[Federal Register Volume 77, Number 147 (Tuesday, July 31, 2012)]
[Proposed Rules]
[Pages 45285-45288]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-18560]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 700, 701, 741 and 750

RIN 3133-AD97


Definition of Troubled Condition

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule with request for comments.

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SUMMARY: NCUA proposes to amend the definition of ``troubled 
condition'' as that term appears in Sec.  701.14 and elsewhere in 
NCUA's regulations. Generally, under the current definition, only a 
state supervisory authority (SSA) may declare a federally insured, 
state-chartered credit union (FISCU) to be in ``troubled condition.'' 
The proposal expands the definition to permit either NCUA or an SSA to 
declare a FISCU to be in ``troubled condition.''

DATES: Comments must be received on or before October 1, 2012.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web Site: http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx. Follow the instructions for submitting comments.
     Email: Address to [email protected]. Include ``[Your 
name]--Comments on Notice of Proposed Rulemaking for Parts 700, 701, 
741 and 750'' in the email subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for email.
     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.
    Public Inspection: You can view all public comments on NCUA's Web 
site at http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx as 
submitted, except for those we cannot post for technical reasons. NCUA 
will not edit or remove any identifying or contact information from the 
public comments submitted. You may inspect paper copies of comments in 
NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by 
appointment weekdays between 9 a.m. and 3 p.m. To make an appointment, 
call (703) 518-6546 or send an email to [email protected].

FOR FURTHER INFORMATION CONTACT: Steven W. Widerman, Staff Attorney, 
Office of General Counsel, at the above address or by telephone: (703) 
518-6557.

SUPPLEMENTARY INFORMATION:

I. Background

    1. Notification and Disapproval of Change in Officials. In 1989, 
the Financial Institutions Reform, Recovery and Enforcement Act, Public 
Law 101-73, 103 Stat. 183 (1989), amended the Federal Credit Union Act 
(the Act) to require a federally insured credit union, under two 
conditions, to notify NCUA prior to adding or replacing any individual 
serving as a member of the board of directors or of a committee, or 
employed as a senior executive officer (together, officials). 12 U.S.C. 
1790a. One condition is if the insured credit union has been chartered 
less than 2 years. 12 U.S.C. 1790a(a)(1). The other condition is if the 
insured credit union ``is in troubled condition, as determined on the 
basis of such credit union's most recent report of condition or report 
of examination.'' 12 U.S.C. 1790a(a)(2).
    An insured credit union that meets either condition may not add or 
replace an official if the NCUA issues a Notice of Disapproval in 
response to a notification of a change in officials. 12 U.S.C. 
1790a(b). NCUA may disapprove an individual when ``the competence, 
experience, character, or integrity of the individual * * * indicates 
that it would not be in the best interests'' of the credit union's 
members or the public for the individual to serve. 12 U.S.C. 1790a(e). 
The credit union may appeal the disapproval to the NCUA Board. 12 CFR 
747.904.
    2. Current Definition of ``Troubled Condition''. To implement the 
notification requirement, the Act required NCUA to prescribe by 
regulation a definition for the term ``troubled condition.'' 12 U.S.C. 
1790a(f). Since 1990, the NCUA Board has defined a natural person 
credit union in ``troubled condition'' as either: (1) A federal credit 
union that has been assigned a ``4'' or ``5'' composite CAMEL rating by 
NCUA; (2) a FISCU that has been assigned a ``4'' or ``5'' composite 
CAMEL rating by its SSA; (3) a FISCU that has been assigned a ``4'' or 
``5'' composite CAMEL rating by NCUA based on core workpapers received 
from an SSA; or (4) a federal credit union or FISCU that has received 
special assistance under sections 208 or 216 of the Act to avoid 
liquidation. 12 CFR 701.14(b)(3); 55 FR 43086 (Oct. 26, 1990).
    In 1999, the NCUA Board adopted a separate definition of ``troubled 
condition'' for corporate credit unions in order to conform to the 
Corporate Risk Information System (CRIS). 64 FR 28715 (May 27, 1999). 
Under that definition, a corporate credit union that is in ``troubled 
condition'' is either: (1) A corporate federal credit union that is 
assigned a ``4'' or ``5'' CRIS rating by NCUA in either the Financial 
Risk or Risk Management composites; (2) a corporate FISCU that is 
assigned a ``4'' or ``5'' CRIS rating by its SSA in either the 
Financial Risk or Risk Management composites or, if the state has not 
adopted CRIS, is assigned a ``4'' or ``5'' composite CAMEL rating by 
its SSA; (3) a corporate FISCU that is assigned a ``4'' or ``5'' CRIS 
rating in either the Financial Risk or Risk Management composites by 
NCUA based on core workpapers received from an SSA in a state that does 
not use either the CRIS or CAMEL rating systems; or (4) a corporate 
federal credit union or corporate FISCU that has received special 
assistance under sections 208 or 216 of the Act to avoid liquidation. 
12 CFR 701.14(b)(4).
    The ``troubled condition'' definitions for natural person credit 
unions and corporate credit unions have until now remained unchanged 
through several modifications to other parts of Sec.  701.14,\1\ and 
the definitions have since been incorporated by reference in parts 711, 
741, 747 and 750 of NCUA regulations.
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    \1\ 59 FR 36042 (July 15, 1994) (change of NCUA address); 60 FR 
31911 (June 19, 1995) (correcting U.S. Code citation); 66 FR 65622 
(Dec. 20, 2001) (substitution of new Sec.  216 for repealed Sec.  
116 of the Act); 69 FR 62562 (Oct. 27, 2004) (commencement of 
service while notification is pending); 75 FR 34620 (June 18, 2010) 
(changed ``Camel'' to ``CAMEL'').
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II. Proposed Rule

1. Part 701--Proposed Definition of ``Troubled Condition''

    The proposed amendments to the definition of ``troubled condition'' 
primarily affect natural person FISCUs and corporate FISCUs. Under 
current

[[Page 45286]]

Sec.  701.14(b), the CAMEL or CRIS rating assigned by an SSA alone 
determines if a FISCU is in ``troubled condition.'' 12 CFR 
701.14(b)(3)(i)(B), 701.14(b)(4)(i)(B). The proposed rule would define 
a FISCU as in ``troubled condition'' not just when its SSA assigns it a 
``4'' or ``5'' composite CAMEL rating or a ``4'' or ``5'' CRIS rating 
in either the Financial Risk or Risk Management composites, but when 
either its SSA or NCUA assigns such a rating.
    As administrator of the National Credit Union Share Insurance Fund 
(Fund), the NCUA Board is responsible for taking proactive steps to 
protect the Fund. NCUA is uniquely positioned to observe national 
trends in the credit union industry that can affect the Fund. For 
example, NCUA has seen an increase in the number of credit unions with 
assets between $250 million and $500 million that have experienced some 
degree of financial stress. In response to this monitoring, NCUA has 
increased the number of joint FISCU examinations in which it 
participates with SSAs. Previously, NCUA generally would only 
participate in joint examinations of FISCUs with assets over $500 
million. More recently, NCUA has begun participating in joint 
examinations of FISCUs over $250 million. As a result, the number of 
hours NCUA examiners spend participating in joint examinations has 
nearly doubled. The NCUA Board emphasizes, however, that only the time 
spent on joint examinations has doubled, not the number of FISCUs 
experiencing difficulties.
    Statistics indicate that in approximately 2 to 4 percent of all 
joint FISCU examinations, either the variation between NCUA's CAMEL 
rating and that given by the applicable SSA made the difference between 
a troubled versus an untroubled FISCU (i.e., a ``4'' versus a ``3''), 
or the SSA's troubled rating was lower than that given by NCUA (i.e., a 
``5'' instead of a ``4''). These statistics show that disagreement 
between an SSA and NCUA on a FISCU rating could result from either 
regulator issuing the higher or lower score. When the variation in 
scores determines whether a FISCU is troubled versus untroubled, it is 
significant from a supervisory perspective.
    The primary purpose of the proposal is to guard against this 
ratings discrepancy as a precaution to protect the Fund. Expanding the 
definition of ``troubled condition'' as proposed enhances the 
likelihood that problems in a particular FISCU will be identified and 
corrected because it permits the full utilization of the resources of 
both the related SSA and the NCUA. NCUA's national perspective and an 
SSA's in-depth familiarity with local trends complement each other in 
that effort.
    The proposal also makes some technical corrections to Sec.  701.14. 
For example, Sec.  701.14(b)(3)(ii) and 701.14(b)(4)(ii) of the current 
rule also define a federally insured credit union as in ``troubled 
condition'' if it ``has been granted assistance as outlined under 
Sections 208 or 216 of the Federal Credit Union Act.'' 12 CFR 
701.14(b)(3)(ii), 701.14(b)(4)(ii). The citation to section 216 of the 
Act, 12 U.S.C. 1790d, is inapplicable because it does not pertain to 
assistance to credit unions.\2\ Accordingly, the proposed rule modifies 
this ``troubled condition'' criterion by deleting the reference to 
section 216 of the Act, while preserving the reference to assistance 
under section 208 of the Act. 12 U.S.C. 1788.
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    \2\ Section 116 of the Act [reserve transfers], 12 U.S.C. 1762, 
the predecessor to section 216 of the Act [prompt corrective 
action], 12 U.S.C. 1790d, was repealed in 1998. Public Law 105-219, 
Sec.  301(g)(3), 112 Stat. 913, 931 (1998). In 2001, the citations 
to repealed section 116 of the Act in Sec.  701.14 were replaced 
with references to section 216 of the Act. 66 FR 65622 (Dec. 20, 
2001). Neither section 116 nor 216 of the Act, however, pertain to 
providing assistance to credit unions, making assistance under 
either section illusory as a criterion of ``troubled condition.''
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    The current rule allows NCUA to assign a FISCU's CAMEL rating 
``based on core workpapers received from the state supervisor in the 
case of a [FISCU] in a state that does not use the CAMEL system.'' 12 
CFR 701.14(b)(3)(i)(C). Today, all states use the CAMEL system, 
rendering this alternative obsolete. The proposed rule therefore 
eliminates it.
    Similarly, the current rule allows a state that does not use the 
CRIS system in rating its corporate FISCUs to instead use the CAMEL 
rating system. 12 CFR 701.14(b)(4)(i)(B). If a state uses neither the 
CRIS system nor the CAMEL system, the current rule allows NCUA to 
assign a CRIS rating ``based on core workpapers received from the state 
supervisor.'' 12 CFR 701.14(b)(4)(i)(C). However, with the 
recapitalization and restructuring of the corporate credit union system 
since 2009, all of the states having jurisdiction over the ten current 
corporate FISCUs now use the CRIS rating system. The proposed rule 
therefore eliminates as moot the alternatives of using the CAMEL system 
to rate corporate FISCUs, and of having NCUA assign CRIS ratings to 
corporate FISCUs in place of a state that uses neither the CAMEL nor 
the CRIS rating system.

2. Part 700--Definition of ``Troubled Condition''

    The definition of ``troubled condition'' in Sec.  701.14(b) is 
incorporated by reference in parts 711 [management official 
interlocks], 741 [requirements for insurance], 747 [challenge to 
disapproval of change in officials] and 750 [golden parachute and 
indemnification payments] of NCUA's regulations. 12 CFR 711.6(a), 
741.205, 747.901, 750.1(e)(1) and 750.1(l). For purposes of 
convenience, uniformity, and ease of cross-referencing, the proposed 
rule adds to part 700 [general definitions] the definition of 
``troubled condition'' for natural person and corporate credit unions 
exactly as revised in proposed Sec.  701.14(b)(3) and (4).

3. Part 741--Technical Correction

    In the case of a FISCU chartered less than 2 years or in ``troubled 
condition,'' current Sec.  741.205 requires NCUA, before disapproving a 
change in officials, to ``consult with the state supervisor before 
making its determination pursuant to Sec.  701.14 (d)(2) and (f) of 
this chapter. NCUA will notify the state supervisor of its approval/
disapproval no later than the time that it notifies the affected 
individual pursuant to Sec.  701.14(d)(1) of this chapter.'' 12 CFR 
741.205. The citations in both sentences are incorrect as Sec.  701.14 
has no subsections (d)(1), (d)(2) or (f). The proposed rule deletes 
those incorrect citations without affecting the meaning of Sec.  
741.205.

III. Comments

    NCUA welcomes public comment on this proposed rule. To facilitate 
consideration of the public's views, we ask commenters to organize and 
identify their comments by corresponding topic, part number or 
definition. General comments, if any, should be included in a 
separately identified section. Please recognize that the requirement 
that a troubled credit union notify NCUA of a change in officials is 
prescribed by statute. Therefore, this rulemaking will not address 
comments suggesting that NCUA ignore or eliminate this requirement.

IV. 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 (primarily those under $10 
million in assets). This proposed rule does not impose any requirements 
on small credit unions. NCUA has

[[Page 45287]]

determined this proposed rule will not have a significant economic 
impact on a substantial number of small credit unions, so NCUA is not 
required to conduct a regulatory flexibility analysis.

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 increases an existing burden. 44 U.S.C. 3507(d); 5 CFR part 
1320. For purposes of the PRA, a paperwork burden may take the form of 
either a reporting or a recordkeeping requirement, both referred to as 
information collections. NCUA has determined that the proposed rule 
does not impose a new information collection requirement or increase an 
existing burden.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. 
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order to adhere to fundamental 
federalism principles. This proposed rule will not have substantial 
direct effects on the states, on the relationship between the national 
government and the states, or on the distribution of power and 
responsibilities among the various levels of government. NCUA has 
determined that this proposed rule does not constitute a policy that 
has federalism implications for purposes of the executive order.

Treasury and General Government Appropriations Act, 1999

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

List of Subjects

12 CFR Part 700

    Credit unions, Definitions.

12 CFR Part 701

    Credit unions, Reporting and recordkeeping requirements.

12 CFR Part 741

    Credit unions, Requirements for insurance.

12 CFR Part 750

    Credit unions, Golden parachute payments, Indemnity payments.

    By the National Credit Union Administration Board on July 24, 
2012.
Mary Rupp,
Secretary of the Board.

    For the reasons set forth above, NCUA proposes to amend 12 CFR 
parts 700, 701, 741, and 750 as follows:

PART 700--DEFINITIONS

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

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

    2. Amend Sec.  700.2 by redesignating paragraph (j) as (k) and 
adding new paragraph (j) to read as follows:


Sec.  700.2  Definitions.

* * * * *
    (j) Troubled condition means:
    (1) In the case of an insured natural person credit union:
    (i) A federal credit union that has been assigned a 4 or 5 CAMEL 
composite rating by NCUA; or
    (ii) A federally insured, state-chartered credit union that has 
been assigned a 4 or 5 CAMEL composite rating by either NCUA or its 
state supervisor; or
    (iii) A federal credit union or a federally insured, state-
chartered credit union that has been granted assistance under section 
208 of the Federal Credit Union Act, 12 U.S.C. 1788.
    (2) In the case of an insured corporate credit union:
    (i) A federal credit union that has been assigned a 4 or 5 
Corporate Risk Information System (CRIS) rating by NCUA in either the 
Financial Risk or Risk Management composites; or
    (ii) A federally insured, state-chartered credit union that has 
been assigned a 4 or 5 CRIS rating by either NCUA or its state 
supervisor in either the Financial Risk or Risk Management composites; 
or
    (iii) A federal credit union or a federally insured, state-
chartered credit union that has been granted assistance under section 
208 of the Federal Credit Union Act, 12 U.S.C. 1788.
* * * * *

PART 701--ORGANIZATION AND OPERATIONS 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. 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.  701.14(b)(3) and Sec.  701.14(b)(4) to read as 
follows:


Sec.  701.14  Change in official or senior executive officer in credit 
unions that are newly chartered or are in troubled condition.

* * * * *
    (b) * * *
    (3) In the case of an insured natural person credit union, Troubled 
condition means:
    (i) A federal credit union that has been assigned a 4 or 5 CAMEL 
composite rating by NCUA; or
    (ii) A federally insured, state-chartered credit union that has 
been assigned a 4 or 5 CAMEL composite rating by either NCUA or its 
state supervisor; or
    (iii) A federal credit union or a federally insured, state-
chartered credit union that has been granted assistance under section 
208 of the Federal Credit Union Act, 12 U.S.C. 1788.
    (4) In the case of an insured corporate credit union, Troubled 
condition means:
    (i) A federal credit union that has been assigned a 4 or 5 
Corporate Risk Information System (CRIS) rating by NCUA in either the 
Financial Risk or Risk Management composites; or
    (ii) A federally insured, state-chartered credit union that has 
been assigned a 4 or 5 CRIS rating by either NCUA or its state 
supervisor in either the Financial Risk or Risk Management composites; 
or
    (iii) A federal credit union or a federally insured, state-
chartered credit union that has been granted assistance under section 
208 of the Federal Credit Union Act, 12 U.S.C. 1788.

PART 741--REQUIREMENTS FOR INSURANCE

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

    Authority:  12 U.S.C. 1757, 1766, 1781--1790, and 1790d. Section 
741.4 is also authorized by 31 U.S.C. 3717.

    6. Amend Sec.  741.205 by revising the last two sentences to read 
as follows:


Sec.  741.205  Reporting requirements for credit unions that are newly 
chartered or in troubled condition.

    * * * NCUA will consult with the state supervisor before making its 
determination. NCUA will notify the state supervisor of its approval/
disapproval no later than the time that it notifies the affected 
individual.

PART 750--GOLDEN PARACHUTE AND INDEMNIFICATION PAYMENTS

    7. The authority citation for part 750 continues to read as 
follows:


[[Page 45288]]


    Authority:  12 U.S.C. 1786(t).

    8. Amend Sec.  750.1 by revising paragraph (e)(1)(ii) to read as 
follows:


Sec.  750.1  Definitions.

* * * * *
    (ii) * * *
    (C) The federally insured credit union is in troubled condition as 
defined in Sec.  700.2(j) of this chapter; or
    (D) In the case of a corporate credit union, the federally insured 
credit union is undercapitalized as defined in Sec.  704.4 of this 
chapter; or
    (E) The federally insured credit union is subject to a proceeding 
to terminate or suspend its share insurance; and
* * * * *
    9. Remove paragraph (l) of Sec.  750.1.

[FR Doc. 2012-18560 Filed 7-30-12; 8:45 am]
BILLING CODE 7535-01-P