[Federal Register Volume 76, Number 56 (Wednesday, March 23, 2011)]
[Proposed Rules]
[Pages 16345-16348]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-6757]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 700, 701, 702, and 741

RIN 3133-AD87


Net Worth and Equity Ratio

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: On January 4, 2011, President Obama signed Senate Bill 4036 
into law, which, among other things, amends the statutory definitions 
of ``net worth'' and ``equity ratio'' in the Federal Credit Union Act. 
NCUA proposes to make conforming amendments to the definition of ``net 
worth'' as it appears in NCUA's Prompt Corrective Action regulation and 
the definition of ``equity ratio'' as it appears in NCUA's Requirements 
for Insurance regulation. NCUA also proposes to make technical changes 
in other regulations to ensure clarity and consistency in the use of 
the term ``net worth,'' as it is applied to federally-insured credit 
unions.

DATES: Comments must be received on or before May 23, 2011.

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

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

SUPPLEMENTARY INFORMATION:

A. Background

    On January 4, 2011, President Obama signed Senate Bill 4036 (the 
Bill) into law. S. 4036, 111th Cong., Public Law 111-382 (2011). The 
Bill amends the Federal Credit Union Act (the Act) to clarify NCUA's 
authority to make stabilization fund expenditures without borrowing 
from the Treasury, amends the definitions of ``equity ratio'' and ``net 
worth,'' and requires the Comptroller General of the United States to 
conduct a study on NCUA's handling of the recent corporate credit union 
crisis. The Bill is divided into four sections, each of which is 
discussed briefly below. The amendments in this proposed rule implement 
the changes made to the Act by sections two and three of the Bill.

1. Section One--Stabilization Fund

    This section amends the Temporary Corporate Credit Union 
Stabilization Fund (TCCUSF) provisions of the Act in 12 U.S.C. 1795e. 
Specifically, the amendments add a new provision authorizing NCUA to 
make premium assessments of federally-insured credit unions to pay 
pending or future TCCUSF expenses directly, in addition to the existing 
authority to make assessments to repay Treasury advances. Public Law 
111-382. Exercise of this direct assessment authority requires the NCUA 
Board ``take into consideration any potential impact on credit union 
earnings such an assessment may have'' and requires the premium be paid 
not later than 60 days following the assessment. The amendments also 
make clear that, during the period of time in which the Treasury agrees 
to extend the life of the TCCUSF, the NCUA can obtain additional 
advances from the Treasury. Id. NCUA does not have regulations on the 
TCCUSF, so no changes to NCUA regulations are necessary.

2. Section Two--Equity Ratio

    Section two of the Bill amends Sec.  202(h)(2) of the Act (12 
U.S.C. 1782(h)(2)) by redefining the equity ratio for the National 
Credit Union Share Insurance Fund (NCUSIF or Fund). Under the amended 
definition, the equity ratio will be calculated ``using the financial 
statements of the Fund alone, without any consolidation or combination 
with the financial statements of any other fund or entity.'' Public Law 
111-382. The term ``equity ratio'' is defined in Sec.  741.4(b) of 
NCUA's regulations and is used in several places throughout that 
section. As discussed more fully below, the Board, is proposing to 
amend the definition of ``equity ratio'' in NCUA's regulations to 
mirror the recent statutory change.
Section Three--Net Worth Definition
    Section three of the Bill amends section 216(o)(2) of the Act (12 
U.S.C. 1790(o)(2)) by redefining the term ``net worth'' as it applies 
to federally insured credit unions for purposes of prompt corrective 
action (PCA). The amended definition retains all of the existing 
elements of net worth and includes the

[[Page 16346]]

following new component: ``[A]t the Board's discretion and subject to 
rules and regulations established by the Board, assistance provided 
under Sec.  208 to facilitate a least-cost resolution consistent with 
the best interests of the credit union system.'' Public Law 111-382. As 
discussed more fully below, the Board proposes to amend the definition 
of ``net worth'' in NCUA's regulations for PCA purposes (Sec.  
702.2(f)) to reflect and implement this statutory change.
Section Four--Study of the National Credit Union Administration
    Section four of the Bill requires the Comptroller General of the 
United States to conduct a study of NCUA's supervision of corporate 
credit unions and implementation of PCA. The purpose of the study is to 
determine the reasons for the failure of any corporate credit union 
since 2008, evaluate the adequacy of NCUA's response to the failures of 
corporate credit unions, evaluate the effectiveness of the 
implementation of PCA by NCUA, and examine whether NCUA has effectively 
implemented each of the recommendations of its Inspector General in its 
Material Loss Review Report. The Bill requires the Comptroller to 
submit the report, within one year from the date of enactment of the 
Bill, to the Financial Stability Oversight Council (the Council). 
Within six months after the date of receipt of the report from the 
Comptroller General, the Council must submit a report to the Committee 
on Banking, Housing, and Urban Affairs of the Senate and the Committee 
on Financial Services of the House of Representatives on actions taken 
in response to the report, including any recommendations issued to the 
National Credit Union Administration under section 120 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5330).

B. Proposed Changes

    As noted above, the Bill amends the definition of ``equity ratio'' 
and the PCA definition of ``net worth.'' The Board is proposing to make 
amendments to NCUA's regulations to implement the recent statutory 
changes.

1. Equity Ratio

    The Board is proposing to amend the definition of ``equity ratio'' 
set forth in Sec.  741.4(b) to clarify that the equity ratio will be 
calculated using the financial statements of the NCUSIF alone, without 
any consolidation or combination with the financial statements of any 
other fund or entity. The Board notes that this amendment reflects a 
statutory change to section 202 of the Act, 12 U.S.C. 1782, and, as 
such, the Board must make this change to Sec.  741.4, which implements 
section 202 of the Act.

2. Net Worth

    The Board is also proposing to amend NCUA's regulations to reflect 
the recent statutory change to the definition of ``net worth'' for 
purposes of PCA. As already noted, the definition of ``net worth'' for 
purposes of PCA is found in Sec.  702.2(f) of NCUA's regulations, 12 
CFR 702.2(f). The Bill provides that the Board, in its discretion, may 
include any assistance provided under section 208 of the Act (12 U.S.C. 
1788) in the computation of a federally insured credit union's net 
worth for PCA purposes. Public Law 111-382, Sec.  3. The Bill also 
provides that the inclusion of Sec.  208 assistance in the computation 
of net worth is subject to any rules or regulations established by the 
Board. Id.
    Section 208 of the Act allows the Board, in its discretion, to make 
loans to, or purchase the assets of, or establish accounts in insured 
credit unions the Board has determined are in danger of closing or in 
order to assist in the voluntary liquidation of a solvent credit union. 
12 U.S.C. 1788(a)(1). Except in the case of a voluntary liquidation, 
the Board is permitted to provide assistance under Sec.  208 only when 
it is necessary to protect the Fund or the interests of the members of 
the credit union. Id. In addition to Sec.  208 assistance provided for 
liquidity purposes, the NCUA may place funds containing the elements of 
capital in a credit union. 12 U.S.C. 1788(a)(2). Capital accounts would 
include subordinated notes and capital instruments. These accounts, 
including interest accrued and paid, would be available to cover losses 
realized by the credit union exceeding available retained earnings and 
should be included in the calculation of regulatory capital to the 
extent the accounts meet the qualifications discussed below.
    In this rule the Board proposes to limit the inclusion of Sec.  208 
assistance in the computation of a credit union's net worth to those 
types of assistance containing minimum elements of equity. The Board 
proposes to further limit the accounts that will qualify as regulatory 
capital to accounts that: Have a remaining maturity of five years or 
more; are not insured by the NCUSIF; may not be pledged as security on 
a loan to, or other obligation of, any party; have non-cumulative 
dividends; and are subordinate to the NCUSIF, shareholders, and 
creditors.
    Although the Board is currently proposing rules with respect to 
Sec.  208 assistance as permitted under the Bill, the Board may propose 
additional rules in the future, as it is necessary to protect the Fund 
or ensure the efficient application of PCA.
a. Technical Changes
    This proposed rule also includes a technical correction to the 
definition of net worth in Sec.  702.2(f)(3) to address situations 
where an acquiring credit union benefits twice from a combination. 
NCUA's current rules require the addition of the retained earnings of 
the acquired credit union to the net worth of the acquiring credit 
union. In the circumstance of a combination that results in a bargain 
purchase gain,\1\ the current rule's requirements can result in a 
double counting of net worth for the purposes of PCA. This proposed 
correction seeks to prevent this situation by requiring the subtraction 
of any bargain purchase gain from the target's retained earnings before 
the latter amount is included as net worth. This proposed correction 
limits the difference between the added retained earnings and bargain 
purchase gain to an amount that is zero or more, which will prevent a 
retained earnings deficit from flowing forward to the acquiring 
institution. The proposed revision to this section also adds the 
requirement that the retained earnings of the acquired credit union at 
the point of acquisition must be measured under generally accepted 
accounting principles as referenced in the Act. 12 
U.S.C.1790d(o)(2)(A).
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    \1\ For combinations of mutual institutions in which no 
consideration is transferred, a bargain purchase occurs when the 
fair value of the net assets acquired exceeds the fair value of the 
equity or member interest in the acquirer. Generally accepted 
accounting principles require this excess to be recognized 
immediately as a gain in earnings, which increases retained earnings 
and qualifies as regulatory capital. See Accounting Standards 
Codification (ASC) Paragraphs 805-30-55-3 through 55-5, Special 
Considerations in Applying the Acquisition Method to Combinations of 
Mutual Entities.
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    The Board is also making technical changes to other sections of 
NCUA's regulations that reference or use the term ``net worth'' in the 
PCA context. These changes will ensure clarity and continuity in NCUA's 
definition of ``net worth.''
    Section 701.21(h) of the regulations addresses third party 
servicing of indirect vehicle loans and, in part, limits the aggregate 
amount of vehicle loans serviced by a third-party servicer that a 
federally-insured credit union can acquire, as a percentage of the 
credit union's net worth. The Sec.  701.21(h)(4)(iv) definition of 
``net worth'' is different than that used in part 702 but is based

[[Page 16347]]

on the same statutory provision of the Act. Currently Sec.  
701.21(h)(4)(iv) defines ``net worth'' as:

    The retained earnings balance of the credit union at quarter end 
as determined under generally accepted accounting principles. For 
low income-designated credit unions, net worth also includes 
secondary capital accounts that are uninsured and subordinate to all 
other claims, including claims of creditors, shareholders, and the 
National Credit Union Share Insurance Fund.

    12 CFR 701.21(h)(4)(iv). While this definition is similar to that 
used in Sec.  702.2(f), it does not contain all of the elements used in 
that definition and would not reflect the change made by this proposed 
rule. For consistency and clarity, the Board proposes to amend Sec.  
701.21(h)(4)(iv) to indicate that the term ``net worth'' has the same 
meaning as it is defined in Sec.  702.2. The proposed change would 
replace the current definition in Sec.  701.21(h)(4)(iv) with a 
statement that the term ``net worth'' means the retained earnings 
balance of a credit union at quarter end as determined under generally 
accepted accounting principles and as further defined in Sec.  
702.2(f). This cross reference is similar to others used in NCUA's 
regulations. Although the Board is deleting language regarding the 
computation of net worth for low-income credit unions, this provision, 
which is already found in Sec.  702.2(f), will be incorporated by 
reference under this proposed change.
    With respect to sections of the regulations outside of part 702 
that use the term ``net worth'' in the PCA context, the Board will 
continue to use cross references to the Sec.  702.2(f) definition of 
``net worth.'' Such cross references are found in Sec. Sec.  703.2, 
742.2, and 747.2003 of NCUA's regulations. Finally, the Board notes 
that Sec.  701.34(c) and (d) and its accompanying appendix and Sec.  
701.21(c)(7)(iii) of NCUA's regulations use the term ``net worth'' but 
do not currently contain a cross reference or an alternative definition 
of ``net worth.'' To conform these and any future uses of the term 
``net worth,'' the Board is proposing to include a statement in the 
general definitions of the regulations (part 700) to clarify that, 
unless otherwise noted, the term ``net worth'' as applied to an insured 
credit union has the same definition as that set forth in Sec.  
702.2(f). The Board believes this ``catch all'' statement will 
eliminate confusion and ensure the correct definition is applied in 
varying circumstances.
b. Net Worth in the Member Business Loan Context
    Consistent with the statutory amendment, this proposed rule amends 
the definition of ``net worth'' only when that term is used in the PCA 
context. NCUA's member business loan regulation contains a definition 
of ``net worth'' that differs from the definition used in part 702. See 
12 CFR 723.21 This definition is based on the statutory definition 
included in limitations of member business loans set forth in section 
107A of the Act, 12 U.S.C. 1757a(c)(2). The Bill, which provided the 
authority for the changes proposed in this rule, did not address the 
definition of ``net worth'' as it applies in the context of member 
business loans. As such, the Board is not amending the definition of 
``net worth'' in the member business loan rule.

Regulatory Procedures

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 $10 million in 
assets). This proposed rule modifies the definition of ``net worth'' 
and ``equity ratio,'' it will not have a significant economic impact on 
a substantial number of small credit unions and a regulatory 
flexibility analysis is not required.

Paperwork Reduction Act

    NCUA has determined that the proposed amendments will not increase 
paperwork requirements and a paperwork reduction analysis is not 
required.

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. The proposed rule would not have substantial 
direct effects on the states, on the connection between the national 
government and the states, or on the distribution of power and 
responsibilities among the various levels of government. NCUA has 
determined that this proposed rule does not constitute a policy that 
has federalism implications for purposes of the executive order.

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

    NCUA has determined that this proposed rule would 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).

List of Subjects in 12 CFR Parts 700, 701, 702, and 741

    Bank deposit insurance, Credit, Credit unions, Reporting and 
recordkeeping requirements.

    By the National Credit Union Administration Board on March 17, 
2011.
Mary Rupp,
Secretary of the Board.

    For the reasons stated in the preamble, the National Credit Union 
Administration proposes to amend 12 CFR parts 700, 701, 702, and 742 as 
set forth below:

PART 700--DEFINITIONS

    1. The authority citation for part 700 continues to read as 
follows:

    Authority: 12 U.S.C. 1752, 1757(6) and 1766.

    2. In Sec.  700.2, redesignate paragraphs (f) through (j) as 
paragraphs (g) through (k) and add new paragraph (f) to read as 
follows:


Sec.  700.2  Definitions.

* * * * *
    (f) Net worth. Unless otherwise noted, the term ``net worth,'' as 
applied to credit unions, has the same meaning as set forth in Sec.  
702.2(f) of this chapter.
* * * * *

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

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

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

    4. Revise Sec.  701.21(h)(4)(iv) to read as follows:


Sec.  701.21  Loans to Members and Lines of Credit to Members.

* * * * *
    (h) * * *
    (4) * * *
    (iv) The term ``net worth'' means the retained earnings balance of 
the credit union at quarter end as determined under generally accepted 
accounting principles and as further defined in Sec.  702.2(f) of this 
chapter.
* * * * *

[[Page 16348]]

PART 702--PROMPT CORRECTIVE ACTION

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

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

    6. In Sec.  702.2, revise paragraph (f)(3) and add paragraph (f)(4) 
to read as follows:


Sec.  702.2  Definitions.

* * * * *
    (f) * * *
    (3) For a credit union that acquires another credit union in a 
mutual combination, net worth includes the retained earnings of the 
acquired credit union, or of an integrated set of activities and 
assets, less any bargain purchase gain recognized in either case to the 
extent the difference between the two is greater than zero. The 
acquired retained earnings must be determined at the point of 
acquisition under generally accepted accounting principles. A mutual 
combination is a transaction in which a 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.
    (4) The term ``net worth'' also includes loans to and accounts in 
an insured credit union established pursuant to section 208 of the Act 
[12 U.S.C. 1788], provided such loans and accounts:
    (i) Have a remaining maturity of more than 5 years;
    (ii) Are subordinate to all other claims including those of 
shareholders, creditors and the National Credit Union Share Insurance 
Fund;
    (iii) Are not pledged as security on a loan to, or other obligation 
of, any party;
    (iv) Are not insured by the National Credit Union Share Insurance 
Fund; (v) Have non-cumulative dividends;
    (vi) Are transferable; and
    (vii) Are available to cover operating losses realized by the 
insured credit union that exceed its available retained earnings.
* * * * *

PART 741--REQUIREMENTS FOR INSURANCE

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

    Authority: 12 U.S.C. 1757, 1766(a), 1781-1790, and 1790d; 31 
U.S.C. 3717.

    8. In Sec.  741.4, in paragraph (b), revise the introductory text 
for the definition of equity ratio to read as follows:


Sec.  741.4  Insurance premium and one percent deposit.

* * * * *
    (b) * * *
    Equity ratio, which shall be calculated using the financial 
statements of the NCUSIF alone, without any consolidation or 
combination with the financial statements of any other fund or entity, 
means the ratio of:
* * * * *
[FR Doc. 2011-6757 Filed 3-22-11; 8:45 am]
BILLING CODE 7535-01-P