WAL) of a corporate 
credit union's loan and investment portfolio, excluding derivative 
contracts and equity investments, may not exceed 2.25 years when 
prepayment speeds are reduced by 50 percent. A corporate credit union 
must test its investments at least quarterly, including once on the 
last day of the calendar quarter, for compliance with this WAL 
limitation. When calculating its WAL, a corporate credit union must 
assume that no issuer or

[[Page 64843]]

market options will be exercised. If the WAL of a corporate credit 
union's assets exceeds 2.25 years, this test must be calculated at 
least monthly, including once on the last day of the month, until the 
WAL with the 50 slowdown in prepayment speeds is below 2.25 years.
    (h) Government issued or guaranteed securities. The WAL of 
investments that are issued or fully guaranteed as to principal and 
interest by the U.S. government, its agencies or sponsored enterprises, 
including investments that are fully insured or guaranteed (including 
accumulated dividends and interest) by the NCUSIF or the Federal 
Deposit Insurance Corporation, will be multiplied by a factor of 0.50 
for purposes of the WAL tests of paragraphs (f) and (g) of this 
section.
    (i) Effective and spread durations. A corporate credit union must 
measure at least once a quarter, including once on the last day of the 
calendar quarter, the effective duration and spread durations of each 
of its assets and liabilities, where the values of these are affected 
by changes in interest rates or credit spreads.
    (j) Regulatory violations. (1)(i) If a corporate credit union's 
decline in NEV, base case NEV ratio or any NEV ratio resulting from the 
test set forth in paragraph (d) of this section violates the limits 
established in that paragraph, or the corporate credit union is unable 
to satisfy the tests in paragraphs (f) or (g) of this section; and
    (ii) The corporate cannot adjust its balance sheet so as to satisfy 
the requirements of paragraphs (d), (f), or (g) of this section within 
10 calendar days after detecting the violation, then:
    (iii) The operating management of the corporate credit union must 
immediately report this information to its board of directors, 
supervisory committee, and the NCUA.
    (2) If any violation described in paragraph (j)(1)(i) persists for 
30 or more calendar days, the corporate credit union:
    (i) Must immediately submit a detailed, written action plan to the 
NCUA that sets forth the time needed and means by which it intends to 
correct the violation and, if the NCUA determines that the plan is 
unacceptable, the corporate credit union must immediately restructure 
its balance sheet to bring the exposure back within compliance or 
adhere to an alternative course of action determined by the NCUA; and
    (ii) If presently categorized as adequately capitalized or well 
capitalized for PCA purposes, immediately be recategorized as 
undercapitalized until the violation is corrected, and
    (iii) If presently less than adequately capitalized, immediately be 
downgraded one additional capital category.
    (k) Overall limit on business generated from individual credit 
unions. On or after April 22, 2013, a corporate credit union is 
prohibited from accepting from any member, or any nonmember credit 
union, any investment, including shares, loans, PCC, or NCAs if, 
following that investment, the aggregate of all investments from that 
entity in the corporate would exceed 15 percent of the corporate credit 
union's moving daily average net assets.

0
14. Revise Sec.  704.9 to read as follows:


Sec.  704.9.  Liquidity management.

    (a) General. In the management of liquidity, a corporate credit 
union must:
    (1) Evaluate the potential liquidity needs of its membership in a 
variety of economic scenarios;
    (2) Regularly monitor and demonstrate accessibility to sources of 
internal and external liquidity;
    (3) Keep a sufficient amount of cash and cash equivalents on hand 
to support its payment system obligations;
    (4) Demonstrate that the accounting classification of investment 
securities is consistent with its ability to meet potential liquidity 
demands; and
    (5) Develop a contingency funding plan that addresses alternative 
funding strategies in successively deteriorating liquidity scenarios. 
The plan must:
    (i) List all sources of liquidity, by category and amount, that are 
available to service an immediate outflow of funds in various liquidity 
scenarios;
    (ii) Analyze the impact that potential changes in fair value will 
have on the disposition of assets in a variety of interest rate 
scenarios; and
    (iii) Be reviewed by the board or an appropriate committee no less 
frequently than annually or as market or business conditions dictate.
    (b) Borrowing limits. A corporate credit union may borrow up to the 
lower of 10 times capital or 50 percent of capital and shares 
(excluding shares created by the use of member reverse repurchase 
agreements).
    (1) Secured borrowings. A corporate credit union may borrow on a 
secured basis for liquidity purposes, but the maturity of the borrowing 
may not exceed 30 days. Only a credit union with core capital in excess 
of five percent of its moving DANA may borrow on a secured basis for 
nonliquidity purposes, and the outstanding amount of secured borrowing 
for nonliquidity purposes may not exceed an amount equal to the 
difference between core capital and five percent of moving DANA.
    (2) Exclusions. CLF borrowings and borrowed funds created by the 
use of member reverse repurchase agreements are excluded from this 
limit.

0
15. Revise Sec.  704.11 to read as follows:


Sec.  704.11  Corporate Credit Union Service Organizations (Corporate 
CUSOs).

    (a) A corporate CUSO is an entity that:
    (1) Is at least partly owned by a corporate credit union;
    (2) Primarily serves credit unions;
    (3) Restricts its services to those related to the normal course of 
business of credit unions as specified in paragraph (e) of this 
section; and
    (4) Is structured as a corporation, limited liability company, or 
limited partnership under state law.
    (b) Investment and loan limitations. (1) The aggregate of all 
investments in member and non-member corporate CUSOs must not exceed 15 
percent of a corporate credit union's capital.
    (2) The aggregate of all investments in and loans to member and 
nonmember corporate CUSOs must not exceed 30 percent of a corporate 
credit union's capital. A corporate credit union may lend to member and 
nonmember corporate CUSOs an additional 15 percent of capital if the 
loan is collateralized by assets in which the corporate has a perfected 
security interest under state law.
    (3) If the limitations in paragraphs (b)(1) and (b)(2) of this 
section are reached or exceeded because of the profitability of the 
CUSO and the related GAAP valuation of the investment under the equity 
method without an additional cash outlay by the corporate, divestiture 
is not required. A corporate credit union may continue to invest up to 
the regulatory limit without regard to the increase in the GAAP 
valuation resulting from the corporate CUSO's profitability.
    (c) Due diligence. A corporate credit union must comply with the 
due diligence requirements of Sec. Sec.  723.5 and 723.6(f) through (j) 
of this chapter for all loans to corporate CUSOs. This requirement does 
not apply to loans excluded under Sec.  723.1(b).
    (d) Separate entity. (1) A corporate CUSO must be operated as an 
entity separate from a corporate credit union.
    (2) A corporate credit union investing in or lending to a corporate 
CUSO must obtain a written legal opinion that concludes the corporate 
CUSO is organized and operated in a manner that the corporate credit 
union will not reasonably be held liable for the

[[Page 64844]]

obligations of the corporate CUSO. This opinion must address factors 
that have led courts to ``pierce the corporate veil,'' such as 
inadequate capitalization, lack of corporate identity, common boards of 
directors and employees, control of one entity over another, and lack 
of separate books and records.
    (e). Permissible activities. (1) Beginning on April 18, 2011, a 
corporate CUSO must agree to limit its activities to:
    (i) Brokerage services,
    (ii) Investment advisory services, and
    (iii) Other categories of activities as approved in writing by NCUA 
and published on NCUA's Web site.
    (2) A corporate credit union must divest from any CUSO that is 
engaged in activities not approved by NCUA under paragraph (e)(1) of 
this section. A corporate credit union may take until October 20, 2011 
to divest itself from a CUSO engaging in one or more unapproved 
activities, but only if the CUSO was engaging in those activities 
before October 20, 2010 and the corporate credit union can establish 
that those activities satisfied the requirements of this section as it 
existed before October 20, 2010.
    (3) Once NCUA has approved an activity and published that activity 
on its Web site as provided for in paragraph (e)(1)(iii) of this 
section, NCUA will not remove that particular activity the approved 
list, or make substantial changes to the content or description of that 
approved activity, except through the formal rulemaking process.
    (f) An official of a corporate credit union which has invested in 
or loaned to a corporate CUSO may not receive, either directly or 
indirectly, any salary, commission, investment income, or other income, 
compensation, or consideration from the corporate CUSO. This 
prohibition also extends to immediate family members of officials.
    (g) Prior to making an investment in or loan to a corporate CUSO, a 
corporate credit union must obtain a written agreement that the CUSO:
    (1) Will follow GAAP;
    (2) Will provide financial statements to the corporate credit union 
at least quarterly;
    (3) Will obtain an annual CPA opinion audit and provide a copy to 
the corporate credit union. A wholly owned or majority owned CUSO is 
not required to obtain a separate annual audit if it is included in the 
corporate credit union's annual consolidated audit;
    (4) Will not acquire control, directly or indirectly, of another 
depository financial institution or to invest in shares, stocks, or 
obligations of an insurance company, trade association, liquidity 
facility, or similar organization;
    (5) Will allow the auditor, board of directors, and NCUA complete 
access to its personnel, facilities, equipment, books, records, and any 
other documentation that the auditor, directors, or NCUA deem 
pertinent; and
    (6) Will comply with all the requirements of this section.
    (h) Corporate credit union authority to invest in or loan to a CUSO 
is limited to that provided in this section. A corporate credit union 
is not authorized to invest in or loan to a CUSO under part 712 of this 
chapter.

0
16. Revise paragraph (a) of Sec.  704.14 to read as follows:
    Sec.  704.14. Representation.
    (a) Board representation. The board will be determined as 
stipulated in its bylaws governing election procedures, provided that:
    (1) At least a majority of directors, including the chair of the 
board, must serve on the board as representatives of member credit 
unions;
    (2) On or after February 17, 2011, only individuals who currently 
hold the position of chief executive officer, chief financial officer, 
chief operating officer, or treasurer/manager at a member may seek 
election or re-election to the board;
    (3) No individual may be elected or appointed to serve on the board 
if, after such election or appointment, the individual would be a 
director at more than one corporate credit union;
    (4) No individual may be elected or appointed to serve on the board 
if, after such election or appointment, any member of the corporate 
credit union would have more than one representative on the board of 
the corporate;
    (5) The chair of the board may not serve simultaneously as an 
officer, director, or employee of a credit union trade association;
    (6) A majority of directors may not serve simultaneously as 
officers, directors, or employees of the same credit union trade 
association or its affiliates (not including chapters or other subunits 
of a state trade association);
    (7) For purposes of meeting the requirements of paragraphs (a)(5) 
and (a)(6) of this section, an individual may not serve as a director 
or chair of the board if that individual holds a subordinate employment 
relationship to another employee who serves as an officer, director, or 
employee of a credit union trade association;
    (8) In the case of a corporate credit union whose membership is 
composed of more than 25 percent non credit unions, the majority of 
directors serving as representatives of member credit unions, including 
the chair, must be elected only by member credit unions, and
    (9) After October 21, 2013, at least a majority of directors of 
every corporate credit union, including the chair of the board, must 
serve on the board as representatives of natural person credit union 
members.
* * * * *

0
17. Revise Sec.  704.19 to read as follows:


Sec.  704.19  Disclosure of executive and director compensation.

    (a) Annual disclosure. Corporate credit unions must annually 
prepare and maintain a disclosure of the compensation, in dollar terms, 
paid to its most highly compensated employees, in accordance with the 
following schedule:
    (1) For corporate credit unions with forty-one or more full time 
employees, disclosure is required of the compensation paid to the five 
most highly compensated employees;
    (2) For corporate credit unions with between thirty and forty-one 
full time employees, disclosure is required of the compensation paid to 
the four most highly compensated employees;
    (3) For corporate credit unions with thirty or fewer full time 
employees, disclosure is required of the compensation paid to the three 
most highly compensated employees; and
    (4) In all cases, compensation paid to the corporate credit union's 
chief executive officer must also be disclosed, if the chief executive 
officer is not already included among the most highly compensated 
employees described in paragraphs (a)(1) through (a)(3) of this 
section.
    (b) Availability of disclosure. Any member may obtain a copy of the 
most current disclosure, and all disclosures for the previous three 
years, on request made in person or in writing. The corporate credit 
union must provide the disclosure(s), at no cost to the member, within 
five business days of receiving the request. In addition, the corporate 
must distribute the most current disclosure to all its members at least 
once a year, either in the annual report or in some other manner of the 
corporate's choosing.
    (c) Supplemental information. In providing the disclosure required 
by this section, a corporate credit union may also provide 
supplementary information to put the disclosure in context, for 
example, salary surveys, a discussion of compensation in relation to 
other credit union expenses, or compensation information from

[[Page 64845]]

similarly sized credit unions or financial institutions.
    (d) Special rule for mergers. With respect to any merger involving 
a corporate credit union that would result in a material increase in 
compensation, i.e., an increase of more than 15 percent or $10,000, 
whichever is greater, for any senior executive officer or director of 
the merging corporate, the corporate must:
    (1) Describe the compensation arrangement in the merger plan 
documents submitted to NCUA for approval of the merger, pursuant to 
Sec.  708b of this part; and
    (2) In the case of any federally chartered corporate credit union, 
describe the compensation arrangement in the materials provided to the 
membership of the merging credit union before the member vote on 
approving the merger.
0
18. Add a new Sec.  704.20 to read as follows:


Sec.  704.20.  Limitations on golden parachute and indemnification 
payments.

    (a) Definitions. The following definitions apply for this section:
    (1) Board means the National Credit Union Administration Board.
    (2) Benefit plan means any plan, contract, agreement or other 
arrangement which is an ``employee welfare benefit plan'' as that term 
is defined in section 3(1) of the Employee Retirement Income Security 
Act of 1974, as amended (29 U.S.C. 1002(1)), or other usual and 
customary plans such as dependent care, tuition reimbursement, group 
legal services or cafeteria plans; provided however, that such term 
does not include any plan intended to be subject to paragraphs 
(a)(4)(iv)(C) and (E) of this section.
    (3) Bona fide deferred compensation plan or arrangement means any 
plan, contract, agreement or other arrangement whereby:
    (i) An institution-affiliated party (IAP) voluntarily elects to 
defer all or a portion of the reasonable compensation, wages or fees 
paid for services rendered which otherwise would have been paid to the 
IAP at the time the services were rendered (including a plan that 
provides for the crediting of a reasonable investment return on such 
elective deferrals) and the corporate credit union either:
    (A) Recognizes compensation expense and accrues a liability for the 
benefit payments according to Generally Accepted Accounting Principles 
(GAAP); or
    (B) Segregates or otherwise sets aside assets in a trust which may 
only be used to pay plan and other benefits, except that the assets of 
such trust may be available to satisfy claims of the institution's or 
holding company's creditors in the case of insolvency; or
    (ii) A corporate credit union establishes a nonqualified deferred 
compensation or supplemental retirement plan, other than an elective 
deferral plan described in paragraph (a)(3)(i) of this section:
    (A) Primarily for the purpose of providing benefits for certain 
IAPs in excess of the limitations on contributions and benefits imposed 
by Sections 415, 401(a)(17), 402(g) or any other applicable provision 
of the Internal Revenue Code of 1986 (26 USC 415, 401(a)(17), 402(g)); 
or
    (B) Primarily for the purpose of providing supplemental retirement 
benefits or other deferred compensation for a select group of 
directors, management or highly compensated employees (excluding 
severance payments described in paragraph (4)(ii)(E) of this section 
and permissible golden parachute payments described in Sec.  704.20(d); 
and
    (iii) In the case of any nonqualified deferred compensation or 
supplemental retirement plans as described in paragraphs (a)(3)(i) and 
(ii) of this section, the following requirements will apply:
    (A) The plan was in effect at least one year prior to any of the 
events described in paragraph (a)(4)(ii) of this section;
    (B) Any payment made pursuant to such plan is made in accordance 
with the terms of the plan as in effect no later than one year prior to 
any of the events described in paragraph (a)(4)(ii) of this section and 
in accordance with any amendments to such plan during such one year 
period that do not increase the benefits payable thereunder;
    (C) The IAP has a vested right, as defined under the applicable 
plan document, at the time of termination of employment to payments 
under such plan;
    (D) Benefits under such plan are accrued each period only for 
current or prior service rendered to the employer (except that an 
allowance may be made for service with a predecessor employer);
    (E) Any payment made pursuant to such plan is not based on any 
discretionary acceleration of vesting or accrual of benefits which 
occurs at any time later than one year prior to any of the events 
described in paragraph (a)(4)(ii) of this section;
    (F) The corporate credit union has previously recognized 
compensation expense and accrued a liability for the benefit payments 
according to GAAP or segregated or otherwise set aside assets in a 
trust which may only be used to pay plan benefits, except that the 
assets of such trust may be available to satisfy claims of the 
corporate credit union's creditors in the case of insolvency; and
    (G) Payments pursuant to such plans must not be in excess of the 
accrued liability computed in accordance with GAAP.
    (4) Golden parachute payment means any payment (or any agreement to 
make any payment) in the nature of compensation by any corporate credit 
union for the benefit of any current or former IAP pursuant to an 
obligation of such corporate credit union that:
    (i) Is contingent on, or by its terms is payable on or after, the 
termination of such IAP's primary employment or affiliation with the 
corporate credit union; and
    (ii) Is received on or after, or is made in contemplation of, any 
of the following events:
    (A) The insolvency (or similar event) of the corporate that is 
making the payment; or
    (B) The appointment of any conservator or liquidating agent for 
such corporate credit union; or
    (C) A determination by the Board or the appropriate state 
supervisory authority (in the case of a state-chartered corporate 
credit union) respectively, that the corporate credit union is in a 
troubled condition; or
    (D) The corporate credit union is undercapitalized, as defined in 
Sec.  704.4; or
    (E) The corporate credit union is subject to a proceeding to 
terminate or suspend its share account insurance; and
    (iii) Is payable to an IAP whose employment by or affiliation with 
the corporate is terminated at a time when the corporate credit union 
by which the IAP is employed or with which the IAP is affiliated 
satisfies any of the conditions enumerated in paragraphs (a)(4)(ii)(A) 
through (E) of this section, or in contemplation of any of these 
conditions.
    (iv) Exceptions. The term golden parachute payment does not 
include:
    (A) Any payment made pursuant to a pension or retirement plan which 
is qualified (or is intended within a reasonable period of time to be 
qualified) under Section 401 of the Internal Revenue Code of 1986 (26 
U.S.C. 401); or
    (B) Any payment made pursuant to a benefit plan as that term is 
defined in paragraph (a)(2) of this section; or
    (C) Any payment made pursuant to a bona fide deferred compensation 
plan or arrangement as defined in paragraph (a)(3) of this section; or

[[Page 64846]]

    (D) Any payment made by reason of death or by reason of termination 
caused by the disability of an IAP; or
    (E) Any payment made pursuant to a nondiscriminatory severance pay 
plan or arrangement which provides for payment of severance benefits to 
all eligible employees upon involuntary termination other than for 
cause, voluntary resignation, or early retirement; provided, however, 
that no employee will receive any such payment which exceeds the base 
compensation paid to such employee during the twelve months (or such 
longer period or greater benefit as the Board will consent to) 
immediately preceding termination of employment, resignation or early 
retirement, and such severance pay plan or arrangement must not have 
been adopted or modified to increase the amount or scope of severance 
benefits at a time when the corporate credit union was in a condition 
specified in paragraph (a)(4)(ii) of this section or in contemplation 
of such a condition without the prior written consent of the Board; or
    (F) Any severance or similar payment which is required to be made 
pursuant to a state statute which is applicable to all employers within 
the appropriate jurisdiction (with the exception of employers that may 
be exempt due to their small number of employees or other similar 
criteria); or
    (G) Any other payment which the Board determines to be permissible 
in accordance with Sec.  704.20(d).
    (5) Institution-affiliated party (IAP) means any individual meeting 
the criteria specified in section 206(r) of the Act (12 U.S.C. 
1786(r)).
    (6) Liability or legal expense means:
    (i) Any legal or other professional fees and expenses incurred in 
connection with any claim, proceeding, or action;
    (ii) The amount of, and any cost incurred in connection with, any 
settlement of any claim, proceeding, or action; and
    (iii) The amount of, and any cost incurred in connection with, any 
judgment or penalty imposed with respect to any claim, proceeding, or 
action.
    (7) Nondiscriminatory means that the plan, contract or arrangement 
in question applies to all employees of a corporate credit union who 
meet reasonable and customary eligibility requirements applicable to 
all employees, such as minimum length of service requirements. A 
nondiscriminatory plan, contract or arrangement may provide different 
benefits based only on objective criteria such as salary, total 
compensation, length of service, job grade or classification, which are 
applied on a proportionate basis (with a variance in severance benefits 
relating to any criterion of plus or minus ten percent) to groups of 
employees consisting of not less than the lesser of 33 percent of 
employees or 1,000 employees.
    (8) Payment means:
    (i) Any direct or indirect transfer of any funds or any asset;
    (ii) Any forgiveness of any debt or other obligation;
    (iii) The conferring of any benefit, including but not limited to 
stock options and stock appreciation rights; or
    (iv) Any segregation of any funds or assets, the establishment or 
funding of any trust or the purchase of or arrangement for any letter 
of credit or other instrument, for the purpose of making, or pursuant 
to any agreement to make, any payment on or after the date on which 
such funds or assets are segregated, or at the time of or after such 
trust is established or letter of credit or other instrument is made 
available, without regard to whether the obligation to make such 
payment is contingent on:
    (A) The determination, after such date, of the liability for the 
payment of such amount; or
    (B) The liquidation, after such date, of the amount of such 
payment.
    (9) Prohibited indemnification payment means any payment (or any 
agreement or arrangement to make any payment) by any corporate credit 
union for the benefit of any person who is or was an IAP of such 
corporate credit union, to pay or reimburse such person for any civil 
money penalty, judgment or other liability or legal expense resulting 
from any administrative or civil action instituted by the Board or any 
appropriate state regulatory authority that results in a final order or 
settlement pursuant to which such person:
    (i) Is assessed a civil money penalty;
    (ii) Is removed from office or prohibited from participating in the 
conduct of the affairs of the corporate credit union; or
    (iii) Is required to cease and desist from or take any affirmative 
action described in Section 206 of the Act with respect to such 
corporate credit union.
    (iv) Exceptions. The term prohibited indemnification payment does 
not include any reasonable payment by a corporate credit union that:
    (A) Is used to purchase any commercial insurance policy or fidelity 
bond, provided that such insurance policy or bond must not be used to 
pay or reimburse an IAP for the cost of any judgment or civil money 
penalty assessed against such person in an administrative proceeding or 
civil action commenced by NCUA or the appropriate state supervisory 
authority (in the case of a state chartered corporate), but may pay any 
legal or professional expenses incurred in connection with such 
proceeding or action or the amount of any restitution to the corporate 
credit union or its liquidating agent; or
    (B) Represents partial indemnification for legal or professional 
expenses specifically attributable to particular charges for which 
there has been a formal and final adjudication or finding in connection 
with a settlement that the IAP has not violated certain laws or 
regulations or has not engaged in certain unsafe or unsound practices 
or breaches of fiduciary duty, unless the administrative action or 
civil proceeding has resulted in a final prohibition order against the 
IAP.
    (10) Troubled Condition means that the corporate credit union:
    (i) Has been assigned:
    (A) A 4 or 5 Corporate Risk Information System (CRIS) rating by 
NCUA in either the Financial Risk or Risk Management composites, in the 
case of a federal corporate credit union, or
    (B) An equivalent 4 or 5 CRIS rating in either the Financial Risk 
or Risk Management composites by the state supervisory authority (SSA) 
in the case of a federally insured, state-chartered corporate credit 
union in a state that has adopted the CRIS system, or an equivalent 4 
or 5 CAMEL composite rating by the SSA in the case of a federally 
insured, state-chartered corporate credit union in a state that uses 
the CAMEL system, or
    (C) A 4 or 5 CRIS rating in either the Financial Risk or Risk 
Management composites by NCUA based on core work papers received from 
the SSA in the case of a federally insured, state-chartered credit 
union in a state that does not use either the CRIS or CAMEL system. In 
this case, the SSA will be notified in writing by the Director of the 
Office of Corporate Credit Unions that the corporate credit union has 
been designated by NCUA as a troubled institution; or
    (ii) Has been granted assistance as outlined under Sections 208 or 
216 of the Federal Credit Union Act.
    (b) Golden parachute payments prohibited. No corporate credit union 
will make or agree to make any golden parachute payment, except as 
otherwise provided in this section.
    (c) Prohibited indemnification payments. No corporate credit union 
will make or agree to make any

[[Page 64847]]

prohibited indemnification payment, except as provided in this section.
    (d) Permissible golden parachute payments. (1) A corporate credit 
union may agree to make or may make a golden parachute payment if and 
to the extent that:
    (i) Such an agreement is made in order to hire a person to become 
an IAP either at a time when the corporate credit union satisfies or in 
an effort to prevent it from imminently satisfying any of the criteria 
set forth in paragraph (a)(4)(ii) of this section, and the Board, 
consents in writing to the amount and terms of the golden parachute 
payment. Such consent by the Board must not improve the IAP's position 
in the event of the insolvency of the corporate credit union since such 
consent can neither bind a liquidating agent nor affect the provability 
of claims in liquidation. In the event that the institution is placed 
into conservatorship or liquidation, the conservator or the liquidating 
agent, as the case may be, will not be obligated to pay the promised 
golden parachute and the IAP will not be accorded preferential 
treatment on the basis of such prior approval; or
    (ii) Such a payment is made pursuant to an agreement which provides 
for a reasonable severance payment, not to exceed twelve months salary, 
to an IAP in the event of a merger with another corporate credit union; 
provided, however, that a corporate credit union must obtain the 
consent of the Board, before making such a payment and this paragraph 
(d)(1)(iii) does not apply to any merger between corporates that 
results from an assisted transaction as described in Section 208 of the 
Act (12 U.S.C. 1788) or the corporate credit union being placed into 
conservatorship or liquidation; or
    (iii) The Board, with the written concurrence of the appropriate 
state supervisory authority (in the case of a state-chartered 
corporate), determines that such a payment or agreement is permissible.
    (2) A corporate credit union making a request pursuant to 
paragraphs (d)(1)(i) through (iii) of this section must demonstrate 
that it does not possess and is not aware of any information, evidence, 
documents or other materials which would indicate that there is a 
reasonable basis to believe, at the time such payment is proposed to be 
made, that:
    (i) The IAP has committed any fraudulent act or omission, breach of 
trust or fiduciary duty, or insider abuse with regard to the corporate 
credit union that has had or is likely to have a material adverse 
effect on the corporate credit union;
    (ii) The IAP is substantially responsible for the insolvency of, 
the appointment of a conservator or liquidating agent for, or the 
troubled condition, as defined by Sec.  701.14(b)(4), of the corporate 
credit union;
    (iii) The IAP has materially violated any applicable federal or 
state banking law or regulation that has had or is likely to have a 
material effect on the corporate credit union; and
    (iv) The IAP has violated or conspired to violate Section 215, 656, 
657, 1005, 1006, 1007, 1014, 1032, or 1344 of Title 18 of the United 
States Code, or Section 1341 or 1343 of such title affecting a 
federally insured financial institution as defined in Title 18 of the 
United States Code.
    (3) In making a determination under paragraphs (d)(1)(i) through 
(iii) of this section, the Board may consider:
    (i) Whether, and to what degree, the IAP was in a position of 
managerial or fiduciary responsibility;
    (ii) The length of time the IAP was affiliated with the corporate 
credit union, and the degree to which the proposed payment represents a 
reasonable payment for services rendered over the period of employment; 
and
    (iii) Any other factors or circumstances which would indicate that 
the proposed payment would be contrary to the intent of Section 206(t) 
of the Act or this part.
    (e) Permissible indemnification payments. (1) A corporate credit 
union may make or agree to make reasonable indemnification payments to 
an IAP with respect to an administrative proceeding or civil action 
initiated by NCUA or a state regulatory authority if:
    (i) The corporate credit union's board of directors, in good faith, 
determines in writing after due investigation and consideration that 
the institution-affiliated party acted in good faith and in a manner 
he/she believed to be in the best interests of the membership;
    (ii) The corporate credit union's board of directors, in good 
faith, determines in writing after due investigation and consideration 
that the payment of such expenses will not materially adversely affect 
the institution's or holding company's safety and soundness;
    (iii) The indemnification payments do not constitute prohibited 
indemnification payments as that term is defined in Sec.  704.20(c); 
and
    (iv) The IAP agrees in writing to reimburse the corporate credit 
union, to the extent not covered by payments from insurance or bonds 
purchased pursuant to Sec.  704.20(a)(9)(iv)(A), for that portion of 
the advanced indemnification payments which subsequently become 
prohibited indemnification payments, as defined in Sec.  704.20(a)(9).
    (2) An IAP seeking indemnification payments must not participate in 
any way in the board's discussion and approval of such payments; 
provided, however, that such IAP may present his/her request to the 
board and respond to any inquiries from the board concerning his/her 
involvement in the circumstances giving rise to the administrative 
proceeding or civil action.
    (3) In the event that a majority of the members of the board of 
directors are named as respondents in an administrative proceeding or 
civil action and request indemnification, the remaining members of the 
board may authorize independent legal counsel to review the 
indemnification request and provide the remaining members of the board 
with a written opinion of counsel as to whether the conditions 
delineated in paragraph (e)(1) of this section have been met. If 
independent legal counsel opines that said conditions have been met, 
the remaining members of the board of directors may rely on such 
opinion in authorizing the requested indemnification.
    (4) In the event that all of the members of the board of directors 
are named as respondents in an administrative proceeding or civil 
action and request indemnification, the board will authorize 
independent legal counsel to review the indemnification request and 
provide the board with a written opinion of counsel as to whether the 
conditions delineated in paragraph (e)(1) of this section have been 
met. If independent legal counsel opines that said conditions have been 
met, the board of directors may rely on such opinion in authorizing the 
requested indemnification.
    (f) Filing instructions. Requests to make excess nondiscriminatory 
severance plan payments pursuant to Sec.  704.20(a)(4)(iv)(E) and 
golden parachute payments permitted by Sec.  704.20(d) must be 
submitted in writing to the Board. The request must be in letter form 
and must contain all relevant factual information as well as the 
reasons why such approval should be granted.
    (g) Applicability in the event of liquidation or conservatorship. 
The provisions of this part, or any consent or approval granted under 
the provisions of this part by the Board, will not in any way bind any 
liquidating agent or conservator for a failed corporate credit union 
and will not in any way obligate the liquidating agent or conservator 
to pay any claim or obligation pursuant to any golden

[[Page 64848]]

parachute, severance, indemnification or other agreement. Claims for 
employee welfare benefits or other benefits that are contingent, even 
if otherwise vested, when a liquidating agent or conservator is 
appointed for any corporate credit union, including any contingency for 
termination of employment, are not provable claims or actual, direct 
compensatory damage claims against such liquidating agent or 
conservator. Nothing in this part may be construed to permit the 
payment of salary or any liability or legal expense of any IAP contrary 
to 12 U.S.C. 1786(t)(3).


0
19. Revise Appendix A to part 704 to read as follows:

Appendix A to Part 704--Capital Prioritization and Model Forms

Part I--Optional Capital Prioritization

    Notwithstanding any other provision in this chapter, a corporate 
credit union, at its option, may determine that capital contributed 
to the corporate on or after January 18, 2011 will have priority, 
for purposes of availability to absorb losses and payout in 
liquidation, over capital contributed to the corporate before that 
date. The board of directors at a corporate credit union that 
desires to make this determination must:
    (a) On or before January 18, 2011, adopt a resolution 
implementing its determination.
    (b) Inform the credit union's members and NCUA, in writing and 
as soon as practicable after adoption of the resolution, of the 
contents of the board resolution.
    (c) Ensure the credit union uses the appropriate initial and 
periodic Model Form disclosures in Part II below.

Part II--Model Forms

    Part II contains model forms intended for use by corporate 
credit unions to aid in compliance with the capital disclosure 
requirements of Sec.  704.3 and Part I of this Appendix.

Model Form A

Terms and Conditions of Membership Capital Account

    Note:  This form is for use before October 20, 2011 in the 
circumstances where the credit union has determined NOT to give 
newly issued capital priority over older capital as described in 
Part I of this Appendix.

    (1) A membership capital account is not subject to share 
insurance coverage by the NCUSIF or other deposit insurer.
    (2) A membership capital account is not releasable due solely to 
the merger, charter conversion or liquidation of the member credit 
union. In the event of a merger, the membership capital account 
transfers to the continuing credit union. In the event of a charter 
conversion, the membership capital account transfers to the new 
institution. In the event of liquidation, the membership capital 
account may be released to facilitate the payout of shares with the 
prior written approval of NCUA.
    (3) A member credit union may withdraw membership capital with 
three years' notice.
    (4) Membership capital cannot be used to pledge borrowings.
    (5) Membership capital is available to cover losses that exceed 
retained earnings and paid-in capital.
    (6) Where the corporate credit union is liquidated, membership 
capital accounts are payable only after satisfaction of all 
liabilities of the liquidation estate including uninsured 
obligations to shareholders and the NCUSIF.
    (7) Where the corporate credit union is merged into another 
corporate credit union, the membership capital account will transfer 
to the continuing corporate credit union. The three-year notice 
period for withdrawal of the membership capital account will remain 
in effect.
    (8) If an adjusted balance account--: The membership capital 
balance will be adjusted--(1 or 2)--time(s) annually in relation to 
the member credit union's--(assets or other measure)-- as of--
(date(s))--. If a term certificate--: The membership capital account 
is a term certificate that will mature on--(date)--.
    I have read the above terms and conditions and I understand 
them.
    I further agree to maintain in the credit union's files the 
annual notice of terms and conditions of the membership capital 
account.
    The notice form must be signed by either all of the directors of 
the member credit union or, if authorized by board resolution, the 
chair and secretary of the board of the credit union.
    The annual disclosure notice form must be signed by the chair of 
the corporate credit union. The chair must then sign a statement 
that certifies that the notice has been sent to member credit unions 
with membership capital accounts. The certification must be 
maintained in the corporate credit union's files and be available 
for examiner review.

Model Form B

Terms and Conditions of Membership Capital Account

    Note:  This form is for use before October 20, 2011 in the 
circumstances where the credit union has determined THAT IT WILL 
give newly issued capital priority over older capital as described 
in Part I of this Appendix.

    (1) A membership capital account is not subject to share 
insurance coverage by the NCUSIF or other deposit insurer.
    (2) A membership capital account is not releasable due solely to 
the merger, charter conversion or liquidation of the member credit 
union. In the event of a merger, the membership capital account 
transfers to the continuing credit union. In the event of a charter 
conversion, the membership capital account transfers to the new 
institution. In the event of liquidation, the membership capital 
account may be released to facilitate the payout of shares with the 
prior written approval of NCUA.
    (3) A member credit union may withdraw membership capital with 
three years' notice.
    (4) Membership capital cannot be used to pledge borrowings.
    (5)(a) Membership capital that is issued on or after January 18, 
2011, is available to cover losses that exceed retained earnings, 
contributed capital issued before January 18, 2011, and perpetual 
capital issued on or after January 18, 2011. Any such losses will be 
distributed pro rata, at the time the loss is realized, among 
membership capital account holders with accounts issued on or after 
January 18, 2011. To the extent that NCA funds are used to cover 
losses, the corporate credit union is prohibited from restoring or 
replenishing the affected accounts under any circumstances.
    (b) Membership capital that is issued before January 18, 2011 is 
available to cover losses that exceed retained earnings and 
perpetual capital issued before January 18, 2011. Any such losses 
will be distributed pro rata, at the time the loss is realized, 
among membership capital account holders with accounts issued before 
January 18, 2011. To the extent that NCA funds are used to cover 
losses, the corporate credit union is prohibited from restoring or 
replenishing the affected accounts under any circumstances.
    (c) Attached to this disclosure is a statement that describes 
the amount of NCA the credit union has with the corporate credit 
union in each of the categories described in paragraphs (5)(a) and 
(5)(b) above.
    (6) If the corporate credit union is liquidated:
    (a) Membership capital accounts issued on or after January 18, 
2011 are payable only after satisfaction of all liabilities of the 
liquidation estate including uninsured obligations to shareholders 
and the NCUSIF, but not including contributed capital accounts 
issued before January 18, 2011 and perpetual capital accounts issued 
on or after January 18, 2011. However, membership capital that is 
used to cover losses in a calendar year previous to the year of 
liquidation has no claim against the liquidation estate.
    (b) Membership capital accounts issued before January 18, 2011, 
are payable only after satisfaction of all liabilities of the 
liquidation estate including uninsured obligations to shareholders 
and the NCUSIF, but not including perpetual capital accounts issued 
before January 18, 2011. However, membership capital that is used to 
cover losses in a calendar year previous to the year of liquidation 
has no claim against the liquidation estate.
    (7) Where the corporate credit union is merged into another 
corporate credit union, the membership capital account will transfer 
to the continuing corporate credit union. The three-year notice 
period for withdrawal of the membership capital account will remain 
in effect.
    (8) If an adjusted balance account--: The membership capital 
balance will be adjusted--(1 or 2)--time(s) annually in relation to 
the member credit union's--(assets or other measure)--as of --
(date(s))--. If a term certificate--: The membership capital account 
is a term certificate that will mature on--(date)--.
    I have read the above terms and conditions and I understand 
them.
    I further agree to maintain in the credit union's files the 
annual notice of terms and

[[Page 64849]]

conditions of the membership capital account.
    The notice form must be signed by either all of the directors of 
the member credit union or, if authorized by board resolution, the 
chair and secretary of the board of the credit union.
    The annual disclosure notice form must be signed by the chair of 
the corporate credit union. The chair must then sign a statement 
that certifies that the notice has been sent to member credit unions 
with membership capital accounts. The certification must be 
maintained in the corporate credit union's files and be available 
for examiner review.

Model Form C

Terms and Conditions of Nonperpetual Capital

    Note: This form is for use on and after October 20, 2011 in the 
circumstances where the credit union has determined NOT to give 
newly issued capital priority over older capital as described in 
Part I of this Appendix. Also, corporate credit unions should ensure 
that existing membership capital accounts that do not meet the 
qualifying conditions for nonperpetual capital are modified so as to 
meet those conditions.

Terms and Conditions of Nonperpetual Capital Account

    (1) A nonperpetual capital account is not subject to share 
insurance coverage by the NCUSIF or other deposit insurer.
    (2) A nonperpetual capital account is not releasable due solely 
to the merger, charter conversion or liquidation of the member 
credit union. In the event of a merger, the nonperpetual capital 
account transfers to the continuing credit union. In the event of a 
charter conversion, the nonperpetual capital account transfers to 
the new institution. In the event of liquidation, the nonperpetual 
capital account may be released to facilitate the payout of shares 
with the prior written approval of NCUA.
    (3) If the nonperpetual capital account is a notice account, a 
member credit union may withdraw the nonperpetual capital with a 
minimum of five years' notice. If the nonperpetual capital account 
is a term instrument it may be redeemed only at maturity. The 
corporate credit union may not redeem any account prior to the 
expiration of the notice period, or maturity, without the prior 
written approval of the NCUA.
    (4) Nonperpetual capital cannot be used to pledge borrowings.
    (5) Nonperpetual capital is available to cover losses that 
exceed retained earnings and perpetual contributed capital. Any such 
losses will be distributed pro rata among nonperpetual capital 
account holders at the time the loss is realized. To the extent that 
NCA funds are used to cover losses, the corporate credit union is 
prohibited from restoring or replenishing the affected accounts 
under any circumstances.
    (6) Where the corporate credit union is liquidated, nonperpetual 
capital accounts are payable only after satisfaction of all 
liabilities of the liquidation estate including uninsured 
obligations to shareholders and the NCUSIF. However, nonperpetual 
capital that is used to cover losses in a calendar year previous to 
the year of liquidation has no claim against the liquidation estate.
    (7) Where the corporate credit union is merged into another 
corporate credit union, the nonperpetual capital account will 
transfer to the continuing corporate credit union. For notice 
accounts, the five-year notice period for withdrawal of the 
nonperpetual capital account will remain in effect. For term 
accounts, the original term will remain in effect.
    (8) If a term certificate--: The nonperpetual capital account is 
a term certificate that will mature on--(date)--(insert date with a 
minimum five-year original maturity).
    I have read the above terms and conditions and I understand 
them.
    I further agree to maintain in the credit union's files the 
annual notice of terms and conditions of the nonperpetual capital 
account.
    The notice form must be signed by either all of the directors of 
the member credit union or, if authorized by board resolution, the 
chair and secretary of the board of the credit union.
    The annual disclosure notice form must be signed by the chair of 
the corporate credit union. The chair must then sign a statement 
that certifies that the notice has been sent to member credit unions 
with nonperpetual capital accounts. The certification must be 
maintained in the corporate credit union's files and be available 
for examiner review.

Model Form D

Terms and Conditions of Nonperpetual Capital

    Note: This form is for use before October 20, 2011 in the 
circumstances where the credit union has determined THAT IT WILL 
give newly issued capital priority over older capital as described 
in Part I of this Appendix. Also, corporate credit unions should 
ensure that existing membership capital accounts that do not meet 
the qualifying conditions for nonperpetual capital are modified so 
as to meet those conditions.

Terms and Conditions of Nonperpetual Capital Account

    (1) A nonperpetual capital account is not subject to share 
insurance coverage by the NCUSIF or other deposit insurer.
    (2) A nonperpetual capital account is not releasable due solely 
to the merger, charter conversion or liquidation of the member 
credit union. In the event of a merger, the nonperpetual capital 
account transfers to the continuing credit union. In the event of a 
charter conversion, the nonperpetual capital account transfers to 
the new institution. In the event of liquidation, the nonperpetual 
capital account may be released to facilitate the payout of shares 
with the prior written approval of NCUA.
    (3) If the nonperpetual capital account is a notice account, a 
member credit union may withdraw the nonperpetual capital with a 
minimum of five years' notice. If the nonperpetual capital account 
is a term instrument it may be redeemed only at maturity. The 
corporate credit union may not redeem any account prior to the 
expiration of the notice period, or maturity, without the prior 
written approval of the NCUA.
    (4) Nonperpetual capital cannot be used to pledge borrowings.
    (5)(a) Nonperpetual capital that is issued on or after January 
18, 2011 is available to cover losses that exceed retained earnings, 
all contributed capital issued before January 18, 2011, and 
perpetual capital issued on or after January 18, 2011. Any such 
losses will be distributed pro rata, at the time the loss is 
realized, among nonperpetual capital account holders with accounts 
issued on or after January 18, 2011. To the extent that NCA funds 
are used to cover losses, the corporate credit union is prohibited 
from restoring or replenishing the affected accounts under any 
circumstances.
    (b) Nonperpetual capital that is issued before January 18, 2011, 
is available to cover losses that exceed retained earnings and 
perpetual capital issued before January 18, 2011. Any such losses 
will be distributed pro rata, at the time the loss is realized, 
among nonperpetual capital account holders with accounts issued 
before January 18, 2011. To the extent that NCA funds are used to 
cover losses, the corporate credit union is prohibited from 
restoring or replenishing the affected accounts under any 
circumstances.
    (c) Attached to this disclosure is a statement that describes 
the amount of NCA the credit union has with the corporate credit 
union in each of the categories described in paragraphs (5)(a) and 
(5)(b) above.
    (6) If the corporate credit union is liquidated:
    (a) Nonperpetual capital accounts issued on or after January 18, 
2011 are payable only after satisfaction of all liabilities of the 
liquidation estate including uninsured obligations to shareholders 
and the NCUSIF, but not including contributed capital accounts 
issued before January 18, 2011 or perpetual capital accounts issued 
on or after January 18, 2011. However, nonperpetual capital that is 
used to cover losses in a calendar year previous to the year of 
liquidation has no claim against the liquidation estate.
    (b) Nonperpetual capital accounts issued before January 18, 2011 
are payable only after satisfaction of all liabilities of the 
liquidation estate including uninsured obligations to shareholders 
and the NCUSIF, but not including perpetual capital accounts issued 
before January 18, 2011. However, nonperpetual capital that is used 
to cover losses in a calendar year previous to the year of 
liquidation has no claim against the liquidation estate.
    (7) Where the corporate credit union is merged into another 
corporate credit union, the nonperpetual capital account will 
transfer to the continuing corporate credit union. For notice 
accounts, the five-year notice period for withdrawal of the 
nonperpetual capital account will remain in effect. For term 
accounts, the original term will remain in effect.
    (8) If a term certificate--: The nonperpetual capital account is 
a term certificate that will mature on--(date)--(insert date with a 
minimum five-year original maturity).
    I have read the above terms and conditions and I understand 
them.

[[Page 64850]]

    I further agree to maintain in the credit union's files the 
annual notice of terms and conditions of the nonperpetual capital 
account.
    The notice form must be signed by either all of the directors of 
the member credit union or, if authorized by board resolution, the 
chair and secretary of the board of the credit union.
    The annual disclosure notice form must be signed by the chair of 
the corporate credit union. The chair must then sign a statement 
that certifies that the notice has been sent to member credit unions 
with nonperpetual capital accounts. The certification must be 
maintained in the corporate credit union's files and be available 
for examiner review.

Model Form E

Terms and Conditions of Paid-In Capital

    Note: This form is for use before October 20, 2011 in the 
circumstances where the credit union has determined NOT to give 
newly issued capital priority over older capital as described in 
Part I of this Appendix.

Terms and Conditions of Paid-In Capital

    (1) A paid-in capital account is not subject to share insurance 
coverage by the NCUSIF or other deposit insurer.
    (2) A paid-in capital account is not releasable due solely to 
the merger, charter conversion or liquidation of the member credit 
union. In the event of a merger, the paid-in capital account 
transfers to the continuing credit union. In the event of a charter 
conversion, the paid-in capital account transfers to the new 
institution. In the event of liquidation, the paid-in capital 
account may be released to facilitate the payout of shares with the 
prior written approval of NCUA.
    (3) The funds are callable only at the option of the corporate 
credit union and only if the corporate credit union meets its 
minimum required capital and NEV ratios after the funds are called. 
The corporate must also obtain NCUA's approval before the corporate 
calls any paid-in capital.
    (4) Paid-in capital cannot be used to pledge borrowings.
    (5) Paid-in capital is available to cover losses that exceed 
retained earnings.
    (6) Where the corporate credit union is liquidated, paid-in 
capital accounts are payable only after satisfaction of all 
liabilities of the liquidation estate including uninsured 
obligations to shareholders and the NCUSIF, and membership capital 
holders.
    (7) Where the corporate credit union is merged into another 
corporate credit union, the paid-in capital account will transfer to 
the continuing corporate credit union.
    (8) Paid-in capital is perpetual maturity and noncumulative 
dividend.
    I have read the above terms and conditions and I understand 
them. I further agree to maintain in the credit union's files the 
annual notice of terms and conditions of the paid-in capital 
instrument.
    The notice form must be signed by either all of the directors of 
the credit union or, if authorized by board resolution, the chair 
and secretary of the board of the credit union.

Model Form F

Terms and Conditions of Paid-In Capital

    Note: This form is for use before October 20, 2011 in the 
circumstances where the credit union has determined THAT IT WILL 
give newly issued capital priority over older capital as described 
in Part I of this Appendix.

Terms and Conditions of Paid-In Capital

    (1) A paid-in capital account is not subject to share insurance 
coverage by the NCUSIF or other deposit insurer.
    (2) A paid-in capital account is not releasable due solely to 
the merger, charter conversion or liquidation of the member credit 
union. In the event of a merger, the paid-in capital account 
transfers to the continuing credit union. In the event of a charter 
conversion, the paid-in capital account transfers to the new 
institution. In the event of liquidation, the paid-in capital 
account may be released to facilitate the payout of shares with the 
prior written approval of NCUA.
    (3) The funds are callable only at the option of the corporate 
credit union and only if the corporate credit union meets its 
minimum required capital and NEV ratios after the funds are called. 
The corporate must also obtain NCUA's approval before the corporate 
calls any paid-in capital.
    (4) Paid-in capital cannot be used to pledge borrowings.
    (5) Availability to cover losses.
    (a) Paid-in capital issued before January 18, 2011 is available 
to cover losses that exceed retained earnings. Any such losses must 
be distributed pro rata, at the time the loss is realized, among 
holders of paid-in capital issued before January 18, 2011. To the 
extent that paid-in capital funds are used to cover losses, the 
corporate credit union is prohibited from restoring or replenishing 
the affected accounts under any circumstances.
    (b) Paid-in capital issued on or after January 18, 2011 is 
available to cover losses that exceed retained earnings and any 
contributed capital issued before January 18, 2011. Any such losses 
must be distributed pro rata, at the time the loss is realized, 
among holders of paid-in capital issued on or after January 18, 
2011. To the extent that paid-in capital funds are used to cover 
losses, the corporate credit union is prohibited from restoring or 
replenishing the affected accounts under any circumstances.
    (c) Attached to this disclosure is a statement that describes 
the amount of perpetual capital the credit union has with the 
corporate credit union in each of the categories described in 
paragraphs (5)(a) and (5)(b) above.
    (6) Where the corporate credit union is liquidated:
    (a) Paid-in capital accounts issued on or after January 18, 2011 
are payable only after satisfaction of all liabilities of the 
liquidation estate including uninsured obligations to shareholders 
and the NCUSIF, but not including contributed capital accounts 
issued before January 18, 2011. However, paid-in capital that is 
used to cover losses in a calendar year previous to the year of 
liquidation has no claim against the liquidation estate.
    (b) Paid-in capital accounts issued before January 18, 2011 are 
payable only after satisfaction of all liabilities of the 
liquidation estate including uninsured obligations to shareholders 
and the NCUSIF, nonperpetual accounts issued before January 18, 2011 
and contributed capital accounts issued on or after January 18, 
2011. However, paid-in capital that is used to cover losses in a 
calendar year previous to the year of liquidation has no claim 
against the liquidation estate.
    (7) Where the corporate credit union is merged into another 
corporate credit union, the paid-in capital account will transfer to 
the continuing corporate credit union.
    (8) Paid-in capital is perpetual maturity and noncumulative 
dividend.
    I have read the above terms and conditions and I understand 
them. I further agree to maintain in the credit union's files the 
annual notice of terms and conditions of the paid-in capital 
instrument.
    The notice form must be signed by either all of the directors of 
the credit union or, if authorized by board resolution, the chair 
and secretary of the board of the credit union.

Model Form G

Terms and Conditions of Perpetual Contributed Capital

    Note:  This form is for use on and after October 20, 2011 in the 
circumstances where the credit union has determined NOT to give 
newly issued capital priority over older capital as described in 
Part I of this Appendix. Also, capital previously issued under the 
nomenclature ``paid-in capital'' is considered perpetual contributed 
capital.

    (1) A perpetual contributed capital account is not subject to 
share insurance coverage by the NCUSIF or other deposit insurer.
    (2) A perpetual contributed capital account is not releasable 
due solely to the merger, charter conversion or liquidation of the 
member credit union. In the event of a merger, the perpetual 
contributed capital account transfers to the continuing credit 
union. In the event of a charter conversion, the perpetual 
contributed capital account transfers to the new institution. In the 
event of liquidation, the perpetual contributed capital account may 
be released to facilitate the payout of shares with the prior 
written approval of NCUA.
    (3) The funds are callable only at the option of the corporate 
credit union and only if the corporate credit union meets its 
minimum required capital and NEV ratios after the funds are called. 
The corporate must also obtain the prior, written approval of the 
NCUA before releasing any perpetual contributed capital funds.
    (4) Perpetual contributed capital cannot be used to pledge 
borrowings.
    (5) Perpetual contributed capital is perpetual maturity and 
noncumulative dividend.
    (6) Perpetual contributed capital is available to cover losses 
that exceed retained earnings. Any such losses must be distributed 
pro rata among perpetual contributed capital holders at the time the 
loss is realized. To the extent that perpetual contributed capital 
funds are used to cover losses, the corporate credit union is

[[Page 64851]]

prohibited from restoring or replenishing the affected accounts 
under any circumstances.
    (7) Where the corporate credit union is liquidated, perpetual 
contributed capital accounts are payable only after satisfaction of 
all liabilities of the liquidation estate including uninsured 
obligations to shareholders and the NCUSIF, and nonperpetual capital 
holders. However, perpetual contributed capital that is used to 
cover losses in a calendar year previous to the year of liquidation 
has no claim against the liquidation estate.
    I have read the above terms and conditions and I understand 
them. I further agree to maintain in the credit union's files the 
annual notice of terms and conditions of the perpetual contributed 
capital instrument.
    The notice form must be signed by either all of the directors of 
the credit union or, if authorized by board resolution, the chair 
and secretary of the board of the credit union.

Model Form H

Terms and Conditions of Perpetual Contributed Capital

    Note:  This form is for use before October 20, 2011 in the 
circumstances where the credit union has determined THAT IT WILL 
give newly issued capital priority over older capital as described 
in Part I of this Appendix. Also, capital previously issued under 
the nomenclature ``paid-in capital'' is considered perpetual 
contributed capital.

    (1) A perpetual contributed capital account is not subject to 
share insurance coverage by the NCUSIF or other deposit insurer.
    (2) A perpetual contributed capital account is not releasable 
due solely to the merger, charter conversion or liquidation of the 
member credit union. In the event of a merger, the perpetual 
contributed capital account transfers to the continuing credit 
union. In the event of a charter conversion, the perpetual 
contributed capital account transfers to the new institution. In the 
event of liquidation, the perpetual contributed capital account may 
be released to facilitate the payout of shares with the prior 
written approval of NCUA.
    (3) The funds are callable only at the option of the corporate 
credit union and only if the corporate credit union meets its 
minimum required capital and NEV ratios after the funds are called. 
The corporate must also obtain the prior, written approval of the 
NCUA before releasing any perpetual contributed capital funds.
    (4) Perpetual contributed capital cannot be used to pledge 
borrowings.
    (5) Perpetual contributed capital is perpetual maturity and 
noncumulative dividend.
    (6) Availability to cover losses.
    (a) Perpetual contributed capital issued before January 18, 2011 
is available to cover losses that exceed retained earnings. Any such 
losses must be distributed pro rata, at the time the loss is 
realized, among holders of perpetual contributed capital issued 
before January 18, 2011. To the extent that perpetual contributed 
capital funds are used to cover losses, the corporate credit union 
is prohibited from restoring or replenishing the affected accounts 
under any circumstances.
    (b) Perpetual contributed capital issued on or after January 18, 
2011 is available to cover losses that exceed retained earnings and 
any contributed capital issued before January 18, 2011. Any such 
losses must be distributed pro rata, at the time the loss is 
realized, among holders of perpetual contributed capital issued on 
or after January 18, 2011. To the extent that perpetual contributed 
capital funds are used to cover losses, the corporate credit union 
is prohibited from restoring or replenishing the affected accounts 
under any circumstances.
    (c) Attached to this disclosure is a statement that describes 
the amount of perpetual capital the credit union has with the 
corporate credit union in each of the categories described in 
paragraphs (6)(a) and (6)(b) above.
    (7) Where the corporate credit union is liquidated:
    (a) Perpetual contributed capital accounts issued on or after 
January 18, 2011 are payable only after satisfaction of all 
liabilities of the liquidation estate including uninsured 
obligations to shareholders and the NCUSIF, but not including 
contributed capital accounts issued before January 18, 2011. 
However, perpetual contributed capital that is used to cover losses 
in a calendar year previous to the year of liquidation has no claim 
against the liquidation estate.
    (b) Perpetual contributed capital accounts issued before January 
18, 2011 are payable only after satisfaction of all liabilities of 
the liquidation estate including uninsured obligations to 
shareholders and the NCUSIF, nonperpetual capital accounts issued 
before January 18, 2011, and all contributed capital accounts issued 
on or after January 18, 2011. However, perpetual contributed capital 
that is used to cover losses in a calendar year previous to the year 
of liquidation has no claim against the liquidation estate.
    I have read the above terms and conditions and I understand 
them. I further agree to maintain in the credit union's files the 
annual notice of terms and conditions of the perpetual contributed 
capital instrument.
    The notice form must be signed by either all of the directors of 
the credit union or, if authorized by board resolution, the chair 
and secretary of the board of the credit union.


0
21. Revise Appendix B to Part 704 to read as follows:

Appendix B to Part 704--Expanded Authorities and Requirements

    A corporate credit union may obtain all or part of the expanded 
authorities contained in this Appendix if it meets the applicable 
requirements of Part 704 and Appendix B, fulfills additional 
management, infrastructure, and asset and liability requirements, 
and receives NCUA's written approval. Additional guidance is set 
forth in the NCUA publication Guidelines for Submission of Requests 
for Expanded Authority.
    A corporate credit union seeking expanded authorities must 
submit to NCUA a self-assessment plan supporting its request. A 
corporate credit union may adopt expanded authorities when NCUA has 
provided final approval. If NCUA denies a request for expanded 
authorities, it will advise the corporate credit union of the 
reason(s) for the denial and what it must do to resubmit its 
request. NCUA may revoke these expanded authorities at any time if 
an analysis indicates a significant deficiency. NCUA will notify the 
corporate credit union in writing of the identified deficiency. A 
corporate credit union may request, in writing, reinstatement of the 
revoked authorities by providing a self-assessment plan detailing 
how it has corrected the deficiency.
    A state chartered corporate credit union may not exercise any 
expanded authority that exceeds the powers and authorities provided 
for under its state laws. Accordingly, requests by state chartered 
corporate credit unions for expansions under this part must be 
approved by the state regulator before being submitted to NCUA.

Minimum Requirement

    In order to participate in any of the authorities set forth in 
Base-Plus, Part I, Part II, Part III, or Part IV of this Appendix, a 
corporate credit union must evaluate monthly, including once on the 
last day of the month, the changes in NEV, NEV ratio, NII, WAL, and 
duration as required by paragraphs (d)(1)(i), (e), (f), (g), and (i) 
of Sec.  704.8.

Base-Plus

    A corporate that has met the requirements for this Base-plus 
authority may, in performing the rate stress tests set forth in 
704.8(d)(1)(i), allow its NEV to decline as much as 20 percent.

Part I

    (a) A corporate credit union that has met all the requirements 
established by NCUA for this Part I, including a minimum capital 
ratio of at least six percent, may:
    (1) Purchase investments with long-term ratings no lower than A- 
(or equivalent);
    (2) Purchase investments with short-term ratings no lower than 
A-2 (or equivalent), provided that the issuer has a long-term rating 
no lower than A- (or equivalent) or the investment is a 
domestically-issued asset-backed security;
    (3) Engage in short sales of permissible investments to reduce 
interest rate risk;
    (4) Purchase principal only (PO) stripped mortgage-backed 
securities to reduce interest rate risk; and
    (5) Enter into a dollar roll transaction.
    (b) In performing the rate stress tests set forth in Sec.  
704.8(d), the NEV of a corporate credit union that has met the 
requirements of this Part I may decline as much as:
    (1) 20 percent;
    (2) 28 percent if the corporate credit union has a seven percent 
minimum capital ratio and is specifically approved by NCUA; or
    (3) 35 percent if the corporate credit union has an eight 
percent minimum capital ratio and is specifically approved by NCUA.
    (c) The maximum aggregate amount in unsecured loans and lines of 
credit to any one member credit union, excluding pass-through and 
guaranteed loans from the CLF and the NCUSIF, must not exceed 100 
percent of the corporate credit union's capital. The board of 
directors must establish the limit, as a percent of the corporate 
credit

[[Page 64852]]

union's capital plus pledged shares, for secured loans and lines of 
credit.
    (d) The aggregate total of investments purchased under the 
authority of Part I (a)(1) and Part I (a)(2) may not exceed the 
lower of 500 percent of the corporate credit union's capital or 25 
percent of assets.
    (e) On or after October 20, 2011, corporate credit unions will 
substitute ``leverage ratio'' for ``capital ratio'' wherever it 
appears in Part I.

Part II

    (a) A corporate credit union that has met the requirements of 
Part I of this Appendix and the additional requirements established 
by NCUA for Part II may invest in:
    (1) Debt obligations of a foreign country;
    (2) Deposits and debt obligations of foreign banks or 
obligations guaranteed by these banks;
    (3) Marketable debt obligations of foreign corporations. This 
authority does not apply to debt obligations that are convertible 
into the stock of the corporation; and
    (4) Foreign issued asset-backed securities.
    (b) All foreign investments are subject to the following 
requirements:
    (1) Investments must be rated no lower than the minimum 
permissible domestic rating under the corporate credit union's Part 
I authority;
    (2) A sovereign issuer, and/or the country in which an obligor 
is organized, must have a long-term foreign currency (non-local 
currency) debt rating no lower than AA- (or equivalent);
    (3) For each approved foreign bank line, the corporate credit 
union must identify the specific banking centers and branches to 
which it will lend funds;
    (4) Obligations of any single foreign obligor may not exceed 25 
percent of capital or $5 million, whichever is greater; and
    (5) Obligations in any single foreign country may not exceed 250 
percent of capital.

Part III

    (a) A corporate credit union that has met the requirements 
established by NCUA for this Part III may enter into derivative 
transactions specifically approved by NCUA to:
    (1) Create structured products;
    (2) Mitigate interest rate risk and credit risk on its own 
balance sheet; and
    (3) Hedge the balance sheets of its members.
    (b) Credit Ratings:
    (1) All derivative transactions are subject to the following 
requirements:
    (i) If the intended counterparty is domestic, the counterparty 
rating must be no lower than A- (or equivalent) by every NRSRO that 
provides a publicly available long-term rating on the counterparty;
    (ii) If the intended counterparty is foreign, the corporate must 
have Part II expanded authority and the counterparty rating must be 
no lower than the minimum permissible rating for a comparable term 
investment under Part II Authority;
    (iii) The corporate must identify the rating(s) relied upon to 
meet the requirements of this part at the time the transaction is 
entered into and monitor those ratings for as long as the contract 
remains open; and
    (iv) The corporate credit unions must comply with Sec.  704.10 
of this part if any rating relied upon to meet the requirements of 
paragraphs (b)(1)(i) or (ii) of this part is downgraded below the 
minimum rating requirements.
    (2) Exceptions. Credit ratings are not required for derivative 
transactions with:
    (i) Domestically chartered credit unions;
    (ii) U.S. government sponsored enterprises; or
    (iii) Counterparties where the transaction is fully guaranteed 
by an entity with a minimum permissible rating for comparable term 
investments.

Part IV

    A corporate credit union that has met all the requirements 
established by NCUA for this Part IV may participate in loans with 
member natural person credit unions as approved by the NCUA and 
subject to the following:
    (a) The maximum aggregate amount of participation loans with any 
one member credit union must not exceed 25 percent of capital; and
    (b) The maximum aggregate amount of participation loans with all 
member credit unions will be determined on a case-by-case basis by 
the NCUA.


0
22. Add a new Appendix C to Part 704 to read as follows:

Appendix C to Part 704--Risk-Based Capital Credit Risk-Weight 
Categories

Table of Contents

I. Introduction
    (a) Scope
    (b) Definitions
II. Risk-Weightings
    (a) On-balance sheet assets
    (b) Off-balance sheet activities
    (c) Recourse obligations, direct credit substitutes, and certain 
other positions
    (d) Collateral

Part I: Introduction

(a) Scope

    (1) This Appendix explains how a corporate credit union must 
compute its risk-weighted assets for purposes of determining its 
capital ratios.
    (2) Risk-weighted assets equal risk-weighted on-balance sheet 
assets (computed under Section II(a) of this Appendix), plus risk-
weighted off-balance sheet activities (computed under Section II(b) 
of this Appendix), plus risk-weighted recourse obligations, direct 
credit substitutes, and certain other positions (computed under 
Section II(c) of this Appendix).
    (3) Assets not included (i.e., deducted from capital) for 
purposes of calculating capital under part 704 are not included in 
calculating risk-weighted assets.
    (4) Although this Appendix describes risk-weightings for various 
assets and activities, this Appendix does not provide authority for 
corporate credit unions to invest in or purchase any particular type 
of asset or to engage in any particular type of activity. A 
corporate credit union must have other identifiable authority for 
any investment it makes or activity it engages in. So, for example, 
this Appendix describes risk weightings for subordinated securities. 
Section 704.5, however, prohibits corporate credit unions from 
investing in subordinated securities, and so a corporate credit 
union cannot invest in subordinated securities.

(b) Definitions

    The following definitions apply to this Appendix. Additional 
definitions, applicable to this entire Part, are located in Sec.  
704.2 of this Part.
    Cash items in the process of collection means checks or drafts 
in the process of collection that are drawn on another depository 
institution, including a central bank, and that are payable 
immediately upon presentation; U.S. Government checks that are drawn 
on the United States Treasury or any other U.S. Government or 
Government-sponsored agency and that are payable immediately upon 
presentation; broker's security drafts and commodity or bill-of-
lading drafts payable immediately upon presentation; and unposted 
debits.
    Commitment means any arrangement that obligates a corporate 
credit union to:
    (1) Purchase loans or securities;
    (2) Extend credit in the form of loans or leases, participations 
in loans or leases, overdraft facilities, revolving credit 
facilities, home equity lines of credit, eligible ABCP liquidity 
facilities, or similar transactions.
    Depository institution means a financial institution that 
engages in the business of providing financial services; that is 
recognized as a bank or a credit union by the supervisory or 
monetary authorities of the country of its incorporation and the 
country of its principal banking operations; that receives deposits 
to a substantial extent in the regular course of business; and that 
has the power to accept demand deposits. In the United States, this 
definition encompasses all federally insured offices of commercial 
banks, mutual and stock savings banks, savings or building and loan 
associations (stock and mutual), cooperative banks, credit unions, 
and international banking facilities of domestic depository 
institutions.
    Bank holding companies and savings and loan holding companies 
are excluded from this definition. For the purposes of assigning 
risk-weights, the differentiation between OECD depository 
institutions and non-OECD depository institutions is based on the 
country of incorporation. Claims on branches and agencies of foreign 
banks located in the United States are to be categorized on the 
basis of the parent bank's country of incorporation.
    Direct credit substitute means an arrangement in which a 
corporate credit union assumes, in form or in substance, credit risk 
associated with an on-balance sheet or off-balance sheet asset or 
exposure that was not previously owned by the corporate credit union 
(third-party asset) and the risk assumed by the corporate credit 
union exceeds the pro rata share of the corporate credit union's 
interest in the third-party asset. If a corporate credit union has 
no claim on the third-party asset, then the corporate credit union's 
assumption of any

[[Page 64853]]

credit risk is a direct credit substitute. Direct credit substitutes 
include:
    (1) Financial standby letters of credit that support financial 
claims on a third party that exceed a corporate credit union's pro 
rata share in the financial claim;
    (2) Guarantees, surety arrangements, credit derivatives, and 
similar instruments backing financial claims that exceed a corporate 
credit union's pro rata share in the financial claim;
    (3) Purchased subordinated interests that absorb more than their 
pro rata share of losses from the underlying assets, including any 
tranche of asset-backed securities that is not the most senior 
tranche;
    (4) Credit derivative contracts under which the corporate credit 
union assumes more than its pro rata share of credit risk on a 
third-party asset or exposure;
    (5) Loans or lines of credit that provide credit enhancement for 
the financial obligations of a third party;
    (6) Purchased loan servicing assets if the servicer is 
responsible for credit losses or if the servicer makes or assumes 
credit-enhancing representations and warranties with respect to the 
loans serviced. Servicer cash advances as defined in this section 
are not direct credit substitutes;
    (7) Clean-up calls on third-party assets. However, clean-up 
calls that are 10 percent or less of the original pool balance and 
that are exercisable at the option of the corporate credit union are 
not direct credit substitutes; and
    (8) Liquidity facilities that provide support to asset-backed 
commercial paper (other than eligible ABCP liquidity facilities).
    Exchange rate contracts means cross-currency interest rate 
swaps; forward foreign exchange rate contracts; currency options 
purchased; and any similar instrument that, in the opinion of the 
NCUA, may give rise to similar risks.
    Face amount means the notational principal, or face value, 
amount of an off-balance sheet item or the amortized cost of an on-
balance sheet asset.
    Financial asset means cash or other monetary instrument, 
evidence of debt, evidence of an ownership interest in an entity, or 
a contract that conveys a right to receive or exchange cash or 
another financial instrument from another party.
    Financial standby letter of credit means a letter of credit or 
similar arrangement that represents an irrevocable obligation to a 
third-party beneficiary:
    (1) To repay money borrowed by, or advanced to, or for the 
account of, a second party (the account party); or
    (2) To make payment on behalf of the account party, in the event 
that the account party fails to fulfill its obligation to the 
beneficiary.
    OECD-based country means a member of that grouping of countries 
that are full members of the Organization for Economic Cooperation 
and Development (OECD) plus countries that have concluded special 
lending arrangements with the International Monetary Fund (IMF) 
associated with the IMF's General Arrangements To Borrow. This term 
excludes any country that has rescheduled its external sovereign 
debt within the previous five years. A rescheduling of external 
sovereign debt generally would include any renegotiation of terms 
arising from a country's inability or unwillingness to meet its 
external debt service obligations, but generally would not include 
renegotiations of debt in the normal course of business, such as a 
renegotiation to allow the borrower to take advantage of a decline 
in interest rates or other change in market conditions.
    Original maturity means, with respect to a commitment, the 
earliest date after a commitment is made on which the commitment is 
scheduled to expire (i.e., it will reach its stated maturity and 
cease to be binding on either party), provided that either:
    (1) The commitment is not subject to extension or renewal and 
will actually expire on its stated expiration date; or
    (2) If the commitment is subject to extension or renewal beyond 
its stated expiration date, the stated expiration date will be 
deemed the original maturity only if the extension or renewal must 
be based upon terms and conditions independently negotiated in good 
faith with the member at the time of the extension or renewal and 
upon a new, bona fide credit analysis utilizing current information 
on financial condition and trends.
    Performance-based standby letter of credit means any letter of 
credit, or similar arrangement, however named or described, which 
represents an irrevocable obligation to the beneficiary on the part 
of the issuer to make payment on account of any default by a third 
party in the performance of a nonfinancial or commercial obligation. 
Such letters of credit include arrangements backing subcontractors' 
and suppliers' performance, labor and materials contracts, and 
construction bids.
    Prorated assets means the total assets (as determined in the 
most recently available GAAP report but in no event more than one 
year old) of a consolidated CUSO multiplied by the corporate credit 
union's percentage of ownership of that consolidated CUSO.
    Qualifying mortgage loan means a loan that:
    (1) Is fully secured by a first lien on a one-to four-family 
residential property;
    (2) Is underwritten in accordance with prudent underwriting 
standards, including standards relating the ratio of the loan amount 
to the value of the property (LTV ratio), as presented in the 
Interagency Guidelines for Real Estate Lending Policies, 57 FR 62890 
(December 31, 1992). A nonqualifying mortgage loan that is paid down 
to an appropriate LTV ratio (calculated using value at origination, 
appraisal obtained within the prior six months, or updated value 
using an automated valuation model) may become a qualifying loan if 
it meets all other requirements of this definition;
    (3) Maintains an appropriate LTV ratio based on the amortized 
principal balance of the loan; and
    (4) Is performing and is not more than 90 days past due.
    If a corporate credit union holds the first and junior lien(s) 
on a residential property and no other party holds an intervening 
lien, the transaction is treated as a single loan secured by a first 
lien for the purposes of determining the LTV ratio and the 
appropriate risk-weight under Appendix C. Also, a loan to an 
individual borrower for the construction of the borrower's home may 
be included as a qualifying mortgage loan.
    Qualifying multifamily mortgage loan. (1) Qualifying multifamily 
mortgage loan means a loan secured by a first lien on multifamily 
residential properties consisting of 5 or more dwelling units, 
provided that:
    (i) The amortization of principal and interest occurs over a 
period of not more than 30 years;
    (ii) The original minimum maturity for repayment of principal on 
the loan is not less than seven years;
    (iii) When considering the loan for placement in a lower risk-
weight category, all principal and interest payments have been made 
on a timely basis in accordance with its terms for the preceding 
year;
    (iv) The loan is performing and not 90 days or more past due;
    (v) The loan is made in accordance with prudent underwriting 
standards; and
    (vi) If the interest rate on the loan does not change over the 
term of the loan, the current loan balance amount does not exceed 80 
percent of the value of the property securing the loan, and for the 
property's most recent calendar year, the ratio of annual net 
operating income generated by the property (before payment of any 
debt service on the loan) to annual debt service on the loan is not 
less than 120 percent, or in the case of cooperative or other not-
for-profit housing projects, the property generates sufficient cash 
flows to provide comparable protection to the institution; or
    (vii) If the interest rate on the loan changes over the term of 
the loan, the current loan balance amount does not exceed 75 percent 
of the value of the property securing the loan, and for the 
property's most recent calendar year, the ratio of annual net 
operating income generated by the property (before payment of any 
debt service on the loan) to annual debt service on the loan is not 
less than 115 percent, or in the case of cooperative or other not-
for-profit housing projects, the property generates sufficient cash 
flows to provide comparable protection to the institution.
    (2) For purposes of paragraphs (1)(vi) and (1)(vii) of this 
definition, the term value of the property means, at origination of 
a loan to purchase a multifamily property, the lower of the purchase 
price or the amount of the initial appraisal, or if appropriate, the 
initial evaluation. In cases not involving purchase of a multifamily 
loan, the value of the property is determined by the most current 
appraisal, or if appropriate, the most current evaluation. In cases 
where a borrower refinances a loan on an existing property, as an 
alternative to paragraphs (1)(iii), (1)(vi), and (1)(vii) of this 
definition:
    (i) All principal and interest payments on the loan being 
refinanced have been made on a timely basis in accordance with the 
terms of that loan for the preceding year; and
    (ii) The net income on the property for the preceding year would 
support timely principal and interest payments on the new loan in 
accordance with the applicable debt service requirement.

[[Page 64854]]

    Qualifying residential construction loan, also referred to as a 
residential bridge loan, means a loan made in accordance with sound 
lending principles satisfying the following criteria:
    (1) The builder must have substantial project equity in the home 
construction project;
    (2) The residence being constructed must be a 1-4 family 
residence sold to a home purchaser;
    (3) The lending entity must obtain sufficient documentation from 
a permanent lender (which may be the construction lender) 
demonstrating that the home buyer intends to purchase the residence 
and has the ability to obtain a permanent qualifying mortgage loan 
sufficient to purchase the residence;
    (4) The home purchaser must have made a substantial earnest 
money deposit;
    (5) The construction loan must not exceed 80 percent of the 
sales price of the residence;
    (6) The construction loan must be secured by a first lien on the 
lot, residence under construction, and other improvements;
    (7) The lending credit union must retain sufficient undisbursed 
loan funds throughout the construction period to ensure project 
completion;
    (8) The builder must incur a significant percentage of direct 
costs (i.e., the actual costs of land, labor, and material) before 
any drawdown on the loan;
    (9) If at any time during the life of the construction loan any 
of the criteria of this rule are no longer satisfied, the corporate 
must immediately recategorize the loan at a 100 percent risk-weight 
and must accurately report the loan in the corporate's next 
quarterly call report;
    (10) The home purchaser must intend that the home will be owner-
occupied;
    (11) The home purchaser(s) must be an individual(s), not a 
partnership, joint venture, trust corporation, or any other entity 
(including an entity acting as a sole proprietorship) that is 
purchasing the home(s) for speculative purposes; and
    (12) The loan must be performing and not more than 90 days past 
due.
    The NCUA retains the discretion to determine that any loans not 
meeting sound lending principles must be placed in a higher risk-
weight category. The NCUA also reserves the discretion to modify 
these criteria on a case-by-case basis provided that any such 
modifications are not inconsistent with the safety and soundness 
objectives of this definition.
    Qualifying securities firm means:
    (1) A securities firm incorporated in the United States that is 
a broker-dealer that is registered with the Securities and Exchange 
Commission (SEC) and that complies with the SEC's net capital 
regulations (17 CFR 240.15c3(1)); and
    (2) A securities firm incorporated in any other OECD-based 
country, if the corporate credit union is able to demonstrate that 
the securities firm is subject to consolidated supervision and 
regulation (covering its subsidiaries, but not necessarily its 
parent organizations) comparable to that imposed on depository 
institutions in OECD countries. Such regulation must include risk-
based capital requirements comparable to those imposed on depository 
institutions under the Accord on International Convergence of 
Capital Measurement and Capital Standards (1988, as amended in 
1998).
    Recourse means a corporate credit union's retention, in form or 
in substance, of any credit risk directly or indirectly associated 
with an asset it has sold (in accordance with Generally Accepted 
Accounting Principles) that exceeds a pro rata share of that 
corporate credit union's claim on the asset. If a corporate credit 
union has no claim on an asset it has sold, then the retention of 
any credit risk is recourse. A recourse obligation typically arises 
when a corporate credit union transfers assets in a sale and retains 
an explicit obligation to repurchase assets or to absorb losses due 
to a default on the payment of principal or interest or any other 
deficiency in the performance of the underlying obligor or some 
other party. Recourse may also exist implicitly if a corporate 
credit union provides credit enhancement beyond any contractual 
obligation to support assets it has sold. Recourse obligations 
include:
    (1) Credit-enhancing representations and warranties made on 
transferred assets;
    (2) Loan servicing assets retained pursuant to an agreement 
under which the corporate credit union will be responsible for 
losses associated with the loans serviced. Servicer cash advances as 
defined in this section are not recourse obligations;
    (3) Retained subordinated interests that absorb more than their 
pro rata share of losses from the underlying assets;
    (4) Assets sold under an agreement to repurchase, if the assets 
are not already included on the balance sheet;
    (5) Loan strips sold without contractual recourse where the 
maturity of the transferred portion of the loan is shorter than the 
maturity of the commitment under which the loan is drawn;
    (6) Credit derivatives that absorb more than the corporate 
credit union's pro rata share of losses from the transferred assets;
    (7) Clean-up calls on assets the corporate credit union has 
sold. However, clean-up calls that are 10 percent or less of the 
original pool balance and that are exercisable at the option of the 
corporate credit union are not recourse arrangements; and
    (8) Liquidity facilities that provide support to asset-backed 
commercial paper (other than eligible ABCP liquidity facilities).
    Replacement cost means, with respect to interest rate and 
exchange-rate contracts, the loss that would be incurred in the 
event of a counterparty default, as measured by the net cost of 
replacing the contract at the current market value. If default would 
result in a theoretical profit, the replacement value is considered 
to be zero. This mark-to-market process must incorporate changes in 
both interest rates and counterparty credit quality.
    Residential properties means houses, condominiums, cooperative 
units, and manufactured homes. This definition does not include 
boats or motor homes, even if used as a primary residence, or 
timeshare properties.
    Residual interest. (1) Residual interest means any on-balance 
sheet asset that:
    (i) Represents an interest (including a beneficial interest) 
created by a transfer that qualifies as a sale (in accordance with 
Generally Accepted Accounting Principles) of financial assets, 
whether through a securitization or otherwise; and
    (ii) Exposes a corporate credit union to credit risk directly or 
indirectly associated with the transferred asset that exceeds a pro 
rata share of that corporate credit union's claim on the asset, 
whether through subordination provisions or other credit enhancement 
techniques.
    (2) Residual interests generally include credit-enhancing 
interest-only strips, spread accounts, cash collateral accounts, 
retained subordinated interests (and other forms of 
overcollateralization), and similar assets that function as a credit 
enhancement. Residual interests further include those exposures 
that, in substance, cause the corporate credit union to retain the 
credit risk of an asset or exposure that had qualified as a residual 
interest before it was sold. Residual interests generally do not 
include assets purchased from a third party, but a credit-enhancing 
interest-only strip that is acquired in any asset transfer is a 
residual interest.
    (3) Corporate credit unions will use this definition of the term 
``residual interests,'' and not the definition in Sec.  704.2, for 
purposes of applying this Appendix.
    Risk participation means a participation in which the 
originating party remains liable to the beneficiary for the full 
amount of an obligation (e.g., a direct credit substitute), 
notwithstanding that another party has acquired a participation in 
that obligation.
    Risk-weighted assets means the sum total of risk-weighted on-
balance sheet assets, as calculated under Section II(a) of this 
Appendix, and the total of risk-weighted off-balance sheet credit 
equivalent amounts. The total of risk-weighted off-balance sheet 
credit equivalent amounts equals the risk-weighted off-balance sheet 
activities as calculated under Section II(b) of this Appendix plus 
the risk-weighted recourse obligations, risk-weighted direct credit 
substitutes, and certain other risk-weighted positions as calculated 
under Section II(c) of this Appendix.
    Servicer cash advance means funds that a residential mortgage 
servicer advances to ensure an uninterrupted flow of payments, 
including advances made to cover foreclosure costs or other expenses 
to facilitate the timely collection of the loan. A servicer cash 
advance is not a recourse obligation or a direct credit substitute 
if:
    (1) The servicer is entitled to full reimbursement and this 
right is not subordinated to other claims on the cash flows from the 
underlying asset pool; or
    (2) For any one loan, the servicer's obligation to make 
nonreimbursable advances is contractually limited to an 
insignificant amount of the outstanding principal amount on that 
loan.
    Structured financing program means a program where receivable 
interests and asset-or mortgage-backed securities issued by multiple 
participants are purchased by a special purpose entity that 
repackages those exposures into securities that can be sold to 
investors. Structured financing programs

[[Page 64855]]

allocate credit risk, generally, between the participants and credit 
enhancement provided to the program.
    Traded position means a position retained, assumed, or issued in 
connection with a securitization that is rated by a NRSRO, where 
there is a reasonable expectation that, in the near future, the 
rating will be relied upon by:
    (1) Unaffiliated investors to purchase the security; or
    (2) An unaffiliated third party to enter into a transaction 
involving the position, such as a purchase, loan, or repurchase 
agreement.
    Unconditionally cancelable means, with respect to a commitment-
type lending arrangement, that the corporate credit union may, at 
any time, with or without cause, refuse to advance funds or extend 
credit under the facility.
    United States Government or its agencies means an 
instrumentality of the U.S. Government whose debt obligations are 
fully and explicitly guaranteed as to the timely payment of 
principal and interest by the full faith and credit of the United 
States Government.
    United States Government-sponsored agency or corporation means 
an agency or corporation originally established or chartered to 
serve public purposes specified by the United States Congress but 
whose obligations are not explicitly guaranteed by the full faith 
and credit of the United States Government.

Part II: Risk-Weightings

(a) On-Balance Sheet Assets

    Except as provided in Section II(b) of this Appendix, risk-
weighted on-balance sheet assets are computed by multiplying the on-
balance sheet asset amounts times the appropriate risk-weight 
categories. The risk-weight categories are:
    (1) Zero percent Risk-Weight (Category 1).
    (i) Cash, including domestic and foreign currency owned and held 
in all offices of a corporate credit union or in transit. Any 
foreign currency held by a corporate credit union must be converted 
into U.S. dollar equivalents;
    (ii) Securities issued by and other direct claims on the U.S. 
Government or its agencies (to the extent such securities or claims 
are unconditionally backed by the full faith and credit of the 
United States Government) or the central government of an OECD 
country;
    (iii) Notes and obligations issued or guaranteed by the Federal 
Deposit Insurance Corporation or the National Credit Union Share 
Insurance Fund and backed by the full faith and credit of the United 
States Government;
    (iv) Deposit reserves at, claims on, and balances due from 
Federal Reserve Banks;
    (v) The book value of paid-in Federal Reserve Bank stock;
    (vi) That portion of assets directly and unconditionally 
guaranteed by the United States Government or its agencies, or the 
central government of an OECD country.
    (viii) Claims on, and claims guaranteed by, a qualifying 
securities firm that are collateralized by cash on deposit in the 
corporate credit union or by securities issued or guaranteed by the 
United States Government or its agencies, or the central government 
of an OECD country. To be eligible for this risk-weight, the 
corporate credit union must maintain a positive margin of collateral 
on the claim on a daily basis, taking into account any change in a 
corporate credit union's exposure to the obligor or counterparty 
under the claim in relation to the market value of the collateral 
held in support of the claim.
    (2) 20 percent Risk-Weight (Category 2).
    (i) Cash items in the process of collection;
    (ii) That portion of assets conditionally guaranteed by the 
United States Government or its agencies, or the central government 
of an OECD country;
    (iii) That portion of assets collateralized by the current 
market value of securities issued or guaranteed by the United States 
government or its agencies, or the central government of an OECD 
country;
    (iv) Securities (not including equity securities) issued by and 
other claims on the U.S. Government or its agencies which are not 
backed by the full faith and credit of the United States Government;
    (v) Securities (not including equity securities) issued by, or 
other direct claims on, United States Government-sponsored agencies;
    (vi) That portion of assets guaranteed by United States 
Government-sponsored agencies;
    (vii) That portion of assets collateralized by the current 
market value of securities issued or guaranteed by United States 
Government-sponsored agencies;
    (viii) Claims on, and claims guaranteed by, a qualifying 
securities firm, subject to the following conditions:
    (A) A qualifying securities firm must have a long-term issuer 
credit rating, or a rating on at least one issue of long-term 
unsecured debt, from a NRSRO. The rating must be in one of the three 
highest investment grade categories used by the NRSRO. If two or 
more NRSROs assign ratings to the qualifying securities firm, the 
corporate credit union must use the lowest rating to determine 
whether the rating requirement of this paragraph is met. A 
qualifying securities firm may rely on the rating of its parent 
consolidated company, if the parent consolidated company guarantees 
the claim.
    (B) A collateralized claim on a qualifying securities firm does 
not have to comply with the rating requirements under paragraph (a) 
if the claim arises under a contract that:
    (1) Is a reverse repurchase/repurchase agreement or securities 
lending/borrowing transaction executed using standard industry 
documentation;
    (2) Is collateralized by debt or equity securities that are 
liquid and readily marketable;
    (3) Is marked-to-market daily;
    (4) Is subject to a daily margin maintenance requirement under 
the standard industry documentation; and
    (5) Can be liquidated, terminated or accelerated immediately in 
bankruptcy or similar proceeding, and the security or collateral 
agreement will not be stayed or avoided under applicable law of the 
relevant jurisdiction. For example, a claim is exempt from the 
automatic stay in bankruptcy in the United States if it arises under 
a securities contract or a repurchase agreement subject to Section 
555 or 559 of the Bankruptcy Code (11 U.S.C. 555 or 559), a 
qualified financial contract under Section 207(c)(8) of the Federal 
Credit Union Act (12 U.S.C. 1787(c)(8)) or Section 11(e)(8) of the 
Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a netting 
contract between or among financial institutions under Sections 401-
407 of the Federal Deposit Insurance Corporation Improvement Act of 
1991 (12 U.S.C. 4401-4407), or Regulation EE (12 CFR part 231).
    (C) If the securities firm uses the claim to satisfy its 
applicable capital requirements, the claim is not eligible for a 
risk-weight under this paragraph II(a)(2)(viii);
    (ix) Claims representing general obligations of any public-
sector entity in an OECD country, and that portion of any claims 
guaranteed by any such public-sector entity;
    (x) Balances due from and all claims on domestic depository 
institutions. This includes demand deposits and other transaction 
accounts, savings deposits and time certificates of deposit, federal 
funds sold, loans to other depository institutions, including 
overdrafts and term federal funds, holdings of the corporate credit 
union's own discounted acceptances for which the account party is a 
depository institution, holdings of bankers acceptances of other 
institutions and securities issued by depository institutions, 
except those that qualify as capital;
    (xi) The book value of paid-in Federal Home Loan Bank stock;
    (xii) Deposit reserves at, claims on and balances due from the 
Federal Home Loan Banks;
    (xiii) Assets collateralized by cash held in a segregated 
deposit account by the reporting corporate credit union;
    (xiv) Claims on, or guaranteed by, official multilateral lending 
institutions or regional development institutions in which the 
United States Government is a shareholder or contributing member; 
\1\
---------------------------------------------------------------------------

    \1\ These institutions include, but are not limited to, the 
International Bank for Reconstruction and Development (World Bank), 
the Inter-American Development Bank, the Asian Development Bank, the 
African Development Bank, the European Investments Bank, the 
International Monetary Fund and the Bank for International 
Settlements.
---------------------------------------------------------------------------

    (xv) That portion of assets collateralized by the current market 
value of securities issued by official multilateral lending 
institutions or regional development institutions in which the 
United States Government is a shareholder or contributing member.
    (xvi) All claims on depository institutions incorporated in an 
OECD country, and all assets backed by the full faith and credit of 
depository institutions incorporated in an OECD country. This 
includes the credit equivalent amount of participations in 
commitments and standby letters of credit sold to other depository 
institutions incorporated in an OECD country, but only if the 
originating bank remains liable to the member or beneficiary for the 
full amount of the commitment or standby letter of credit. Also 
included in this category are the credit equivalent amounts of risk 
participations in

[[Page 64856]]

bankers' acceptances conveyed to other depository institutions 
incorporated in an OECD country. However, bank-issued securities 
that qualify as capital of the issuing bank are not included in this 
risk category;
    (xvii) Claims on, or guaranteed by depository institutions other 
than the central bank, incorporated in a non-OECD country, with a 
remaining maturity of one year or less;
    (xviii) That portion of local currency claims conditionally 
guaranteed by central governments of non-OECD countries, to the 
extent the corporate credit union has local currency liabilities in 
that country.
    (3) 50 percent Risk-Weight (Category 3).
    (i) Revenue bonds issued by any public-sector entity in an OECD 
country for which the underlying obligor is a public-sector entity, 
but which are repayable solely from the revenues generated from the 
project financed through the issuance of the obligations;
    (ii) Qualifying mortgage loans and qualifying multifamily 
mortgage loans;
    (iii) Privately-issued mortgage-backed securities (i.e., those 
that do not carry the guarantee of the U.S. Government, a U.S. 
government agency, or a U.S. government sponsored enterprise) 
representing an interest in qualifying mortgage loans or qualifying 
multifamily mortgage loans. If the security is backed by qualifying 
multifamily mortgage loans, the corporate credit union must receive 
timely payments of principal and interest in accordance with the 
terms of the security. Payments will generally be considered timely 
if they are not 30 days past due; and
    (iv) Qualifying residential construction loans.
    (4) 100 percent Risk-Weight (Category 4).
    All assets not specified above or deducted from calculations of 
capital pursuant to Sec.  704.2 and Sec.  704.3 of this part, 
including, but not limited to:
    (i) Consumer loans;
    (ii) Commercial loans;
    (iii) Home equity loans;
    (iv) Non-qualifying mortgage loans;
    (v) Non-qualifying multifamily mortgage loans;
    (vi) Residential construction loans;
    (vii) Land loans;
    (viii) Nonresidential construction loans;
    (ix) Obligations issued by any state or any political 
subdivision thereof for the benefit of a private party or enterprise 
where that party or enterprise, rather than the issuing state or 
political subdivision, is responsible for the timely payment of 
principal and interest on the obligations, e.g., industrial 
development bonds;
    (x) Debt securities not specifically risk-weighted in another 
category;
    (xi) Investments in fixed assets and premises;
    (xii) Servicing assets;
    (xiii) Interest-only strips receivable, other than credit-
enhancing interest-only strips;
    (xiv) Equity investments;
    (xv) The prorated assets of subsidiaries (except for the assets 
of consolidated CUSOs) to the extent such assets are included in 
adjusted total assets;
    (xvi) All repossessed assets or assets that are more than 90 
days past due; and
    (xvii) Intangible assets not specifically weighted in some other 
category.
    (5) Indirect ownership interests in pools of assets. Assets 
representing an indirect holding of a pool of assets, e.g., mutual 
funds, are assigned to risk-weight categories under this section 
based upon the risk-weight that would be assigned to the assets in 
the portfolio of the pool. An investment in shares of a mutual fund 
whose portfolio consists primarily of various securities or money 
market instruments that, if held separately, would be assigned to 
different risk-weight categories, generally is assigned to the risk-
weight category appropriate to the highest risk-weighted asset that 
the fund is permitted to hold in accordance with the investment 
objectives set forth in its prospectus. The corporate credit union 
may, at its option, assign the investment on a pro rata basis to 
different risk-weight categories according to the investment limits 
in its prospectus. In no case will an investment in shares in any 
such fund be assigned to a total risk-weight less than 20 percent. 
If the corporate credit union chooses to assign investments on a pro 
rata basis, and the sum of the investment limits of assets in the 
fund's prospectus exceeds 100 percent, the corporate credit union 
must assign the highest pro rata amounts of its total investment to 
the higher risk categories. If, in order to maintain a necessary 
degree of short-term liquidity, a fund is permitted to hold an 
insignificant amount of its assets in short-term, highly liquid 
securities of superior credit quality that do not qualify for a 
preferential risk-weight, such securities will generally be 
disregarded in determining the risk-weight category into which the 
corporate credit union's holding in the overall fund should be 
assigned. The prudent use of hedging instruments by a mutual fund to 
reduce the risk of its assets will not increase the risk-weighting 
of the mutual fund investment. For example, the use of hedging 
instruments by a mutual fund to reduce the interest rate risk of its 
government bond portfolio will not increase the risk-weight of that 
fund above the 20 percent category. Nonetheless, if the fund engages 
in any activities that appear speculative in nature or has any other 
characteristics that are inconsistent with the preferential risk-
weighting assigned to the fund's assets, holdings in the fund will 
be assigned to the 100 percent risk-weight category.
    (6) Derivatives. Certain transactions or activities, such as 
derivatives transactions, may appear on a corporate's balance sheet 
but are not specifically described in the Section II(a) on-balance 
sheet risk-weight categories. These items will be assigned risk-
weights as described in Section II(b) or II(c) below.

(b) Off-Balance Sheet Items

    Except as provided in Section II(c) of this Appendix, risk-
weighted off-balance sheet items are determined by the following 
two-step process. First, the face amount of the off-balance sheet 
item must be multiplied by the appropriate credit conversion factor 
listed in this Section II(b). This calculation translates the face 
amount of an off-balance sheet exposure into an on-balance sheet 
credit-equivalent amount. Second, the credit-equivalent amount must 
be assigned to the appropriate risk-weight category using the 
criteria regarding obligors, guarantors, and collateral listed in 
Section II(a) of this Appendix.\2\ The following are the credit 
conversion factors and the off-balance sheet items to which they 
apply.
---------------------------------------------------------------------------

    \2\ The sufficiency of collateral and guarantees for off-balance 
sheet items is determined by the market value of the collateral or 
the amount of the guarantee in relation to the face amount of the 
item, except for derivative contracts, for which this determination 
is generally made in relation to the credit equivalent amount. 
Collateral and guarantees are subject to the same provisions noted 
under paragraph II(d) of this Appendix C.
---------------------------------------------------------------------------

    (1) 100 percent credit conversion factor (Group A).
    (i) Risk participations purchased in bankers' acceptances;
    (ii) Forward agreements and other contingent obligations with a 
certain draw down, e.g., legally binding agreements to purchase 
assets at a specified future date. On the date a corporate credit 
union enters into a forward agreement or similar obligation, it 
should convert the principal amount of the assets to be purchased at 
100 percent as of that date and then assign this amount to the risk-
weight category appropriate to the obligor or guarantor of the item, 
or the nature of the collateral;
    (iii) Indemnification of members whose securities the corporate 
credit union has lent as agent. If the member is not indemnified 
against loss by the corporate credit union, the transaction is 
excluded from the risk-based capital calculation. When a corporate 
credit union lends its own securities, the transaction is treated as 
a loan. When a corporate credit union lends its own securities or is 
acting as agent, agrees to indemnify a member, the transaction is 
assigned to the risk-weight appropriate to the obligor or collateral 
that is delivered to the lending or indemnifying institution or to 
an independent custodian acting on their behalf; and
    (iv) Unused portions of ABCP liquidity facilities that do not 
meet the definition of an eligible ABCP liquidity facility. The 
resulting credit equivalent amount is assigned to the risk category 
appropriate to the assets to be funded by the liquidity facility 
based on the assets or the obligor, after considering any collateral 
or guarantees, or external credit ratings under paragraph II(c)(3) 
of this Appendix, if applicable.
    (2) 50 percent credit conversion factor (Group B).
    (i) Transaction-related contingencies, including, among other 
things, performance bonds and performance-based standby letters of 
credit related to a particular transaction;
    (ii) Unused portions of commitments (including home equity lines 
of credit and eligible ABCP liquidity facilities) with an original 
maturity exceeding one year except those listed in paragraph 
II(b)(5) of this Appendix. For eligible ABCP liquidity facilities, 
the resulting credit equivalent amount is assigned to the risk 
category appropriate to the assets to be funded by the liquidity 
facility based on the assets or the obligor, after considering any 
collateral or guarantees, or external credit ratings under

[[Page 64857]]

paragraph II(c)(3) of this Appendix, if applicable; and
    (iii) Revolving underwriting facilities, note issuance 
facilities, and similar arrangements pursuant to which the corporate 
credit union's CUSO or member can issue short-term debt obligations 
in its own name, but for which the corporate credit union has a 
legally binding commitment to either:
    (A) Purchase the obligations the member is unable to sell by a 
stated date; or
    (B) Advance funds to its member, if the obligations cannot be 
sold.
    (3) 20 percent credit conversion factor (Group C). Trade-related 
contingencies, i.e., short-term, self-liquidating instruments used 
to finance the movement of goods and collateralized by the 
underlying shipment. A commercial letter of credit is an example of 
such an instrument.
    (4) 10 percent credit conversion factor (Group D). Unused 
portions of eligible ABCP liquidity facilities with an original 
maturity of one year or less. The resulting credit equivalent amount 
is assigned to the risk category appropriate to the assets to be 
funded by the liquidity facility based on the assets or the obligor, 
after considering any collateral or guarantees, or external credit 
ratings under paragraph II(c)(3) of this Appendix, if applicable;
    (5) Zero percent credit conversion factor (Group E). (i) Unused 
portions of commitments with an original maturity of one year or 
less, except for eligible ABCP liquidity facilities;
    (ii) Unused commitments with an original maturity greater than 
one year, if they are unconditionally cancelable at any time at the 
option of the corporate credit union and the corporate credit union 
has the contractual right to make, and in fact does make, either:
    (A) A separate credit decision based upon the borrower's current 
financial condition before each drawing under the lending facility; 
or
    (B) An annual (or more frequent) credit review based upon the 
borrower's current financial condition to determine whether or not 
the lending facility should be continued; and
    (iii) The unused portion of retail credit card lines or other 
related plans that are unconditionally cancelable by the corporate 
credit union in accordance with applicable law.
    (6) Off-balance sheet derivative contracts; interest rate and 
foreign exchange rate contracts (Group F).
    (i) Calculation of credit equivalent amounts. The credit 
equivalent amount of an off-balance sheet derivative contract that 
is not subject to a qualifying bilateral netting contract in 
accordance with paragraph II(b)(6)(ii) of this Appendix is equal to 
the sum of the current credit exposure, i.e., the replacement cost 
of the contract, and the potential future credit exposure of the 
contract. The calculation of credit equivalent amounts is measured 
in U.S. dollars, regardless of the currency or currencies specified 
in the contract.
    (A) Current credit exposure. The current credit exposure of an 
off-balance sheet derivative contract is determined by the mark-to-
market value of the contract. If the mark-to-market value is 
positive, then the current credit exposure equals that mark-to-
market value. If the mark-to-market value is zero or negative, then 
the current exposure is zero. In determining its current credit 
exposure for multiple off-balance sheet derivative contracts 
executed with a single counterparty, a corporate credit union may 
net positive and negative mark-to-market values of off-balance sheet 
derivative contracts if subject to a bilateral netting contract as 
provided in paragraph II(b)(6)(ii) of this Appendix.
    (B) Potential future credit exposure. The potential future 
credit exposure of an off-balance sheet derivative contract, 
including a contract with a negative mark-to-market value, is 
estimated by multiplying the notional principal by a credit 
conversion factor.\3\ Corporate credit unions, subject to examiner 
review, should use the effective rather than the apparent or stated 
notional amount in this calculation. The conversion factors are: \4\
---------------------------------------------------------------------------

    \3\ For purposes of calculating potential future credit exposure 
for foreign exchange contracts and other similar contracts, in which 
notional principal is equivalent to cash flows, total notional 
principal is defined as the net receipts to each party falling due 
on each value date in each currency.
    \4\ No potential future credit exposure is calculated for single 
currency interest rate swaps in which payments are made based upon 
two floating rate indices, so-called floating/floating or basis 
swaps; the credit equivalent amount is measured solely on the basis 
of the current credit exposure.

----------------------------------------------------------------------------------------------------------------
                                                             Interest rate    Foreign exchange  Other derivative
                    Remaining maturity                         contracts       rate contracts       contracts
                                                               (percent)          (percent)         (percent)
----------------------------------------------------------------------------------------------------------------
One year or less.........................................               0.0                1.0              10.0
Over one year but less than five years...................               0.50               5.0              12.0
Over five years..........................................               0.50               5.0              15.0
----------------------------------------------------------------------------------------------------------------

     (ii) Off-balance sheet derivative contracts subject to 
bilateral netting contracts. In determining its current credit 
exposure for multiple off-balance sheet derivative contracts 
executed with a single counterparty, a corporate credit union may 
net off-balance sheet derivative contracts subject to a bilateral 
netting contract by offsetting positive and negative mark-to-market 
values, provided that:
    (A) The bilateral netting contract is in writing;
    (B) The bilateral netting contract creates a single legal 
obligation for all individual off-balance sheet derivative contracts 
covered by the bilateral netting contract. In effect, the bilateral 
netting contract provides that the corporate credit union has a 
single claim or obligation either to receive or pay only the net 
amount of the sum of the positive and negative mark-to-market values 
on the individual off-balance sheet derivative contracts covered by 
the bilateral netting contract. The single legal obligation for the 
net amount is operative in the event that a counterparty, or a 
counterparty to whom the bilateral netting contract has been validly 
assigned, fails to perform due to any of the following events: 
Default, insolvency, bankruptcy, or other similar circumstances;
    (C) The corporate credit union obtains a written and reasoned 
legal opinion(s) representing, with a high degree of certainty, that 
in the event of a legal challenge, including one resulting from 
default, insolvency, bankruptcy or similar circumstances, the 
relevant court and administrative authorities would find the 
corporate credit union's exposure to be the net amount under:
    (1) The law of the jurisdiction in which the counterparty is 
chartered or the equivalent location in the case of noncorporate 
entities, and if a branch of the counterparty is involved, then also 
under the law of the jurisdiction in which the branch is located;
    (2) The law that governs the individual off-balance sheet 
derivative contracts covered by the bilateral netting contract; and
    (3) The law that governs the bilateral netting contract;
    (D) The corporate credit union establishes and maintains 
procedures to monitor possible changes in relevant law and to ensure 
that the bilateral netting contract continues to satisfy the 
requirements of this section; and
    (E) The corporate credit union maintains in its files 
documentation adequate to support the netting of an off-balance 
sheet derivative contract.\5\
---------------------------------------------------------------------------

    \5\ By netting individual off-balance sheet derivative contracts 
for the purpose of calculating its credit equivalent amount, a 
corporate credit union represents that documentation adequate to 
support the netting of an off-balance sheet derivative contract is 
in the corporate credit union's files and available for inspection 
by the NCUA. Upon determination by the NCUA that a corporate credit 
union's files are inadequate or that a bilateral netting contract 
may not be legally enforceable under any one of the bodies of law 
described in paragraphs II(b)(5)(ii) of this Appendix, the 
underlying individual off-balance sheet derivative contracts may not 
be netted for the purposes of this section.
---------------------------------------------------------------------------

    (iii) Walkaway clause. A bilateral netting contract that 
contains a walkaway clause is not eligible for netting for purposes 
of calculating the current credit exposure amount. The term 
``walkaway clause'' means

[[Page 64858]]

a provision in a bilateral netting contract that permits a 
nondefaulting counterparty to make a lower payment than it would 
make otherwise under the bilateral netting contract, or no payment 
at all, to a defaulter or the estate of a defaulter, even if the 
defaulter or the estate of the defaulter is a net creditor under the 
bilateral netting contract.
    (iv) Risk-weighting. Once the corporate credit union determines 
the credit equivalent amount for an off-balance sheet derivative 
contract, that amount is assigned to the risk-weight category 
appropriate to the counterparty, or, if relevant, to the nature of 
any collateral or guarantee. Collateral held against a netting 
contract is not recognized for capital purposes unless it is legally 
available for all contracts included in the netting contract. 
However, the maximum risk-weight for the credit equivalent amount of 
such off-balance sheet derivative contracts is 50 percent.
    (v) Exceptions. The following off-balance sheet derivative 
contracts are not subject to the above calculation, and therefore, 
are not part of the denominator of a corporate credit union's risk-
based capital ratio:
    (A) A foreign exchange rate contract with an original maturity 
of 14 calendar days or less; and
    (B) Any interest rate or foreign exchange rate contract that is 
traded on an exchange requiring the daily payment of any variations 
in the market value of the contract.
    (C) Asset-backed commercial paper programs.
    (1) A corporate credit union that qualifies as a primary 
beneficiary and must consolidate an ABCP program that is a variable 
interest entity under Generally Accepted Accounting Principles may 
exclude the consolidated ABCP program assets from risk-weighted 
assets if the corporate credit union is the sponsor of the ABCP 
program.
    (2) If a corporate credit union excludes such consolidated ABCP 
program assets from risk-weighted assets, the corporate credit union 
must assess the appropriate risk-based capital requirement against 
any exposures of the corporate credit union arising in connection 
with such ABCP programs, including direct credit substitutes, 
recourse obligations, residual interests, liquidity facilities, and 
loans, in accordance with Sections II(a), II(b), and II(c) of this 
Appendix.
    (3) If a corporate credit union has multiple overlapping 
exposures (such as a program-wide credit enhancement and a liquidity 
facility) to an ABCP program that is not consolidated for risk-based 
capital purposes, the corporate credit union is not required to hold 
duplicative risk-based capital under this part against the 
overlapping position. Instead, the corporate credit union should 
apply to the overlapping position the applicable risk-based capital 
treatment that results in the highest capital charge.

(c) Recourse Obligations, Direct Credit Substitutes, and Certain 
Other Positions

    (1) In general. Except as otherwise permitted in this Section 
II(c), to determine the risk-weighted asset amount for a recourse 
obligation or a direct credit substitute (but not a residual 
interest):
    (i) Multiply the full amount of the credit-enhanced assets for 
which the corporate credit union directly or indirectly retains or 
assumes credit risk by a 100 percent conversion factor (For a direct 
credit substitute that is an on-balance sheet asset (e.g., a 
purchased subordinated security), a corporate credit union must use 
the amount of the direct credit substitute and the full amount of 
the asset it supports, i.e., all the more senior positions in the 
structure); and
    (ii) Assign this credit equivalent amount to the risk-weight 
category appropriate to the obligor in the underlying transaction, 
after considering any associated guarantees or collateral. Section 
II(a) lists the risk-weight categories.
    (2) Residual interests. Except as otherwise permitted under this 
Section II(c), a corporate credit union must maintain risk-based 
capital for residual interests as follows:
    (i) Credit-enhancing interest-only strips. A corporate credit 
union must maintain risk-based capital for a credit-enhancing 
interest-only strip equal to the remaining amount of the strip even 
if the amount of risk-based capital that must be maintained exceeds 
the full risk-based capital requirement for the assets transferred.
    (ii) Other residual interests. A corporate credit union must 
maintain risk-based capital for a residual interest (excluding a 
credit-enhancing interest-only strip) equal to the face amount of 
the residual interest, even if the amount of risk-based capital that 
must be maintained exceeds the full risk-based capital requirement 
for the assets transferred.
    (iii) Residual interests and other recourse obligations. Where a 
corporate credit union holds a residual interest (including a 
credit-enhancing interest-only strip) and another recourse 
obligation in connection with the same transfer of assets, the 
corporate credit union must maintain risk-based capital equal to the 
greater of:
    (A) The risk-based capital requirement for the residual interest 
as calculated under Section II(c)(2)(i) through (ii) of this 
Appendix; or
    (B) The full risk-based capital requirement for the assets 
transferred, subject to the low-level recourse rules under Section 
II(c)(5) of this Appendix.
    (3) Ratings-based approach--(i) Calculation. A corporate credit 
union may calculate the risk-weighted asset amount for an eligible 
position described in Section II(c)(3)(ii) of this section by 
multiplying the face amount of the position by the appropriate risk-
weight determined in accordance with Table A or B of this section.

                                 Table A
------------------------------------------------------------------------
                                                            Risk-weight
                Long term rating category                  (in percent)
------------------------------------------------------------------------
Highest or second highest investment grade..............              20
Third highest investment grade..........................              50
Lowest investment grade.................................             100
One category below investment grade.....................             200
------------------------------------------------------------------------


                                 Table B
------------------------------------------------------------------------
                                                            Risk-weight
               Short term rating category                  (in percent)
------------------------------------------------------------------------
Highest investment grade................................              20
Second highest investment grade.........................              50
Lowest investment grade.................................             100
------------------------------------------------------------------------

    (ii) Eligibility.
    (A) Traded positions. A position is eligible for the treatment 
described in paragraph II(c)(3)(i) of this Appendix if:
    (1) The position is a corporate debt obligation with a remaining 
maturity of 120 days or less, a recourse obligation, a direct credit 
substitute, a residual interest, or an asset- or mortgage-backed 
security and is not a credit-enhancing interest-only strip;
    (2) The position is a traded position; and
    (3) The NRSRO has rated a long term position as one grade below 
investment grade or better or a short term position as investment 
grade. If two or more NRSROs assign ratings to a traded position, 
the corporate credit union must use the lowest rating to determine 
the appropriate risk-weight category under paragraph (3)(i).
    (B) Non-traded positions. A position that is not traded is 
eligible for the treatment described in paragraph(3)(i) if:
    (1) The position is a recourse obligation, a direct credit 
substitute, a residual interest, or an asset- or mortgage-backed 
security extended in connection with a securitization and is not a 
credit-enhancing interest-only strip;
    (2) More than one NRSRO rate the position;
    (3) All of the NRSROs that rate the position rate it as no lower 
than one grade below investment grade (for long term position) or no 
lower than investment grade (for short term investments). If the 
NRSROs assign different ratings to the position, the corporate 
credit union must use the lowest rating to determine the appropriate 
risk-weight category under paragraph (3)(i);
    (4) The NRSROs base their ratings on the same criteria that they 
use to rate securities that are traded positions; and
    (5) The ratings are publicly available.
    (C) Unrated senior positions. If a recourse obligation, direct 
credit substitute, residual interest, or asset- or mortgage-backed 
security is not rated by an NRSRO, but is senior or preferred in all 
features to a traded position (including collateralization and 
maturity), the corporate credit union may risk-weight the face 
amount of the senior position under paragraph (3)(i) of this 
section, based on the rating of the traded position, subject to 
supervisory guidance. The corporate credit union must satisfy NCUA 
that this treatment is appropriate. This paragraph (3)(i)(c) applies 
only if the traded position provides substantive credit support to 
the unrated position until the unrated position matures.
    (iii) Consistent use of Ratings Based Approach. A corporate 
credit union that determines to use the ratings based approach must 
do so in a consistent manner. For example, if the corporate credit 
union employs the ratings based approach on at least one security or 
position on a given call report, the credit union must use the 
ratings

[[Page 64859]]

based approach on that call report for every security and position 
that is eligible for the ratings based approach.
    (4) Certain positions that are not rated by NRSROs. (i) 
Calculation. A corporate credit union may calculate the risk-
weighted asset amount for eligible position described in paragraph 
II(c)(4)(ii) of this section based on the corporate credit union's 
determination of the credit rating of the position. To risk-weight 
the asset, the corporate credit union must multiply the face amount 
of the position by the appropriate risk-weight determined in 
accordance with Table C of this section.

                                 Table C
------------------------------------------------------------------------
                                                            Risk-weight
                     Rating category                       (in percent)
------------------------------------------------------------------------
Investment grade........................................             100
One category below investment grade.....................             200
------------------------------------------------------------------------

     (ii) Eligibility. A position extended in connection with a 
securitization is eligible for the treatment described in paragraph 
II(c)(4)(i) of this section if it is not rated by an NRSRO, is not a 
residual interest, and meets the one of the three alternative 
standards described in paragraphs (A), (B), or (C) below:
    (A) Position rated internally. A direct credit substitute, but 
not a purchased credit-enhancing interest-only strip, is eligible 
for the treatment described under paragraph II(c)(4)(i) of this 
Appendix, if the position is assumed in connection with an asset-
backed commercial paper program sponsored by the corporate credit 
union. Before it may rely on an internal credit risk rating system, 
the corporate must demonstrate to NCUA's satisfaction that the 
system is adequate. Acceptable internal credit risk rating systems 
typically:
    (1) Are an integral part of the corporate credit union's risk 
management system that explicitly incorporates the full range of 
risks arising from the corporate credit union's participation in 
securitization activities;
    (2) Link internal credit ratings to measurable outcomes, such as 
the probability that the position will experience any loss, the 
expected loss on the position in the event of default, and the 
degree of variance in losses in the event of default on that 
position;
    (3) Separately consider the risk associated with the underlying 
loans or borrowers, and the risk associated with the structure of 
the particular securitization transaction;
    (4) Identify gradations of risk among ``pass'' assets and other 
risk positions;
    (5) Use clear, explicit criteria to classify assets into each 
internal rating grade, including subjective factors;
    (6) Employ independent credit risk management or loan review 
personnel to assign or review the credit risk ratings;
    (7) Include an internal audit procedure to periodically verify 
that internal risk ratings are assigned in accordance with the 
corporate credit union's established criteria;
    (8) Monitor the performance of the assigned internal credit risk 
ratings over time to determine the appropriateness of the initial 
credit risk rating assignment, and adjust individual credit risk 
ratings or the overall internal credit risk rating system, as 
needed; and
    (9) Make credit risk rating assumptions that are consistent 
with, or more conservative than, the credit risk rating assumptions 
and methodologies of NRSROs.
    (B) Program ratings.
    (1) A recourse obligation or direct credit substitute, but not a 
residual interest, is eligible for the treatment described in 
paragraph II(c)(4)(i) of this Appendix, if the position is retained 
or assumed in connection with a structured finance program and an 
NRSRO has reviewed the terms of the program and stated a rating for 
positions associated with the program. If the program has options 
for different combinations of assets, standards, internal or 
external credit enhancements and other relevant factors, and the 
NRSRO specifies ranges of rating categories to them, the corporate 
credit union may apply the rating category applicable to the option 
that corresponds to the corporate credit union's position.
    (2) To rely on a program rating, the corporate credit union must 
demonstrate to NCUA's satisfaction that that the credit risk rating 
assigned to the program meets the same standards generally used by 
NRSROs for rating traded positions. The corporate credit union must 
also demonstrate to NCUA's satisfaction that the criteria underlying 
the assignments for the program are satisfied by the particular 
position.
    (3) If a corporate credit union participates in a securitization 
sponsored by another party, NCUA may authorize the corporate credit 
union to use this approach based on a program rating obtained by the 
sponsor of the program.
    (C) Computer program. A recourse obligation or direct credit 
substitute, but not a residual interest, is eligible for the 
treatment described in paragraph II(c)(4)(i) of this Appendix, if 
the position is extended in connection with a structured financing 
program and the corporate credit union uses an acceptable credit 
assessment computer program to determine the rating of the position. 
An NRSRO must have developed the computer program and the corporate 
credit union must demonstrate to NCUA's satisfaction that the 
ratings under the program correspond credibly and reliably with the 
rating of traded positions.
    (5) Limitations on risk-based capital requirements--
    (i) Low-level exposure rule. If the maximum contractual exposure 
to loss retained or assumed by a corporate credit union is less than 
the effective risk-based capital requirement, as determined in 
accordance with this Section II(c), for the assets supported by the 
corporate credit union's position, the risk-based capital 
requirement is limited to the corporate credit union's contractual 
exposure less any recourse liability account established in 
accordance with Generally Accepted Accounting Principles. This 
limitation does not apply when a corporate credit union provides 
credit enhancement beyond any contractual obligation to support 
assets it has sold.
    (ii) Mortgage-related securities or participation certificates 
retained in a mortgage loan swap. If a corporate credit union holds 
a mortgage-related security or a participation certificate as a 
result of a mortgage loan swap with recourse, it must hold risk-
based capital to support the recourse obligation and that percentage 
of the mortgage-related security or participation certificate that 
is not covered by the recourse obligation. The total amount of risk-
based capital required for the security (or certificate) and the 
recourse obligation is limited to the risk-based capital requirement 
for the underlying loans, calculated as if the corporate credit 
union continued to hold these loans as an on-balance sheet asset.
    (iii) Related on-balance sheet assets. If an asset is included 
in the calculation of the risk-based capital requirement under this 
Section II(c) and also appears as an asset on the corporate credit 
union's balance sheet, the corporate credit union must risk-weight 
the asset only under this Section II(c), except in the case of loan 
servicing assets and similar arrangements with embedded recourse 
obligations or direct credit substitutes. In that case, the 
corporate credit union must separately risk-weight the on-balance 
sheet servicing asset and the related recourse obligations and 
direct credit substitutes under this section, and incorporate these 
amounts into the risk-based capital calculation.
    (6) Obligations of CUSOs. All recourse obligations and direct 
credit substitutes retained or assumed by a corporate credit union 
on the obligations of CUSOs in which the corporate credit union has 
an equity investment are risk-weighted in accordance with this 
Section II(c), unless the corporate credit union's equity investment 
is deducted from the credit union's capital and assets under Sec.  
704.2 and Sec.  704.3.
    (d) Collateral. The only forms of collateral that are recognized 
for risk-weighting purposes are cash on deposit in the corporate 
credit union; Treasuries, U.S. Government agency securities, and 
U.S. Government-sponsored enterprise securities; and securities 
issued by multilateral lending institutions or regional development 
banks. Claims secured by cash on deposit are assigned to the zero 
percent risk-weight category (to the extent of the cash amount). 
Claims secured by securities are assigned to the twenty percent 
risk-weight category (to the extent of the fair market value of the 
securities).

PART 709--INVOLUNTARY LIQUIDATION OF FEDERAL CREDIT UNIONS AND 
ADJUDICATION OF CREDITOR CLAIMS INVOLVING FEDERALLY INSURED CREDIT 
UNIONS IN LIQUIDATION.

0
23. The authority citation for part 709 continues to read as follows:

    Authority:  12 U.S.C. 1757, 1766, 1767, 1786(h), 1787, 1788, 
1789, 1789a.


0
24. Revise paragraphs (b)(7) and (b)(9) of Sec.  709.5 to read as 
follows:

[[Page 64860]]

Sec.  709.5  Payout priorities in involuntary liquidation.

* * * * *
    (b) * * *
    (7) in a case involving liquidation of a corporate credit union, 
holders of then-outstanding membership capital accounts and 
nonperpetual capital accounts or instruments to the extent not depleted 
in a calendar year prior to the date of liquidation and also subject to 
the capital priority option described in Appendix A of part 704 of this 
chapter;
* * * * *
    (9) in a case involving liquidation of a corporate credit union, 
holders of then-outstanding paid in capital or perpetual contributed 
capital instruments to the extent not depleted in a calendar year prior 
to the date of liquidation and also subject to the capital priority 
option described in Appendix A of Part 704 of this chapter;
* * * * *

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

0
25. The authority citation for part 747 continues to read as follows:

    Authority: 12 U.S.C. 1766, 1782, 1784, 1786, 1787; 42 U.S.C. 
4012a; Pub. L. 101-410; Pub. L. 104-134.


0
26. Effective October 20, 2011, add a new subpart M to part 747 to read 
as follows:
Subpart M--Issuance, Review and Enforcement of Orders Imposing Prompt 
Corrective Action on Corporate Credit Unions
Sec.
747.3001. Scope.
747.3002. Review of orders imposing discretionary supervisory 
action.
747.3003. Review of order reclassifying a corporate credit union on 
safety and soundness criteria.
747.3004. Review of order to dismiss a director or senior executive 
officer.
747.3005. Enforcement of directives.
747.3006. Conservatorship or liquidation of critically 
undercapitalized corporate credit union.

Subpart M--Issuance, Review and Enforcement of Orders Imposing 
Prompt Corrective Action on Corporate Credit Unions


Sec.  747.3001  Scope.

    (a) Independent review process. The rules and procedures set forth 
in this subpart apply to corporate credit unions which are subject to 
discretionary supervisory actions under Sec.  704.4 of this chapter and 
to reclassification under Sec.  704.4(d)(3) of this chapter to 
facilitate prompt corrective action, and to senior executive officers 
and directors of such corporate credit unions who are dismissed 
pursuant to a discretionary supervisory action imposed under Sec.  
704.4 of this chapter. Section 747.3002 of this subpart provides an 
independent appellate process to challenge such decisions.
    (b) Notice to State officials. With respect to a State-chartered 
corporate credit union under Sec. Sec.  747.3002, 747.3003 and 747.3004 
of this subpart, any notices, directives and decisions on appeal served 
upon a corporate credit union, or a dismissed director or officer 
thereof, by the NCUA will also be served upon the appropriate State 
official. Responses, requests for a hearing and to present witnesses, 
requests to modify or rescind a discretionary supervisory action and 
requests for reinstatement served upon the NCUA by a corporate credit 
union, or any dismissed director or officer of a corporate credit 
union, will also be served upon the appropriate State official.


Sec.  747.3002  Review of orders imposing discretionary supervisory 
action.

    (a) Notice of intent to issue directive.--(1) Generally. Whenever 
the NCUA intends to issue a directive imposing a discretionary 
supervisory action under Sec. Sec.  704.4(k)(2)(v) and 704.4(k)(3) of 
this chapter on a corporate credit union classified 
``undercapitalized'' or lower, the NCUA will give the corporate credit 
union prior notice of the proposed action and an opportunity to 
respond.
    (2) Immediate issuance of directive without notice. The NCUA may 
issue a directive to take effect immediately under paragraph (a)(1) of 
this section without notice to the corporate credit union if the NCUA 
finds it necessary in order to carry out the purposes of Sec.  704.4 of 
this chapter. A corporate credit union that is subject to a directive 
which takes effect immediately may appeal the directive in writing to 
the NCUA Board (Board). Such an appeal must be received by the Board 
within 14 calendar days after the directive was issued, unless the 
Board permits a longer period. Unless ordered by the NCUA, the 
directive will remain in effect pending a decision on the appeal. The 
Board will consider any such appeal, if timely filed, within 60 
calendar days of receiving it.
    (b) Contents of notice. The NCUA's notice to a corporate credit 
union of its intention to issue a directive imposing a discretionary 
supervisory action will state:
    (1) The corporate credit union's capital measures and capital 
category classification;
    (2) The specific restrictions or requirements that the Board 
intends to impose, and the reasons therefore;
    (3) The proposed date when the discretionary supervisory action 
would take effect and the proposed date for completing the required 
action or terminating the action; and
    (4) That a corporate credit union must file a written response to a 
notice within 14 calendar days from the date of the notice, or within 
such shorter period as the Board determines is appropriate in light of 
the financial condition of the corporate credit union or other relevant 
circumstances.
    (c) Contents of response to notice. A corporate credit union's 
response to a notice under paragraph (b) of this section must:
    (1) Explain why it contends that the proposed discretionary 
supervisory action is not an appropriate exercise of discretion under 
this section;
    (2) Request the Board to modify or to not issue the proposed 
directive; and
    (3) Include other relevant information, mitigating circumstances, 
documentation, or other evidence in support of the corporate credit 
union's position regarding the proposed directive.
    (d) NCUA Board consideration of response. The Board, or an 
independent person designated by the Board to act on the Board's 
behalf, after considering a response under paragraph (c) of this 
section, may:
    (1) Issue the directive as originally proposed or as modified;
    (2) Determine not to issue the directive and to so notify the 
corporate credit union; or
    (3) Seek additional information or clarification from the corporate 
credit union or any other relevant source.
    (e) Failure to file response. A corporate credit union which fails 
to file a written response to a notice of the Board's intention to 
issue a directive imposing a discretionary supervisory action, within 
the specified time period, will be deemed to have waived the 
opportunity to respond, and to have consented to the issuance of the 
directive.
    (f) Request to modify or rescind directive. A corporate credit 
union that is subject to an existing directive imposing a discretionary 
supervisory action may request in writing that the Board reconsider the 
terms of the directive, or rescind or modify it, due to changed 
circumstances. Unless otherwise ordered by the Board, the directive 
will remain in effect while

[[Page 64861]]

such request is pending. A request under this paragraph which remains 
pending 60 days following receipt by the Board is deemed granted.


Sec.  747.3003  Review of order reclassifying a corporate credit union 
on safety and soundness criteria.

    (a) Notice of proposed reclassification based on unsafe or unsound 
condition or practice. When the Board proposes to reclassify a 
corporate credit union or subject it to the supervisory actions 
applicable to the next lower capitalization category pursuant to Sec.  
704.4(d)(3) of this chapter (such action hereinafter referred to as 
``reclassification''), the Board will issue and serve on the corporate 
credit union reasonable prior notice of the proposed reclassification.
    (b) Contents of notice. A notice of intention to reclassify a 
corporate credit union based on unsafe or unsound condition or practice 
will state:
    (1) The corporate credit union's current capital ratios and the 
capital category to which the corporate credit union would be 
reclassified;
    (2) The unsafe or unsound practice(s) and/or condition(s) 
justifying reasons for reclassification of the corporate credit union;
    (3) The date by which the corporate credit union must file a 
written response to the notice (including a request for a hearing), 
which date will be no less than 14 calendar days from the date of 
service of the notice unless the Board determines that a shorter period 
is appropriate in light of the financial condition of the corporate 
credit union or other relevant circumstances; and
    (4) That a corporate credit union which fails to --
    (i) File a written response to the notice of reclassification, 
within the specified time period, will be deemed to have waived the 
opportunity to respond, and to have consented to reclassification;
    (ii) Request a hearing will be deemed to have waived any right to a 
hearing; and
    (iii) Request the opportunity to present witness testimony will be 
deemed to have waived any right to present such testimony.
    (c) Contents of response to notice. A corporate credit union's 
response to a notice under paragraph (b) of this section must:
    (1) Explain why it contends that the corporate credit union should 
not be reclassified;
    (2) Include any relevant information, mitigating circumstances, 
documentation, or other evidence in support of the corporate credit 
union's position;
    (3) If desired, request an informal hearing before the Board under 
this section; and
    (4) If a hearing is requested, identify any witness whose testimony 
the corporate credit union wishes to present and the general nature of 
each witness's expected testimony.
    (d) Order to hold informal hearing. Upon timely receipt of a 
written response that includes a request for a hearing, the Board will 
issue an order commencing an informal hearing no later than 30 days 
after receipt of the request, unless the corporate credit union 
requests a later date. The hearing will be held in Alexandria, 
Virginia, or at such other place as may be designated by the Board, 
before a presiding officer designated by the Board to conduct the 
hearing and to recommend a decision.
    (e) Procedures for informal hearing.--(1) The corporate credit 
union may appear at the hearing through a representative or through 
counsel. The corporate credit union will have the right to introduce 
relevant documents and to present oral argument at the hearing. The 
corporate credit union may introduce witness testimony only if 
expressly authorized by the Board or the presiding officer. Neither the 
provisions of the Administrative Procedure Act (5 U.S.C. 554-557) 
governing adjudications required by statute to be determined on the 
record nor the Uniform Rules of Practice and Procedure (12 CFR part 
747) will apply to an informal hearing under this section unless the 
Board orders otherwise.
    (2) The informal hearing will be recorded, and a transcript will be 
furnished to the corporate credit union upon request and payment of the 
cost thereof. Witnesses need not be sworn, unless specifically 
requested by a party or by the presiding officer. The presiding officer 
may ask questions of any witness.
    (3) The presiding officer may order that the hearing be continued 
for a reasonable period following completion of witness testimony or 
oral argument to allow additional written submissions to the hearing 
record.
    (4) Within 20 calendar days following the closing of the hearing 
and the record, the presiding officer will make a recommendation to the 
Board on the proposed reclassification.
    (f) Time for final decision. Not later than 60 calendar days after 
the date the record is closed, or the date of receipt of the corporate 
credit union's response in a case where no hearing was requested, the 
Board will decide whether to reclassify the corporate credit union, and 
will notify the corporate credit union of its decision. The decision of 
the Board will be final.
    (g) Request to rescind reclassification. Any corporate credit union 
that has been reclassified under this section may file a written 
request to the Board to reconsider or rescind the reclassification, or 
to modify, rescind or remove any directives issued as a result of the 
reclassification. Unless otherwise ordered by the Board, the corporate 
credit union will remain reclassified, and subject to any directives 
issued as a result, while such request is pending.


Sec.  747.3004  Review of order to dismiss a director or senior 
executive officer.

    (a) Service of directive to dismiss and notice. When the Board 
issues and serves a directive on a corporate credit union requiring it 
to dismiss from office any director or senior executive officer under 
Sec. Sec.  704.4(g) and 704.4(k)(3) of this chapter, the Board will 
also serve upon the person the corporate credit union is directed to 
dismiss (Respondent) a copy of the directive (or the relevant portions, 
where appropriate) and notice of the Respondent's right to seek 
reinstatement.
    (b) Contents of notice of right to seek reinstatement. A notice of 
a Respondent's right to seek reinstatement will state:
    (1) That a request for reinstatement (including a request for a 
hearing) must be filed with the Board within 14 calendar days after the 
Respondent receives the directive and notice under paragraph (a) of 
this section, unless the Board grants the Respondent's request for 
further time;
    (2) The reasons for dismissal of the Respondent; and
    (3) That the Respondent's failure to--
    (i) Request reinstatement will be deemed a waiver of any right to 
seek reinstatement;
    (ii) Request a hearing will be deemed a waiver of any right to a 
hearing; and
    (iii) Request the opportunity to present witness testimony will be 
deemed a waiver of the right to present such testimony.
    (c) Contents of request for reinstatement. A request for 
reinstatement in response to a notice under paragraph (b) of this 
section must:
    (1) Explain why the Respondent should be reinstated;
    (2) Include any relevant information, mitigating circumstances, 
documentation, or other evidence in support of the Respondent's 
position;
    (3) If desired, request an informal hearing before the Board under 
this section; and

[[Page 64862]]

    (4) If a hearing is requested, identify any witness whose testimony 
the Respondent wishes to present and the general nature of each 
witness's expected testimony.
    (d) Order to hold informal hearing. Upon receipt of a timely 
written request from a Respondent for an informal hearing on the 
portion of a directive requiring a corporate credit union to dismiss 
from office any director or senior executive officer, the Board will 
issue an order directing an informal hearing to commence no later than 
30 days after receipt of the request, unless the Respondent requests a 
later date. The hearing will be held in Alexandria, Virginia, or at 
such other place as may be designated by the Board, before a presiding 
officer designated by the Board to conduct the hearing and recommend a 
decision.
    (e) Procedures for informal hearing.--(1) A Respondent may appear 
at the hearing personally or through counsel. A Respondent will have 
the right to introduce relevant documents and to present oral argument 
at the hearing. A Respondent may introduce witness testimony only if 
expressly authorized by the Board or by the presiding officer. Neither 
the provisions of the Administrative Procedure Act (5 U.S.C. 554-557) 
governing adjudications required by statute to be determined on the 
record nor the Uniform Rules of Practice and Procedure (12 CFR part 
747) apply to an informal hearing under this section unless the Board 
orders otherwise.
    (2) The informal hearing will be recorded, and a transcript will be 
furnished to the Respondent upon request and payment of the cost 
thereof. Witnesses need not be sworn, unless specifically requested by 
a party or the presiding officer. The presiding officer may ask 
questions of any witness.
    (3) The presiding officer may order that the hearing be continued 
for a reasonable period following completion of witness testimony or 
oral argument to allow additional written submissions to the hearing 
record.
    (4) A Respondent will bear the burden of demonstrating that his or 
her continued employment by or service with the corporate credit union 
would materially strengthen the corporate credit union's ability to --
    (i) Become ``adequately capitalized,'' to the extent that the 
directive was issued as a result of the corporate credit union's 
capital classification category or its failure to submit or implement a 
capital restoration plan; and
    (ii) Correct the unsafe or unsound condition or unsafe or unsound 
practice, to the extent that the directive was issued as a result of 
reclassification of the corporate credit union pursuant to Sec.  
704.4(d)(3) of this chapter.
    (5) Within 20 calendar days following the date of closing of the 
hearing and the record, the presiding officer will make a 
recommendation to the Board concerning the Respondent's request for 
reinstatement with the corporate credit union.
    (f) Time for final decision. Not later than 60 calendar days after 
the date the record is closed, or the date of the response in a case 
where no hearing was requested, the Board will grant or deny the 
request for reinstatement and will notify the Respondent of its 
decision. If the Board denies the request for reinstatement, it will 
set forth in the notification the reasons for its decision. The 
decision of the Board will be final.
    (g) Effective date. Unless otherwise ordered by the Board, the 
Respondent's dismissal will take and remain in effect pending a final 
decision on the request for reinstatement.


Sec.  747.3005  Enforcement of directives.

    (a) Judicial remedies. Whenever a corporate credit union fails to 
comply with a directive imposing a discretionary supervisory action, or 
enforcing a mandatory supervisory action under Sec.  704.4 of this 
chapter, the Board may seek enforcement of the directive in the 
appropriate United States District Court pursuant to 12 U.S.C. 
1786(k)(1).
    (b) Administrative remedies--(1) Failure to comply with directive. 
Pursuant to 12 U.S.C. 1786(k)(2)(A), the Board may assess a civil money 
penalty against any corporate credit union that violates or otherwise 
fails to comply with any final directive issued under Sec.  704.4 of 
this chapter, or against any institution-affiliated party of a 
corporate credit union (per 12 U.S.C. 1786(r)) who participates in such 
violation or noncompliance.
    (2) Failure to implement plan. Pursuant to 12 U.S.C. 1786(k)(2)(A), 
the Board may assess a civil money penalty against a corporate credit 
union which fails to implement a capital restoration plan under Sec.  
704.4(e) of this chapter, regardless whether the plan was published.
    (c) Other enforcement action. In addition to the actions described 
in paragraphs (a) and (b) of this section, the Board may seek 
enforcement of the directives issued under Section 704.4 of this 
chapter through any other judicial or administrative proceeding 
authorized by law.


Sec.  747.3006  Conservatorship or liquidation of critically 
undercapitalized corporate credit union.

    Notwithstanding any other provision of this title, the NCUA may, 
without any administrative due process, immediately place into 
conservatorship or liquidation any corporate credit union that has been 
categorized as critically undercapitalized.

[FR Doc. 2010-24616 Filed 10-19-10; 8:45 am]
BILLING CODE 7535-01-P