[Federal Register Volume 78, Number 13 (Friday, January 18, 2013)]
[Rules and Regulations]
[Pages 4026-4029]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-00863]


=======================================================================
-----------------------------------------------------------------------

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 700, 701, 741, 747, and 750

RIN 3133-AD97


Definition of Troubled Condition

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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

SUMMARY: The NCUA Board (Board) is issuing a final rule amending the 
definition of ``troubled condition'' as that term is used to trigger 
the statutory requirement to give the Board notice and an opportunity 
to disapprove a change of credit union officials, and as that term 
appears elsewhere in NCUA's regulations. Generally, the current 
definition allows only a state supervisory authority (SSA) to declare a 
federally insured, state-chartered credit union (FISCU) to be in 
``troubled condition.'' The final rule amends the definition to allow 
either NCUA or an SSA to declare a FISCU in ``troubled condition.'' 
NCUA is adopting the amended definition of ``troubled condition'' as 
proposed.

DATES: This rule is effective February 19, 2013.

FOR FURTHER INFORMATION CONTACT: Frank Kressman, Associate General 
Counsel, or Steven W. Widerman, Staff Attorney, at (703) 518-6557.

SUPPLEMENTARY INFORMATION:

1. Background
2. Proposed Rule
3. Discussion of Comments on Proposed Rule
4. Regulatory Procedures

1. Background

    a. Why is NCUA Adopting this Rule? The Board is adopting this rule 
to fully utilize the combined resources of NCUA and SSAs to identify 
FISCUs in ``troubled condition'' at the earliest possible juncture. The 
Federal Credit Union Act (the Act) requires a credit union in 
``troubled condition'' to give NCUA notice and an opportunity to 
disapprove a change of credit union officials. Currently, only SSAs can 
make this determination for a FISCU. The rule permits either NCUA or an 
SSA to designate a FISCU in ``troubled condition'' for this purpose, 
thus expanding NCUA's opportunity to act preemptively to ensure that 
the officials who take control of a FISCU in ``troubled condition'' are 
qualified to address its troubles. This gives the National Credit Union 
Share Insurance Fund (NCUSIF) a further measure of protection against 
the risk of loss.
    b. Statutory Framework. In 1989, Congress amended the Act to 
require a federally insured credit union ``in troubled condition, as 
determined on the basis of such credit union's most recent report of 
condition or report of examination,'' \1\ to notify NCUA prior to 
adding or replacing any individual serving as a member of the board of 
directors or a committee, or employed

[[Page 4027]]

as a senior executive officer (each, an official).\2\
---------------------------------------------------------------------------

    \1\ 12 U.S.C. 1790a(a)(2).
    \2\ 12 U.S.C. 1790a.
---------------------------------------------------------------------------

    The amendment to the Act bars an insured credit union in troubled 
condition from adding or replacing an official if NCUA issues a Notice 
of Disapproval in response to a notification of a change in 
officials.\3\ 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.\4\ The individual or 
the credit union may appeal the disapproval to the Board.\5\
---------------------------------------------------------------------------

    \3\ 12 U.S.C. 1790a(b).
    \4\ 12 U.S.C. 1790a(e).
    \5\ 12 CFR 747.904.
---------------------------------------------------------------------------

    c. Historical Definition of ``Troubled Condition.'' To implement 
the amendment to the Act, Congress directed NCUA to define by 
regulation the term ``troubled condition.'' \6\ Since 1990, NCUA has 
defined a natural person credit union in ``troubled condition'' as:
---------------------------------------------------------------------------

    \6\ 12 U.S.C. 1790a(f).
---------------------------------------------------------------------------

    (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.\7\
---------------------------------------------------------------------------

    \7\ 12 CFR 701.14(b)(3); 55 FR 43086 (Oct. 26, 1990).
---------------------------------------------------------------------------

    In 1999, the Board adopted a separate definition of ``troubled 
condition'' for corporate credit unions to conform to the Corporate 
Risk Information System (``CRIS'').\8\ Under that definition, a 
corporate credit union is in ``troubled condition'' if:
---------------------------------------------------------------------------

    \8\ 64 FR 28715 (May 27, 1999).
---------------------------------------------------------------------------

    (1) A corporate federal credit union is assigned a ``4'' or ``5'' 
CRIS rating by NCUA in either the Financial Risk or Risk Management 
composites;
    (2) A corporate FISCU 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 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 a state that does not use either the 
CRIS or CAMEL rating systems; or
    (4) A corporate federal credit union or corporate FISCU receives 
special assistance under sections 208 or 216 of the Act to avoid 
liquidation.\9\
---------------------------------------------------------------------------

    \9\ 12 CFR 701.14(b)(4).
---------------------------------------------------------------------------

    The ``troubled condition'' definitions for natural person credit 
unions and corporate credit unions have since been incorporated by 
reference in other parts of NCUA's regulations.

2. Proposed Rule

    The proposed rule defined a FISCU in ``troubled condition'' not 
just when its SSA assigns it a ``4'' or ``5'' composite CAMEL or CRIS 
rating, but when either its SSA or NCUA assigns such a rating.\10\ This 
expanded definition was intended to enhance NCUA's ability to 
administer and protect the NCUSIF. Additionally, the proposed rule made 
technical and conforming amendments to update the rule and the cross-
references to ``troubled condition'' that appear elsewhere in NCUA's 
regulations.\11\
---------------------------------------------------------------------------

    \10\ 77 FR 45285 (July 31, 2012).
    \11\ 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 parts 711, 
741, 747, and 750.
---------------------------------------------------------------------------

3. Discussion of Comments on Proposed Rule

    NCUA received 48 comment letters in response to the proposed rule: 
21 from FISCUs, 16 from state credit union leagues, 5 from state credit 
union regulators, 4 from credit union trade associations, and 2 from 
individuals. All of the commenters opposed the proposed rule, noting 
various concerns.
    Approximately half of the commenters objected that the rule 
constitutes excessive federal oversight that will undermine or 
destabilize the dual chartering system. The Board disagrees with these 
conclusions. The rule's primary purpose is to help NCUA, as 
administrator of the NCUSIF, to minimize losses to the NCUSIF by 
instituting a regulatory framework that more fully utilizes state and 
federal resources. The rule does not supplant an SSA's authority with 
NCUA's, nor does it substitute NCUA's judgment for that of an SSA. 
Rather, the Board views it as a cooperative effort between NCUA and 
SSAs. Under the rule, NCUA acknowledges that SSAs are the primary 
regulators of FISCUs. Further, SSAs maintain all of their regulatory 
and supervisory authorities with no diminution of responsibilities. 
Accordingly, the Board believes the rule reflects its commitment to the 
dual chartering system and, as noted below, is consistent with 
federalism policymaking criteria.
    Five commenters interpreted the rule as implying doubt that SSAs 
are qualified to assess their own FISCUs, and that NCUA's judgment is 
superior. A few others condemned the implication of doubt as a pretext 
to diminish an SSA's regulatory responsibility in favor of federal 
authority. The Board finds no merit in these comments. In the final 
rule, the Board in no way intends to diminish an SSA's role or 
disparage the high quality work performed by state examiners. In fact, 
the final rule simply levels the playing field by deferring to 
whichever regulator--state or federal--assigns a CAMEL 4 or 5 rating to 
a FISCU. In instances where an SSA rates a FISCU as a CAMEL 4 or 5 but 
NCUA does not, the SSA's rating prevails. In such cases, even if NCUA 
rates that FISCU as a CAMEL 1, 2, or 3, NCUA will defer to the SSA's 
CAMEL 4 or 5 rating and will classify that FISCU as being in ``troubled 
condition.''
    Additionally, the scope of the rule is limited to changes in FISCU 
officials and does not affect other aspects of an SSA's relationship 
with its credit unions.
    Seventeen commenters found a lack of sufficient justification to 
support the rule, with eight maintaining that NCUA did not document 
enough cases where the discrepancy between NCUA's and an SSA's rating 
made a difference. From cases arising in the recent financial crisis, 
NCUA has learned that it must be able to respond quickly when problems 
are discovered in the credit unions that it insures. Failing to timely 
identify a credit union in ``troubled condition'' can have significant 
consequences for the NCUSIF. In some cases during the crisis, it was 
not possible to respond quickly enough when NCUA's CAMEL rating of a 
FISCU differed from the SSA's. In 4 of 8 cases since 2008 that yielded 
a loss to the NCUSIF, the SSA assigned a CAMEL rating that did not 
trigger ``troubled condition'' status.\12\
---------------------------------------------------------------------------

    \12\ The four credit unions ultimately failed due to various 
causes, together producing a loss of $235 million to the NCUSIF.
---------------------------------------------------------------------------

    Although ratings discrepancies between NCUA and SSAs affecting 
whether a FISCU is deemed in ``troubled condition'' are not routine, 
they do occur. Such ratings discrepancies between NCUA and SSAs 
averaged 7.7 percent among regular examinations of FISCUs and on-site

[[Page 4028]]

supervision contacts conducted from 2009 through 2011. More recently, 
NCUA has observed a significant increase in the discrepancy rate. Among 
regular examinations of FISCUs and on-site supervision contacts in 
2012, the CAMEL rating variance between ``troubled condition'' and not 
was 10 percent through the third quarter.
    When NCUA's rating is inconsistent with an SSA's, NCUA's practice 
is to work cooperatively with state examiners to resolve the 
discrepancy. Further, pursuant to NCUA policy, NCUA will not designate 
a FISCU to be in ``troubled condition'' without first making an on-site 
contact at that FISCU. This on-site contact will typically consist of a 
joint examination by NCUA and state examiners.
    Eleven commenters contended that requiring an SSA to defer to 
NCUA's lower CAMEL rating to designate a FISCU in ``troubled 
condition'' would diminish and encroach on an SSA's authority as 
primary regulator. As explained above, the Board maintains that the 
single, narrow purpose of the rule is not an encroachment on, or 
diminution of, an SSA's authority over its FISCUs.
    Three commenters complained that the rule is inconsistent with 
applicable federalism policymaking criteria, alleging that NCUA did not 
identify a problem of national significance to justify the rule, and 
did not assess its impact on the states. The Board disagrees, as 
explained in the discussion of Executive Order 13132 in section 4 
below.
    Finally, eight commenters argued that the rule is unnecessary 
because the Act gives NCUA other remedies to deal with issues relating 
to FISCU officials. Further, six commenters maintained that a FISCU's 
change of officials should be the exclusive province of the SSA and 
NCUA should have no role at all. The Board notes, however, that, in 
1989, Congress granted NCUA the authority to disapprove a change of 
officials of an insured credit union (including a FISCU) in ``troubled 
condition.'' This Congressional action is the foundation of NCUA's 
position that it need not limit itself to existing ``other remedies'' 
to deal with FISCU officials and, further, that deciding who is 
qualified to serve as a FISCU official is not the ``exclusive 
province'' of an SSA.
    Apart from the CAMEL and CRIS ratings-based criteria for ``troubled 
condition,'' the Board on its own initiative is adding language to the 
final rule to clarify the ``troubled condition'' criterion that is 
based on a credit union's receipt of cash assistance from NCUA. The 
proposed rule, like the existing rule, provided that an insured credit 
union is in ``troubled condition'' if it ``has been granted assistance 
under section 208'' of the Act.\13\ This incorrectly suggests that a 
credit union, once granted such assistance, remains in ``troubled 
condition'' even after it has satisfied its repayment obligation to 
NCUA. To clarify that an insured credit union is no longer in 
``troubled condition'' once it has met this obligation, the final rule 
provides that an insured credit union is in ``troubled condition'' if 
it ``has been granted assistance under section 208 of the [Act], 12 
U.S.C. 1788, that remains outstanding and unextinguished.'' (emphasis 
added).
---------------------------------------------------------------------------

    \13\ 12 U.S.C. 1788.
---------------------------------------------------------------------------

    The Board has carefully considered the comments and appreciates the 
commenters' concerns. For the foregoing reasons, however, the Board 
adopts the amended definition of ``troubled condition'' as proposed 
with the addition of the substantive change described in the preceding 
paragraph.\14\
---------------------------------------------------------------------------

    \14\ As suggested by a commenter, the final rule makes a 
technical amendment to the cross-reference to ``troubled condition'' 
in Sec.  747.901 so that it properly refers to the new uniform 
definition of ``troubled condition'' in Sec.  700.2.
---------------------------------------------------------------------------

4. Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a rule may have on a 
substantial number of small entities (less than $10 million in assets). 
This rule enables NCUA to better administer the NCUSIF without imposing 
any additional regulatory burden on credit unions. It will not have a 
significant economic impact on a substantial number of small credit 
unions.

Paperwork Reduction Act

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

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their regulatory actions on state and local 
interests. NCUA, an independent regulatory agency as defined in 44 
U.S.C. 3502(5), voluntarily adheres to the fundamental federalism 
principles addressed by the Executive Order.
    In promulgating this rule, the Board has carefully limited its 
scope. The rule narrowly addresses the definition of a FISCU in 
``troubled condition'' for the sole purpose of better enabling NCUA to 
administer and protect the NCUSIF. The rule fully recognizes an SSA's 
primary regulatory and supervisory authority over its FISCUs. The rule 
creates a cooperative partnership between primary regulator (SSA) and 
insurer (NCUA) and in no way diminishes an SSA's power or authority. 
For these reasons, NCUA believes this rule will not have a substantial 
direct effect on the states, on the relationship between the national 
government and the states, or on the distribution of power and 
responsibilities among the various levels of government. Accordingly, 
this rule does not constitute a policy that has federalism implications 
for purposes of the Executive Order.

Treasury and General Government Appropriations Act, 1999

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

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) (``SBREFA'') provides generally for congressional 
review of agency rules. A reporting requirement is triggered in 
instances where NCUA issues a final rule as defined by Section 551 of 
the APA.\15\ The Office of Management and Budget has determined that 
this rule is not a ``major rule'' for purposes of SBREFA.
---------------------------------------------------------------------------

    \15\ 5 U.S.C. 551.
---------------------------------------------------------------------------

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 747

    Administrative practice and procedure, Bank deposit insurance, 
claims, Credit unions, Crime, Equal access to justice, Hearing 
procedures, Investigations, Lawyers, Penalties.

12 CFR Part 750

    Credit unions, Golden parachute payments, Indemnity payments.


[[Page 4029]]


    By the National Credit Union Administration Board on January 10, 
2013.
Mary Rupp,
Secretary of the Board.

    For the reasons set forth above, 12 CFR parts 700, 701, 741, 747, 
and 750 are amended as follows:

PART 700--DEFINITIONS

0
1. The authority citation for part 700 continues to read as follows:

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


0
2. Amend Sec.  700.2 by adding a new definition of ``troubled 
condition'' in alphabetical order to read as follows:


Sec.  700.2  Definitions.

* * * * *
    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, after an 
on-site contact, 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, that remains 
outstanding and unextinguished.
    (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 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 Corporate Risk Information System rating by 
either NCUA, after an on-site contact, 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, that remains 
outstanding and unextinguished.
* * * * *

PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS

0
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.

0
4. Revise Sec.  701.14(b)(3) and (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, after an 
on-site contact, 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, that remains 
outstanding and unextinguished.
    (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 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 Corporate Risk Information System rating by 
either NCUA, after an on-site contact, 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, that remains 
outstanding and unextinguished.
* * * * *

PART 741--REQUIREMENTS FOR INSURANCE

0
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.


0
6. Amend Sec.  741.205 by removing the last two sentences and adding 
one sentence in its place 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 747--ADMINISTRATIVE ACTIONS, ADJUDICATIVE HEARINGS, RULES OF 
PRACTICE AND PROCEDURE, AND INVESTGATIONS

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

    Authority: 12 U.S.C. 1766, 1782, 1784, 1785, 1786, 1787, 1790a, 
1790d; 42 U.S.C. 4012a; Pub. L. 101-410; Pub. L. 104-134; Pub. L. 
109-351; 120 Stat. 1966.

0
8. Amend Sec.  747.901 by removing ``Sec.  701.14 of this chapter'' at 
the end of the first sentence and adding in its place ``Sec.  700.2 of 
this chapter''.

PART 750--GOLDEN PARACHUTE AND INDEMNIFICATION PAYMENTS

0
9. The authority citation for part 750 continues to read as follows:

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


0
10. Amend Sec.  750.1 as follows:
0
a. Revise paragraphs (e)(1)(ii)(C), (D), and (E) ; and
0
b. Remove paragraph (l).


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
* * * * *
[FR Doc. 2013-00863 Filed 1-17-13; 8:45 am]
BILLING CODE 7535-01-P